Economic Outlook - Denver 11-09
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Economic & Market Update Denver November 2009
The investments described herein are: NOT FDIC INSURED • NOT BANK GUARANTEED • MAY LOSE VALUE • NOT A DEPOSIT NOT INSURED BY ANY FEDERAL OR STATE GOVERNMENT AGENCY
Looking back “Perhaps the worst “financial earthquake” since the 1930’s.”
The “Great Recession”
The financial system on the brink of collapse The economy in a nose dive Public panic
So far, 2009:
2
Economic recovery taking hold A large government stimulus package But long-term problems that continue to overhang the economy and the markets
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
The stages of economic recovery “Like the wall of water released by a dam burst, economic growth tends to surge early in economic recovery.”
Stage 1: The recession ends
The economy gradually stabilizes Pessimism remains high
Currently between Stage 1 and Stage 2
Stage 2: A initial growth surge
“Catch up” consumer spending is unleashed Inventories are replenished, productive capacity restored Pessimism wanes
Stage 3: Sustainable growth
3
Growth settles back to the “sustainable” rate Optimism takes hold
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
Areas that drive economic activity “The health of the economy depends upon the health of its parts.”
Consumers Businesses Exports Government
4
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
Consumers “Even a slowly flowing stream releases a surge of water when a dam is removed.”
Do consumers have the confidence to spend?
Consumer confidence has lagged economic recovery in the past
Consumer confidence has improved but remains low The economy continues to show improvement Business confidence, which is a better predictor, has improved sharply
Do consumers have “spendable” reserves?
Credit remains constrained for many spenders Spending remains high relative to personal income 90% of the public retain their jobs
5
Many of the “still employed” have curtailed spending Unemployment likely will continue to increase
How much growth can consumer spending drive longer term? Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
Businesses “The foundation for improved business activity has been laid. Businesses just need to see improving sales.”
Business surveys: Expectations for the future have improved
A good indicator of an improving economy
Businesses are exceptionally “lean”
Inventories have been pared substantially Employment: hour reductions versus layoffs
Lingering concerns
6
Sales need to improve Competition remains fierce: Little pricing flexibility Margin pressure: Energy and other commodity costs Uncertainty about healthcare and energy policy
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
Exports “Overseas economies have typically lagged U.S. recovery by about six months.”
Emerging markets
Remain a strong source of global growth Activity has pulled back a bit, but growth seems likely to resume
Developed markets
Some countries are recovering faster than the United States Could provide earlier support for the U.S. economy
A declining dollar could help drive exports
7
The dollar normally declines after a global recession Overseas fears of the large U.S. deficits may also push the dollar lower
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
Longer-term problems “The “sustainable” growth rate may be lower over the next few years.”
Consumer spending relative to income Employment Deficits and Inflation
8
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
Spending relative to Income “Spending, relative to income, is still high.” Monthly Data 1/31/1959 - 8/31/2009 (Log Scale)
P e rso n a lC o n s u m p tio nR e la tiv etoP e rso n a lIn c o m e
2005
84.99
84.99
84.48
84.48
83.98
83.98
83.48
83.48
82.98 82.49
82.98
1960
82.49
82.00
82.00
81.51
81.51
81.03
81.03
80.55
80.55
80.07
80.07
79.59
79.59
79.12
79.12
78.65
78.65
78.18
78.18
1998
77.72
77.72
77.26
77.26
76.80
76.80
76.34
76.34
75.89
75.89
75.44
75.44
74.99
74.99
74.54
74.54
74.10
74.10
1960
KCP75
1965
1970
1975
1980
1982
1985
1990
1995
2000
C o p y rig h t2 0 0 9N e dD a visR e se a rch ,In c .F u rth e rd istrib u tio np ro h ib ite dw ith o u tp rio rp e rm issio n .A llR ig h tsR e s e rve d . S e eN D R D isc la im e ra t w w w .n d r.co m /co p yrig h t.h tm l .F o rd a tav e n d o rd isc la im e rsre fe rto
9
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
2005
w w w .n d r.co m /ve n d o rin fo /
.
