Transcript Slide 1

2010 Economic Outlook:
Prospects for an
Enduring Recovery
Indianapolis
May 5, 2010
William Testa
Vice President
and Economic Advisor
Federal Reserve Bank of Chicago
www.chicagofed.org/midwest
The “Great Recession” appears to have come
to an end around the middle of last year and
the economy expanded by 3.2% in the first quarter
Real gross domestic product
percent
8
Quarterly change (saar)
6
4
2
0
-2
-4
Percent change from a year earlier
-6
-8
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
First quarter GDP expanded at a solid pace
with contributions largely coming from
consumption and inventories
Contributions to real GDP growth in Q1:2010
percentage points (annual rate)
4
3.2
3
2.6
2
1.6
1
0.4
0
-0.3
-1
GDP
Consumption
-0.4
-0.6
Business Residential Change in Government Net Exports
Fixed
Investment Inventories
Investment
The inventory to GDP ratio has
fallen to record low readings
Inventory to GDP ratio
ratio
38
36
34
32
30
28
26
24
22
20
18
16
14
12
1950
'55
'60
'65
'70
'75
'80
'85
'90
'95
'00
'05
'10
The pace of inventory accumulation is
predicted to continue to increase through 2011
Change in business inventories
billions of chained 2005 dollars (saar)
125
100
75
50
25
0
-25
-50
-75
-100
-125
-150
-175
Blue Chip Forecast
Q1-2010
2000
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
GDP is forecast to grow
above trend in 2010 and 2011
Real gross domestic product
Blue Chip GDP Forecast
percent
Actual
2009
0.1
10
8
Quarterly change (saar)
6
Forecast
2010
2011
2.9
3.2
4
2
0
Q1-2010
-2
Percent change from a year earlier
-4
-6
-8
2000
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
What will recovery look like?
1. “Shallow in-Shallow out violated, a weak
recovery
-- exports gaining, and consumer, business
equipment
-- financial sector stabilizing (non bank esp.)
2. What will hold us back?
-- Previous wealth destruction/consumption
spending weak
-- Overhang in housing and CRE
-- Fragile capital markets
The forecast path of the current recovery is relatively muted
compared with past deep recession recovery cycles
Business cycle recovery path
index - business cycle trough = 100
116
1981-82
114
112
1974-75
110
108
106
2008-09
104
102
Blue Chip forecast recovery path
100
98
-8
-7
-6 -5 -4 -3 -2
quarters before trough
-1
0
1
2
3
4
5
6
7
quarters after trough
8
9
10
Consumer Sector
The stock market has improved since March 2009,
but remains well below previous levels
S&P 500 stock index
Index: 1941-43 = 10
1,600
1,400
1,200
1,000
800
600
400
200
0
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Home price declines have been large
Median sales price - existing single family home
3-month smoothed - percent change from a year earlier
20
15
United States
10
5
0
-5
Midwest
-10
-15
-20
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
In the fourth quarter, home prices fell by just over
one percent over the past year
3 Red States
19 Light Blue States
Household Balance Sheets
Ratio of Household Net Worth to DPI
Household Debt and Savings Rate
(hundreds of percent)
(percent)
Financial Obligations Ratio
Personal Savings Rate
7
21.0
9.0
6
19.0
6.0
5
17.0
3.0
4
1992
15.0
1992
0.0
Q3-2009
'95
'98
'01
'04
'07
'96
'00
FOR: Ratio of hh debt payments to DPI
'04
'08
Q3-2009
Q3-2009
Consumer spending is expected to
rise at a slower pace in the fourth quarter of 2009
and then gradually improve through 2011
Real personal consumption expenditures
percent
8
Blue Chip PCE Forecast
Quarterly change (saar)
Actual
2009
1.1
6
Forecast
2010
2011
2.2
2.7
4
Q4-2009
2
0
-2
Percent change from a year earlier
-4
2000
01
02
03
04
05
06
07
08
09
10
11
Labor Market
Employment has fallen by over 8.2 million jobs
since December 2007
Total employment
percent
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
Percent change from a year earlier
Monthly change (saar)
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Job Performance by state
Total employment
percent change from a year earlier
6
4
US
WI
2
0
-2
IN
IL
IA
-4
-6
-8
MI
-10
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
The unemployment rate has risen to
the highest level since April 1983
Unemployment rate
percent
11
10
9
8
7
6
5
4
3
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Unemployment
Unemployment Rate
(percent)
FOMC Forecasts as of
late January 2010
12
Mar-2010
9
6
Late Jan
3
2010
2011
2012
Long-run
0
1960
'70
FOMC
9.6
8.3
7.1
5.0 – 2.8
'80
April
BC
9.6
8.8
BC
9.7
8.9
'90
2000
2010
19
The unemployment rate is forecast to peak at 10.2%
early this year and then begin to edge lower
Unemployment rate
Blue Chip UR Forecast
peaks at 10.2% in Q1-2010
percent
12
Q4-2009
10
8
6
4
2
0
2000
01
02
03
04
05
06
07
08
09
10
11
