JLL - 3Q08 National Economy

Adding insight through unprecedented times 3rd quarter 2008 economic overview October 2008 A third quarter like no other… • • • • • • • • • • • • • Freddie, Fannie taken over by federal government Lehman Brothers does not get Fed bailout; files for Chapter 11 Merrill Lynch acquired by Bank of America Fed bails out AIG JPMorgan and Fed rescue Washington Mutual after FDIC take-over Bailout package proposed and rejected by House Bailout package revised and passed by Senate Citi and FDIC reach deal for Citi to acquire Wachovia Wells Fargo counteroffers Citi’s proposed purchase and agrees to buy Wachovia House passes rescue package President Bush signs rescue bailout into law Stock market experiences unprecedented volatility DJIA falls to lowest level since 2003 2 3q national economic overview • GDP growth sunk into negative territory in Q3, decreasing by 0.3 percent. The largest drag on GDP was consumer spending, which reached its lowest level in 28 years. While substantial headwinds to growth will remain present over the next few quarters, including the housing recession, highly stressed and volatile financial markets, declining wealth from the housing and equity markets, and worrisome inflation levels; As a result, businesses have shed jobs and decelerated investment • The U.S. economy continues to shed jobs with nine consecutive months of net job losses through September. For the year through October, total employment declined by 1,179,000 jobs. Weakness by industry sector is fairly broad-based, with natural resources and mining, education and health services and government being the only major sectors still displaying significant levels of job growth; Construction, manufacturing, retail, professional and business services among other sectors are in clear job-shedding mode and this should continue over the next few quarters. • The housing market remains in deep recession; A glut of inventory, limited availability of mortgages, buyer apathy and a surge in foreclosures are all contributing to the continuing slump and a market recovery is not yet in sight; National home prices are likely to decline by at least an additional 10-15% over the next 12-18 months • Positive news is found in the Federal Reserve’s, and Congress’ swift and decisive actions to avert severe recession; Low short-term interest rates, aggressive efforts to increase liquidity, the tax rebate package, a housing bill with support for Fannie Mae and Freddie Mac and the economic stabilization act of 2008 will all prove simulative to growth 3 GDP growth decreases Due to weak consumer spending GDP growth decreased by 0.3 percent in the third quarter according to advanced estimates. The third quarter marked the weakest consumer spending in 28 years, falling by 3.1 percent. Consumer spending generally accounts for 70 percent of GDP. Annualized Change 7% 5% 3% 1% -1% 2000Q1 2000Q3 2001Q1 2001Q3 2002Q1 2002Q3 2003Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 Source: Bureau of Economic Analysis * Projections from Moody's economy.con 4 GDP composition Negative growth due to weak consumer spending Personal income and expenditures shaved 225 bps off growth in 3q, which was offset by a an acceleration in net exports of goods and services and increases in government expenditures and investment. Personal Income & Expenditures Net Exports of Goods & Services Government Consumption Expenditures & Investment Gross Private Domestic Investment 100% 80% 60% 40% 20% 0% -20% -40% -60% -80% 2000Q1 2000Q3 2001Q1 2001Q3 2002Q1 2002Q3 2003Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 Source: Bureau of Economic Analysis 5 US housing market: residential investment Market predicted to hit bottom in the second half of 2009 The housing market isn’t expected to hit bottom until mid 2009, continuing to take its toll on GDP growth and the overall downward confidence in the US economy. Investment (Bil 2000 $) $850 $800 $750 $700 $650 $600 $550 $500 $450 $400 $350 2001Q2 2001Q4 2002Q2 2002Q4 2003Q2 2003Q4 2004Q2 2004Q4 2005Q2 2005Q4 2006Q2 2006Q4 2007Q2 2007Q4 2008Q2 Down 38 percent since 2005 high Source: Bureau of Economic Analysis 6 Corporate profits weaken further in 2q Corporate profits from current production decreased $60.2 billion in the second quarter, following a $17.6 billion decrease in the first quarter. 1800 1600 1400 1200 $ Billions 1000 800 600 400 200 0 2001-III 2002-III 2003-III 2004-III 2005-III 2006-III Down $60.2b in 2q Corporate profits with inventory valuation and capital consumption adjustments Source: Bureau of Economic Analysis 2007-III 2001-I 2002-I 2003-I 2004-I 2005-I 2006-I 2007-I 2008-I 7 Productivity Reaches a three-year high as companies do more with less Worker productivity in the U.S. grew at a 3.4 percent annual rate in the second quarter of 2008, a faster-than-expected pace as companies scaled back hiring and relied on increased output from current workers. 