The Economic Outlook and Policy Actions

Truck Blue Book Conference

Craig S. HakkioFederal Reserve Bank of Kansas City

April 30, 2009

Overview The recession is long, deep, and global. The financial system remains under significant stress. In response to the crisis, we have seen massive policy

interventions around the world. Cautiously optimistic the worst of the crisis may be over.

Financial market conditions have improved somewhat.

Some signs of a possible bottom. Many economists expect a recovery to begin by year-

end.

The current recession: among the worst in the post-war period

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Real GDP GrowthQuarterly Percent Change (annualized)

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The collapse of housing …

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Single Family Housing StartsThousands

Labor markets have deteriorated

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Unemployment and Nonfarm Payroll Employment

Thousands, average 3-month change Percent

Nonfarm Payrolls(left-axis)

Unemployment Rate(right-axis)

Change since December 2007

Nonfarm Payrolls : - 5.1 MillionUnemployment Rate : + 3.6 ppts

The slowdown is global

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Industrial Production(IMF, April 2009)

WorldAdvanced economiesEmerging economies

Percent Change from Year Ago

Financial stress has diminished, but still remains elevated.

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FRB KC Financial Stress IndexIndex Index

In response, we have seen massive policy interventions

around the world.

The Federal Reserve has responded aggressively.

Federal funds rate target cut from 5 ¼ percent to 0 – ¼ percent.

Established facilities to provide backing to commercial paper and consumer ABS markets.

The Federal Reserve has committed to buying $1.75 trillion of Agency MBS, Agency debt, and Treasury securities.

The Fed’s balance sheet:Change in composition, significant increase in size

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Jan-07 Jul-07 Jan-08 Jul-08 Jan-09

Federal Reserve Banks' Assets

Provide Liquidty to Key Credit Markets

Rescue Operations

Short-Term Lending to Financial Firms

Purchase of Long-Term Securities

Treasury Portfolio & Misc

$, Trillions

So, how much is $1 trillion?

So, how much is $1 trillion?

$1 million = 11 ½ days = Sunday, April 12, 2009 (Easter).

So, how much is $1 trillion?

$1 million = 11 ½ days = Sunday, April 12, 2009

$1 billion = 32 years = 1977

So, how much is $1 trillion?

$1 million = 11 ½ days = Sunday, April 12, 2009

$1 billion = 32 years = 1977 $1 trillon = 32,000 years = 30,000 BC

(Neanderthals disappeared from Europe)

Central banks around the world have been reducing interest rates

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Central Bank Policy Rates

China

Euro Zone

Canada

United States

Percent

Governments around the world are also supporting financial markets

The fiscal package is large:$787 billion, with the bulk coming in 2009-2011

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2009 2010 2011 Total

Composition of Stimulus PackageBillions $Total

(right axis)

Billions $

SpendingTax cuts

Fiscal years

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Fiscal policy in the rest of the world is also stimulative

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General Government Fiscal Balances(IMF, April 2009)

World

Advanced economies

Emerging and developing economies

Percent of GDP

Cautiously optimistic the worst of the crisis may be over

There are tentative signs of a bottom in housing

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New and Existing Home SalesThousands, 3-Month moving average Thousands

New home sales(left axis)

Existing home sales(right axis)

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Inventories of Unsold HomesMonths Months

Existing homes

New homes

Home price deflation may not be getting worse.

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Home Price IndicesPercent Change from Year Ago

Case-Shiller

FHFA

Recently, consumer spending has picked up somewhat

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Monthly Growth of Core Retail SalesPercentPercent, Annualized 3-month moving average

Interest rates have come down where the Fed has intervened

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30-Year FRM and 10-Year Treasury RatesPercent Percent

30-Year FRM

10-Year Treasury

And while the stock market has picked up, …

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S&P 500 IndexIndex

… it remains depressed

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S&P 500 IndexIndex

The outlook: Most forecasters expect recovery to start in 2009:H2

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Real GDP Growth

ActualBlue Chip Apr Forecasts

Quarterly percent change (annualized)

2008 Q3 2008 Q4 2009 Q1 2009 Q2

What drives the expected recovery?

Federal Reserve policy: Actions to unfreeze financial markets and favorable interest rates support consumer and business spending and housing.

Fiscal policy: Tax cuts and spending increases stimulate aggregate demand.

Turnaround in consumer spending and, in turn, business spending

Housing market bottoms in the second half of the year, due to low mortgage rates, low house prices, and tax credits.

Inventories fall so much that firms eventually ramp up production.

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Unemployment will continue to drift higher before eventually declining

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Unemployment Rate

ActualBlue Chip April Forecast

Quarterly Average Rate

The IMF expects growth to pick up in 2010

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World Advanced US Euro Area Japan Newly industrialized

Asian economies

Emerging and

developing economies

China India Brazil Mexico

World GDP Growth

2008 2009 2010

Q4/Q4 Percent Change

2008 and 2009:Advanced and newly industrialized Asian economies decline.Emerging and developing economies grow.

2010:All economies (except Japan) grow.

Core inflation will remain low

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Core PCE Inflation Q4/Q4

Actual

Survey of Professional Forecasters

Q4/Q4 percent change

Summary

Current recession is among the sharpest of the post-war period.

Monetary and fiscal policy have responded aggressively.

Most forecasters expect recovery to begin in the second half. Optimistically, we may be seeing tentative signs of a

bottom. However, recovery is likely to be gradual.

Truck Market Outlook

Carl HeikelPresident & CEO

Arrow Truck Sales, Inc.

Slide 1Truck Blue Book – Carl Heikel – April 30, 2009

Slide 2Truck Blue Book – Carl Heikel – April 30, 2009

39,131

25,23924,548

16,000

21,000

24,000

28,000

25,727

10,000

16,000

17,000

18,000

284,008

150,965133,473

110,000

155,000175,000

200,000

31,643

26,842

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

NAFTA Retail Sales Forecast

2006 2008

246,000

184,863

348,866

U.S.

CANADA

MEXICO

NAFTA

216,000

2011Forecast

2010Forecast

2012Forecast

207,847

2009Forecast

136,000

2007

192,000

Slide 3Truck Blue Book – Carl Heikel – April 30, 2009

U.S. Class 8 Retail Sales Volumes2009

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00 11,2

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J F M A M J J A S O N D

Monthly Volume

Actual Volume

Forecasted Annual Retail Sales: 110,000

Q1 Actual: 21,832

Q1 Forecast: 19,500

Difference: +2,332

1st Quarter21,832

2nd Quarter23,700

3rd Quarter30,000

4th Quarter34,468

Slide 4Truck Blue Book – Carl Heikel – April 30, 2009

Used Trucks Business• Price deterioration in the last 12 months• Used Trucks prices compared to New Trucks• Retail Sales improving for those able to finance• Wholesale limited by dealer floor planning• Exports to new markets competing with Europeans• Difficulties of the Canadian market• Mexico opened for import - and closed again• The opportunities in the coming months:

– General economic recovery and age of equipment– Price increases new environmental rules - US10 engines