© 2011 morningstar, inc. all rights reserved. from slow straggle to steady stride: a hesitant...
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© 2011 Morningstar, Inc. All rights reserved.
From Slow Straggle to Steady Stride: A Hesitant Recovery Assumes New Cadence
Robert Johnson, CFADirector of Economic AnalysisFebruary 22, [email protected](312) 696-6103
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Executive Summary
×Worst recession since the Great Depression, ended June 2009
×Growth during 2010 may have approached 3%, 3.5% to 4.0% for 2011
×Manufacturing slowed somewhat during the summer of 2010
×Services, consumer sectors need to take the stage
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Executive Summary
×Below-average recovery so far
×Worry zones: European debt crisis, banks, real wages, geopolitical issues, emerging economies stall as in inflation accelerates
×Bullishness based on consumer, high productivity, limited declines in construction, exports to developing markets
×Market valuations no longer dirt cheap, but not outrageously priced
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Hidden Potential for the Economy to Perform Better than Expectations
2010 (a) 2.9% growth, because:
×End of inventory draw-down
×Renewed auto production
×Bottom in residential construction
×Exports
My GDP View
Source: Morningstar
My Inflation Outlook
Inflation 2010 (a)1.4%
Inflation 2011 (e)2.0%
My Unemployment Outlook×Unemployment peaked
about 10.1%
×Current rate 9.0%
×Potentially under 9% by mid-2011
2011(e) 3.75% growth
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Where Are We Now?
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The Harder GDP Falls, the Higher It Bounces--Usually
Year After Bottom, 18 Month GDP
Growth Rate
Prior GDP Contractio
n
1981 11.7% -2.6%
1957 9.8% -3.7%
1953 9.5% -2.6%
1960 9.4% -1.0%
1969 8.8% -1.1%
1973 7.5% -3.2%
1990 4.8% -1.4%
2001 2.6% -0.3%
1980 1.4% -2.2%
Average 7.0% -2.0%
2007 4.5% -4.1%Source: BEA, Morningstar calculations.
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Retail Spending the Most Typical of Past Recoveries
Source: St. Louis Federal Reserve, updated January 31, 2010
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Consumer, Exports Drive GDP Overall% Contribution to GDP Growth by Category
Source: Bureau of Economic Analysis, Morningstar, updated January 28, 2011
RecoveryBegins Whole
Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Recovery
Consumer Goods 0.6 -0.7 1.6 0.4 1.3 0.8 0.9 2.3 2.0
Consumer Services -0.1 0.1 -0.2 0.3 0.0 0.8 0.7 0.8 0.6
Business Structures -2.3 -0.7 -0.4 -1.0 -0.5 0.0 -0.1 0.0 -0.5Equipment & Software -3.0 -0.3 0.3 0.9 1.2 1.5 1.0 0.4 1.5Residential Construction -1.3 -0.7 0.3 0.0 -0.3 0.6 -0.8 0.1 -0.1Inventory -2.4 -1.4 1.1 2.8 2.6 0.8 1.6 -3.7 1.3
Exports -4.0 -0.5 1.3 2.6 1.3 1.1 0.8 1.0 2.1Imports 6.6 2.1 -2.7 -0.7 -1.6 -4.6 -2.5 2.4 -2.5
Government -0.5 1.3 0.3 -0.3 -0.3 0.8 0.8 -0.1 0.3
Other -0.3
Total GDP Growth(annualized) -6.4 -0.8 1.6 5.0 3.7 1.7 2.6 3.2
Total Recovery GDP growth 4.5
Boxes are two best categories for the period
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Double Dip Not Likely
×Consumers are the key driver, and they keep spending
×Average recovery lasts longer than four years
×Manufacturing always pauses at this stage of the recovery
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The Consumer Drives the Economy
Source: Morningstar
Employment Expands
Consumer Spending Accelerates
Industrial Production Grows
Capital Spending Increases
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Average Recovery Lasts About Five YearsRecovery Duration
Trough Peak Months Comment
Oct-49 Jul-53 45May-54 Aug-57 39Apr-58 Apr-60 24Feb-61 Dec-69 106Nov-70 Nov-73 36Mar-75 Jan-80 58Jul-80 Jul-81 12 Shortest
Nov-82 Jul-90 92Mar-91 Mar-01 120 LongestNov-01 Dec-07 73
Average 61 Average
Jun-09 Dec-10 18 Current
Source: National Bureau of Economic Analysis, Morningstar
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Manufacturing: PMI Predicts More Recessions than Occur
Source: ISM, NBER, updated February 1, 2011
PMI Composite versus Recessions(Three Month Moving Average)
Stripes Equal Recessions
30
35
40
45
50
55
60
65
Jan 1990 Jan 1995 Jan 2000 Jan 2005 Jan 2010
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Employment Poised for Improvement?
