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