Transcript here - 495/MetroWest Partnership

Domestic Economic Conditions
Jeff Fuhrer
Director of Research
Federal Reserve Bank of Boston
Presented to the
495/MetroWest Corridor Partnership’s Economic Forum
September 4, 2008
Chart assistance provided by Denny Lie
Overview
Update on the housing crisis: Still going
Update on financial market stresses: Still going
Outlook and risks for the real economy: Weak
second half
Outlook and risks for inflation
Housing: A massive construction decline
has lowered the stock of houses for sale
2000
1800
700
Stock of new homes for sale (right scale)
600
Single-family building permits (left scale)
1600
500
400
1200
300
1000
200
800
100
600
400
2000:Jan
0
2001:Jan
2002:Jan
2003:Jan
2004:Jan
2005:Jan
2006:Jan
2007:Jan
2008:Jan
Thousands
Thousands
1400
Housing: Despite the construction decline,
inventories remain high relative to sales
1600
12.0
Months' supply of new homes for sale (right scale)
10.0
Single-familyhome sales (left scale)
1200
8.0
1000
6.0
800
4.0
600
2.0
400
0.0
2000:Jan
2001:Jan
2002:Jan
Source:Census
Census Bureau
Source:
Bureau
2003:Jan
2004:Jan
2005:Jan
2006:Jan
2007:Jan
2008:Jan
Months' supply
Thousands
1400
Housing: Prices continue to fall
200
250
OFHEO purchase-only index
180
Case-Shiller national index
160
200
140
120
150
Percentage changes
100
OFHEO
50
CaseShiller
Q2
-1.4
-2.3
This year
-3.0
-8.9
Since peak
-4.8
-18.2
0
1990:Q1
1992:Q1
1994:Q1
1996:Q1
1998:Q1
2000:Q1
2002:Q1
2004:Q1
2006:Q1
100
80
60
40
20
0
2008:Q1
Financial market conditions:
Continued liquidity pressures
1.2
1.0
Spread, 3-mo. $ Libor over 3-mo. OIS
0.8
0.6
0.4
After improvement earlier
this year, conditions have
continued to deteriorate
0.2
5
08
20
08
20
08
20
08
20
08
20
07
20
07
20
07
20
07
20
07
20
07
20
20
07
Significant improvement in liquidity in markets
08
0
0
06
2
7
05
0
4
03
2
7
02
0
5
12
2
9
11
0
6
09
2
3
08
1
8
06
2
5
05
1
0
03
3
4
02
1
07
20
20
07
01
0
1
0.0
Financial market conditions:
Tightening lending standards, for all markets
Senior Loan Officer Survey, % indicating tighter standards
100
80
Comm'l RE loans
Mortgage loans
Other consumer loans
C&I Loans to med/large firms
Credit cards
60
40
Credit conditions have tightened in a wide array of markets
20
0
-20
Senior Loan Officers’ Survey
-40
2000:Q1
2001:Q1
2002:Q1
2003:Q1
2004:Q1
2005:Q1
Sources: Federal Reserve Board, Financial Times, The Wall Street Journal
2006:Q1
2007:Q1
2008:Q1
Financial market conditions:
Mortgage, corporate rates have risen, despite
Fed actions
7.5
5.5
5.0
7.0
4.5
6.5
4.0
6.0
3.5
Conventional mortgage rate
5.5
3.0
BAA corporate bond rate
Federal funds rate
2.5
5.0
2.0
4.5
1.5
4.0
2006:Sep
1.0
2007:Jan
2007:May
2007:Sep
2008:Jan
2008:May
At the heart of this, still: The
mortgage/housing/subprime crisis
7
6
5
Foreclosures initiated in quarter as
a percentage of loans
7
6
5
4
4
3
3
Subprime
Subprime
ARM
ARM
Subprime
Subprime
fixed
fixed
rate
rate
Prime
Prime
ARM
ARM
Prime
Prime
fixed
fixed
rate
rate
1.8
1.6
1.4
…but prime ARMs,
1.2
while at a lower rate,
Subprime ARMs showed the
are dramatic
now showing
most
rise ina parallel
rise in foreclosures
foreclosures…
1.0
0.8
0.6
2
2
0.4
1
1
0.2
0 0
2002:Q1
2002:Q1
0.0
2003:Q1
2003:Q1
Source: Mortgage Bankers’ Association
2004:Q1
2004:Q1
2005:Q1
2005:Q1
2006:Q1
2006:Q1
2007:Q1
2007:Q1
2008:Q1
Fed responses to financial market problems
Liquidity measures (Goal: to restore flow of
short-term lending)
– Term Auction Facility (TAF)
Take MBS as collateral in bids for short-term funding
– Other lending facilities (to “primary dealers,” for
longer terms, expand list of collateral, lend to used-car
dealers, hot-dog stands, etc.)
– Bear-Stearns—we could spend all day on this one
Underlying credit problems: Harder to address
Monetary policy response
– Cut three 3-¼ percentage points since August 2007
Lessons learned from financial markets
What have we learned?
– We are infinitely capable of getting ourselves in trouble.
– That’s probably here to stay.
– Regulation is to self-regulation as important is to selfimportanta.
– A “AAA” rating for a fancy new asset really means
“Could be pretty good stuff, who am I to say no?”b
– When it comes right down to it, there’s only one
institution you can trust:
THE FED
aWillem
Buiter, 2008
bEspecially if you’re willing to pay me a very large fee if I call it AAA
The Real Economy
Weak second half expected
– Consumer supports not good
Wage growth slowing
Wealth declining
Oil prices are “taxing”—some respite lately
Interest rates not particularly low
– Housing moribund
– Commercial real estate—weakening
– Exports—foreign growth stalling
May well muddle through at low growth rates
– But weaker outcomes are possible
Inflation Risks: Recent data are somewhat
worrisome
4
Even for those measures that exclude food and energy prices
3.5
3
2.5
2
1.5
1
12-mo. % chg., CPI
3-mo. % chg., Cpi
0.5
12-mo. % chg., PCE
3-mo. % chg., PCE
0
2003:Jan
2004:Jan
2005:Jan
2006:Jan
2007:Jan
2008:Jan
Inflation risks: Some comfort—
A slowing economy will help
16
Contrary to some analysts’
assertions, inflation always
falls during slowdowns
14
12
10
8
CPI inflation
(4-qtr. % chg.)
6
4
2
0
1955:Q1
1961:Q1
1967:Q1
Sources: Bureau of Labor Statistics
1973:Q1
1979:Q1
1985:Q1
1991:Q1
1997:Q1
2003:Q1
The recent trajectory of oil prices, if sustained,
will also help
160
370
Crude oil, $/bbl
140
Gasoline, NY harbor, cents/gal.
320
120
270
100
220
80
… both by:
(1) Lowering the “tax” on consumers; and
(2) Diminishing the risk of elevated
inflation
60
40
20070101
170
120
20070618
20071203
20080519
Summary
The housing slowdown continues
– Sales may flatten, but still inventory to work off, and
prices continue to decline
Financial markets remain somewhat fragile
– Tightened lending standards, liquidity issues
Expecting weak second-half growth, rising
unemployment
Inflation a risk
– Has been high lately
– Largely lagged effects of food, energy prices
– Likely to retreat in coming months