keynote address robert strand
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aba.com 1-800-BANKERS
Rob Strand
American Bankers Association
Bank and Capital Markets Tax Institute
Orlando, FL
November 8, 2012
Recovery and Risk
• The economy is recovering.
• Jobs are returning.
• Housing has bottomed.
• But there are real risks.
Slow and Steady Recovery
-8%
-4%
0%
4%
8%
1990 1995 2000 2005 2010
Source: Bureau of Economic Analysis
Gross Domestic Product
Inflation and Seasonally-Adjusted Annual Growth Rate, Quarterly
11 Quarters
of Growth
NT, PNC & WFC
Forecast
Gross Domestic Product
Source: U.S. Bureau of Economic Analysis
12
12.5
13
13.5
14
2004 2005 2006 2007 2008 2009 2010 2011 2012
Infl
ati
on
-Ad
juste
d $
Tri
llio
n
Recession
4 Years
Source: Federal Reserve Bank of Philadelphia
State Leading Indices
0.0% to 1.5%
-1.5% to 0.0%
-1.5% to -4.5%
1.5% to 4.5%
30
35
40
45
50
55
60
65
2006 2007 2008 2009 2010 2011 2012
Source: Institute for Supply Management
ISM Composite Indexes
Manufacturing
Non-
Manufacturing
Co
ntr
acti
on
E
xp
an
sio
n
200
250
300
350
400
450
500
550
600
650
700
2
3
3
4
4
5
5
2007 2008 2009 2010 2011 2012
Source: Bureau of Labor Statistics
Job Market Improvement Jo
b O
pen
ing
s (
Mil
lio
ns)
Init
ial C
laim
s (
000’s
4-W
eek m
a)
Initial Claims
Job Openings
-900
-700
-500
-300
-100
100
300
500
2005 2006 2007 2008 2009 2010 2011 2012
Payroll Growth
Source: Bureau of Labor Statistics
8.8 Million Lost
GDP Broke Even
Payro
ll C
han
ge 0
00’s
4.5 Million
Recovered
Loss in Payrolls from Pre-Recession Peak
Source: Bureau of Labor Statistics
-8%
-4%
0%
4%
0 12 24 36 48
1948 1953 1957 1960 1969 1973
1980 1981 1990 2001 2007
Months
Unemployment Rate
0%
2%
4%
6%
8%
10%
12%
14%
1992 1996 2000 2004 2008 2012
Source: Bureau of Labor Statistics
7.9%
Source: U.S..Bureau of Labor Statistics
Declining Unemployment
0%
2%
4%
6%
8%
10%
2011 2012 2013
NT, PNC & WFC Forecast
Labor Force Participation Rate
58%
60%
62%
64%
66%
68%
1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
Source: Bureau of Labor Statistics
Labor Force Participation Rate
45%
55%
65%
75%
1976 1982 1988 1994 2000 2006 2012
Source: Bureau of Labor Statistics
Women
Men
Labor Force Participation Rate
58%
60%
62%
64%
66%
68%
1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
Source: Bureau of Labor Statistics
1985-2005
Average: 66.4%
Official vs. Real* Unemployment
0%
2%
4%
6%
8%
10%
12%
14%
1992 1996 2000 2004 2008 2012
Source: Bureau of Labor Statistics, ABA
“Real Unemployment”*
Official Unemployment
* Real Unemployment Indicates what the unemployment rate would be if labor force participation were at its 20-year average (1985-2005)
12.0%
7.9%
Case-Shiller 20-City Index
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
100
120
140
160
180
200
220
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Case-Shiller/S&P. Non-seasonally adjusted index.
Case-Shiller
20-City Index
Year-Over-Year
% Change
Source: Robert Denk, NAHB
Housing Prices and Income
1991 1995 1999 2003 2007 2011
50
100
150
200
250
Home Prices
Income
Index
Source: Robert Denk, NAHB
House Prices to Income
Overcorrection
Prices In Line
with Income
Under-correction
0
10
20
30
40
50
60
70
80
2004 2006 2008 2010 2012
Source: National Association of Home Builders
Housing Bottomed N
AH
B H
ou
sin
g M
ark
et
Ind
ex
Recession
0
1
2
3
1963 1970 1977 1984 1991 1998 2005 2012
Source: U.S.. Department of the Census
Housing Starts M
illio
ns
of
Un
its
Recession 1959 - 2010 Average
Aug
2012:
750k
798k 837k 904k 843k
Source: Standard & Poor’s
S&P 500 Index
0
400
800
1200
1600
2005 2006 2007 2008 2009 2010 2011 2012
Up 107% from
the 2009 low
Source: Bureau of Economic Analysis
Retail Sales
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
1994 1998 2002 2006 2010
Inflation & Seasonally-Adjusted Quarterly Growth Rate on Quarter Avg.