Employment “Michael Jordan (at 46), versus LeBron James (at 24): Economies, like people, also age.” Monthly Data 12/31/2000- 9/30/2010
P e rfo rm a n c e o fN o n -F a rm P a y ro lls v s1 9 9 1 a n d A v e ra g e o fL a s tF iv e E x p a n s io n s 122
122 * D a te s u s e d fo r d e te rm in in g a re th o s e d e s ig n a te d b y th e N a tio n a lB u re a u o f E c o n o m ic R e s e a rc h .T h e d a ta h a s b e e n a d ju s te d fo re a s e o fc o m p a ris o n w ith th e c u rre n tc y c le . E x p a n s io n s ta rtin g d a te s u s e d :N o v e m b e r1 9 7 0 , M a rc h 1 9 7 5 ,J u ly 1 9 8 0 ,N o v e m b e r1 9 8 2 ,a n d M a rc h 1 9 9 1 .
121 120 119 118
e c o n o m ic
e x p a n s io n s
121 120 119 118
117
117
116
116
115
Average of the last five expansions
R e c e s s io n e n d e d
114
115
1991 Expansion
in N o v e m b e r2 0 0 1 .
114
113
113
112
112
111
A v e ra g e o f L a s t P o s tW o rld W a rIIE x p a n s io n s ( )
110
111
F iv e
110
E n d o f
109
109
e x p a n s io n
108
1 9 9 1
107
108
E x p a n s io n ( )
107
106
106
2001 expansion
105
105
104
104
103
103
102
C u rre n t (
101
102
E x p a n s io n )
101
100
100
(BL29453x01)
M
2001
J
S
D
M
2002
J
S
D
M
2003
J
S
D
M
2004
J
S
D
M
2005
J
S
D
M
2006
J
S
D
M
2007
J
ÓC o p y rig h t2 0 0 9 N e d D a v isR e s e a rc h ,In c .F u rth e rd is trib u tio n p ro h ib ite d w ith o u tp rio rp e rm is s io n .A llR ig h ts R e s e rv e d . S e e N D R D is c la im e ra t w w w .n d r.c o m /c o p y rig h t.h tm l
10
S
D
M
2008
J
S
D
M
2009
J
.F o rd a ta v e n d o rd is c la im e rs re fe rto
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
S
D
M
2010
J
w w w .n d r.c o m /v e n d o rin fo /
S
.
When do government deficits cause inflation? “When deficits grow faster than the economy, eventually it damages the economy.”
Pressure on the dollar
Government debt rises as a percentage of GDP Interest costs absorb an ever larger share of the budget Lenders become concerned
Interest rates rise significantly
Lenders require a “risk premium” to invest Other investment projects get “crowded out”
Borrowing cannot cover the deficits
11
The government must reduce spending or print money Inflation erodes the value of the debt – and the currency Economic growth suffers
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
Denver longer term: Growth focus “Denver Employment Growth over the past 5 yrs has averaged 1.6% vs. 1.1% for the US.
Industries that drove Denver’s faster growth
Manufacturing – avg. decline at -0.4% vs. -1.5% for US, 0.6x exposure
Prof. & Tech. – avg. growth at 4.1% vs. 3.5% for the US
Drove 0.2% of 0.5% out-performance for DEN vs. the US DEN had a 1.4x exposure to the best performing industry in the US Of the 0.5% annual out-performance Prof. & Tech. drove 0.1%
Population growth per year for DEN of 1.7% was above the US at 0.9%. Relative to pop. growth, DEN employment growth inline with US.
Industries that partially offset faster growth
12
Info. – decline of -2.3% vs. -1.2% for US, 1.7x concentration Mining & Cons. – Growth of 1.2% vs. 1.9% for US Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
Denver Employment Outlook Employment Growth / Decline
Decline in DEN Employment more severe than US US Leading Economic Indicators bottomed in March 2009 US Employment lagged the trough in LEIs by: Bottom: 1991 – 6 mos. 2001 – 11 mos. Renewed Growth 1991 – 15 mos. 2001 – 33 mos. DEN Employment lagged the trough in LEIs by: Bottomed: 1991 – NA 2001 – 10 mos. Renewed Growth 1991 – NA 2001 – 35 mos.
