economic and banking conditions update and outlook

Economic and Banking Conditions Update and OutlookJared Fronk, Ph.D.November 23, 2020Division of Insurance and Research

Federal Deposit Insurance Corporation

Session Goals:

FDIC Economic Outlook 2

• Understand the current condition of the U.S. economy and banking sector.

• Identify and characterize existing and emerging risks to U.S. economic growth.

Poll:Question: The U.S. Economy is __________.

Possible Answers:a) In a recession.b) On shaky ground.c) Recovering.d) Growing.


U.S. GDP experienced historic contraction in second quarter. The economy is in recession.


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2013 2014 2015 2016 2017 2018 2019 2020 2021

Sources: Bureau of Economic Analysis (Haver Analytics); Blue Chip Forecasts (November 2020); FDIC.

Real U.S. Gross Domestic Product (GDP)Quarterly percent change at annual rate

Blue Chip consensus forecast

Average Growth Rate1980-2006: 3.1%2007-2017: 1.5%


-9-6-30369

1215182124

Consumption Business Investment Government Net Exports

Source: Bureau of Economic Analysis (Haver Analytics).

Contribution to Real GDP Growth (Percent)

Goods+9.2

IntellectualProperty

-0.03

Increase in Exports+5.0

Increase in Imports

-8.0

Federal Govt. -0.4

State Govt.-0.3

Equipment+3.3

Inventories+6.6

+25.3 +11.6 -0.7 -3.1Total

ResidentialConstruction

+2.1

Services+16.0

Non-Res. Construction

-0.4

GDP rose a record 33.1 percent in third quarter 2020 as the economy partially reopened.

Global growth is expected to fall in 2020 before recovering in 2021. The outlook depends on pandemic developments.


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2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Emerging

World

Advanced

Real GDP GrowthPercent change at annual rate

Forecast

Source: IMF World Economic Outlook, October 2020.

COVID-19 and geopolitical issues present downside risks.


• COVID-19• Many countries’ borders remain sealed, disrupting international trade.• A new wave of lockdowns has begun in Europe, which will further impact

economic growth there, with knock-on effects abroad.• Brexit

• The EU and the UK have so far failed to negotiate a post-Brexit trade agreement.

• Without no agreement, the UK will crash out of the EU on January 1, 2021• War in the Caucuses

• Armenia and Azerbaijan are engaged in a limited war over a long-disputed territory, Nagorno-Karabakh

• The region is a major fuel corridor for Europe, and an intensification of the conflict could threaten the European energy supply

The labor market has experienced an unprecedented increase in volatility and unemployment remains historically high.


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80 85 90 95 00 05 10 15 20Source: Bureau of Labor Statistics (Haver Analytics). Note: Shaded areas indicate recession.

Civilian Unemployment Rate Percent

Unemployed +Marginally Attached +Part Time for Economic Reasons (U-6)

Official Unemployment Rate (U-3)

April Peak: U-6 22.8U-3 14.7

Current (Sept): U-6 12.8U-3 7.9

PollQuestion: Which industry had severe (greater than 2 million) job losses during March and April?

Possible Answers:a) Leisure and Hospitality (including Restaurants)b) Professional Servicesc) Education and Health Servicesd) Retail Trade


Job losses were widespread but especially severe in retail and hospitality. Strong gains have not made up losses.


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Monthly Job Change (Seasonally Adjusted, Thousands)

Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20

Source: BLS (Haver)

-3840 -1386 -1397 -942 -483 -647 -495 -304 -394 -312 -276 -162Net Job Change March to September:

Business loan nonpayments increased but have begun to come down.


0% 10% 20% 30% 40%

Finance and InsuranceInformation

Prof, Science, & TechConstructtiion

Real Estate and RentalWholesale Trade

Mining, Oil, and GasRetail Trade

ManufacturingHealth Care

National AverageAdmin and Support

Arts & RecreationEducational Services

Other ServicesTrans. & WarehousingFood & Accomodation

Source: U.S. Census Bureau.

Percent of Businesses that Missed Scheduled Payments

0% 10% 20% 30% 40%

Finance and InsuranceInformation

Prof, Science, & TechConstructtiion

Real Estate and RentalWholesale Trade

Mining, Oil, and GasRetail Trade

ManufacturingHealth Care

National AverageAdmin and Support

Arts & RecreationEducational Services

Other ServicesTrans. & WarehousingFood & Accomodation

Other Payments(rent, utilities,payroll)

Loan Payments

Percent of Businesses that MissedScheduled Payments

May 23 October 12

Home sales have slowed from April through May, but have since rebounded. Structural factors helped keep prices high.


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Jul-18 Nov-18 Mar-19 Jul-19 Nov-19 Mar-20 Jul-20

NAR Total Existing Home Sales, United States (SAAR, Thous)

New 1-Family Houses Sold: United States (SAAR, Thous)

Source: National Association of Realtors (Haver).

Total Existing Home Sales, Thousands (SAAR)

New 1-Family Houses Sold, Thousands (SAAR)

Mortgage forbearance requests have steadily fallen, but remain elevated.


2.73

8.55

6.81

5.83

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1

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8

9Percent of Total Servicing Volume Portfolio in Forbearance

Source: Mortgage Bankers Association's Forbearance and Call Volume Survey, June 28, 2020.

Mortgage delinquencies have increased, especially in the South and Mid-Atlantic.

FDIC Economic Outlook 14Source: CoreLogic.

2019 2020

Equities contracted in March and April but have recovered most of their initial losses.


