A recession is born!

1. A recession is born! A tale of St. Cloud King Banaian St. Cloud State University Winter Institute, Feb 25 2009

2. Good advice for a forecaster Tell me what you know. Tell me what you don't know. And then, based on what you really know and what you really don't know, tell me what you think is most likely to happen. Gen. Colin Powell, 2004, to intelligence officers • All forecasts should have three parts • What I know • What I don’t know • What I think

3. By now, you know the drill What did we say last year? Let’s look at a few slides from the end of last time…

4. False signal Is this another fake like 2006, or is this one real? Turns out this one was VERY real!

5. So, do we say it this time? • “Recent Federal Reserve actions indicate they will cut aggressively, but inflation a concern. • “Next QBR out in March may have enough information from business leaders, but I still see reasons for disagreement.” • I think we got this right. • Inflation stayed tame; now our survey respondents are concerned of deflation. • The recession in St. Cloud probably started later than March.

6. THIS IS LAST YEAR! Numbers for next year • We should not see growth here in the first half of 2008; a mild decline in employment is my best guess. • Credit-insensitive sectors should continue to grow. Will it be enough to stay out of a recession? • Nationally, manufacturers might be helped by lower exchange rates, but that doesn’t help much here. • So I will venture for all 2008 employment growth <1%. • Not enough to keep unemployment from growing. • It will feel like a recession, but is it? • I’ll let you know next year.

7. What do we know?

8. Unemployment rate highest since ‘91

9. A recession that was not bothering us before, is the worst right now

10. Worst ever? • Only have data for local economy since 1989 • Nationally, two eight-month recessions, very mild during that time • Data for the last two recessions before 1989 show much more severe drops • “Worst in a quarter century” ducks the data

11. In terms of recessions, this one is worse than average, but not worst

12. We may reach the 1981 level, but the 1957 level is less likely

13. Minnesota went into recession in February 2008 Source: Federal Reserve Bank of Philadelphia

14. Real estate volumes have fallen 31% over the last two years

15. Supply of houses might be leveling off, listings are back to 2006 levels

16. Bank-owned real estate still a pressure, but not too many All data as of September 30

17. View of one realtor • Claims to have 400 foreclosure properties available • For 4th quarter 2008: • Bank owned homes made up 59% of all sales on the St Cloud MLS under $150,000. • Bank owned homes made up 19% of all sales on the St Cloud MLS over $150,000.

18. 70% of deposits in St. Cloud held by locally-owned banks

19. Local banks are losing profits as they write down loans

20. Balance sheet data, 21 area banks

21. What probably happened to a typical household’s balance sheet Source: Survey of Consumer Finances, and Dr. James Kwak, “The Baseline Scenario”, 2/15/09. http://baselinescenario.com/2009/02/15/household-assets-debt-savings-federal-reserve-survey/

22. The outlook on the Federal budget

23. That’s the end of what I know • What I don’t know: • State budget • So far, local infrastructure investment looks small • But most of bridge spending happens right now. • Effects of federal stabilization plans • Stimulus – how much do we get? • Mortgage and banking plans not yet defined • Risks of inflation or deflation • At this point, your guess is as good as mine • Data revisions (happen very soon)

24. So what do I think? • Nothing indicates the recession ends this spring or summer. • Maybe a late-2009 recovery. • I don’t believe this is different in nature than other severe contractions. • Old enough to remember the savings and loan scare

25. Updated LEI through January 2009

26. Probability of recession, 4-6 mos. 2nd recession begins 8/08 in St. Cloud (we think) No end yet 

27. Getting to the deflation story The deflation of the Depression continued for four years and almost 50% Source: Casey Mulligan, 25.Feb.2009

28. After months of deflationary signals, shipping data is rebounding

29. But no turn yet in CRB

30. Credit markets calming, not yet calm

31. What does this mean for us? • Local banks, well-capitalized for the most part, have seen the worst. • If left to its own, housing can begin to rebound late in year. • Risk of upset from mortgage/banking plans • Pressure on the dollar will at least allow manufacturers some breathing room. • We need a recovery in goods sector to get going. I think that can happen late this year.

32. What do I hope to see? • A rebound in oil prices • Can the Fed create inflation with zero interest rates? • Stable mortgage rates • Keep an eye on timber prices • There’s a base to build on in St. Cloud • Health and education • Business services (though this will take awhile) • Transportation

33. Only a small glimmer • If there’s a turnaround in 2009, it will be late and not very strong. • Severe recessions since WW2 last about 16 months • National thus near over • If we start later, do we end later? I think so • If no turnaround before end 2009, then you can say “it’s the worst economy since the Great Depression”

34. See you same time next year!