Factors affecting the employment outlook
13
Exposures to materials could benefit from secular growth in China and other emerging economies but at the cost of volatility. Important to maintain high quality of life that has attracted strong net migration and led to dynamic population and employment growth. Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
Stockmarket outlook “We may be in the latter innings of the equities rally, but it should have more to go.”
Reasons the rally should continue
Continuing economic improvement – but with continuing skepticism Estimates of company earnings are still low Many investors still seem to be on the sidelines
After the rally plays out
We may not see a sharp selloff
Overseas markets may also have brighter prospects
14
Economic growth may be stronger Inflation fears about the U.S. could also drive gains for foreign stocks
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
Key Private Bank Investment Recommendations Asset Classes Stocks
Bonds
Emphasize
Deemphasize
Geographic Region Cash Deemphasize
United States
International
Deemphasize
Developed Emphasize
Emerging
Emphasize
Market Sectors Basic Materials
Emphasize
Consumer Cyclicals
Emphasize
Energy
Emphasize
Industrials
Emphasize
Technology
Emphasize
Financials
Neutral
Consumer Staples
Deemphasize
Health Care
Deemphasize
Utilities
Deemphasize
Market Capitalization
Investment Style Value
Growth
Large Cap
Neutral
Neutral
Mid-Cap
Deemphasize
Emphasize
Small Cap
Deemphasize
Emphasize
Alternative Investments Commodities
Emphasize November 2009
15
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
Disclosures Key Private Bank is part of KeyBank National Association. Trust services provided by KeyBank National Association. Investments are: NOT FDIC INSURED • NOT BANK GUARANTEED • MAY LOSE VALUE • NOT A DEPOSIT NOT INSURED BY ANY FEDERAL OR STATE GOVERNMENT AGENCY
16
The investments described herein are: NOT FDIC INSURED • NOT BANK GUARANTEED • MAY LOSE VALUE • NOT A DEPOSIT NOT INSURED BY ANY FEDERAL OR STATE GOVERNMENT AGENCY
Looking back “Perhaps the worst “financial earthquake” since the 1930’s.”
The “Great Recession”
The financial system on the brink of collapse The economy in a nose dive Public panic
So far, 2009:
2
Economic recovery taking hold A large government stimulus package But long-term problems that continue to overhang the economy and the markets
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
The stages of economic recovery “Like the wall of water released by a dam burst, economic growth tends to surge early in economic recovery.”
Stage 1: The recession ends
The economy gradually stabilizes Pessimism remains high
Currently between Stage 1 and Stage 2
Stage 2: A initial growth surge
“Catch up” consumer spending is unleashed Inventories are replenished, productive capacity restored Pessimism wanes
Stage 3: Sustainable growth
3
Growth settles back to the “sustainable” rate Optimism takes hold
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
Areas that drive economic activity “The health of the economy depends upon the health of its parts.”
Consumers Businesses Exports Government
4
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
Consumers “Even a slowly flowing stream releases a surge of water when a dam is removed.”
Do consumers have the confidence to spend?
Consumer confidence has lagged economic recovery in the past
Consumer confidence has improved but remains low The economy continues to show improvement Business confidence, which is a better predictor, has improved sharply
Do consumers have “spendable” reserves?
Credit remains constrained for many spenders Spending remains high relative to personal income 90% of the public retain their jobs
5
Many of the “still employed” have curtailed spending Unemployment likely will continue to increase
How much growth can consumer spending drive longer term? Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
Businesses “The foundation for improved business activity has been laid. Businesses just need to see improving sales.”
