The Economic Outlook Community Development Forum Salt Lake City - PowerPoint PPT Presentation

Comptroller of the Currency Administrator of National Banks The Economic Outlook Community Development Forum Salt Lake City July 19, 2012 Ray Squitieri Economic and Policy Analysis, OCC

Summary — US economy • Slow growth to persist, but US likely to avoid recession • Slow growth means slow improvement in unemployment • Housing has yet to turn around • Europe now a big risk to US economy • Positives: lower energy prices, continued low interest rates 1

Recovery plods along Real GDP, % change annual rate Quarterly average unemployment rate, % 11.0 4.0 3.0 10.0 2.0 9.0 1.0 8.0 0.0 Consensus Forecast Consensus 7.0 Forecast -1.0 6.0 -2.0 -3.0 5.0 -4.0 Recession Recession 4.0 07 08 09 10 11 12F 13F 07 08 09 10 11 12F 13F Sources: BEA, BLS, Blue Chip Indicators (June 2012) 2

Weekly leading index has waffled since end of recession, unlike steady gains in past expansions Weekly leading index 1992 = 100 150 140 130 120 110 100 90 80 70 Recessions 60 80 84 88 92 96 00 04 08 12 Source: Economic Cycle Research Institute (ECRI) 3

After rising above 200K per month, job growth faltered over the last 4 months Change in nonfarm employment, thousands 300 100 07 08 09 10 11 12 -100 3.8 million jobs added since 2/10; -300 548 thousand in 2012 -500 -700 Recession -900 8.8 million jobs lost in total through 2/10 Sources: BLS, E&PA calculations (data through May 2012) 4

Much of the improvement in unemployment rate Civilian Unemployment Rate: 16 yr + due to drop in labor force participation rate SA, % Civilian Participation Rate: 16 yr + SA, % 10 67 Unemployment rate % SA RHS 9 66 8 65 7 64 Labor Force Participation rate % SA 6 63 LHS Note: if participation rate had remained at 2010 average, latest 5 62 UE rate would be 9.5% not 8.2% 4 61 07 08 09 10 11 Sources: Bureau of Labor Statistics /Haver Analytics Source: Bureau of Labor Statistics / Haver Analytics 5

If labor force exits had remained unemployed, the statistics would look a lot worse today Labor force participation rate Unemployment rate % of civilian population share of labor force 14% 68 Unemployment rate assuming all labor force exits remained 12% 66 unemployed 10% 64 Unprecedented drop As published 8% 62 in LF participation in recent years 6% 60 4% 58 2% 56 Recessions 0% 54 05 06 07 08 09 10 11 12 52 62 72 82 92 02 12 Source: BLS 6

For most states, employment likely to remain below pre-recession levels through 2013 U.S. =-2.3% Source: Moody’s Analytics; Federal Reserve Board Supervisory Stress -Test Baseline 7

Consumer confidence remains historically low Consumer Confidence 1985 = 100 160 140 120 100 80 60 40 20 Recessions 0 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 Source: Conference Board 8

… though s hoppers are gradually returning to the stores Retail sales (ex. auto) Yr-yr % change 10% 5% 0% -5% forecast -10% 06 07 08 09 10 11 12 13 Source: Census Bureau, Moody’s Analytics 9

Inventory of distressed properties still weighing on housing market “For - sale” and shadow inventory Single-family home sales millions millions 6 6 5 5 New Shadow inventory of distressed 4 4 existing homes 3 3 “For - sale” inventory of all existing homes 2 2 Non-distressed existing 1 1 Distressed existing 0 0 (estimated) 06 07 08 09 10 11 12* 07 08 09 10 11 12* Sources: CoreLogic; NAR; *2012 sales data are first quarter at annualized rate. 2012 inventory data are through S&P; Fiserv; E&PA calculations January. Distressed existing home sales estimates include short-sales and sales from REO inventory; 10 latter is two-thirds of volume. Shadow inventory includes all properties in serious delinquency or worse that are ultimately expected to be listed as for sale from REO

Inventory of distressed properties still weighing on house prices First mortgage loans (number) Case-Shiller 20-Metro Home Price Index, SA, 2006Q2=100 5,000 100 90+days delinquent In foreclosure 4,000 90 - 33% 3,000 80 2,000 70 1,000 - 36% 60 0 50 06 07 08 09 10 11 12 00 01 02 03 04 05 06 07 08 09 10 1112F 13F Sources: Equifax/Moody’s Analytics , Fiserv/Moody’s Analytics ( May 2012 baseline forecast) 11

Few housing markets are showing much price appreciation yet Existing single-family (constant quality) home price indexes Index April 2006 peak = 100 100% 100% Dallas 90% 90% Boston 80% 80% NYC Tampa 70% 70% Los Angeles DC Chicago 60% 60% 50% 50% Detroit Miami 40% 40% Phoenix Las Vegas 30% 30% 20% 20% 10% 10% 0% 0% 06 07 08 09 10 11 12 06 07 08 09 10 11 12 Source: S&P Case-Shiller monthly data through April 2012 12