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Source: Bureau of Labor Statistics, Morningstar, Jobs Lost Between 12/2007 and 6/2009
Employment Very Bad, Goods Producing Very Hard Hit
Jobs Lost During 2007 Recession (in 1,000s)
Employment DataService
ProducingGoods
Producing Government Total
Employment December 2007 93,618 21,956 22,377
137,951
Jobs Lost -3,916 -3,962 +346 -7.532
Percentage Decline -4.2% -18.1% +1.6% -5.5%
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Initial Unemployment Claims: Breaking-Out?
Source: Bureau of Labor Statistics, updated February 10, 2011
Claims % of Covered Employment
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
0.80%
0.90%
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Employment Growth Would Have Been Almost 1.6 Million Higher if Hours Worked Had
Remained Constant
Source: Bureau of Labor Statistics, Updated February 4, 2011
32.5
33.0
33.5
34.0
34.5
35.0
35.5
36.0
36.5
37.0
37.5
Jan-70 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10
Hours
per W
eek
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ISM Employment Data Points to Employment Recovery
Source: St. Louis Federal Reserve, Morningstar Industrials Team. Updated February 1, 2011
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
70.0
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010% Change Private Employment
PM
I E
mp
loy
me
nt
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
% C
ha
ng
e P
riv
ate
Em
plo
ym
en
t
PMI Employment Level Change Private Employment
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Demand Deferred, Not Lost: The Rubber Band Effect
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Starts Far Below Natural Demand, Improvement Stalled
Source: Census Bureau, Morningstar, updated February 17, 2011
Monthly Total Housing Starts (SAAR, thousands)
0
500
1,000
1,500
2,000
2,500
3,000
1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009
Red bar represents average natural demand, Morningstar estimate
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Housing Affordability at Record High
Source: National Association of Realtors, updated February 1, 2011
Composite Housing Affordability Index(Median Income = Qualifying Income = 100)
80
100
120
140
160
180
200
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Ind
ex
Va
lue
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Consumer Takes The Stage
Source: topnews.net.nz
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Consumption Establishes Uptrend
Source: Bureau of Economic Analysis, updated January 31, 2010
Real Personal Consumption
9,1009,1259,1509,1759,2009,2259,2509,2759,3009,3259,3509,3759,4009,4259,4509,4759,500
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10
Millions
of $
ConsumptionBottom
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Savings Rate Peaked for this Cycle?
0
2
4
6
8
10
12
14
% Sav
ings
Rat
e
Source: U.S. Bureau of Economic Analysis, updated January 31, 2011Red bars denote recession
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Consumer Fixed Payments Improved Sharply
Financial Obligations Ratio
15.00
15.50
16.00
16.50
17.00
17.50
18.00
18.50
19.00
19.50
20.00
Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08
Average =17.2
Source: U.S. Federal Reserve, Morningstar, Updated December 21, 2010
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Real Hourly Wages Looking Up Again
Source: Morningstar, Bureau of Labor Statistics, Bureau of Economic Analysis, updated January 31, 2011
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
1967 1972 1977 1982 1987 1992 1997 2002 2007
Real Hourly Wage Real Personal Consumption