2009 Economic Outlook: Interview with Ed Friedman of Moody's Economy.com
But when can we hope to escape it?
In this exclusive interview, Ed Friedman, a director with Moody's Economy.com, a division of Moody's Analytics, shares fresh insights on:
Ed Friedman is a director of Moody's Economy.com. He covers the states of Texas and Minnesota, provides monthly summaries of the U.S. financial industry, and maintains a high-frequency econometric model used to estimate current-quarter GDP. Dr. Friedman also edits monthly regional and macroeconomic publications, is participating in a project to expand metropolitan area forecasting to foreign cities, and manages the work of junior personnel. Now based in the company's West Chester PA office, he previously worked for the Federal Reserve Bank of New York, supervising the collection of data on cross-border transactions in securities. Friedman received a Ph.D. in international economics from Yale University. His bachelor's degree in mathematics is from Dartmouth College.
TOM FIELD: Hi, this is Tom Field, Editorial Director with Information Security Media Group. The topic today is the economy and we are privileged to be speaking with Ed Friedman, a Director at Moody's Economy.com. Ed thanks so much for joining me today.
ED FRIEDMAN: Hi, how are you?
FIELD: Doing very well, thanks. It's a new year, and it's an exciting year based on what we've seen in the news so far. Ed, tell us a little bit about yourself and the work you do with Moody's Economy.com.
FRIEDMAN: All right. Moody's Economy.com is a consulting service that looks at the macro economy and also, in particular, the regional economy around the various states and metropolitan areas of the United States, providing advisory services to a client bases that consists largely of real estate, residential real estate and commercial real estate investors, as well as state and local governments, utilities and some manufacturing companies.
FIELD: Now Ed, I get the sense that the economy these days is a lot like the weather. In other words everybody is watching, and everybody has got an opinion, but I am most interested in your opinion. What are some of the signs that you see in the economy and where do you think we are headed?
FRIEDMAN: Well the economy is still headed down at present and it will be for a while. We are seeing, for example, single family housing starts and permits at a quarter of their peaks in 2004. Car sales are down to the $10 million range and for most of the years between 2000 and 2007 had been around $16 million at an annual rate and are now down to $10 million.
And of course this is the result of several things, most recently the meltdown in the financial system and the deepening global economic recession centered in the United States and in Europe.
FIELD: So obviously we are uniquely tied here to banking institutions, what are some of the unique factors that these institutions should be weighing now?
FRIEDMAN: Well I'll speak of it from my perspective, my area of experience, I am not a specialist on the banking industry of course, but as an economist I think bankers need to realize, and I believe they do, that all the dimensions of this recession are the biggest since the 1930's and 1940's, since the Depression.
The depth of the recession is among the largest -- we will see more than four million jobs lost by the time we are done, and that will represent nearly 4% of total non-farm employment; basically, essentially the biggest since 1949. The duration, the length of the recession will be the longest in post-war history and should last ... and of course everyone says, "When will it end?" and no one knows exactly, but we have to put a number into our baseline and that number yields a peak to trough of 21 months. So next September is the point we have said is when we believe it ends. Of course there is a lot of uncertainty around that, but that would make it the longest in the post-war era.
So we've got the deepest, the longest and also the widest and that is, as I said, we look at states and metropolitan areas around the country and forecast their individual economies, and you have never seen so much breadth. Really just about everywhere in the entire country is headed downward, no pockets of real strength, only a few that are only at risk rather than already headed downward.
FIELD: So encouraging signs for all.
FRIEDMAN: Well, this is what it looks like. I guess the thing that I need to say next is that in comparison to the 1930's, it is not that bad, and there are a number of reasons for that.
One is that the financial authorities, in comparison with those in 1929 and 1930, are truly doing everything they can think of and have been very creative in attempting to address the crisis, gong far beyond what the Federal Reserve System ever did before in attempting to shore up the financial system.
Secondly, we will see a large fiscal stimulus package, and that is another big comparison with the 1930's, when the idea of providing fiscal stimulus to the economy was really in its infancy. So for those two big reasons, the monetary and the fiscal, we will avoid having the kind of contraction we had from 1929 to 1932.
FIELD: You know it's interesting that you sort of speak of some optimism there, and it seems like there is a lot of optimism that is invested in the new administration, just to set realistic expectations, what post-inaugural expectations should we really have?
FRIEDMAN: Well the easiest way to answer the question is what sort of specific policies can we expect to see? So I will answer that first and then I will answer the other question of what does that mean in terms of the actual numbers that may flow from it in terms of the private sector.
So we should absolutely expect to see a stimulus package on the order of $700 to $800 billion dollars, which is enormous, record-breaking and so forth. It will be a composition of tax cuts, personal income tax cuts, payroll tax cuts have been talked about, and direct government spending. There is a lot of talk about infrastructure spending programs, and we should see some of that as well.
We will continue to see the Federal Reserve System and the financial authorities making absolutely certain that the banking system will not fail, whatever the cost, because they always understand that should it fail the cost of that would be even higher.
And most recently, I mean today in the news, we see that Bank of America is to close its deal with buying Merrill Lynch, and apparently we will need some additional federal assistance, additional TARP money assistance and that will likely be forthcoming. So that answers the question of what are we likely to see right now in post-inauguration in terms of what the government will do.
The other question of course is will that work and when will we see the numbers begin to improve. There, it is going to take time. Just the way individuals spend their money versus save their money and the time it takes for various programs to work and the time it takes for financial markets to adjust, we believe that the recession will be ongoing unfortunately for at least another six to nine months before the economy begins to bottom out, and even at that point it is not going to be a rapid turnaround, but rather a slow gradual turnaround.
FIELD: You know everything is so different today, including the workforce. What are some of the turnaround signs that we should look for to see that the economy is bouncing back?
FRIEDMAN: All right. First off, individuals who look at these financial markets typically look at something called the "Ted Spread." This is the rate of interest on inter-bank loans and so called LIBOR rates less that on short-term Treasuries. We want to look for that spread to continue to come down some. It is at a high level now and it was particularly high in the fall, which was a symptom of the panic. Banks were refusing to lend to each other and of course when the banks won't even lend to each other they certainly won't lend to you and me. So that spread has been coming down some and we should look for that to continue to come down.
Of course we should continue to look at the monthly data on permits for new housing, car sales and so forth, looking for signs that they have begun to bottom out. New single-family permits have not yet begun to bottom out and they are still dropping quickly. Car sales may or may not have bottomed out; they are at a depressed level of about $10.2 million at an annual rate. Keep looking.
We should look for more purchase mortgage originations, the declines in interest rates that we have seen over the last couple of months as a result of Federal Reserve efforts, have indeed raised overall mortgage originations, but that has been mostly refinancing thus far. So we should start to hope to see more purchase mortgage originations.
And then looking in terms of a little more structurally, we should keep abreast of what is happening, the ratio of home prices relative to incomes. In other words, measure of affordability. Because home prices have declined these measure of affordability have come down some and they are coming close to a long-term equilibrium but have a little further to fall.
Another measure we track is the ratio of price to rent for home price to rental rate and there that has come down in the right direction but it has not come down to historical norms yet.
So these are some of the numbers that we look at and that investors should look at to determine when the economy will be firming up.
FIELD: Ed that is very insightful. I really appreciate your time this morning and your interest in sharing this information with us.
FRIEDMAN: Well I thank you very much. I enjoyed talking to you.
FIELD: We've been talking with Ed Friedman, a Director with Moody's Economy.com. For Information Security Media Group, I'm Tom Field. Thank you very much.