Mortgages with negative equity will keep RES RE loss rates high in some states Share of 1 st liens (count) with negative equity 70% 60% Underwater less than 20% (LTV 100% to 120%) Underwater more than 20% (LTV >120%) 50% 40% 30% 45% 20% 31% 27% 26% 22% 10% 21% 18% 10% 2% 0% US NV MI FL AZ GA IL CA UT Sources: OCC Mortgage Metrics; LPS Data are for 9 large servicers. Data reflect both loans held in portfolio and Home Price Index; data as of January serviced for others. Data include FHA/VA mortgages but exclude 1 st liens 2011 without a refreshed LTV. 13

Euro area slowdown weighing on U.S. export growth Real GDP Real quarterly U.S. GDP and exports Yr-yr % chg % chg. annualized, seasonally adjusted 15 3.5 exports 3.0 10 2.5 5 2010 2.0 GDP 0 2011 1.5 -5 2012 1.0 est. -10 0.5 -15 0.0 Recessions -0.5 -20 Euro Area U.K. U.S. Advanced 98 00 02 04 06 08 10 12 Economies Sources: IMF July 2012 World Economic Outlook update; BEA 14

Obstacles to growth still outweigh positives Negatives Positives  Weak housing market  Signs of life in construction  Fiscal drag  Stronger household balance sheets  Continued deleveraging  Lower energy prices  Generally tight credit  Some credit easing; low  Low consumer and interest rates and inflation business confidence  Better US competitiveness  Risk from Europe 15

Loss rates still high for residential real estate National banks and federal thrifts Annual net charge-off rates, % Large Community Midsize 3.0 3.0 3.0 2.5 2.5 2.5 2.0 2.0 2.0 1Q:12 1.5 1.5 1.5 91-12 1.0 1.0 1.0 avg 0.5 0.5 0.5 0.0 0.0 0.0 1-4 famly HELOC 1-4 famly HELOC 1-4 famly HELOC Source: Integrated Banking Data are merger adjusted as of 1Q:2012 and use the current Information System (OCC) supervision designation. 16

Loss rates well above average on CRE loans at community banks National banks and federal thrifts Annual net charge-off rates, % Large Community Midsize 4.0 4.0 4.0 3.5 3.5 3.5 3.0 3.0 3.0 2.5 2.5 2.5 1Q:12 91-12 2.0 2.0 2.0 avg 1.5 1.5 1.5 1.0 1.0 1.0 0.5 0.5 0.5 0.0 0.0 0.0 Construction Cmmrcl Construction Cmmrcl Construction Cmmrcl mortgage mortgage mortgage Source: Integrated Banking Data are merger adjusted as of 1Q:2012 and use the current Information System (OCC) supervision designation. 17

Risks to economy: What did we say last year? [From March 13, 2011 presentation to Utah Bankers’ Roundtable] Downside risks Soft job market keeps unemployment rate high  Housing falls again as foreclosure crisis drags on  Weak housing and job market further stresses banks  Overseas: Mid East turmoil, Japan disaster, European debt crisis  State and local fiscal woes intensify  Upside risks Emerging market growth accelerates  Strong business sector drives hiring  Self-sustaining growth cycle kicks in  18

Risks to economy: This year’s story US (high-impact, low probability) Economy falls off fiscal cliff  US (lower-impact, higher-probability) Housing falls again as foreclosure crisis drags on • Global (high-impact, low probability) War in Persian Gulf, European financial meltdown • Global (lower-impact, higher-probability) Long slump in Europe, Sharp slowdown in China • Upside possibilities Emerging markets pick up  Strong US business sector drives hiring  19

Summary — US economy • Slow growth to persist, but US likely to avoid recession • Slow growth means slow improvement in unemployment • Housing has yet to turn around • Europe now a big risk to US economy • Positives: lower energy prices, continued low interest rates 20

Outlook for Utah and Salt Lake City • Moderate growth in jobs, household income • Positive signs in housing market, though house prices have yet to turn around 21

SLC leads Utah and the U.S. in job growth Sources: BLS, Moody’s Analytics 22

Office jobs increasing in Utah Office-using employment 2011Q1 to 2012Q1 Salt Lake City Provo Ogden Utah Las Vegas Denver Seattle US -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% Sources: BLS, Moody’s Analytics 23

Utah will show solid job growth over next 12 months Forecast employment growth 2012Q1 to 2013Q1 Sources: BLS, Moody’s Analytics (July 2012 forecast) 24

Foreign migration dominates in SLC Sources: Census Bureau/Moody’s Analytics 25

Job gains support income gains in SLC Sources: BLS, Moody’s Analytics 26