Business surveys: Expectations for the future have improved
A good indicator of an improving economy
Businesses are exceptionally “lean”
Inventories have been pared substantially Employment: hour reductions versus layoffs
Lingering concerns
6
Sales need to improve Competition remains fierce: Little pricing flexibility Margin pressure: Energy and other commodity costs Uncertainty about healthcare and energy policy
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
Exports “Overseas economies have typically lagged U.S. recovery by about six months.”
Emerging markets
Remain a strong source of global growth Activity has pulled back a bit, but growth seems likely to resume
Developed markets
Some countries are recovering faster than the United States Could provide earlier support for the U.S. economy
A declining dollar could help drive exports
7
The dollar normally declines after a global recession Overseas fears of the large U.S. deficits may also push the dollar lower
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
Longer-term problems “The “sustainable” growth rate may be lower over the next few years.”
Consumer spending relative to income Employment Deficits and Inflation
8
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
Spending relative to Income “Spending, relative to income, is still high.” Monthly Data 1/31/1959 - 8/31/2009 (Log Scale)
P e rso n a lC o n s u m p tio nR e la tiv etoP e rso n a lIn c o m e
2005
84.99
84.99
84.48
84.48
83.98
83.98
83.48
83.48
82.98 82.49
82.98
1960
82.49
82.00
82.00
81.51
81.51
81.03
81.03
80.55
80.55
80.07
80.07
79.59
79.59
79.12
79.12
78.65
78.65
78.18
78.18
1998
77.72
77.72
77.26
77.26
76.80
76.80
76.34
76.34
75.89
75.89
75.44
75.44
74.99
74.99
74.54
74.54
74.10
74.10
1960
KCP75
1965
1970
1975
1980
1982
1985
1990
1995
2000
C o p y rig h t2 0 0 9N e dD a visR e se a rch ,In c .F u rth e rd istrib u tio np ro h ib ite dw ith o u tp rio rp e rm issio n .A llR ig h tsR e s e rve d . S e eN D R D isc la im e ra t w w w .n d r.co m /co p yrig h t.h tm l .F o rd a tav e n d o rd isc la im e rsre fe rto
9
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
2005
w w w .n d r.co m /ve n d o rin fo /
.
Employment “Michael Jordan (at 46), versus LeBron James (at 24): Economies, like people, also age.” Monthly Data 12/31/2000- 9/30/2010
P e rfo rm a n c e o fN o n -F a rm P a y ro lls v s1 9 9 1 a n d A v e ra g e o fL a s tF iv e E x p a n s io n s 122
122 * D a te s u s e d fo r d e te rm in in g a re th o s e d e s ig n a te d b y th e N a tio n a lB u re a u o f E c o n o m ic R e s e a rc h .T h e d a ta h a s b e e n a d ju s te d fo re a s e o fc o m p a ris o n w ith th e c u rre n tc y c le . E x p a n s io n s ta rtin g d a te s u s e d :N o v e m b e r1 9 7 0 , M a rc h 1 9 7 5 ,J u ly 1 9 8 0 ,N o v e m b e r1 9 8 2 ,a n d M a rc h 1 9 9 1 .
121 120 119 118
e c o n o m ic
e x p a n s io n s
121 120 119 118
117
117
116
116
115
Average of the last five expansions
R e c e s s io n e n d e d
114
115
1991 Expansion
in N o v e m b e r2 0 0 1 .
114
113
113
112
112
111
A v e ra g e o f L a s t P o s tW o rld W a rIIE x p a n s io n s ( )
110
111
F iv e
110
E n d o f
109
109
e x p a n s io n
108
1 9 9 1
107
108
E x p a n s io n ( )
107
106
106
2001 expansion
105
105
104
104
103
103
102
C u rre n t (
101
102
E x p a n s io n )
101
100
100
(BL29453x01)
M
2001
J
S
D
M
2002
J
S
D
M
2003
J
S
D
M
2004
J
S
D
M
2005
J
S
D
M
2006
J
S
D
M
2007
J
ÓC o p y rig h t2 0 0 9 N e d D a v isR e s e a rc h ,In c .F u rth e rd is trib u tio n p ro h ib ite d w ith o u tp rio rp e rm is s io n .A llR ig h ts R e s e rv e d . S e e N D R D is c la im e ra t w w w .n d r.c o m /c o p y rig h t.h tm l
10
S
D
M
2008
J
S
D
M
2009
J
.F o rd a ta v e n d o rd is c la im e rs re fe rto
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
S
D
M
2010
J
w w w .n d r.c o m /v e n d o rin fo /
S
.