8% 6% % Annual Change Up 3.4 percent 4% 2% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 -2% Nonfarm business annual % change of output per hour Source: Bureau of Labor Statistics 8 Public equities market Dow down 42 percent since October high 14,000 13,000 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 87 88 89 90 91 92 93 94 NASDAQ DJIA 42 percent loss since October 2007 High 95 96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 Source: yahoo finance 9 Federal funds target interest rate Down 250 bps from start of 2008 10% The Federal Reserve lowered interest rates to 1.0 percent (October 2008) following a recent rate cut earlier this month. Worsening financial instability has made it harder for businesses and consumers to obtain credit and therefore has slowed spending. Inflationary pressure has eased with a reduction in energy and commodity prices, while economic growth remains weak. 8% 6% 1.0 percent 4% 2% 0% 87 Source: Federal Reserve Bank 92 97 '02 '07 10 Inflation Price pressure form energy has eased in the past three months Reaching 4.9 percent growth in September. Inflation has moderated recently due to a decrease in oil prices, which has brought down commodity prices, which will benefit consumers and work to stabilize pricing across the board. 5% 4% 3% 4.9 percent 2% 1% 0% 2001 2002 2003 2004 2005 2006 2007 YTD 2008 Source: Federal Reserve Bank 11 US dollar Has gained ground as other currencies fall due to continued fallout globally of financial markets 2.00 1.60 U.S. Dollar per Euro 1.20 0.80 $1.24 US = 1 Euro 0.40 0.00 2001Q2 2002Q4 2004Q2 2005Q4 2007Q2 Source: Economy.com 12 Oil pricing drops significantly As global demand thins Oil prices increased sharply in the summer, however, prices have dropped dramatically over the past three months as worldwide demand has slowed due to the slowing global economy $140.00 $120.00 $100.00 US Average (Per Barrel) $80.00 $60.00 $68.50 $40.00 $20.00 Price per barrel has decreased 49 percent from summer high $0.00 2002 2003 2004 2005 2006 2007 2008 Source: Economy.com, July pricing as of July 31, 2008 13 Gas prices moderated after hitting record highs Gas prices have moderated significantly in the last two months, following a peak in July, due to weaker demand from the national and global economy. $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 2001 2004 2007 US Average (Per gallon) $2.69 Source: Economy.com, July pricing as of July 31st, 2008 14 Dipping consumer confidence Hit all-time low in October 125 115 105 Consumer Confidence Index 95 85 75 65 55 45 35 2002M2 2002M8 2003M2 2003M8 2004M2 2004M8 2005M2 Consumer confidence reached a historic low since the index began in 1969, dropping to 38.0 in October. Primary concerns were: a continued deterioration of the labor market, declines and instability in equity markets, reduced credit availability and weakening housing markets. Katrina Credit Crunch Iraq War 38.0 2005M8 2006M2 2006M8 2007M2 2007M8 2008M2 2008M8 15 Source: Conference Board Credit market debt outstanding: Financial sectors, rest of the world, domestic non-financial sectors $61,400 Financial sectors, (Bil. $) Rest of the world, (Bil. $) Domestic nonfinancial sectors, (Bil. $) $51,400 $41,400 US $ Billions $31,400 $21,400 $11,400 1980Q1 1982Q1 1984Q1 1986Q1 1988Q1 1990Q1 1992Q1 1994Q1 1996Q1 1998Q1 2000Q1 2002Q1 2004Q1 2006Q1 Source: The Federal Reserve 2008Q1 $1,400 16 Commercial mortgages by owner type Commercial banks hold the majority of commercial mortgage assets on their balance sheets. life insurance companies real estate investment trusts commercial banking finance companies $180,000 $130,000 in millions $80,000 $30,000 -$20,000 2002Q2 2002Q4 2003Q2 2003Q4 2004Q2 2004Q4 2005Q2 2005Q4 2006Q2 2006Q4 2007Q2 2007Q4 2008Q2 Source: The Federal Reserve 17 Monthly US job growth Job market continues to deteriorate Total non-farm employment reported a loss of 240,000 jobs in October, bringing YTD jobs losses to 1,179,000. Following This the largest month-to-month decrease in 2008. Disappointing job data provided further evidence that the economy is currently in a recession. Monthly net Job Change Unemployment Rate Monthly net change (000) 300 100 -100 -300 -500 -700 -900 6.0% 5.0% 4.0% 1,179,000 jobs lost in 2008 3.0% 2.0% 1.0% 0.0% 2001 2002 2003 2004 2005 2006 2007 Source: Bureau of Labor Statistics (Sum of 1 month net change for the quarter, Total non-farm, seasonally adjusted) 2008 Unemployment Rate 500 7.0% 18 National employment percent change by industry past year September 2008 Construction, manufacturing and information were the hardest hit industries, while natural resources and mining saw a large increase. 