Industrial Production
Industrial output fell quite sharply during the recession,
but has risen strongly over the past eight months
Industrial production - manufacturing
percent
40
30
Monthly change (saar)
Percent change from a year earlier
20
10
0
-10
-20
-30
-40
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Export growth has been rising over the past year
Exports, monthly
percent change from a year earlier
25
20
15
10
5
0
-5
-10
-15
-20
-25
1993 '94
'95
'96
'97
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
Industrial production is forecast to
rise at a solid pace through the end of 2011
Blue Chip IP Forecast
Total industrial production
Actual
2009
-4.8
percent
10
Forecast
2010
2011
5.1
4.1
Quarterly change (saar)
5
0
-5
Percent change from a year earlier
Q4-2009
-10
-15
-20
2000
01
02
03
04
05
06
07
08
09
10
11
Housing
Housing starts have been cut-back sharply
Housing starts
3-month smoothed - percent change from a year earlier
40
30
20
10
0
-10
-20
-30
-40
-50
-60
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Mortgage rates are very low
Mortgage rate - 30-year fixed
percent
11
10
9
8
7
6
5
4
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Housing affordability improved dramatically
Composite housing affordability index
index=100 when median family income qualifies for an 80% mortgage
on a median priced existing single family home
190
180
170
160
150
140
130
120
110
100
90
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
The forecast calls for a very slow recovery in housing
Housing starts
thousands
2,500
2,000
1,500
1,000
Blue Chip Housing Starts
Forecast (thousands)
Actual
2009
553
500
Forecast
2010
2011
685
952
0
1980
'85
'90
'95
'00
'05
'10
CRE, Financial Sector and Bank Lending
CRE is a banking issue
Agency- and GSEBacked Mortgage
Pools
4%
GovernmentSponsored
Enterprises
6%
Governments
4%
Other
5%
Commercial
Banking
45%
• Unlike residential
mortgages that were
heavily securitized, most
CRE is on bank balance
sheets
Savings Institutions
6%
• Smaller banks tend to
have larger concentrations
Life Insurance
Companies
9%
CMBS, CDO, and
other ABS Issues
21%
• A major source of recent
growth & profits for
community banks
Nonresidential Investment: Structures
Vacancy Rates
(percent)
Nonresidential Private Construction
Office
Industrial
(billions of dollars, three month moving average)
440
20
360
15
Q3-2009
Nov-2009
280
10
j
200
2000
'01
'03
'04
'06
'07
'09
5
2000
'03
'06
'09
CMBS delinquency
rises to record levels
• Delinquency rates rising across all property types to record levels
• Over 50% of current maturities unable/unwilling to refinance
• CMBS Special Servicers have limited ability to extend maturities
Bank Lending
Total Loans and Credit Outstanding
C&I Loans Outstanding
(three month percent change in MA3)
(three month percent change in MA3)
6.0
7.0
5.0
4.0
5.0
3.0
3.0
2.0
1.0
1.0
0.0
-1.0
-1.0
Nov-2009-3.0
-2.0
-3.0
-5.0
Shading corresponds with NBER recession periods
-4.0
1978 '81 '84 '87 '90 '93 '96 '99 '02 '05
Shading corresponds with NBER recession periods
-7.0
1978 '81 '84 '87 '90 '93 '96 '99 '02 '05 '08
'08
Nov-2009
Inflation
The Fed has been very aggressive, lowering the
Fed Funds rate by nearly 525 basis points
Fed Funds rate
percent
9
8
7
6
5
4
3
2
1
0
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Inflation has begun to move higher
Personal consumption expenditure - chain price index
percent change from a year earlier
6
5
4
3
2
1
0
-1
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Removing the volatile food and energy
components from the PCE,
“core” inflation remains contained
Personal consumption expenditure - less food and energy chain price index
percent change from a year earlier
5
4
3
2
1
0
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Inflation is anticipated to rise
by 1.8 percent this year and 2.1 percent next year
Consumer price index
percent
8
Quarterly change (saar)
6
Q4-2009
4
2
0
-2
Percent change from a year earlier
-4
Blue Chip CPI Forecast
-6
Actual
2009
1.5
-8
Forecast
2010
2011
1.8
2.1
-10
2000
01
02
03
04
05
06
07
08
09
10
11
Summary
•The outlook is for the U.S. economy to expand at a
solid pace this year and next year
•Employment is expected to rise moderately this year and next
year, with the unemployment rate edging lower through 2011
•Slackness in the economy will lead to a relatively
low inflation rate over the next two years
•Growth in manufacturing output will be solid in 2010 and 2011
due to improving demand and rebuilding of depleted inventories
•The volatile credit markets, concerns about commercial
real estate, and the weak housing market are some of
the biggest risks on the horizon for the U.S. economy