Monthly Economic Outlook

We Have Seen This Movie Before

Fri, Feb 13 2009, 10:57 GMT
by Wachovia Research Team - Wells Fargo Investments, LLC | View company's profile

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U.S. Overview

We Have Seen This Movie Before

Throughout this financial crisis there have been endless comparisons between today’s environment and the 1930s. We feel a more apt comparison is the deep 1973-75 recession, a period that also dealt with an oil price shock, a housing collapse and a banking crisis. Even then these problems were global, with housing slumping not only in America but in Europe and parts of the developing world.

The early 1970s economic and geopolitical environment was remarkably similar to what we have seen recently. A weakening dollar along with a nearly 50 percent spike in oil prices led to the downturn and an abrupt end to the unprecedented housing boom, sending the financial sector reeling. Unemployment sky-rocketed and policymakers leaned heavily on monetary policy to fight the recession and promote recovery. When the recovery did arrive, it was quite treacherous, with both unemployment and inflation remaining uncomfortably high. Our most recent forecast shows a deeper and longer recession, similar to 1973-75, than we experienced in 1990 and 2001. Real final sales are expected to remain negative throughout 2009. Inventory swings and declines in imports might produce a positive GDP figure before then, but we now believe the recession will last through the end of the year while job losses and rising unemployment will carry over into next year.

International Overview

Deep Global Recession in Train

Monthly data show that most economies contracted sharply in the fourth quarter of last year. Indeed, the 7.6 percent decline in OECD industrial production in November was the sharpest year-over-year contraction ever recorded (the series begins in 1975). The synchronized downturn that occurred at the end of last year reflects the global nature of the credit crunch that froze financial markets.

There is some tentative evidence that the rate of decline in global economic activity in the first quarter may not be quite as sharp as it was in the fourth quarter of last year. That said, most major economies remain mired in deep recession at present, and economic recovery in many countries does not seem likely until the second half of the year at the earliest. Stimulative monetary and fiscal policy and declining inflation, which will help to support purchasing power, should eventually help to stabilize the global economy.

Our forecast calls for global GDP to decline 0.3 percent in 2009, which would mark the first drop in global GDP since the IMF began to compile worldwide GDP data in 1970. Although global growth should turn positive again the following year, the 2.9 percent growth rate that we project for 2010 is below the long-term growth rate of 3.6 percent per annum that global GDP growth has averaged over the past four decades.

Adjusting To The New Reality

Recent weeks have seen a flurry of activity in Washington directed at solving the financial crisis and moving the economy toward recovery. One thing is certain: there is no “silver bullet.” The recession will take time to play out and the economic stimulus package and financial sector reform efforts will take time to produce results. We have been incorporating a very large stimulus effort into our baseline forecast for the past several months. The current bill is lighter on infrastructure spending than we had thought it would be but the tax cuts are more significant than we originally expected. As result, we have slightly boosted our estimates for income growth and spending around the middle of this year. The bulk of the impact from the stimulus package will not affect the economy until late this year and early next year.

Financial reform efforts being undertaken by the government are harder to gauge right now. So much of current efforts seem to be aimed at bringing lending back to where it was previously. That is clearly not going to happen. The current recession marks the end of the era of abundant and cheap credit just as the 1973-75 recession marked the end of the era of abundant and cheap energy. Businesses, policymakers and households need to adjust to this new reality. With the securitization market still largely frozen, banks will continue to closely scrutinize anything they add to their balance sheets. Banks will lend but credit will be allocated much more cautiously, not just this year but for years into the future.

Tighter credit conditions mean that anything that is dependent upon credit for growth will continue to struggle. This includes home sales, motor vehicles sales, commercial construction, business fixed investment and even state and local governments. The credit bubble inflated demand for most of these sectors in the years leading up to this recession, and now that credit is dearer, we are enduring the bitter aftermath of that bubble.

What all this means for the economic outlook is consumer spending will remain weak throughout 2009. We do expect some improvement, however. Motor vehicle sales should gradually ramp up from their recent lows of around a 9.5 million unit pace to an 11.0 million unit pace by the end of this year, and an 11.5 million unit pace in 2010. While that marks an improvement it is still well below the nearly 17 million unit pace averaged earlier in the decade when many households were feeling flush and drew on their increased equity from rising home values.

