A Severe Global Manufacturing Recession

1. A Severe Global Manufacturing Recession Presented by Dan Meckstroth Chief Economist dmeckstroth@mapi.net

2. The Root of the Crisis--Misguided Policy, Greed, Poor Decisions • Taxpayer Relief Act of 1997 • Exempted $500,000 in home equity from personal taxation • 1997 Asian Currency Crisis • Developing countries’ central banks manipulated exchange rates to build currency reserves • Global savings glut lowered mortgage rates (homebuyers) and fixed investment yields (domestic and foreign investors) • Public Policy (for both Parties) to Increase Homeownership Rates, Especially by Minorities • Pressure on Fannie and Freddie to lower lending standards • Fannie and Freddie remained severely undercapitalized but able to borrow at below market rates • Bush Administration’s Financial Market Deregulation Philosophy • Federal Reserve Policy to Clean Up After Bubbles, Not Prevent Them • Financial Industry Creates and Brokers Complex and Opaque Derivatives • Home Equity Loans Finance a Consumer Spending Spree

3. Vicious Circle of Financial Deleveraging Rising losses in subprime markets Source: McKinsey & Company

4. Credit Conditions: Banks Tightening Business and Consumer Lending Standards • Senior Loan Officer Opinion Survey Source: Federal Reserve Board

5. The Financial Crisis Has Spread Worldwide • World Stock Prices Index, January 2007=100 Source: Yahoo Finance

6. Vicious Circle From Financial Sector to Real Economy Rising losses in subprime markets Source: MAPI

7. A Severe Decline in Household Wealth • Housing Prices and Common Stock Prices Source: OFHEO, S&P 500, MAPI F=Forecast

8. Home Equity No Longer Supports Spending Mortgage Equity Withdrawal Source: Federal Reserve Board, Calculatedrisk.com

9. Overextended Consumer: Confidence Plummets • Consumer Confidence Index Source: University of Michigan

10. Consumers Drastically Cut Big-Ticket Spending Motor Vehicles and Housing Starts Source: U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis, MAPI F=Forecast

11. Widespread Job Loss in the Economy Job Loss in the Recession 1Change in jobs as a percent of the Dec. 2007 level 2Industry employment as a percent of all jobs in Jan. 2009 Source: U.S. Bureau of Labor Statistics, MAPI

12. Widespread Job Loss in Manufacturing Job Loss in the Recession 1Change in jobs as a percent of the Dec. 2007 level 2Industry employment as a percent Mfg. in Dec. 2007 Source: U.S. Bureau of Labor Statistics, MAPI

13. Consumer Industries Led Manufacturing into Recession Consumer-Related Manufacturing Production Source: Federal Reserve Board, Global Insight Model, MAPI

14. Excess Capacity in the Economy Depresses Capital Investment • Labor Unemployment Rate and Excess Factory Capacity Source: U.S. Bureau of Labor Statistics , Federal Reserve Board, MAPI F=Forecast

15. Falling Capacity Utilization and Tight Credit Conditions Drive Down Business Investment Spending • Business Investment, Inflation-Adjusted Source: U.S. Bureau of Economic Analysis , MAPI F=Forecast

16. Capital Equipment Industries Were Pulled Into Recession Investment-Related Manufacturing Production Source: Federal Reserve Board, Global Insight Model, MAPI

17. Intermediate Industries Are In Recession Material Manufacturing Production Source: Federal Reserve Board, Global Insight Model, MAPI

18. Declining U.S. Steel Production U.S. Steel Production U.S. Steel Production Source: Left – Federal Reserve Board, Right – Federal Reserve Board F=Forecast

19. A Massive Federal Stimulus is On the Way $787 Billion Stimulus Package by Major Category (Percent of Total) Sources: Joint Committee on Taxation, House Committee on Rules, Congressional Budget Office

20. Infrastructure and Energy Projects, Education and State Governments Receive the Most Funding Major Categories of Discretionary Spending in Stimulus Package (Billions of Dollars) Sources: Joint Committee on Taxation, House Committee on Rules, Congressional Budget Office

21. US Dollar Appreciation and Global Recession Hurts Exports Which Have Been a Pillar of Strength in Manufacturing U.S. Dollar Exchange Rates World Trade Weight GDP Growth Source: Left – Federal Reserve Board, Right – Federal Reserve Board F=Forecast

22. A Severe Manufacturing Recession Non-High Tech Manufacturing Production Non-High Tech Manufacturing Production Source: Left – Federal Reserve Board, Right – Federal Reserve Board

23. The 2008-2009 Recession is As Severe As 1973-75 Length and Depth of Selected Post-World War II Recessions Source: National Bureau of Economic Research, Bureau of Economic Analysis, Bureau of Labor Statistics, Federal Reserve Board and Manufacturers Alliance/MAPI

24. Two Speed World: Advanced Countries In Manufacturing Recession • Manufacturing Production Growth Source: Government Statistical Agencies, Global Insight, MAPI F=Forecast

25. Two Speed World: Developing Countries Grow At A Decelerating Rate • Manufacturing Production Growth Source: Government Statistical Agencies, Global Insight, MAPI F=Forecast

26. A Severe Global Recession World GDP & Manufacturing Production World Manufacturing Production Source: Left – Federal Reserve Board, Right – Federal Reserve Board F=Forecast

27. World Steel Production Collapsed at the End of 2008 • Global Steel Production Source: World Steel Association

28. Pervasive Decline in Global Steel Production Global Steel Production Source: World Steel Association