Last year even as the US was already in a recession not only were forecasters saying we weren't in a downturn, they were predicting that the economy would be moving strongly forward by the beginning of 2009.

1. 4/27/2009
Recession Economics
Christopher Thornberg
Founding Principal, Beacon Economics
NBER says U.S. recession began
December 2007
Mon Dec 1, 12:20 pm ET
WASHINGTON (Reuters) – The U.S. economy
slipped into recession in December 2007, the
National Bureau of Economic Research's
business cycle dating committee announced
on Monday.
1

2. 4/27/2009
Reality
Hysteria
Denial
Equity Hysteria
US Indexes
Foreign Markets
180
220
160 200
180
140
Indexed (Jan 04 = 100)
Index (Jan 04 = 100)
160
120
140
100
120
80 100
80
60
60
40
40
Jun-00
Apr-01
Sep-01
Jul-02
Aug-04
Jan-00
Nov-00
Feb-02
Dec-02
May-03
Oct-03
Mar-04
Jan-05
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jul-00
Jul-01
Jul-02
Jul-03
Jul-04
Dow Jones Industrial Average Nikkei Average Index
NYSE Indexes DAX Index
S&P 500 FTSE 100
2

3. 4/27/2009
What is a Recession?
GROWTH COMES IN TRENDS AND BENDS
– The trend is long run growth driven by
demographics, productivity, investment, public policy, etc.
– Bends are short run fluctuations around the trend driven by some
imbalances
A RECESSION IS A NEGATIVE BEND
RECESSION
– “Two quarters negative growth” confuses symptoms with the disease
– Caused by some shock to the economy that causes rapid changes in
aggregate demand, factor markets can’t clear
Two Parts to any downturn
– Pain of initial shock
– Unemployment rises, capacity utilization falls creating a negative feedback
loop
– Recovery is a given, but the process is painful
• A fall to remember
– Heard on the street “There are only two positions out there:
cash, and fetal”
• Its not ‘what Wall Street troubles mean to California’, its ‘what
California troubles mean for Wall Street’
– Recession was already fully underway even if many economists and
politicians remained in deep denial
• What went wrong
– The big three imbalances: housing, finance, and the consumer
• Where from here?
– Things are bad.. But not THAT bad! So far the numbers are in line (if
a bit worse) than past recessions, and proportionate to the
imbalances in the economy…
– Recovery is a given, the big question is when
3

4. 4/27/2009
6
GDP -6.2
4
Personal consumption -3.01
Durable goods -1.67
2
Nondurable goods -1.95
Services 0.61
0
Gross investment -3.11
Structures -0.24
-2 1980-II -7.8 Equipment software -2.24
1982-I -6.4
Worst Residential -0.78
-4 2008-IV -6.2 Change in inventories 0.16
Quarters
1981-IV -4.9 Net exports -0.46
-6 Exports -3.44
1975-I -4.7
Imports 2.99
-8 Government 0.32
Federal 0.50
State and local -0.18
Labor Markets
Employment Losses from Peak Unemployment from Trough
100.5 4.0
3.5
100.0
3.0
99.5
2.5
99.0
2.0
98.5
1.5
98.0
1.0
97.5
0.5
97.0
0.0
96.5
-0.5
96.0
Peak
M+2
M+4
M+6
M+8
M+10
M+12
M+14
M+16
M+18
M+20
Peak
M+2
M+4
M+6
M+8
M+10
M+12
M+14
M+16
M+18
Jul-74 Jul-81 Dec-07
Jul-74 Jul-81 Dec-07
4

