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Look for Low and Away but Watch Out for In Your Ear Economic Update for

Look for Low and Away but Watch Out for In Your Ear Economic Update for South Carolina International Trade Conference. Gregory Miller Chief Economist May 2007. Soft Landing: Deal or No Deal?. Soft Landing v Recession Watch 2007 Risk tilting to latter Consumer “Fundos” OK

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Look for Low and Away but Watch Out for In Your Ear Economic Update for

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  1. Look for Low and Away but Watch Out for In Your Ear Economic Update for South Carolina International Trade Conference Gregory Miller Chief Economist May 2007

  2. Soft Landing: Deal or No Deal? • Soft Landing v Recession Watch 2007 • Risk tilting to latter • Consumer “Fundos” OK • Household Resources Holding but “Reserves” Stretched Thin • Oil Impact on the Way • Labor Market Slowing • Cap Spending Slowing as Credit Tightens • Housing plummeting – Issue is SubPrime Infection • Inflation: Capacity Constraints • The Fed’s playing field • Wages and the Economics of new jobs • Stock Follow Profits • But risk sustainability • FOMC Holds at Neutral • No more Preemptive Strikes • Baseline 2007: Soft Landing v Recession 50/50

  3. STI Recession Probability Matrix Reloaded • Ver 3 predicted 10 of last 7 recessions • Ver5: STI Recession Probability Index  “50/50” • but lower confidence level • half a dozen weak false signals since Oil spike began • So, Recession Watch, not Recession Forecast

  4. US Consumer: Desperate Housewives • Income is OK, but “HH reserves” dissipating • HH Saving • Home-based Wealth • HE draw downs • And, total spending slows while gasoline share rises

  5. Oil: We’re Not in Kansas Anymore, Toto • So far, consumers impervious to high energy price, but • Impact is cumulative • Gas price – just hit new record • US still lacks refinery capacity • Auto sector lags supply of “cheap/efficient” and, from consumers, the cry is far from overwhelming • And, the slowdown doesn’t hit until after oil peaks

  6. Labor Market: Imus, Trump, Wolfowitz, Street Sense: Where Will It All End? • Full employment but new job increments are successively smaller • Layoffs are creeping higher, and • Unemployment trough is a “weak economy” signal • Last 7recessions began with unemployment rate at (or real near) cycle low

  7. US: Cap Spending Catalyst; Excess Inventory; and Credit Tightening • Equip Invest = -1.5% last two quarters; 1Q07; durable goods orders = -7.8% • Affects both Goods and Services production • Inventory: we can’t measure “unplanned” but we can estimate “excess.” • Excess Inventory = $53 Bill Last 4 quarters = $50 bill • Primarily a “Goods sector” indicator • After years of Easy Credit, Banks Tightening

  8. US Housing: See You Later, Decorator • Housing Contribution: • 2003 – 2006.2 = 16% of GDP growth • Last four quarters = -23% of GDP growth (most recent qtr = -60%) • So far, not as bad as early-80s or early-90s = -30%+ • Rate of deterioration improving, but “plans” suggest overhang

  9. US Inflation: I Totally Don’t Know What That Means, But I Wawnt It! • Economics of job creation reverses • Wages = 2% and productivity = 4%, job creation makes business sense • Wages = 4% and productivity = 1%, new jobs don’t pay for themselves • Trade-off: Pass-through (inflation) or profits (decline)

  10. US Inflation: The Tribe Has Spoken • Bernanke: Inflation Bias Remains • Fed Inflation Band = 1.0% - 2.0%; Core sticks just above • Inflation Moving Target • Oil • Wages • Ag (corn)

  11. Stock Market: Sounds a Little Pitchy to Me, Dawg • Stocks respond to Profits • To which my teenage daughter responds: “Duh!” • But, profits (consistently) report two tricky components • Cost Cutting (each round makes next round more difficult) • Revenue from Foreign Sources • 20% S&P  50% sales from foreign source • 5%  75%!

  12. Monetary Policy: The Procedure Could Kill the Patient, but If We Do Nothing, She Dies Anyway. – Gregory House • Fed “Neutral” = 4.75% - 5.25% • Foreign investors eliminate market rates risk premium • Market rates stuck in a trend-less 50 BP range • Mortgage Rates: Fixed = -60 BP; ARM = -40 BP • Leaves Inverted Yield Curve  Risks Credit Crunch • Fed will not ease for Asset Bubbles • Alternative sources: Internal cash, Equity capital • Bernanke Fed wants to see data • No more Greenspan Preemptive Strikes • Waiting for data puts Fed behind the curve • By then it may be too late, because …

  13. “Round Up the Usual Suspects!” -- Captain Renault • The list of traditional recession predictors is falling into alarming territory

  14. Conclusions: Save the Cheerleader – Save the World • Soft Landing and Recession now 50/50 • Expect GDP = 1% to 2% • Risk = negatives • Expect Inflation to moderate, but maybe not fast enough • Oil prices and wages threaten corporate profits • Expect interest rates range bound with downward tilt, but • No relief from inverted yield curve until Fed eases • Inverted yield curve threatens bank profits and credit • So, sustainability hostage to Fed Easing • The Fed is hostage to price indexes that are slow to improve, so • The longer they wait, the greater the risk that RPI is right again

  15. SunTrust Economics – Your Resource Gregory Miller Chief Economist 404.588.7918 Gregory.Miller@SunTrust.Com Material we present here is based upon information available on the date of publication. We believe that our data is reliable. However, we do not represent that it is accurate or complete. We solicit no action based upon this material. Opinions we express are our judgment as of this date and may change. (5/07)

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