Economic OutlookCalifornia Association of County TreasurersCalifornia Association of County Treasurers

& Tax Collectors Annual Conference Yosemite CAYosemite, CA

June 3 2009June 3, 2009Federal Reserve Bank of San FranciscoYelena Takhtamanova, Economist

Overview

1. U.S. monetary policy:o Goalso Tools (conventional and new)

2. Current situation—challenging:g go Financial turmoil and banking challengeso Significant job losses and deep recession

3. FRBSF national economic forecast4. Risks to the forecast4. Risks to the forecast

These remarks represent my views and not necessarily those of my colleagues in the Federal Reserve System.

1. U.S. Monetary Policy Goals1. U.S. Monetary Policy Goalsy yy y

Federal Reserve’s goals:Federal Reserve s goals: • Ensure the functioning of the financial system• Conduct monetary policy to:

• Achieve maximum sustainable employment/output• Maintain low and stable price inflation

Each of these goals is currently being threatened.Therefore, the Federal Reserve has taken action to: ,• Maintain liquidity in financial markets• Provide aid to systemically-important firms• Lower borrowing costs for consumers and businesses• Increase the availability of credit

Monetary Policy in Perspective: Conventional P li I t t Sh tf llPolicy Instrument Shortfall (Because of Zero Bound)

Fed Funds Target Rate and Funds Rate Shortfallg

Source: Rudebusch (2009), FRBSF Economic Letterhttp://www.frbsf.org/publications/economics/letter/2009/el2009-17.pdf

“Zero Bound” Problem: What Can Monetary Policy Do When Interest Rates Approach Zero?Policy Do When Interest Rates Approach Zero?

FedViews of November 13, 2008

Unconventional Monetary Policy Actions: Shifts and Increases in Fed’s Balance SheetShifts and Increases in Fed s Balance Sheet

Federal Reserve Assets Billions of dollars

2100

2400Other LoansCurrency swaps and other assetsCommercial Paper Funding Facility (CPFF)ABCP MMMF Liquidity Facility (AMLF)

1500

1800q y y ( )

Primary Dealer Credit Facility (PDCF)Primary CreditTerm Auction Facility (TAF)Repurchase AgreementsTerm Securities Lending Facility (TSLF)

900

1200Term Securities Lending Facility (TSLF)and Overnight Lending

300

600Securities held outright minus those lent

0Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr2007 2008 2009

“Net Securities Holdings” = U.S Treasuries, Agencies, MBS.

Assessing Unconventional Actions:Benefits of Actions Appear to Outweigh Risks

Benefits of balance sheet policies:

Benefits of Actions Appear to Outweigh Risks

• Improve financial conditions and credit availability• Shorten and lessen severity of current economic downturn y

Potential risks of balance sheet policies:• All lending is secured but some residual credit risk• All lending is secured, but some residual credit risk• May distort relative asset prices and credit allocation• May encourage future risky behavior (moral hazard)• May encourage future risky behavior (moral hazard)• Practical burdens and risks of operating new programs• Problems in unwinding programs (exit strategy)• Problems in unwinding programs (exit strategy)

The Effect of Unconventional Actions: Difficult to Calibrate and Communicate

• Difficult to estimate the amount of macroeconomic stimulus provided by all credit programs and asset purchases.

• There is no simple measure of Fed policy:– Funds rate is no longer a complete summary of policy.Funds rate is no longer a complete summary of policy.– Total size of Fed balance sheet is not usefully linked to

economic outcomes.– Difficult to devise overall index of monetary impetus.

• Important for Fed to communicate intent of policy initiativesp p y

2. Current Situation: Recession Already Is the Longest Since the Early 1980s

Industrial ProductionIndustrial Production Index

SA, 2002=100

120 120

The U.S. economy officially

Industrial Production Index

SA, 2002 = 100Recession

100 100

ff ypeaked in and the recession

began in80 80

began in December 2007.

National Bureau of60

40

60

40

National Bureau of Economic Research

NBER Business Cycle Dating 050095908580

Source: Federal Reserve Board /Haver Analytics 06/01/09

40 40Committee, 11-28-2008.

