Transcript Midwest Economic Outlook

Economic Outlook
Multi-Chamber Economic Outlook Luncheon
Downers Grove, IL
February 10, 2010
William Strauss
Senior Economist
and Economic Advisor
Federal Reserve Bank of Chicago
The Chicago Fed National Activity Index
bottomed in January 2009 and has been rising
Chicago Fed National Activity Index
2.0
1.0
0.0
-1.0
-2.0
Three month average
-3.0
-4.0
Monthly
-5.0
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
The “Great Recession” appears to have come
to an end around the middle of last year and
the economy expanded by 5.7% in the fourth quarter
Real gross domestic product
percent
8
Quarterly change (saar)
6
4
2
0
-2
Percent change from a year earlier
-4
-6
-8
1990 '91
'92
'93
'94
'95
'96
'97
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
Fourth quarter GDP expanded at a fast pace
with contributions largely coming from
inventories, consumption and net exports
Contributions to real GDP growth in Q4:2009
percentage points (annual rate)
7
6
5.7
5
4
3.4
3
1.4
2
1
0.3
0.5
0.1
0
0.0
-1
GDP
Consumption
Business Residential Inventories Government Net Exports
Fixed
Investment
Investment
Personal savings has increased sharply
Personal savings as a percent of disposable personal income
percent
16
14
12
10
8
6
4
2
0
1960
'65
'70
'75
'80
'85
'90
'95
'00
'05
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
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
Q4-2009
4
2
0
-2
Percent change from a year earlier
-4
-6
-8
2000
01
02
03
04
05
06
07
08
09
10
11
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
Employment has fallen by over 8.4 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
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
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
Employment recoveries have taken
much longer over the past two cycles
Employment
number in parenthesis is percent change of employment from peak
recession year
1960
(-2.3%)
1970
(-1.5%)
1974
(-2.8%)
1980
(-1.3%)
1981
(-3.1%)
1990
(-1.5%)
2001
(-2.0%)
2008
(-6.1%) through January 2010
-30
-24
-18
-12
Months of declines in employment
-6
0
6
12
18
24
Months until previous employment peak is reached
Michigan’s job losses are significant,
losing 860,400 jobs since June 2000,
amounting to 18.3% of their jobs
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
Michigan has the highest
state unemployment rate in the nation
Unemployment rate
percent
16
MI
14
12
10
8
6
4
2
US
WI
IN
IL
IA
0
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
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
Adjusted for inflation current oil prices are well below early 1980s prices
Real West Texas Intermediate oil price
dollars per barrel. 2009 dollars
140
120
100
80
60
40
20
0
1970
'75
'80
'85
'90
'95
'00
'05
'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
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
Industrial output fell quite sharply during the recession,
but has risen strongly over the past six 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
The downturn in manufacturing was the deepest and
close to the longest decline over the past 50 years
Industrial production - manufacturing
number in parenthesis is percent change of output from peak
recession year
1960
(-9.9%)
1970
(-8.6%)
1974
(-15.3%)
1980
(-8.4%)
1981
(-9.1%)
1990
(-4.7%)
2001
(-6.9%)
2008
(-16.6%)
-24
-18
-12
-6
Months of declines in output
recovery percentage: 23.6%
0
6
12
18
24
30
Months until previous output peak is reached
36
42
Manufacturing capacity utilization
fell to the lowest level in more than 70 years
Capacity utilization - manufacturing
percent
86
84
82
80
78
76
74
72
70
68
66
64
1990 '91 '92 '93 '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
-4.6
percent
10
Forecast
2010
2011
4.7
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
Light vehicle sales collapsed with 2009 sales off 21%
Light vehicle sales
millions of units (saar)
22
21
20
19
18
17
16
15
14
13
12
11
10
9
8
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Yet, light vehicle production has been cut back by 34%
Light vehicle production
millions of units (saar)
14
13
12
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
The inventory to GDP ratio has
fallen to record low readings
Inventory to GDP ratio
ratio
20
19
18
17
16
15
14
13
12
1950
'55
'60
'65
'70
'75
'80
'85
'90
'95
'00
'05
Increases in new domestic production share
has offset losses in Detroit-3 market share
Share of light vehicle sales
percent
percent
100
100
imports
90
80
90
80
70
new domestics
70
60
60
50
50
40
40
Detroit-3
30
30
20
20
10
10
0
0
1980
'83
'86
'89
'92
'95
'98
'01
'04
'07
In the third quarter of last year,
residential investment had its first increase since 2005
Real residential investment
percent
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
-40
Quarterly change (saar)
Percent change from a year earlier
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Residential investment as a share of GDP is very low
Residential investment as a share of GDP
percent
7
6
5
4
3
2
1960
'65
'70
'75
'80
'85
'90
'95
'00
'05
The supply of new single family homes
has fallen from very high levels
Months supply of new single family homes
months
13
12
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
Housing starts have been cut-back sharply
Housing starts
3-month smoothed - percent change from a year earlier
50
40
30
20
10
0
-10
-20
-30
-40
-50
-60
United States
Midwest
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Housing starts have fallen to a post WWII low
Housing starts
thousands
2,500
2,000
1,500
1,000
500
0
1960
'65
'70
'75
'80
'85
'90
'95
'00
'05
When you take into account the growth of households,
it is an even more dramatic decline
Housing starts per 1,000 households
40
35
30
25
20
15
10
5
0
1960
'65
'70
'75
'80
'85
'90
'95
'00
'05
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
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
Home price declines in the second quarter, compared with a
year-earlier, were quite large in the West and Florida
7 Red States
4 Light Blue States
Conditions improved in the third quarter with prices down
around 4% compared with a year-earlier
4 Red States
7 Light Blue States
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
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
Home sales have been moving higher
New and existing single family home sales
thousands
8,000
7,500
7,000
6,500
6,000
5,500
5,000
4,500
4,000
3,500
3,000
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Yet, consumer attitudes for buying a home remain very low
Consumer attitudes - plan to buy a home in next six months
percent of respondents
6
5
4
3
2
1
0
1980
'85
'90
'95
'00
'05
'10
Lending standards for mortgage loans remain tight
Senior Loan Officer Opinion Survey
net percentage of domestic respondents tightening mortgage loan standards
80
60
40
20
0
-20
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Corporate High Yield rates increased beginning in June 2007
Corporate Aaa and Corporate High Yield rates
percent
24
22
20
18
16
14
12
10
8
6
4
High Yield
Corporate Aaa
J
a
n
A
p
r
J
u
l
2007
O
c
t
J
a
n
A
p
r
J
u
l
2008
O
c
t
J
a
n
A
p
r
J
u
l
2009
O
c
t
J
a
n
2010
Credit spreads between Corporate High Yield securities
and Corporate Aaa securities rose by over 1,400 basis points,
but have been improving steadily since March 2009
Credit spreads between Corporate High Yield and Corporate Aaa
percent
18
16
14
12
10
8
6
4
2
0
J
a
n
A
p
r
J
u
l
2007
O
c
t
J
a
n
A
p
r
J
u
l
2008
O
c
t
J
a
n
A
p
r
J
u
l
2009
O
c
t
J
a
n
2010
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
The Fed’s balance sheet has expanded
in size and in composition
Assets of the Federal Reserve
Billions of dollars
2,500
Commercial Paper Facility
2,000
Remaining Asset Facilities
1,500
Central Bank Swaps
1,000
Term Auction Credit
500
Securities Held Outright
Other Assets
0
2007
2008
2009
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
www.chicagofed.org
www.federalreserve.gov