1

The 2008 Recession

Tom HaneyOctober, 2008

thaney@yahoo.com

The grey bars on the following charts represent periods of recession.

2

Gross Domestic Product

Recession is defined as several months of declining economic activity. We’re probably in a recession now, but next quarter’s GDP number hasn’t been released yet. A recession isn’t “declared” until we’re several months into it.

70% of the GDP now comes from household consumption expenditures, not including housing.

3

Personal Savings Rate

The average household saves nothing. It will be difficult to drive growth with no savings and reduced domestic manufacturing capacity.

4

Consumer Credit Outstanding

People don’t stop spending when they run out of money. They stop when they run out of credit. With the credit crisis, home values decreasing, home equity tapped out, and credit cards at their limit, people may finally be out of credit.

5

Interest RatesCutting interest rates in 2001 helped the economy by unleashing pent up demand to borrow for housing, etc. There is no pent up demand left. Lower interest rates no longer drive this activity.

6

Net ExportsImprovement in net exports could help. If the dollar de-values vs. the Chinese Yuan, domestic consumption could increase. This situation could be accompanied by notable inflation.

7

Federal Consumption

Government spending is already at an all time high, limiting the ability for the government to drive consumption. The high spending is driven in part by the war in Iraq. The bailout will raise spending even further.

8

Foreign Debt

The war in Iraq and bailout are being funded in part by foreigners, especially China, who has been bidding up the price of Treasury offerings to keep the value of the dollar high. 66% of foreign debt held by the public is held by the central banks of Japan and China.

We do not “owe it to ourselves”.

9

China / US Exchange Rate

China is spending to keep the value of the dollar up to maintain Chinese exports. If the value of the dollar falls it could lead to fewer US imports from China, improving net exports, stimulating the U.S. economy.

10

Federal Deficit

The bailout will contribute to the already negative deficit.

11

State Taxes

State and local governments will lack resources to stimulate the economy as taxes will fall as a result of the recession. There are no rainy day funds.

12

UnemploymentUnemployment will increase with the recession. It won’t recover until well after the recession ends as business want to be sure before taking on the expense of new hires.

13

Domestic Investment

Investments in plant and equipment will be reduced until inventories are used and business owners have high confidence in recovery.

14

Inflation

Inflation could escalate if the dollar de-values and demand for treasuries dries up. Many treasuries have maturity lengths under 3 years.

15

Oil Prices

The price of oil is likely to decline with decreased global output.

16

Banks: Commercial Charge-Offs

Bank charge-offs will increase sharply. Q3 yet to be reported.

17

Non-Current Loans - All U.S. Institutions (billions)

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20

40

60

80

100

120

140

160

180

June 2005 June 2006 June 2007 June 2008

Loan loss allowance

Noncurrent loans and leases

source: FDIC Statistics on Banking http://www2.fdic.gov/SDI/SOB/

Non-Current Loans

Next quarter’s numbers could be extreme.