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The New Economic Landscape
William Strauss Senior Economist and Economic Advisor Federal Reserve Bank of
Chicago
The Progressive Manufacturing Summit 2009Sarasota, FLJune 10, 2009
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The economy entered a recession in the first quarter of 2008
-8
-6
-4
-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
Real gross domestic productpercent
Quarterly change (saar)
Percent change from a year earlier
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First quarter GDP was driven down by large decreases in business fixed investment and inventories
-5.7
1.1
-4.5
-1.4-2.3
-0.7
2.2
-8
-6
-4
-2
0
2
4
GDP Consumption Business Fixed
Investment
Residential Investment
Inventories Government Net Exports
Contributions to real GDP growth in Q1:2009percentage points (annual rate)
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GDP growth is forecast to be quite weak this year,but then grow closer to trend in 2010
-8
-6
-4
-2
0
2
4
6
8
2000 01 02 03 04 05 06 07 08 09 10
Real gross domestic productpercent
Quarterly change (saar)
Percent change from a year earlier
Q1-2009
Blue Chip GDP Forecast
Actual Forecast 2008 2009 2010-0.8 -1.3 2.8
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Potential Historical Context
Historical1
Blue Chip Forecast for Current
Episode
Average Range Consensus
Duration (months)11 6 to 16 18-24
Change in GDP2 -1.7 -0.4 to -3.1 -3.63
Maximum Unemployment Rate2
7.8 6.1 to 10.8 9.9
Change in payroll employment2 -2.1 -1.3 to -3.1 -4.5 to -5.04
1. Calculated over the 1960-61, 1969-70, 1973-75, 1980, 1981-82, 1990-91, and 2001 recessions. 2. Percent change from peak to trough of GDP.3. Starting from the peak of GDP in the second quarter of 2008.4. My guess. – through May 2009 employment is down 4.3%
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The Chicago Fed National Activity Indexbottomed in January 2009 and has begun to rise
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Monthly
Chicago Fed National Activity Index
Three month average
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Consumer confidence rose quite sharply in May
0
20
40
60
80
100
120
140
160
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Consumer confidence indexIndex: 1985=100
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Inflation has reversed its upward trajectory
0
1
2
3
4
5
6
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Personal consumption expenditure - chain price indexpercent change from a year earlier
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In large part due to the movement of oil prices
0
20
40
60
80
100
120
140
1970 '75 '80 '85 '90 '95 '00 '05
West Texas Intermediate oil pricedollars per barrel
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Adjusted for inflation - current oil prices are well below early 1980s prices
0
20
40
60
80
100
120
140
1970 '75 '80 '85 '90 '95 '00 '05
Real West Texas Intermediate oil pricedollars per barrel. 2008 dollars
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Expenditures on energy increased over the past few years,and they are currently well below the historical average
4
5
6
7
8
9
10
1960 '65 '70 '75 '80 '85 '90 '95 '00 '05
Energy goods and services expenditures as a share oftotal consumptionpercent
4
5
6
7
8
9
10
1960 '65 '70 '75 '80 '85 '90 '95 '00 '05
Energy goods and services expenditures as a share oftotal consumptionpercent
60s 70s80s
90s 00s
1960-2009
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Removing the volatile food and energy components from the PCE,
“core” inflation has remained in the “comfort zone”
0
1
2
3
4
5
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Personal consumption expenditure - less food and energy -chain price indexpercent change from a year earlier
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Inflation is anticipated to moderate this yearand then rise by just under two percent in 2010
-10
-8
-6
-4
-2
0
2
4
6
8
2000 01 02 03 04 05 06 07 08 09 10
Consumer price indexpercent
Quarterly change (saar)
Percent change from a year earlier Q1-2009Blue Chip CPI Forecast
Actual Forecast 2008 2009 2010
1.5 0.5 1.9
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Employment has fallen by over 6 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
Total employmentpercent
Monthly change (saar)
Percent change from a year earlier
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The unemployment rate has risen tothe highest level since August 1983
3
4
5
6
7
8
9
10
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Unemployment ratepercent
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The unemployment rate is forecast to peak at 9.9%early next year and then begin to edge lower
0
2
4
6
8
10
2000 01 02 03 04 05 06 07 08 09 10
Unemployment ratepercent
Unemployment ratepercent
Q1-2009
Blue Chip UR Forecastpeaks at 9.9% in Q1-2010
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Employment recoveries have takenmuch longer over the past two cycles
-30 -25 -20 -15 -10 -5 0 5 10 15 20 25
2008
2001
1990
1981
1980
1974
1970
1960
Employment
number in parenthesis is percent change of employment from peak
Months of declines in employment
recession year
Months until previous employment peak is reached
(-2.3%)
(-4.3%)
(-2.0%)
(-1.5%)
(-3.1%)
(-1.3%)
(-2.8%)
(-1.5%)
through May 2009
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Light vehicle sales collapsed
89
10111213141516171819202122
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Light vehicle salesmillions of units (saar)
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In an attempt to keep inventories in line with falling saleslight vehicle production has been cut back quite severely
3456789
1011121314
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Light vehicle productionmillions of units (saar)
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Consumer attitudes about buying a vehicle is very low