15%
16%
17%
18%
19%
1995 1997 2000 2002 2005 2007 2010
Source: Federal Reserve Flow of Funds
Financial Obligation Ratio
15.8%, lowest since 1984 →
0%
8%
16%
24%
1960 1970 1980 1990 2000 2010
Household Debt / Assets
Source: Federal Reserve Flow of Funds
-25
-20
-15
-10
-5
0
5
10
15
20
25
2007 2008 2009 2010 2011 2012
Non-Revolving Credit
Revolving Credit
Source: Federal Reserve
Consumer Credit C
han
ge,
$ B
illi
on
-40
-30
-20
-10
0
10
20
30
40
2007 2008 2009 2010 2011 2012
Student Loan*
Other Non-Revolving
Source: Federal Reserve
Student Loans Fueling Growth C
han
ge,
$ B
illi
on
* This only includes federal student loans
• U.S. Fiscal Cliff
• European Meltdown
• Interest Rate Shock
Key Risks
Risk #1: U.S. Fiscal Cliff
$0
$2
$4
$6
$8
$10
$12
$14
2012-2021New Debt
SuperCommittee
Source: Office of Management and Budget
Deficit Outweighs Proposed Solutions $ T
rill
ion
$11.9 Tril
Minimum
Cut: $1.2 Tril
0%
5%
10%
15%
20%
25%
30%
35%
Source: International Monetary Fund
Financing Needs P
erc
en
t o
f G
DP
2012
2013
$4
Trillion
Source: CBO
Fiscal Cliff 2013 $
Bil
lio
n
0
100
200
300
400
500
600
Bush Tax
Cuts
Payroll
Tax Cut
Extended
Unemp.
Sequester Other
$ 5
02 B
illi
on
Sources: University of Chicago (Baker, Bloom, Davis)
Economic Policy Uncertainty
50
100
150
200
250
300
1990 1993 1996 1999 2002 2005 2008 2011
Eco
no
mic
Po
licy U
ncert
ain
ty
-3.9% -5%
0%
5%
2010 2011 2012 2013
Source: U.S. Congressional Budget Office
Fiscal Cliff = Recession R
eal G
DP
Gro
wth
Forecast
Sources: University of Michigan
Consumer Sentiment
50
70
90
110
1990 1993 1996 1999 2002 2005 2008 2011
Ind
ex V
alu
e
Debt Talks
Financial Crisis
Dot Com Bust
80
85
90
95
100
105
-80
-60
-40
-20
0
20
40
60
2005 2007 2009 2011
Source: Federal Reserve Senior Loan Officer Survey
Business Confidence N
et
Perc
en
t o
f B
an
ks
Rep
ort
ing
Str
on
ger
Dem
an
d
NFIB Small Business Optimism
Debt Talks
80
85
90
95
100
105
-80
-60
-40
-20
0
20
40
60
2005 2007 2009 2011
Large and Mid Firms Small Firms
Source: Federal Reserve Senior Loan Officer Survey
Business Confidence N
et
Perc
en
t o
f B
an
ks
Rep
ort
ing
Str
on
ger
Dem
an
d
NFIB Small Business Optimism
Reason
Not a
Good
Time
Good
Time Unsure
Economic Conditions 38 2 14
Political Climate 14 0 9
Sales Prospects 4 2 2
Cost of Expansion 2 0 2
Financing & Interest Rates 2 1 1
Other 2 2 2
Total 62 7 30
Source: National Federation of Independent Business
Businesses Hesitant to Expand
75% of small businesses do not think it is a good time to expand
due to economic conditions and the political climate alone
($79)
($123) ($101)
($134)
($31)
($68)
($59)
($6)
2009 2010 2011 2012
Remaining Budget Gap Budget Gaps Offset by Stimulus
Source: Center on Budget and Public Priorities
Cumulative State Budget Shortfalls
$Billions by Fiscal Year
Cumulative State Budget Gap
Source: National Conference of State Legislatures
$0
$60
$120
$180
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
No
Data
Wells
Fargo
Forecast
$Billions
Risk #2: European Meltdown
0%
25%
50%
75%
100%
125%
150%
175%
200%
0% 2% 4% 6% 8% 10% 12%
Source: International Monetary Fund
Spain Presents Large Problem
Germany