Spending will also likely remain constrained for other goods and services, particularly discretionary purchases such as leisure and travel, and big-ticket items, like household furniture and home electronics. Consumers will gradually ratchet up spending as tax cuts boost disposable income and falling prices for gasoline and food items boost consumer buying power. Lower mortgage rates should also help as more homeowners are able to refinance to low rate long-term fixed mortgages.

Business fixed investment tumbled at nearly a 20 percent annual rate during the fourth quarter of last year, as firms struggled to realign production capacity with dramatically weaker global economic growth. We have lowered our expectations for business fixed investment in 2009, reflecting the recent trend in non-defense capital goods orders. Tighter credit conditions are also playing a role in reining in investment outlays, but the bigger problem here is simply that businesses have too much idle capacity.

Commercial construction will be much weaker this year, with all property types declining for the next 18 to 24 months. Credit conditions tightened dramatically and prices for properties will come under pressure from rising vacancy rates and loans that will soon come due.

Download Full Monthly Economic Outlook

Published On Fri, Feb 13 2009, 11:03 GMT

About this Report

Wells Fargo Investments, LLC

https://www.wellsfargo.com/

sam.bullard@wachovia.com

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A real-time quote for a fast moving stock may be more indicative of what has already occurred in the market rather than the price you will receive. Your Execution Price and Orders Ahead In a fast market, orders are submitted to market makers and specialists at such a rapid pace, that a backlog builds up which can create significant delays. Market makers may execute orders manually or reduce size guarantees during periods of volatility. When you place a market order, your order is executed on a first-come first-serve basis. This means if there are orders ahead of yours, those orders will be executed first. The execution of orders ahead of yours can significantly affect your execution price. Your submitted market order cannot be changed or cancelled once the stock begins trading. Initial Public Offerings may be Volatile IPOs for some internet, e-commerce and high tech issues may be particularly volatile as they begin to trade in the secondary market. Customers should be aware that market orders for these new public companies are executed at the current market price, not the initial offering price. Market orders are executed fully and promptly, without regard to price and in a fast market this may result in an execution significantly different from the current price quoted for that security. Using a limit order can limit your risk of receiving an unexpected execution price. Large Orders in Fast Markets Large orders are often filled in smaller blocks. An order for 10,000 shares will sometimes be executed in two blocks of 5,000 shares each. In a fast market, when you place an order for 10,000 shares and the real-time market quote indicates there are 15,000 shares at 5, you would expect your order to execute at 5. In a fast market, with a backlog of orders, a real-time quote may not reflect the state of the market at the time your order is received by the market maker or specialist. Once the order is received, it is executed at the best prices available, depending on how many shares are offered at each price. Volatile markets may cause the market maker to reduce the size of guarantees. This could result in your large order being filled in unexpected smaller blocks and at significantly different prices. For example: an order for 10,000 shares could be filled as 2,500 shares at 5 and 7,500 shares at 10, even though you received a real-time quote indicating that 15,000 shares were available at 5. In this example, the market moved significantly from the time the "real-time" market quote was received and when the order was submitted. Online Trading and Duplicate Orders Because fast markets can cause significant delays in the execution of a trade, you may be tempted to cancel and resubmit your order. Please consider these delays before canceling or changing your market order, and then resubmitting it. There is a chance that your order may have already been executed, but due to delays at the exchange, not yet reported. When you cancel or change and then resubmit a market order in a fast market, you run the risk of having duplicate orders executed. Limit Orders Can Limit Risk A limit order establishes a "buy price" at the maximum you're willing to pay, or a "sell price" at the lowest you are willing to receive. Placing limit orders instead of market orders can reduce your risk of receiving an unexpected execution price. A limit order does not guarantee your order will be executed -" however, it does guarantee you will not pay a higher price than you expected. Telephone and Online Access During Volatile Markets During times of high market volatility, customers may experience delays with the Wells Fargo Online Brokerage web site or longer wait times when calling 1-800-TRADERS. It is possible that losses may be suffered due to difficulty in accessing accounts due to high internet traffic or extended wait times to speak to a telephone agent. Freeriding is Prohibited Freeriding is when you buy a security low and sell it high, during the same trading day, but use the proceeds of its sale to pay for the