Positive News: Rebound in New Issues of C A t B k d C i l PConsumer Asset-Backed Commercial Paper

FedViews of May 15, 2009

U.S. Economic Output Gap: Real Gross Domestic Product (GDP) Falls Well Below Potential

R l G D ti P d t

Product (GDP) Falls Well Below Potential

Wid i G B t A t l d P t ti lReal Gross Domestic ProductSAAR, Bil.Chn.2000$

Real Potential Gross Domestic Product {CBO}Bil.Chn.2000$

12750 12750R i

Widening Gap Between Actual and Potential Real GDP Measures Lost Output Billions 2000$

12000 12000

Potential Real GDP

Recession

11250

10500

11250

10500

Potential Real GDP (CBO Est.)

Actual Real GDP

Positive Gap

10500

9750

10500

9750

GDP pNegative

GapCBO = Congressional Budget Office

09080706050403020100Sources: BEA, CBO /Haver 06/01/09

9000 9000

CBO Congressional Budget Office

Employment: Total U.S. Nonfarm Employment Has Fallen Every Month Since the Beginning of 2008

Monthly Change in Payroll Jobs (Thousands)All Employees: Total Nonfarm

Difference - Period to Period SA, Thous

500 500

y g y ( )

Job Loss Since Dec. 2007 = Over 5.7 Million

250 250

0

250

0

250-250

-500

-250

-500Monthly Change in Total Nonfarm Jobs

09080706050403020100Source: Bureau of Labor Statistics /Haver Analytics 06/01/09

-750 -750

Total Nonfarm Jobs

Household and Nonprofit Net Worth (as of 2008-Q4): Reduced by Falling Asset Values–Impact on Spending?

H h ld & N fit O i ti T t l R l E t t H ldi (NSA Bil $)

Reduced by Falling Asset Values Impact on Spending?

Households & Nonprofit Organizations: Total Real Estate Holdings (NSA, Bil.$)Households & Nonprofit Organizations: Assets: Pension Fund Reserves (NSA, Bil.$)Households/Nonprof Org:Assets:Equity Shares at Mkt Value Directly Held(NSA,Bil$)

Households & Nonprofit Organizations: Assets: Mutual Funds Shares (NSA, Bil.$)25000 25000

Household Asset Holdings (Flow of Funds, 2008-Q4, Bil.$)

25000

20000

25000

20000

P i F dOwner-occupied

Real Estate15000

10000

15000

10000

Pension Fund Reserves

Real Estate

10000

5000

10000

5000Value of Equities

090807060504030201009998Sources: FRB /Haver 06/01/09

0 0Mutual Fund Shares

U.S. Consumer Attitudes: After Record Deterioration in C fid A U t i E t ti i A il 2009

Conference Board Cons mer Confidence (SA 1985 100)

Confidence – An Upturn in Expectations in April 2009

C C fid I d d C tConference Board: Consumer Confidence (SA, 1985=100)Conference Board: Consumer Confidence Present Situation (SA, 1985=100)

Conference Board: Consumer Expectations (SA, 1985=100)

200 200

Consumer Confidence Index and Components(Index Numbers)

160 160Current SituationConsumer

120

80

120

80

Confidence

80

40

80

40Future

Expectations

09080706050403020100Sources: The Conference Board /Haver Analytics 06/01/09

0 0

Household Spending & Saving: As Wealth, Jobs, and C fi S i (C i )Confidence Fell—Saving Increased (Consumption Fell)

Personal Saving RatePersonal Saving Rate

SAAR, %

10.0 10.0

Personal Saving Rate (as Percentage of Disposable Income)

10.0

7.5

10.0

7.5

5.0

2.5

5.0

2.5

Positive Saving Rate0.0

-2.5

0.0

-2.5

Positive Saving Rate

Negative Saving Rate

05009590Source: Bureau of Economic Analysis /Haver Analytics 06/01/09

-5.0 -5.0

3. Going Forward: Weakness E d (M F )Expected (May Forecasts)

Recession will continue:

– FedViews: The economy shows many signs of continued weakness. That said, several indicators ,suggest the pace of contraction is slowing…

• The bottom might be coming…• Expect the subsequent recovery to be very slow• Expect the subsequent recovery to be very slow…