When do government deficits cause inflation? “When deficits grow faster than the economy, eventually it damages the economy.”
Pressure on the dollar
Government debt rises as a percentage of GDP Interest costs absorb an ever larger share of the budget Lenders become concerned
Interest rates rise significantly
Lenders require a “risk premium” to invest Other investment projects get “crowded out”
Borrowing cannot cover the deficits
11
The government must reduce spending or print money Inflation erodes the value of the debt – and the currency Economic growth suffers
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
Denver longer term: Growth focus “Denver Employment Growth over the past 5 yrs has averaged 1.6% vs. 1.1% for the US.
Industries that drove Denver’s faster growth
Manufacturing – avg. decline at -0.4% vs. -1.5% for US, 0.6x exposure
Prof. & Tech. – avg. growth at 4.1% vs. 3.5% for the US
Drove 0.2% of 0.5% out-performance for DEN vs. the US DEN had a 1.4x exposure to the best performing industry in the US Of the 0.5% annual out-performance Prof. & Tech. drove 0.1%
Population growth per year for DEN of 1.7% was above the US at 0.9%. Relative to pop. growth, DEN employment growth inline with US.
Industries that partially offset faster growth
12
Info. – decline of -2.3% vs. -1.2% for US, 1.7x concentration Mining & Cons. – Growth of 1.2% vs. 1.9% for US Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
Denver Employment Outlook Employment Growth / Decline
Decline in DEN Employment more severe than US US Leading Economic Indicators bottomed in March 2009 US Employment lagged the trough in LEIs by: Bottom: 1991 – 6 mos. 2001 – 11 mos. Renewed Growth 1991 – 15 mos. 2001 – 33 mos. DEN Employment lagged the trough in LEIs by: Bottomed: 1991 – NA 2001 – 10 mos. Renewed Growth 1991 – NA 2001 – 35 mos.
Factors affecting the employment outlook
13
Exposures to materials could benefit from secular growth in China and other emerging economies but at the cost of volatility. Important to maintain high quality of life that has attracted strong net migration and led to dynamic population and employment growth. Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
Stockmarket outlook “We may be in the latter innings of the equities rally, but it should have more to go.”
Reasons the rally should continue
Continuing economic improvement – but with continuing skepticism Estimates of company earnings are still low Many investors still seem to be on the sidelines
After the rally plays out
We may not see a sharp selloff
Overseas markets may also have brighter prospects
14
Economic growth may be stronger Inflation fears about the U.S. could also drive gains for foreign stocks
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
Key Private Bank Investment Recommendations Asset Classes Stocks
Bonds
Emphasize
Deemphasize
Geographic Region Cash Deemphasize
United States
International
Deemphasize
Developed Emphasize
Emerging
Emphasize
Market Sectors Basic Materials
Emphasize
Consumer Cyclicals
Emphasize
Energy
Emphasize
Industrials
Emphasize
Technology
Emphasize
Financials
Neutral
Consumer Staples
Deemphasize
Health Care
Deemphasize
Utilities
Deemphasize
Market Capitalization
Investment Style Value
Growth
Large Cap
Neutral
Neutral
Mid-Cap
Deemphasize
Emphasize
Small Cap
Deemphasize
Emphasize
Alternative Investments Commodities
Emphasize November 2009
15
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
Disclosures Key Private Bank is part of KeyBank National Association. Trust services provided by KeyBank National Association. Investments are: NOT FDIC INSURED • NOT BANK GUARANTEED • MAY LOSE VALUE • NOT A DEPOSIT NOT INSURED BY ANY FEDERAL OR STATE GOVERNMENT AGENCY
16
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