5. Percent
65.0%
65.2%
65.4%
65.6%
65.8%
66.0%
66.2%
66.4%
66.6%
-10
-5
0
5
10
15
Jan-04
Dec-69 Jul-04
Jan-74 Jan-05
Jan-78 Jul-05
Jan-06
Jan-82
Jul-06
Jan-86
Nominal
Jan-07
Jan-90
Jul-07
US Participation Rate
Jan-94
Retail Sales Y-O-Y Growth
Jan-08
Jan-98
Jul-08
Jan-02
Jan-09
Millions
7
9
11
13
15
17
19
7800
8000
8200
8400
8600
8800
9000
9200
Dec-71 Jan-06
Sep-75
May-06
Jun-79
Sep-06
Mar-83
Jan-07
Jan-87
May-07
Oct-90
Consumer Spending
Sep-07
Jul-94
Light Vehicle Sales (SAAR)
Jan-08
Apr-98
Real Disposable Income
May-08
Jan-02
Sep-08
Jan-09
5
4/27/2009

6. 4/27/2009
Total Spending, Y-o-Y
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
Employment, Jan 2007 = 100
2008 2009 Ch %
102
Newspaper
100 publishers 337.9 299 -38.9 -11.5%
98 Periodical
publishers 144.2 134.1 -10.1 -7.0%
96
Book
publishers 80.3 76.5 -3.8 -4.7%
94
92 Directory and
mailing list
90 publishers 46.5 37.8 -8.7 -18.7%
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Other
publishers 25.9 24.4 -1.5 -5.8%
US Publishing
6

7. 4/27/2009
Retail Spending: Books, Music, Hobbies, Etc
7800
7600
7400
7200
7000
6800
6600
6400
6200
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
• Direct Sale
– Steady source of revenue
– Information too easily swapped electronically
– Perhaps an Itunes type system?
• Indirect Sales
– Ad revenues
– Subject to business cycle
7

8. 4/27/2009
The 3 Imbalances
1. The Housing Imbalance
The collapse of the pyramid
2. The Financial Imbalance
The Credit Bubble
3. The Consumer Imbalance
Too much spending
Case Shiller (Real)
260
240
Los Angeles Home Prices
220
Median Annual
200 Median Owner Home Share of
Price Income Cost Income
180
160
1999
140
$199 $62,118 $21,879 35.2%
120
100
2006
80
$577 $78,949 $55,847 70.7%
Jan-87
Jan-89
Jan-91
Jan-93
Jan-95
Jan-97
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07
CS-10 City CS-US
8

9. 50
100
150
200
250
300
-30%
-20%
-10%
0%
10%
20%
30%
40%
1987Q1
Sep-94
1989Q2
Feb-96
1991Q3
1993Q4 Jul-97
High
1996Q1 Jan-99
1998Q2
Jun-00
2000Q3
Low
Nov-01
2002Q4
California Prices
Apr-03
2005Q1
Indexes (to Q4 08)
2007Q2 Sep-04
Mid
2009Q3
San Francisco Case Shiller
Feb-06
2011Q4
Jul-07
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
40000
60000
80000
100000
120000
140000
160000
Jan-94
1988Q1
Jan-95
1990Q1 Jan-96
Low
1992Q1 Jan-97
Jan-98
1994Q1
Jan-99
18
1996Q1
Jan-00
1998Q1 Jan-01
Middle
2000Q1 Jan-02
Jan-03
2002Q1
Changes by Tier
California Home Sales
Jan-04
2004Q1
Jan-05
High
Los Angeles: Year on Year
2006Q1 Jan-06
Jan-07
2008Q1
Jan-08
9
4/27/2009

