“by the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

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“By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

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Page 1: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

“By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

Page 2: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

Here Comes The U.S. Here Comes The U.S. SlowdownSlowdown

…How Bad, And How Long?…How Bad, And How Long?

Ian C. ShepherdsonChief U.S. Economist, High Frequency

Economics

Page 3: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

The Root Of The Problem

The Housing Boom Is At The Root Of The Problem

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68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06

Long-run trend in home sales, million

Total home sales, million

15-year uptrend

Page 4: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

Soaring Sales Have Driven Prices UpSoaring Sales Have Driven Prices Up

Home Price Gains Still Look Substantial…

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79 81 83 85 87 89 91 93 95 97 99 01 03 05

OFHEO index of U.S. house prices, y/y%

15-year acceleration

Page 5: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

Soaring Prices Encourage Equity Soaring Prices Encourage Equity Extraction…Extraction…

As Home Price Gains Slow, Equity Extraction Will Plunge

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7Real OFHEO home prices y/y%,lagged four quarters (Left)

Net equity withdrawal as % nethousing wealth (Right)

Page 6: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

……And Equity Extraction Boosts SpendingAnd Equity Extraction Boosts Spending

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24Real equity withdrawal, y/y $B, 4-quarteraverage (Left)

Personal saving rate, % (Right)

Page 7: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

Meanwhile, Construction Has Boomed TooMeanwhile, Construction Has Boomed Too

Meanwhile, Construction Has Boomed Too

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68 72 76 80 84 88 92 96 00 04

Residential construction as % GDP

Average 1961-95

Page 8: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

But Homebuilders Became GreedyBut Homebuilders Became Greedy

…But Homebuilders Got Greedy; Supply Has Soared

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97 98 99 00 01 02 03 04 05 06

Months supply of new homes (Left)

Page 9: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

Now, Soaring Inventory Is Depressing PricesNow, Soaring Inventory Is Depressing Prices

Now, Soaring Inventory Is Depressing New Home Prices

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26Months supply of new homes, 3-mth ave. (Left)

Median new home price, y/y%, 3-mth average(Right)

Page 10: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

……As Prices Slow, Real Mortgage Rates RiseAs Prices Slow, Real Mortgage Rates Rise

As Price Gains Slow, Real Mortgage Rates Rise…

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76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06

Real mortgage rate, %. Average 30-year fixed mortgage rate less OFHEOy/y home prices

For.

Page 11: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

……And As Real Rates Rise, Home Sales FallAnd As Real Rates Rise, Home Sales Fall

…And As Real Rates Rise, Sales Volumes Will Plunge

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Real mortgage rates, % (Left)Home sales per 1000 of population (Right)

Page 12: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

Put It Another Way: Homes Are ExpensivePut It Another Way: Homes Are Expensive

Put It Another Way: Homes Are Just Too Expensive

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Composite affordability index (Left)

Mortgage applications y/y% (Right)

Page 13: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

Plunging Home Sales Will Hurt RetailersPlunging Home Sales Will Hurt Retailers

Plunging Home Sales Will Hammer Retailers

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20Home sales y/y%, lagged threequarters (Left)

Retail sales of building materials &furniture, y/y% (Right)

Post-Katrina boost

For.

Page 14: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

Soaring Gas Prices Also Hurt ConsumersSoaring Gas Prices Also Hurt Consumers

Soaring Gas Prices Also Hurt Consumers

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130CPI gasoline y/y%, lagged onemonth (Left)

Univ. of Michigan surveyexpectations index (Right)

Page 15: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

Lower Confidence Implies Slower SpendingLower Confidence Implies Slower Spending

Lower Confidence Implies Slower Spending

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6Michigan surveyexpectations index (Left)

Real consumers’ spending,y/y% (Right)

Page 16: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

Retailers Are Already Shedding LaborRetailers Are Already Shedding Labor

Retailers Are Already Shedding Labor

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Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06

Change in retail payrolls, thous.(Left)Three-month average, thous.(Right) Katrina