– Blue Chip: Consensus 2009 Real GDP growth forecast in May was for a decline of 2 8 percentforecast in May was for a decline of 2.8 percent (revised down from -2.6% in April). The 2010 forecast calls for 1.9 percent growth (revised up from 1.8

)percent in April). From May 15, 2009 FedViews, & May 10, 2009 Blue Chip Economic Indicators

See FedViews @ www.frbsf.org/publications/economics/fedviews/

FRBSF Real GDP Forecast: Contraction in Q Q G S i Q2008:Q3-2009:Q3, Growth Starts in 2009:Q4

PercentForecast +7

+5

+3

Quarterly Real

+3

+1

-1Quarterly Real GDP (% annual rate of growth)

-3

-5

-71999 2001 2003 2005 2007 2009

7

FedViews of April 9, 2009FedViews of May 15, 2009

U-Shaped or V-Shaped Recovery: Slower than Normal Recovery Expected

FedViews of May 15, 2009

Labor Market Outlook: Unemployment R t E t d t P k t 9 5 P tRate Expected to Peak at 9.5 Percent

FedViews of May 15, 2009

2009

Going Forward: Inflation Moderation E pected (Ma Forecasts)Expected (May Forecasts)

Both headline and core inflation should moderate:– FedViews: In light of the large degree of economic slack

we are forecasting over the next two years, we expect inflation to remain relatively low.

– Blue Chip: Total CPI (including food and energy) is d d li 0 8 i 2009 ( i d dexpected to decline 0.8 percent in 2009 (revised down

from -0.7 percent in April). For 2010 the forecast is for 1 7 percent inflation (revised up 1 6 percent in April)1.7 percent inflation (revised up 1.6 percent in April).

PCE = Personal Consumption Expenditures, CPI = Consumer Price IndexC I fl ti All it l f d d

From May 15, 2009 FedViews, & May 10, 2008 Blue Chip Economic Indicatorswww.frbsf.org/publications/economics/fedviews/

Core Inflation = All items less food and energy

Price Level Forecasts: FRBSF Expects Inflation to Remain Low

FedViews of May 15, 2009

4. Risks: Many on the Downside —Rebound Should Be Relatively Modest

Overall risks:

– Depths of the global recession (and the size of its adverse impact on U.S. exports and financial conditions)conditions)

– The strength and length of the adverse feedback loop between weakening economic and fi i l ditifinancial conditions

– The impact of the fiscal stimulus and Federal Reserve actions on financial stabilityReserve actions on financial stability

Global Forecasts:Contraction in Major Economies

PercentForecast

FedViews of April 9, 2009

Commercial Real Estate:Sh D i P iSharp Drop in Prices

FedViews of May 15, 2009

Housing Market Indicators: Continuing Price Declines Expected but at a Slowing PaceDeclines Expected, but at a Slowing Pace

FedViews of April 9, 2009

Housing Market Overhang: Correction Is Approaching Magnitude of the OverhangApproaching Magnitude of the Overhang

FedViews of May 15, 2009

Housing Prices: California’s Metropolitan Areas Have Experienced More Rapid Depreciation than the Nation

yryr%<CASCSXA>S&P/C Shill H P i I d

Experienced More Rapid Depreciation than the Nation

S&P/Case-Shiller Home Price IndicesYear-over-year Percent Change

yryr%<CASCSXA>yryr%<CASSFXA>yryr%<CASLXXA>

40 40

S&P/Case-Shiller Home Price IndexesYear-over-year Percent Change

40

20

40

20

Los Angeles

Seattle 0 0

United StatesS F i AreaUnited States (Composite 20)-20 -20

United StatesSan Francisco

0908070605040302010099Sources: S&P, Fiserv, and MacroMarkets LLC /Haver Analytics 06/01/09

-40 -40

Single-Family Housing Activity: California’s Decline Is Now in Line With the NationDecline Is Now in Line With the Nation

Si l F il H i P itPermits: 1-Family Homes, U.S. % Change - Year to Year YTD Units

Permits: 1-Family Homes, Cali fornia % Change - Year to Year YTD Units

50 50

Single-Family Housing Permits Year-to-date, Year-over-year, % Change

50

25

50

25United States

0

25

0

25-25

-50

-25

-50

California

0908070605040302010099Sources: Bureau of the Census /Haver Analytics 06/01/09

-75 -75

U.S. Mortgage Delinquency Rates: Increases S di t P i ARM M t

Conventional Subprime ARM Mortgages: Total Past Due: United States (SA %)

Spreading to Prime ARM Mortgages (Sea. Adj.)

