2010 economic outlook: prospects for an enduring recovery
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2010 Economic Outlook: Prospects for an Enduring Recovery. William Testa Vice President and Economic Advisor Federal Reserve Bank of Chicago. Indianapolis May 5, 2010. www.chicagofed.org/midwest. - PowerPoint PPT PresentationTRANSCRIPT
2010 Economic Outlook:Prospects for an
Enduring Recovery William Testa Vice President and Economic Advisor Federal Reserve Bank of Chicago
IndianapolisMay 5, 2010
www.chicagofed.org/midwest
The “Great Recession” appears to have cometo an end around the middle of last year and
the economy expanded by 3.2% in the first quarter
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-2
0
2
4
6
8
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Real gross domestic productpercent
Quarterly change (saar)
Percent change from a year earlier
First quarter GDP expanded at a solid pacewith contributions largely coming from
consumption and inventories
3.2
2.6
0.4
-0.3
1.6
-0.4-0.6-1
0
1
2
3
4
GDP Consumption Business Fixed
Investment
Residential Investment
Change in Inventories
Government Net Exports
Contributions to real GDP growth in Q1:2010percentage points (annual rate)
The inventory to GDP ratio has fallen to record low readings
1214161820222426283032343638
1950 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10
Inventory to GDP ratioratio
The pace of inventory accumulation ispredicted to continue to increase through 2011
-175-150-125-100
-75-50-25
0255075
100125
2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
Change in business inventoriesbillions of chained 2005 dollars (saar)
Q1-2010
Blue Chip Forecast
GDP is forecast to growabove trend in 2010 and 2011
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-6
-4
-2
0
2
4
6
8
10
2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
Real gross domestic productpercent
Quarterly change (saar)
Percent change from a year earlier
Q1-2010
Blue Chip GDP Forecast
Actual Forecast 2009 2010 2011
0.1 2.9 3.2
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
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100
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108
110
112
114
116
-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10
Business cycle recovery pathindex - business cycle trough = 100
1981-82
2008-09
Blue Chip forecast recovery path
1974-75
quarters before trough quarters after trough
Consumer Sector
The stock market has improved since March 2009,but remains well below previous levels
0
200
400
600
800
1,000
1,200
1,400
1,600
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
S&P 500 stock indexIndex: 1941-43 = 10
Home price declines have been large
-20
-15
-10
-5
0
5
10
15
20
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Midwest
Median sales price - existing single family home3-month smoothed - percent change from a year earlier
United States
In the fourth quarter, home prices fell by just overone percent over the past year
3 Red States19 Light Blue States
Household Balance Sheets
Ratio of Household Net Worth to DPI(hundreds of percent)
Household Debt and Savings Rate(percent)
Financial Obligations RatioPersonal Savings Rate
Q3-2009Q3-2009
Q3-2009
FOR: Ratio of hh debt payments to DPI
Consumer spending is expected torise at a slower pace in the fourth quarter of 2009
and then gradually improve through 2011
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-2
0
2
4
6
8
2000 01 02 03 04 05 06 07 08 09 10 11
Real personal consumption expenditurespercent
Quarterly change (saar)
Percent change from a year earlier
Q4-2009
Blue Chip PCE Forecast
Actual Forecast 2009 2010 20111.1 2.2 2.7
Labor Market
Employment has fallen by over 8.2 million jobssince December 2007
-7-6-5-4-3-2-10123456
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Total employmentpercent
Monthly change (saar)
Percent change from a year earlier
Job Performance by state
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0
2
4
6
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
MI
Total employmentpercent change from a year earlier
US
IL
IN
IA
WI
The unemployment rate has risen tothe highest level since April 1983
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7
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9
10
11
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Unemployment ratepercent
19
UnemploymentUnemployment Rate (percent)
Mar-2010
FOMC Forecasts as of late January 2010
Late Jan April FOMC BC BC2010 9.6 9.7 9.62011 8.3 8.9 8.82012 7.1Long-run 5.0 – 2.8
The unemployment rate is forecast to peak at 10.2%early this year and then begin to edge lower
0
2
4
6
8
10
12
2000 01 02 03 04 05 06 07 08 09 10 11
Unemployment ratepercent
Unemployment ratepercent
Q4-2009
Blue Chip UR Forecastpeaks at 10.2% in Q1-2010
Industrial Production
Industrial output fell quite sharply during the recession,but has risen strongly over the past eight months
-40
-30
-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
Industrial production - manufacturingpercent
Monthly change (saar)
Percent change from a year earlier
Export growth has been rising over the past year
-25-20-15-10
-505
10152025
1993 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Exports, monthlypercent change from a year earlier
Industrial production is forecast torise at a solid pace through the end of 2011
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-15
-10
-5
0
5
10
2000 01 02 03 04 05 06 07 08 09 10 11
Total industrial productionpercent
Quarterly change (saar)
Percent change from a year earlier Q4-2009
Blue Chip IP Forecast
Actual Forecast 2009 2010 2011-4.8 5.1 4.1
Housing
Housing starts have been cut-back sharply
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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
Housing starts3-month smoothed - percent change from a year earlier
Mortgage rates are very low
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1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Mortgage rate - 30-year fixedpercent
Housing affordability improved dramatically
90
100
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170
180
190
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Composite housing affordability indexindex=100 when median family income qualifies for an 80% mortgage
on a median priced existing single family home
The forecast calls for a very slow recovery in housing
0
500
1,000
1,500
2,000
2,500
1980 '85 '90 '95 '00 '05 '10
Housing startsthousands
Blue Chip Housing StartsForecast (thousands)
Actual Forecast 2009 2010 2011553 685 952
CRE, Financial Sector and Bank Lending
CRE is a banking issue
• Unlike residential mortgages that were heavily securitized, most CRE is on bank balance sheets
• Smaller banks tend to have larger concentrations
• A major source of recent growth & profits for community banks
Commercial Banking
45%
CMBS, CDO, and other ABS Issues
21%
Life Insurance Companies
9%
Savings Institutions6%
Government-Sponsored Enterprises
6%
Agency- and GSE-Backed Mortgage
Pools4%
Governments4%
Other5%
Nonresidential Investment: Structures
Nonresidential Private Construction(billions of dollars, three month moving average)
Vacancy Rates(percent)
Nov-2009Q3-2009
OfficeIndustrial
j
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(three month percent change in MA3)
C&I Loans Outstanding(three month percent change in MA3)
Nov-2009 Nov-2009
Shading corresponds with NBER recession periods Shading corresponds with NBER recession periods
Inflation
The Fed has been very aggressive, lowering theFed Funds rate by nearly 525 basis points
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1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Fed Funds ratepercent
Inflation has begun to move higher
-1
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1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Personal consumption expenditure - chain price indexpercent change from a year earlier
Removing the volatile food and energy components from the PCE,
“core” inflation remains contained
0
1
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5
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Personal consumption expenditure - less food and energy -chain price indexpercent change from a year earlier
Inflation is anticipated to riseby 1.8 percent this year and 2.1 percent next year
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2000 01 02 03 04 05 06 07 08 09 10 11
Consumer price indexpercent
Quarterly change (saar)
Percent change from a year earlier
Q4-2009
Blue Chip CPI Forecast
Actual Forecast 2009 2010 20111.5 1.8 2.1
•The outlook is for the U.S. economy to expand at a solid pace this year and next year
Summary
•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