9.8 Natural resources and mining Education and health services Government Utilities Leisure and hospitality Other services Wholesale Trade Professional and business services Transportation and warehousing Trade, transportation, and utilities Financial activities Retail Trade Information Manufacturing Construction Source: Bureau of Labor Statistics 3.1 1.4 1.4 0.6 0.6 -0.8 -0.9 -1.2 -1.3 -1.3 -1.6 -1.7 -3.2 -6.1 -8 -6 -4 -2 0 2 4 6 8 10 12 19 Financial sector-national 12 month growth September 2008 Lessors of nonfinancial intangible assets Securities, commodity contracts, Investments Funds, trusts, and other financial vehicles Monetary authorities - central bank Insurance carriers and related activities Commercial banking Depository credit intermediation Finance and insurance Real estate and rental and leasing -3 Source: Bureau of Labor Statistics, based on total non-farm employment Lessors of non-financial intangible assets saw a large increase while financial real estate, rental and leasing saw the largest contraction. 7.3 0.1 0 0 -0.1 -0.7 -1 -1.1 -1.9 -1 1 3 5 7 12 Month percent Change 20 Major MSA employment gains/losses 12 months preceding Jobs Created From September 07-08 5% 4% Nearly all markets across the country have experienced slower growth with certain markets like those in Florida, Arizona, Nevada and Southern California experiencing net job losses over the year due to their exposure to the housing markets 1.6% 1.8% 1.9% 3% 2% 1% 0% -1% 2.2% 1.1% 0.9% 0.0% 0.1% 0.2% -0.8% -0.7% -0.3% 0.0% 0.9% -0.9% -0.8% 1.4% -1.8% Washington, DC Tampa West Palm Beach 21 -1.4% -2% -3% -4% -1.6% -1.3% Atlanta Charlotte Detroit -2.9% Dallas -2.3% Houston Raleigh-Durham New York Chicago Denver Boston Source: Bureau of Labor Statistics San Francisco Jacksonville Orlando Ft Lauderdale Las Vegas Los Angeles Philadelphia Minneapolis Phoenix Seattle Miami -1.0% Office employment net change by market September 2008 Los Angeles, Miami and Phoenix showed signs of further softening, by shedding office jobs through September year-over-year. 12 month job change in office employment* (September 2008) 16,000 Seattle 30,000 2,300 7,300 8,500 DC 20,000 500 10,000 0 (10,000) -18,500 (20,000) (30,000) (40,000) (50,000) Los Angeles -34,800 -12,600 -12,200 -5,500 -3,700 -3,100 -1,500 1,700 10,200 Houston Philadelphia Phoenix San Franciso Atlanta Las Vegas Chicago Dallas Source: Bureau of Labor Statistics *office employment includes the sum of information, financial activities and professional and business services sectors New York Denver Boston Miami 22 Quarterly US job growth Job growth weakening on national level Information % Annual Change 10 5 0 -5 -10 -15 Financial Activities An increased number of jobs were lost in the information sector, particularity in Las Vegas and Phoenix. Financial Activities continued to shed job across the board. Professional and Business Services Atlanta Dallas DC Houston New York Denver Seattle Miami Source: Bureau of Labor Statistics (June 2008) San Franciso Boston Chicago Las Vegas Los Angeles Philadelphia Phoenix 23 Financial percent change at the market level 12 month growth September 2008 Houston Dallas Boston Seattle Chicago Denver New York DC Phoenix Atlanta Philadelphia Los Angeles Las Vegas San Franciso Miami -5 Source: Bureau of Labor Statistics 2.1 1.5 -0.3 -0.9 -1.0 -1.2 -1.8 -1.8 -2.1 -2.3 -2.4 -2.9 -3.0 -3.1 -3.9 -4 -3 -2 -1 0 1 2 3 24 Manufacturing percent change at the market level 12 month growth September 2008 Seattle Houston Phoenix DC San Franciso New York Boston Chicago Los Angeles Denver Las Vegas Dallas Philadelphia Atlanta Miami -6 Source: Bureau of Labor Statistics 2.2 1.4 -1.0 -1.1 -1.2 -1.4 -1.4 -1.4 -1.4 -1.5 -1.5 -1.8 -2.5 -4.7 -4.7 -5 -4 -3 -2 -1 0 1 2 3 25 Construction percent change at the market level 12 month growth September 2008 Dallas Houston San Franciso New York Denver DC Philadelphia Boston Chicago Seattle Los Angeles Atlanta Las Vegas Miami Phoenix -18.7 -20 Source: Bureau of Labor Statistics *Construction includes natural resources and mining 4.5 2.9 1.7 0.5 -2 -2.8 -2.9 -3.6 -3.9 -4 -6.2 -8 -8.7 -12 -18 -16 -14 -12 -10 -8 -6 -4 -2 0 2 4 6 8 26 Financial employment by market 12 month growth September 2008 Region Northeast Southeast Midwest West 3% 2% 1% 0% Houston Dallas Charlotte Financial Employment Size Less than 100K 100K-200K 200K-300K 300K-500K Seattle Chicago Boston Denver 12-Month Growth -1% -2% Washington, DC U.S. Miami Atlanta Northern NJ SF Phoenix Philadelphia New York -3% -4% -5% -6% -7% 4% 5% Greater than 500K Los Angeles 6% 7% 8% 9% 10% 11% 12% Financial Employment as a % of Total Nonfarm Employment Source: Bureau of Labor Statistics 27 www.joneslanglasalle.com ©2008 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.