3
4
5
6
7
8
9
10
11
12
1980 '85 '90 '95 '00 '05
Consumer attitudes - plan to buy automobile in six monthspercent of respondents
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Increases in new domestic production sharehas offset losses in Detroit-3 market share
0
10
20
30
40
50
60
70
80
90
100
0
10
20
30
40
50
60
70
80
90
100
1980 '83 '86 '89 '92 '95 '98 '01 '04 '07
Share of light vehicle salespercent
Detroit-3
new domestics
imports
percent
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Manufacturing production fell off sharplybeginning in the second half of 2008
-25
-20
-15
-10
-5
0
5
10
15
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Industrial production - manufacturingpercent
Quarterly change (saar)
Percent change from a year earlier
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Manufacturing capacity utilization has fallen to the lowest levels in more than 70 years
6668707274767880828486
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Capacity utilization - manufacturingpercent
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Purchasing managers’ composite index has improved
30
35
40
45
50
55
60
65
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Purchasing managers' index - compositenet percent reporting increases
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The new orders component has improved significantly
202530354045505560657075
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Purchasing managers' index - new ordersnet percent reporting increases
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Residential investment fell off sharply beginning in 2006
-40-35-30-25-20-15-10
-505
10152025
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Real residential investmentpercent
Quarterly change (saar)
Percent change from a year earlier
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Residential investment as a share of GDP is very low
2
3
4
5
6
7
1960 '65 '70 '75 '80 '85 '90 '95 '00 '05
Residential investment as a share of GDPpercent
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The supply of new single family homes is extremely high
3
4
5
6
7
8
9
10
11
12
13
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Months supply of new single family homesmonths
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Housing starts have been cut-back sharply
-60
-50
-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
Housing starts3-month smoothed - percent change from a year earlier
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Housing starts have fallen to a new post WWII low
0
500
1,000
1,500
2,000
2,500
1960 '65 '70 '75 '80 '85 '90 '95 '00 '05
Housing startsthousands
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When you take into account the growth of households,it is an even more dramatic decline
0
5
10
15
20
25
30
35
40
1960 '65 '70 '75 '80 '85 '90 '95 '00 '05
Housing starts per 1,000 households
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Mortgage rates are very low
4
5
6
7
8
9
10
11
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Mortgage rate - 30-year fixedpercent
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Home price declines are 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
Median sales price - existing single family home3-month smoothed - percent change from a year earlier
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Home price have fallen by over eight percent over the past year with large differences across regions
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Housing affordability has improved dramatically
90
100
110
120
130
140
150
160
170
180
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Composite housing affordability indexindex=100 when median family income qualifies for an 80% mortgage
on a median priced existing single family home
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Yet, consumer attitudes for buying a home remain very low
0
1
2
3
4
5
6
1980 '85 '90 '95 '00 '05
Consumer attitudes - plan to buy a home in next six monthspercent of respondents
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Lending standards for mortgage loans remain tight
-20
0
20
40
60
80
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Senior Loan Officer Opinion Surveynet percentage of domestic respondents tightening mortgage loan standards
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Corporate High Yield rates increased beginning in June 2007
468
1012141618202224
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Corporate Aaa and Corporate High Yield ratespercent
2007 2008
High Yield
Corporate Aaa
2009
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Credit spreads between Corporate High Yield securitiesand Corporate Aaa securities rose by over 1,400 basis points,
but have been improving over the past several months
02468
1012141618
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Credit spreads between Corporate High Yield and Corporate Aaapercent
2007 2008 2009
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The Fed has been very aggressive, lowering theFed Funds rate by nearly 525 basis points
0
1
2
3
4
5
6
7
8
9
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Fed Funds ratepercent
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The Fed’s balance sheet has expandedin size and in composition
0
500
1,000
1,500
2,000
2,500
Assets of the Federal ReserveBillions of dollars
Other Assets
Term Auction Credit
Securities Held Outright
Central Bank Swaps
Remaining Asset Facilities
Commercial Paper Facility
2007 2008 2009
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• The outlook is for the U.S. economy to struggle through
most of this year and then grow at a solid pace next year
Summary
• 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
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www.chicagofed.org www.federalreserve.gov