Page 17: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

Broad Payroll Growth Is Slowing Too…Broad Payroll Growth Is Slowing Too…

Overall Payroll Growth Is Slowing Too

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Private nonfarm payrollsThree-month average

Katrina

Page 18: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

……With More To ComeWith More To Come

…With More To Come

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Help wanted, y/y%,five month lag (Left)

Nonfarm payroll 12-month ave. (Right)

Page 19: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

Meanwhile, Manufacturing Is Doing Well…Meanwhile, Manufacturing Is Doing Well…

Meanwhile, Manufacturing Is Doing Well…

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Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06

Manufacturing production, y/y%

Page 20: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

But It Won’t Last, As Higher Rates BiteBut It Won’t Last, As Higher Rates Bite

But It Won’t Last, As Higher Rates Bite Next Year

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4510-year BBB, 4-qtr change %, 4-qtr lag (Left)

Four-quarter change in ISM index (Right)

Page 21: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

The Manufacturing ISM Will Drop Next YearThe Manufacturing ISM Will Drop Next Year

The Manufacturing ISM Will Drop Next Year

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ISM headline index,three-month average

Page 22: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

Expect A Sustained, Broad SlowdownExpect A Sustained, Broad Slowdown

Expect A Sustained, Broad Slowdown

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Real GDP, q/q annualized, %Year-over-year, %

HFE forecast

Page 23: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

In The Meantime, The Labor Market Is TightIn The Meantime, The Labor Market Is Tight

In The Meantime, The Labor Market Is Tight

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Unemployment, 6-mthlag, inverted (Left)Hourly earnings, y/y%(Right)

All data are three-month averages

 

War

Page 24: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

Faster Wage Gains Are Pushing Up CostsFaster Wage Gains Are Pushing Up Costs

Faster Wage Gains Are Pushing Up Costs

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Nonfarm productivity, y/y%

Nonfarm unit labor costs, year-over-year %

Page 25: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

Slower Growth, Rising Costs Hurt EarningsSlower Growth, Rising Costs Hurt Earnings

Slower Growth, Rising Costs Hurt Earnings

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Nominal GDP y/y% less unit labor costs, y/y% (Left)

S&P 500 EPS, y/y% (Right)

HFE forecasts

Page 26: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

Core Inflation Has Clearly Picked UpCore Inflation Has Clearly Picked Up

Core Inflation Has Clearly Picked Up…

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Core CPI y/y%

Core CPI, 3-monthannualized, %

Page 27: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

Rents Aside, Not Much Is HappeningRents Aside, Not Much Is Happening

Rents Aside, Not Much Is Happening

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Services ex-energy &rent y/y% (Left)Core goods y/y%(Right)

Page 28: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

The Fed Can’t Stop Rents RisingThe Fed Can’t Stop Rents Rising

The Fed Cant Stop Rents Rising

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Two-year notes, %, lagged 12months (Left)CPI combined primary rents and OER,y/y% (Right)

Page 29: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

The Lower Dollar Is No Inflation ThreatThe Lower Dollar Is No Inflation Threat

The Lower Dollar Is No Inflation Threat

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1.5Major currencies dollar index,y/y%, inverted (Left)

Price of consumer goodsimports ex-autos, y/y%(Right)

Page 30: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

The Good News: The Trade Deficit Will FallThe Good News: The Trade Deficit Will Fall

The Good News: The Trade Deficit Will Fall

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20Real domestic demand, y/y% (Left)Real imports of goods and services, y/y% (Right)

HFE For.

Page 31: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

The Bad NewsThe Bad News

The Bad News

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60U.S. real domestic demand, y/y% (Left)

U.S. imports from South Africa, y/y% (Right)

For.

Page 32: “By the way, does anything other than ‘trouble’ rhyme with ‘bubble’?”

SummarySummary

• Growth will slow further; housing first, then industry

• The Fed is done, easing starts late 06/Q1 07

• Rising labor costs threaten earnings more than inflation

• Treasury yields are set to trend lower; stocks are in trouble