10. 4/27/2009
Foreclosed homes: mounting
REO Total % HH REO Total % HH
Nevada 27804 65905 6.0% Tennessee 15722 20864 0.8%
Arizona 44058 96525 3.6% New Hampshire 2558 4531 0.8%
Florida 60855 273695 3.1% Rhode Island 2109 3252 0.7%
California 193311 395809 3.0% Washington 8404 19229 0.7%
Michigan 61173 87565 1.9% Texas 45354 65569 0.7%
Illinois 27333 101307 1.9% Wisconsin 7732 17413 0.7%
Ohio 43561 88010 1.7% New York 7021 53823 0.7%
Colorado 17035 35444 1.7% Minnesota 11984 15583 0.7%
Georgia 34971 61281 1.5% Massachusetts 8799 17667 0.6%
New Jersey 7287 52887 1.5% South Carolina 7334 13000 0.6%
Utah 4295 11116 1.2% Arkansas 2986 7924 0.6%
Indiana 13961 31504 1.1% Missouri 11793 16030 0.6%
Idaho 612 6613 1.0% Connecticut 2137 8481 0.6%
Oregon 4519 16271 1.0% DC 912 1673 0.6%
Virginia 15430 27032 0.8% Maryland 5201 13374 0.6%
MBA Numbers: SA to Q4
4.5
4
3.5
3
2.5
60 to 90 Days Behind
2
1.5
1
New Foreclosures
0.5
0
1979Q1
1980Q2
1981Q3
1982Q4
1984Q1
1985Q2
1986Q3
1987Q4
1989Q1
1990Q2
1991Q3
1992Q4
1994Q1
1995Q2
1996Q3
1997Q4
1999Q1
2000Q2
2001Q3
2002Q4
2004Q1
2005Q2
2006Q3
2007Q4
20
10

11. 4/27/2009
• New Bill
– Loosen Fannie Freddie Rules
– Incentivize workouts
– Try to reduce mortgage rates
• Will it work?
– Doesn’t deal with seriously under-water folks
– Won’t turn around banks or markets
– Why does it matter anyways?
Cap Rates Orange County Cap Rates San Francisco
9.5% 10.0%
9.5%
9.0%
9.0%
8.5%
8.5%
8.0%
8.0%
7.5%
7.5%
7.0%
7.0%
6.5% 6.5%
6.0% 6.0%
5.5% 5.5%
5.0% 5.0%
1982Q1
1984Q1
1986Q1
1988Q1
1990Q1
1992Q1
1994Q1
1996Q1
1998Q1
2000Q1
2002Q1
2004Q1
2006Q1
2008Q1
1982Q1
1984Q2
1986Q3
1988Q4
1991Q1
1993Q2
1995Q3
1997Q4
2000Q1
2002Q2
2004Q3
2006Q4
Office Retail Industrial Office Retail Industrial
22
11

12. 4/27/2009
Cap Rates Vacancy
Office Avg Min Q4 08 Q4 06 Q4 08
East Bay 7.9% 6.9% 7.5% 16.9% 18.5%
Inland Empire 7.6% 6.6% 7.7% 9.3% 24.6%
Los Angeles 7.4% 5.7% 6.5% 11.7% 14.1%
Orange County 7.8% 6.0% 7.0% 11.4% 19.2%
Sacramento 8.6% 6.9% 7.8% 12.5% 16.1%
San Diego 8.4% 5.8% 6.9% 10.6% 17.1%
San Francisco 7.7% 5.7% 6.6% 14.0% 15.6%
San Jose 9.4% 6.5% 7.3% 14.4% 17.7%
Warehouse Avg Min Q4 08 Q4 06 Q4 08
East Bay 8.4% 6.2% 6.7% 6.2% 8.2%
Inland Empire 7.8% 5.1% 6.2% 3.3% 8.8%
Los Angeles 7.0% 5.3% 6.2% 3.6% 6.0%
Orange County 8.1% 5.3% 6.4% 5.9% 8.2%
Sacramento 7.4% 6.7% 7.3% 8.0% 8.8%
San Diego 7.3% 5.6% 6.7% 7.3% 7.9%
San Francisco 7.7% 5.9% 6.4% 5.8% 6.8%
San Jose 7.1% 6.1% 6.8% 5.0% 5.6%
Cap Rates Vacancy
Apartment Avg Min Q4 08 Q4 06 Q4 08
East Bay 7.8% 5.0% 5.8% 4.8% 6.2%
Inland Empire 7.8% 4.8% 6.3% 4.3% 6.8%
Los Angeles 7.7% 4.8% 5.5% 4.3% 6.8%
Orange County 7.7% 5.0% 5.9% 3.3% 6.2%
Sacramento 7.8% 5.7% 6.4% 4.8% 6.4%
San Diego 7.8% 4.7% 5.9% 2.8% 5.0%
San Francisco 7.7% 4.8% 5.4% 4.4% 4.6%
San Jose 7.7% 5.0% 5.5% 5.0% 5.9%
Retail Avg Min Q4 08 Q4 06 Q4 08
East Bay 8.7% 5.7% 6.7% 3.4% 6.6%
Inland Empire 8.4% 6.0% 7.4% 9.2% 19.1%
Los Angeles 7.5% 5.7% 6.3% 7.9% 10.4%
Orange County 7.5% 5.7% 6.6% 2.4% 6.7%
Sacramento 7.7% 6.5% 7.6% 7.3% 16.1%
San Diego 8.0% 5.5% 6.6% 1.9% 5.9%
San Francisco 9.0% 5.7% 6.4% 4.6% 6.6%
San Jose 8.5% 5.7% 6.4% 10.9% 16.5%
12