Austria
Italy Portugal
Belgium
Netherlands
France Spain
Greece
Ireland
Pu
blic
De
bt
(%o
f G
DP
)
Deficit (%of GDP) reverse order
Size of Public Bond Market
0%
25%
50%
75%
100%
125%
150%
175%
200%
0% 2% 4% 6% 8% 10% 12%
Source: International Monetary Fund
Spain Presents Large Problem
Germany
Austria
Italy Portugal
Belgium
Netherlands
France
Spain
Greece
Ireland
Pu
blic
De
bt
(%o
f G
DP
)
Deficit (%of GDP) reverse order
Size of Public Bond Market
United States
Source: World Bank (June)
IMF’s World GDP Forecast
Country 2012 2013
World 2.5% 3.0%
United States 2.1% 2.4%
Europe -0.3% 0.7%
Japan 2.4% 1.5%
Emerging Countries 5.3% 5.9%
Brazil 2.9% 4.2%
Russia 3.8% 4.2%
India 6.6% 6.9%
China 8.2% 8.6%
5%
10%
15%
20%
25%
2006 2007 2008 2009 2010 2011 2012
Source: Eurostat
Unemployment Rate
Spain
Greece
France
Germany
Italy
8.2%
50.4% 52.3%
18.4%
0%
10%
20%
30%
40%
50%
60%
Ger Fra Ita Spa Gre Euro U.S.
Source: Europa
Youth Unemployment U
ne
mp
loym
en
t R
ate
Source: U.S. Census Bureau
U.S Exports by Region
North America
Europe, 21%
Pacific Rim Countries
South/Central America
OPEC
Africa
Other Countries
Source: U. S. Department of Commerce
Exports Sensitive to Europe
Exports to Europe (Percent of GDP)
5.6%
< 1.5%
1.5%-2.5%
> 2.5%
0
200
400
600
800
1,000
1,200
U.S. Banks European Banks
Source: Bank for International Settlements
Exposure to Spain and Italy E
xp
osu
re t
o S
pain
an
d Ita
ly (
$B
ill)
$82.4 Billion
$1.2 Trillion
Risk #3: Interest Rate Shocks
$0
$1
$2
$3
2008 2009 2010 2011 2012
$ T
rill
ion
Fed’s Balance Sheet Growth
Source: Federal Reserve
MBS &
Agency
Debt
Treasuries
Liquidity
Programs
Current:
$2.8 Trillion
0%
4%
8%
12%
16%
20%
1972 1982 1992 2002 2012
Source: Federal Reserve
Record Low Rates
Long Term Forecast
0%
2%
4%
6%
8%
10%
12%
2000 2002 2004 2006 2008 2010 2012
Source: University of Michigan, Bureau of Labor Statistics
Federal Reserve’s Dual Mandate
Unemployment Rate
Inflationary Expectations
0
50
100
150
200
250
300
350
400
450
0 2 4 6 8 10 12 14 16 18 20 22 24
Source: Federal Reserve
Fed’s Tightening History
Months Since Tightening Began
1994
300 bp
0
50
100
150
200
250
300
350
400
450
0 2 4 6 8 10 12 14 16 18 20 22 24
Source: Federal Reserve
Fed’s Tightening History
Months Since Tightening Began
1994
2000
175 bp
0
50
100
150
200
250
300
350
400
450
0 2 4 6 8 10 12 14 16 18 20 22 24
Source: Federal Reserve
Fed’s Tightening History
Months Since Tightening Began
1994
2004
2000
425 bp
0%
1%
2%
3%
4%
5%
6%
7%
-1 1 3 5 7 9 11 13 15 17 19 21 23 25
Source: Federal Reserve
Fed’s Tightening History F
ed
Fu
nd
s T
arg
et
Rate
Months Since Tightening Began
1994
2004
2000
Long Term Forecast
Hope for the Future
• The economy is rebounding.
• Jobs are returning.
• Housing has bottomed.
• Household net worth is recovering.
• American Creativity
• Export Strength and Diversity
Dodd-Frank Tracker RegReformTracker.ABA.com
Banks and the Economy www.BanksAndTheEconomy
.blogspot.com
For More See Our Blogs:
aba.com 1-800-BANKERS
Rob Strand
ABA Senior Economist
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Recovery and Risk
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