Conventional Subprime ARM Mortgages: Total Past Due: United States (SA, %)Conventional Subprime FRM Mortgages: Total Past Due: United States (SA, %)

Conventional Prime ARM Mortgages: Total Past Due: United States (SA, %)Conventional Prime FRM Mortgages: Total Past Due: United States (SA, %)

30 30

Conventional Mortgages Past Due (in Percent) by Loan Type FRM = Fixed Rate Mortgage ARM = Adjustable Rate Mortgage

25

20

25

20Subprime ARM

United States

20

15

20

15

Prime ARM

Subprime FRM

10

5

10

5

0908070605040302010099Sources: MBA /Haver 06/01/09

0 0Prime FRM

California Mortgage Delinquency Rates: Increases Most Dramatic for Subprime Mortgages

C ti l S b i ARM M t T t l P t D C lif i (NSA %)

Most Dramatic for Subprime Mortgages(not seasonally adjusted)

Conventional Subprime ARM Mortgages: Total Past Due: Cali fornia (NSA, %)Conventional Subprime FRM Mortgages: Total Past Due: California (NSA, %)

Conventional Prime ARMs: Total Past Due, Cali fornia (NSA, %)Conventional Prime FRM Mortgages: Total Past Due: Cali fornia (NSA, %)

30 30

Conventional Mortgages Past Due (in Percent) by Loan TypeFRM = Fixed Rate Mortgage ARM = Adjustable Rate Mortgage

30

25

30

25

Subprime ARM

California

20

15

20

15Subprime FRM

p

10

5

10

5Prime ARM

0908070605040302010099Sources: MBA /Haver 06/01/09

0 0Prime FRM

Lending Practices: U.S. Bank Lending Standards Some Easing but Remain Tight

FRB Sr Officers Survey: Banks Tightening C&I Loans to Large Firms (%)

Standards—Some Easing, but Remain Tight Federal Reserve Senior Loan Officer Survey

FRB Sr Officers Survey: Banks Tightening C&I Loans to Large Firms (%)FRB Sr Loan Off Survey: Tightening Standards for Commercial Real Estate (%)

FRB Sr Loan Survey: Res Mortgages: Net Share, Banks Tightening (Haver Est, %)FRB Sr Off Survey: Banks Tightening Standards: Consumer Credit Cards (%)

100

Net Percentage of Banks Tightening Lending Standards Greater than 0 % = Tightening Standards

Commercial

75

Commercial Real Estate

Credit Cards

%

Ti

50

25 B i

CardsMortgage

Loans

ghte 25

0

Business Loans

enin As of

0908070605040302010099Sources: FRB /Haver 06/01/09

-25g

As ofApril 2009

Labor Market Conditions: California Job G th Sl ith th US

All Employees: Total Nonfarm United States

Growth Slows with the US

All Employees: Total Nonfarm, United States % Change - Year to Year Thous

All Employees: Total Nonfarm, Cali fornia % Change - Year to Year Thous

4 4

Payroll Job Growth RatesYear-over-year, % Change

2 2United States

0

2

0

2California

-2

-4

-2

-4

0908070605040302010099Sources: BLS/H, BLSCAEDD /Haver 06/01/09

-6 -6

Labor Market Conditions: California Unemployment Rises with the USUnemployment Rises with the US

Unemployment Rate, United StatesSA, %

Unemployment Rate, Cali forniaSA, %

12 12

Unemployment Rate (%)(Seasonally Adjusted)

12

10

12

10

8

6

8

6California6

4

6

4

United States

0908070605040302010099Sources: Bureau of Labor Statistics /Haver Analytics 06/01/09

2 2

Summary Points

• Current situation — challenging

• National forecast — slow recovery

• Risks to the forecast — many:• Global recession• Adverse feedback loop• Shape of the projected recoveryShape of the projected recovery

Thank You!

Yelena Takhtamanova, EconomistFederal Reserve Bank of San Francisco

Yelena.Takhtamanova@sf.frb.org