13. 4/27/2009
• High prices paid? Yes
– Financial issues for some who bought in late
• Cash Flows
– Best in commercial space, but still wobbly
– Negatives: less buying, people in financial
problems, fewer people moving
– Positives: People moving to smaller places, lots of
translocation in coming years
13

14. 4/27/2009
The Financial Imbalance
The CDO “Revolution”
Risky Revenue AAA
Stream
AA
A
BBB
Rating
Agencies
Investment Investment
Managers Bankers
Asset Markets Asset Market
Investors Brokers
14

15. 3
4
5
6
3.5
4.5
5.5
195201
195601
196001
196401
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
196801
03/01/96
197201
01/01/97 197601
11/01/97 198001
198401
09/01/98
198801
National P/E Ratio
07/01/99
199201
05/01/00
199601
03/01/01 200001
01/01/02 200401
200801
11/01/02
09/01/03
Assets greater than $15B
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
3.1
3.3
07/01/04
Assets between $1B and $15B
1988Q1
Assets between $300M and $1B
05/01/05 1989Q4
03/01/06 1991Q3
Loan-Loss Reserves to Delinquent Loans
1993Q2
01/01/07
1995Q1
30
11/01/07
1996Q4
1998Q3
2000Q2
2002Q1
2003Q4
Non-Federal Credit / GDP
2005Q3
2007Q2
15
4/27/2009

16. 4/27/2009
New Corporate Issuances
Interest Rates
200,000
10
180,000 9
8
160,000
7
140,000
6
120,000 5
4
100,000
3
80,000 2
1
60,000
0
40,000
20,000
0
Short Run Paper AAA Bonds
BAA Bonds
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0% M1
4.0% M2
2.0%
0.0%
-2.0%
-4.0%
May-98
Oct-98
May-03
Oct-03
Dec-97
Mar-99
Aug-99
Jan-00
Jun-00
Nov-00
Apr-01
Feb-02
Jul-02
Dec-02
Mar-04
Aug-04
Sep-01
16

17. 4/27/2009
The consumer imbalance…
imbalance…
Consumer Spending and Net Savings Rate as % of DPI
Exports as share of GDP 12
72.0% 0.0%
-1.0%
71.0%
-2.0% 8
70.0%
-3.0%
69.0%
-4.0%
68.0% -5.0%
4
67.0% -6.0%
66.0% -7.0%
1995-I
1998-III
2000-II
2002-I
2005-III
2007-II
1996-IV
2003-IV
0
1975-I
1978-I
1981-I
1984-I
1987-I
1990-I
1993-I
1996-I
1999-I
2002-I
2005-I
Consumer Spending Net Exports
17