original purchase of the security. There is no prohibition against day trading, however you must avoid freeriding. To avoid freeriding, the funds for the original purchase of the security must come from a source other than the sale of the security. Freeriding violates Regulation T of the Federal Reserve Board concerning the extension of credit by the broker-dealer (Wells Fargo Investments, LLC) to its customers. The penalty requires that the customer's account be frozen for 90 days. Stop and Stop Limit Orders A stop is an order that becomes a market order once the security has traded through the stop price chosen. You are guaranteed to get an execution. For example, you place an order to buy at a stop of $50 which is above the current price of $45. If the price of the stock moves to or above the $50 stop price, the order becomes a market order and will execute at the current market price. Your trade will be executed above, below or at the $50 stop price. In a fast market, the execution price could be drastically different than the stop price. A "sell stop" is very similar. You own a stock with a current market price of $70 a share. You place a sell stop at $67. If the stock drops to $67 or less, the trade becomes a market order and your trade will be executed above, below or at the $67 stop price. In a fast market, the execution price could be drastically different than the stop price. A stop limit has two major differences from a stop order. With a stop limit, you are not guaranteed to get an execution. If you do get an execution on your trade, you are guaranteed to get your limit price or better. For example, you place an order to sell stock you own at a stop limit of $67. If the stock drops to $67 or less, the trade becomes a limit order and your trade will only be executed at $67 or better. Glossary All or None (AON) A stipulation of a buy or sell order which instructs the broker to either fill the whole order or don't fill it at all; but in the latter case, don't cancel it, as the broker would if the order were filled or killed. Day Order A buy or sell order that automatically expires if it is not executed during that trading session. Fill or Kill An order placed that must immediately be filled in its entirety or, if this is not possible, totally canceled. Good Til Canceled (GTC) An order to buy or sell which remains in effect until it is either executed or canceled (WellsTrade® accounts have set a limit of 60 days, after which we will automatically cancel the order). Immediate or Cancel An order condition that requires all or part of an order to be executed immediately. The part of the order that cannot be executed immediately is canceled. Limit Order An order to buy or sell a stated quantity of a security at a specified price or at a better price (higher for sales or lower for purchases). Maintenance Call A call from a broker demanding the deposit of cash or marginable securities to satisfy Regulation T requirements and/or the House Maintenance Requirement. This may happen when the customer's margin account balance falls below the minimum requirements due to market fluctuations or other activity. Margin Requirement Minimum amount that a client must deposit in the form of cash or eligible securities in a margin account as spelled out in Regulation T of the Federal Reserve Board. Reg. T requires a minimum of $2,000 or 50% of the purchase price of eligible securities bought on margin or 50% of the proceeds of short sales. Market Makers NASD member firms that buy and sell NASDAQ securities, at prices they display in NASDAQ, for their own account. There are currently over 500 firms that act as NASDAQ Market Makers. One of the major differences between the NASDAQ Stock Market and other major markets in the U.S. is NASDAQ's structure of competing Market Makers. Each Market Maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the Market Maker will immediately purchase for or sell from its own inventory, or seek the other side of the trade until it is executed, often in a matter of seconds. Market Order An order to buy or sell a stated amount of a security at the best price available at the time the order is received in the trading marketplace. Specialists Specialist firms are those securities firms which hold seats on national securities exchanges and are charged with maintaining orderly markets in the securities in which they have exclusive franchises. They buy securities from investors who want to sell and sell when investors want to buy. Stop An order that becomes a market order once the security has traded through the designated stop price. Buy stops are entered above the current ask price. If the price moves to or above the stop price, the order becomes a market order and will be executed at the current market price. This price may be higher or lower than the stop price. Sell stops are entered below the current market price. If the price moves to or below the stop price, the order becomes a market order and will be executed at the current market price. Stop Limit An order that becomes a limit order once the security trades at the designated stop price. A stop limit order instructs a broker to buy or sell at a specific price or better, but only after a given stop price has been reached or passed. It is a combination of a stop order and a limit order. These articles are for information and education purposes only. You will need to evaluate the merits and risks associated with relying on any information provided. 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