Transcript Midwest Economic Outlook

Economic Assessment
Not So Silent Partners:
Libraries and Local Economic Development
Chicago, IL
July 13, 2009
William Strauss
Senior Economist
and Economic Advisor
Federal Reserve Bank of Chicago
The economy entered a recession in the first quarter of 2008
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
The personal savings rate increased sharply
Personal savings as a percent of disposable personal income
percent
10
9
8
7
6
5
4
3
2
1
0
-1
-2
-3
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
GDP growth is forecast to be quite weak this year,
but then grow close to trend in 2010
Real gross domestic product
percent
Blue Chip GDP Forecast
8
Quarterly change (saar)
6
Actual
2008
-0.8
4
Forecast
2009 2010
-1.1
2.7
2
0
-2
Percent change from a year earlier
-4
-6
Q1-2009
-8
2000
01
02
03
04
05
06
07
08
09
10
Potential Historical Context
Blue Chip
Forecast for
Current Episode
Historical1
Average
Range
Consensus
11
6 to 16
18-24
Change in GDP2
-1.7
-0.4 to -3.1
-3.63
Maximum
Unemployment
Rate
7.8
6.1 to 10.8
10.1
Change in payroll
employment2
-2.1
-1.3 to -3.1
-5.0 to -5.34
Duration (months)
1.
2.
3.
4.
Calculated over the 1960-61, 1969-70, 1973-75, 1980, 1981-82, 1990-91, and 2001 recessions.
Percent change from peak to trough of GDP.
Starting from the peak of GDP in the second quarter of 2008.
My guess. – through June 2009 employment is down 4.7%
The Chicago Fed National Activity Index
bottomed in January 2009 and has begun to rise
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
Inflation has reversed its upward trajectory
Personal consumption expenditure - chain price index
percent change from a year earlier
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
In large part due to the movement of oil prices
West Texas Intermediate oil price
dollars per barrel
140
120
100
80
60
40
20
0
1970
'75
'80
'85
'90
'95
'00
'05
Adjusted for inflation current oil prices are well below early 1980s prices
Real West Texas Intermediate oil price
dollars per barrel. 2008 dollars
140
120
100
80
60
40
20
0
1970
'75
'80
'85
'90
'95
'00
'05
Expenditures on energy increased over the past few years,
and they are currently well below the historical average
Energy goods and services expenditures as a share of
percent
total consumption
10
9
8
60s
80s
70s
7
1960-2009
6
5
00s
90s
4
1960
'65
'70
'75
'80
'85
'90
'95
'00
'05
Removing the volatile food and energy
components from the PCE,
“core” inflation has remained in the “comfort zone”
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 moderate this year
and then rise by just under two percent in 2010
Consumer price index
percent
8
Quarterly change (saar)
6
4
2
0
-2
-4
Percent change from a year earlier
Actual
2008
1.5
-6
-8
Q1-2009
Blue Chip CPI Forecast
Forecast
2009 2010
0.7
1.9
-10
2000
01
02
03
04
05
06
07
08
09
10
Employment has fallen by nearly 6.5 million jobs
since December 2007
Total employment
percent
4
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
Percent change from a year earlier
Quarterly change (saar)
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 August 1983
Unemployment rate
percent
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
The unemployment rate is forecast to peak at 10.1%
early next year and then begin to edge lower
Unemployment rate
percent
12
Blue Chip UR Forecast
peaks at 10.1% in Q1-2010
10
Q2-2009
8
6
4
2
0
2000
01
02
03
04
05
06
07
08
09
10
Real disposable personal incomes are anticipated
to continue to rise a moderate pace
Real disposable personal income
percent
12
Quarterly change (saar)
10
8
6
4
2
0
-2
-4
-6 Percent change from a year earlier
-8
-10
2000
01
02
03
04
05
Q1-2009
Blue Chip DPI Forecast
Actual
2008
0.8
06
Forecast
2009 2010
2.7
2.3
07
08
09
10
Consumer spending is expected to
edge down in the second quarter of this year
and then begin to rise
Real personal consumption expenditures
percent
8
Percent change from a year earlier
Quarterly change (saar)
6
4
Q1-2009
2
0
Blue Chip PCE Forecast
-2
Actual
2008
-1.5
-4
Forecast
2009 2010
0.9
2.2
-6
2000
01
02
03
04
05
06
07
08
09
10
Light vehicle sales collapsed
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
In an attempt to keep inventories in line with falling sales
light vehicle production has been cut back quite severely
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
Consumer attitudes about buying a vehicle is very low
Consumer attitudes - plan to buy automobile in six months
percent of respondents
12
11
10
9
8
7
6
5
4
3
1980
'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
Residential investment fell off sharply beginning in 2006
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 is extremely high
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
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
Housing starts have fallen to a new 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
Home price declines are large
Median sales price - existing single family home
3-month smoothed - percent change from a year earlier
18
15
12
9
6
3
0
-3
-6
-9
-12
-15
-18
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Home price have fallen by over seven percent over the past
year with large differences across regions
Housing affordability has 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
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
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
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
F M A M
e a p a
b r r y
J
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J
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A
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g
2007
S
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N
o
v
D
e
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J
a
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F M A M
e a p a
b r r y
J
u
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J
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A
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S
e
p
O
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t
N
o
v
2008
D
e
c
J
a
n
F M A M
e a p a
b r r y
J
u
n
J
u
l
2009
Credit spreads between Corporate High Yield securities
and Corporate Aaa securities rose by over 1,400 basis points,
but have been improving over the past several months
Credit spreads between Corporate High Yield and Corporate Aaa
percent
18
16
14
12
10
8
6
4
2
0
J
a
n
F M A M
e a p a
b r r y
J
u
n
J
u
l
A
u
g
2007
S
e
p
O
c
t
N
o
v
D
e
c
J
a
n
F M A M
e a p a
b r r y
J
u
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J
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A
u
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S
e
p
O
c
t
N
o
v
2008
D
e
c
J
a
n
F M A M
e a p a
b r r y
J
u
n
J
u
l
2009
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
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 struggle through
most of this year and then grow at a solid pace next year
•Employment is expected to remain weak this year,
leading to a continued rise in the unemployment rate
•Slackness in the economy will lead to a relatively
low inflation rate over the coming year
•The volatile credit markets and the weak housing market
are the biggest risk on the horizon for the U.S. economy
www.chicagofed.org
www.federalreserve.gov