18. 4/27/2009
US ‘P/E’ Ratio to Q4 Avg. Wealth Per Household
6 $700,000
$650,000
5.5 $600,000
$550,000
5 $500,000
$450,000
4.5
$400,000
$350,000
4
$300,000
$250,000
3.5
$200,000
1995Q1
1996Q1
1997Q1
1998Q1
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
3
1952Q1
1956Q1
1960Q1
1964Q1
1968Q1
1972Q1
1976Q1
1980Q1
1984Q1
1988Q1
1992Q1
1996Q1
2000Q1
2004Q1
2008Q1
Total Net
35
5
4.5
4
Changes in Income
3.5
Aug to Jan
3 $Bill, SAAR
2.5
Income -23.3
2
1.5 Taxes Paid -178.1
Spending -285.0
1
Int + Trans -15.5
0.5
Savings 455.4
0
Jan-06
May-06
Jan-07
May-07
Jan-08
May-08
Jan-09
Sep-06
Sep-07
Sep-08
36
18

19. 4/27/2009
Retail Sales
Auto Sales
400000
18000
380000
16000
360000
14000 All
340000
320000
12000
300000
10000
280000
w/o Auto
8000 260000
240000
6000
Sep-06
Sep-07
Sep-08
Jan-06
May-06
Jan-07
May-07
Jan-08
May-08
Jan-09
Apr-07
Jul-07
Apr-08
Jul-08
Jan-07
Oct-07
Jan-08
Oct-08
Jan-09
37
Trade
Industrial Production to Jan
$240,000
2.0%
$220,000
1.0%
$200,000
0.0%
$180,000
-1.0% $160,000
$140,000
-2.0%
$120,000
-3.0%
$100,000
Jan-06
Jan-07
Jan-08
Apr-06
Jul-06
Oct-06
Apr-07
Jul-07
Oct-07
Apr-08
Jul-08
Oct-08
-4.0%
Jan-06
Apr-06
Jul-06
Jan-07
Apr-07
Jul-07
Jan-08
Apr-08
Jul-08
Jan-09
Oct-06
Oct-07
Oct-08
Exports Imports
38
19

20. 4/27/2009
Personal Taxes Mortgage Obligation
To Q3 2008, Share of Income % of Owner DPI, Fed Res, to Q3
16% 13
15%
12
14%
11
13%
12%
10
11%
9
10%
8
9%
1958-III
1971-III
1984-III
1997-III
1961-IV
1974-IV
1987-IV
2000-IV
1952-I
1955-II
1965-I
1968-II
1978-I
1981-II
1991-I
1994-II
2004-I
2007-II
80q1
82q1
84q1
86q1
88q1
90q1
92q1
94q1
96q1
98q1
00q1
02q1
04q1
06q1
08q1
Personal Tax Cut Q: How much will 4.5%
conforming mortgage rates and
Income $ 12,250
Taxes (No SI) $ 1,550 foreclosures help?
Tax Cut $ 250
New Savings 2.80%
40
20

21. 4/27/2009
Summary
RECESSION IS HERE…
Consumer weakness will continue , but not forever
Business weakness to get worse on profit issues
Exports are a big negative, but will be solid in the longer run
Housing close to bottom, but no bounce
State budget issues to get worse
WHAT KIND OF RECESSION?
RECESSION?
Bad, but not a depression, decline followed by period of
doldrums
Recover in economy early to mid 2010
Recovery in housing 2012
Unemployment
GDP Growth
14
6%
12
4%
State
10
2%
8
0%
6
-2%
US
4
-4%
-6% 2
-8% 0
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
2011Q1
21

22. 4/27/2009
1. Recovery is inevitable if delayed
2. Fire Sales will create
opportunities—
opportunities—but wait for it
3. Low Home Prices are good in the
long run
4. California is going to have good
times ahead as exports boom
5. Keep to your fundamentals
6. In desperate times comes real
change
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please visit: www.BeaconEcon.com
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and Southern California.
Contact us at 415-457-6030
415-457-
22