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Economic Review and Outlook

Economic Review and Outlook. University of Phoenix January 23, 2008 David B. Johnson ZHP Capital. What they say. What they mean. The Fed’s Dilemma. 2007 Economic Review and Outlook for 2008. Question #1.

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Economic Review and Outlook

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  1. Economic Review and Outlook University of Phoenix January 23, 2008 David B. Johnson ZHP Capital

  2. What they say... What they mean... The Fed’s Dilemma

  3. 2007 Economic Review and Outlook for 2008

  4. Question #1 In 2007, single-family housing starts fell 25%, and home prices are likely to see their first national decline since 1930’s. In 2008, will this housing “pandemic” give the rest of the economy the “flu”, or just a “cold”?

  5. Recession Probability

  6. Business Cycle Expansions and Contractions “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” Source: NBER

  7. Subprime Mortgages The subprime category of residential mortgages typically includes loans made to borrowers that displayed one or more of the following characteristics at the time of origination: • weakened credit • histories that include payment delinquencies, chargeoffs, judgments, and/or bankruptcies; • Reduced repayment capacity as measured by credit scores or debt-to-income ratios; • or incomplete credit histories. Source: July 2007 Senior Loan Officer Opinion Survey on Bank Lending Practices

  8. Housing Starts

  9. S&P/Case-Schiller Existing Home Prices OFHEO Repeat Sales Housing Price Changes

  10. Job Creation

  11. Jobs vs. Income Non-farm Payrolls (LH) Personal Income (RH)

  12. ? Jobs vs. Spending Non-farm Payrolls (LH) Personal Consumption (RH)

  13. Business Capital Spending Capital Goods Orders Industrial Production

  14. Purchasing Manager’s Index

  15. Question #2 In 2007, the Federal Reserve lowered the target Federal Funds rate by 100 basis points, and instituted several extraordinary programs to provide liquidity and credit to the capital markets. In 2008, will the Federal Reserve continue to stoke the monetary fires, raising the risk of a resurgence of inflation?

  16. 9/18 - 50 basis point Fed Funds and Discount Rate Cut 8/17 Discount Rate Cut 10/31 & 12/1125 basis point Fed Funds and Discount Rate Cuts 1/22 - 75 basis point Fed Funds and Discount Rate Cut Federal Reserve Policy ToolsRecent Changes

  17. FOMC Monetary Policy Tight Money Easy Money Source: St. Louis Federal Reserve, Monetary Trends

  18. ? Money Still Matters?

  19. Inflation Expectations

  20. Question #3 In 2007, the exchange value of the US dollar fell to 30 year lows against the currencies of our major trading partners. In 2008, will strong foreign economies and this weak dollar generate enough exports to support the US economy?

  21. $1.46/euro Exchange Rates $0.90/euro

  22. Outlook for Fiscal Stimulus Bush has proposed $150 billion package • Any fiscal stimulus could be counter-productive if not implemented in a timely or efficient manner • Must provide stimulus promptly in next 12 months • Must maximize near-term stimulus per dollar of increased budget expense • Must be explicitly temporary to avoid exacerbating the structural deficit.

  23. Current Conditions • Fed’s Beige Book for Chicago District • Economic Activity expanded at slow pace in December and early January • Consumer spending mixed, with vehicle inventories declining to comfortable levels • Business Spending little changed from previous • Residential construction and home sales declined. Real estate lending remains weak, but defaults were not deteriorating. • Manufacturing growth was stable, and manufacturers remained upbeat about prospects for 2008. Strength in demand for exports and falling dollar has allowed price increases. • Rising input costs for manufacturers, especially for those affected by oil, with a general inability to pass on costs. • Higher wholesale food prices were able to be passed on to retail food consumers.

  24. So what does this mean for Business? • Prepare for a greater slowdown in final sales in the coming months. • Pricing power will be limited • Borrowing rates should fall dramatically, especially for prime borrowers.

  25. Economic Review and Outlook University of Phoenix January 23, 2008 David B. Johnson ZHP Capital

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