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Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20

S&P 500 (Left Axis) VIX (Right Axis)

S&P 500 Index Value (January 2, 2019 = 1) Volatility Index (VIX)

Source: Capital IQ.

PollQuestion: The outlook for economic growth going forward is _____?

Possible Answers:a) Improvingb) Decliningc) Stabled) Too uncertain to tell


Consumer confidence and business optimism fell to normal recession levels and are trending up.


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12 13 14 15 16 17 18 19 20Sources: Conference Board, NFIB (Haver Analytics).

Consumer Sentiment Index

Small Business Optimism(right axis, 1986 = 100)

Consumer Confidence(left axis, 1985 = 100)

Small Business OptimismIndex

Both manufacturing and service conditions entered a contraction, but are now increasing.


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2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Manufacturing Services

Economic Activity, as measured by the ISM Purchasing Managers Index

Source: Institute for Supply Management (Haver Analytics).Note: The ISM Purchasing Managers index is based on a survey of executives on a variety of business activity indicators including new orders, backlog of orders, production, supplier deliveries, and inventories. The index measures the percent of positive responses plus one-half of those responding the same. Index values above 50 percent indicates that activity in the sector--manufacturing or services--is generally expanding.

Values below 50 indicate contraction

CRE vacancies are forecast to increase as different sectors of the economy are affected by COVID-19.


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06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Office

Multifamily

Industrial

Retail

Source: CoStar Portfolio Strategies. Data as of November 2020. Note: Shaded area indicates recession.

Vacancy Rate (percent)

Actual Forecast

Headline and core inflation are below the Federal Reserve Board’s target of two percent.


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2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

RecessionCore PCEHeadline PCE

Headline PCE and Core PCE (Excludes Food and Energy) Year-over-year percent change

Source: Bureau of Labor Statistics (Haver Analytics).Note: Shaded areas indicate recession.

September 2020:PCE: 1.41%Core: 1.37%

PollQuestion: In light of the emerging pandemic, fiscal and monetary policy were _____.

Possible Answers:a) Quick to respond.b) Unprecedented in size and scope.c) A first step, but more will be needed.d) Unnecessary.


• Phase 1- $8.3 billion for vaccine research, testing, and emergency funding for agencies

– Less than 0.1% of GDP

• Phase 2- $192 billion for free testing, sick leave, and unemployment insurance funding to states

– Roughly 0.9% of GDP

• Phase 3- $2.2 trillion of direct subsidies (CARES). Direct one-time payments of $1,200 to qualifying individuals, boosted UI benefits, delayed tax filing, PPP loans to small businesses

– Roughly 10% of GDP

• Phase 4- $484 billion in additional support to PPP small business loans and hospitals

– Roughly 2% of GDP

• Phase 5- under negotiations


Fiscal policy actions in response to COVID-19.

• Interest Rate Cuts – The Fed cut rates twice in March, both in unscheduled meetings. Lower short term interest rate support aggregate demand in the economy

• Asset Purchases – Unlimited Treasury and mortgage backed securities (MBS) purchases to reduce longer term rates (unprecedented)

• Reserve Requirements – the Fed cut reserve requirement for banks to zero on March 26

• Liquidity and Lending Facilities – support commercial paper, money market funds, corporate debt, small and medium sized businesses, household lending, municipalities

• Dollar Swaps—Increased standing dollar swap lines, and announced new ones with other central banks

• Repo Operations—introduced a new repo facility for foreign central banks

• Regulatory Guidance

Monetary policy actions in response to COVID-19.


The Fed cut rates at two emergency meetings in March. Expectations are for rates to stay low for the foreseeable future.


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1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020

Federal Funds Rate TargetPercent

Sources: Federal Reserve; Bloomberg.

Forecast based on FOMC communications

The Federal Reserve has cut its policy rate back down to the effective zero lower bound, where it was between 2008 and 2015.

The Fed increased its balance sheet to over $7 trillion, the most on record, mostly through Treasury and MBS purchases.


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Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20Source: Federal Reserve Board (Haver).

Trillions of USD

The yield curve is flat and low. Expectations are for the curve to remain there for the foreseeable future.


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1M 3M 12M 2Y 3Y 5Y 7Y 10Y 30Y

October 30, 2020

July 31, 2020

March 31, 2020

December 31, 2019

The yield curve steepened in October after falling from March.

Source: Federal Reserve and U.S. Treasury (Haver Analytics).Note: Recessions in inset shaded.

U.S. Treasury Yield Curves (percent)

0246

'02 '07 '12 '17

U.S. Treasury 10-Year Yield

PollQuestion: The biggest risk to the U.S. economic outlook is _____.

Possible Answers:a) A resurgence of COVID-19 slowing recovery.b) Policy uncertainty, especially concerning trade.c) Corporate debt sector challenges.d) Something else.


The COVID-19 pandemic has entered its third wave.


The Midwest and South are now the hardest hit.


Risks to the U.S. Economic Outlook:

• COVID-19 related reopening risks

o Pandemic nature and ability to lift stay-at-home orders

o Additional fiscal policy responses

o Additional monetary policy responses

o Consumer sentiment and path of recovery

• Policy uncertainty, especially concerning trade

• Corporate debt sector challenges (leveraged lending, high corporate debt)

• Domestic issues

• Geopolitical risks


PollQuestion: In light of these trends, the shape of the U.S. economic recovery will most likely be _____.

Possible Answers:a) V-shapedb) K-shapedc) W-shapedd) Reverse radical symbol


https://www.fdic.gov/analysis/

FDIC has several economic and banking publications available online.


https://www.fdic.gov/analysis/

economic and banking conditions update and outlook

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