Economic Assessment
Wade Rousse
Economic Outreach Specialist
Federal Reserve Bank of Chicago
IASETChicago, ILDecember 12, 2008
The economy entered a recession in the first quarter of 2008
-4-3-2-1012345678
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Real gross domestic productpercent
Quarterly change (saar)
Percent change from a year earlier
Home price declines are larger outside the Midwest
-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
Midwest
Median sales price - existing single family home3-month smoothed - percent change from a year earlier
United States
Housing starts have fallen sharply
500
750
1,000
1,250
1,500
1,750
2,000
2,250
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Housing startsthousands - 3-month smoothed
The supply of new single family homes is extremely high
3
4
5
6
7
8
9
10
11
12
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Months supply of new single family homesmonths
Home price changes over the past year has been mixed
Foreclosure filings are quite high in California, Florida, Nevada and Arizona
Mortgage rates remain low
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
Mortgage rate - 30-year fixedpercent
Housing affordability has improved quite a bit
90
100
110
120
130
140
150
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Composite housing affordability indexindex=100 when median family income qualifies for an 80% mortgage
on a median priced existing single family home
Lending standards for mortgage loanshave tightened considerably
-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
Senior Loan Officer Opinion Surveynet percentage of domestic respondents tightening mortgage loan standards
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
Residential investment growth fell off sharply,subtracting a full percentage point
off of GDP growth over the past year
-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
Real residential investmentpercent
Quarterly change (saar)
Percent change from a year earlier
Residential investment as a share of GDPis approaching previous lows
3
4
5
6
7
1960 '65 '70 '75 '80 '85 '90 '95 '00 '05
Residential investment as a share of GDPpercent
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
Personal consumption expenditure - chain price indexpercent change from a year earlier
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
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. 2007 dollars
Expenditures on energy increased over the past few years,and they currently are at 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
1960-2008
Removing the volatile food and energy components from the PCE,
“core” inflation has been averaging just above two percent
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
Personal consumption expenditure - less food and energy -chain price indexpercent change from a year earlier
Employment decreased by 1,870,000 jobs over the past year
-5-4-3-2-10123456
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Total employmentpercent
Monthly change (saar)
Percent change from a year earlier
The unemployment rate has been rising
3
4
5
6
7
8
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Unemployment ratepercent
Productivity growth remains solid
-4
-2
0
2
4
6
8
10
12
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Nonfarm business productivitypercent
Quarterly change (saar)
Percent change from a year earlier
Real incomes are unchanged with a year earlier
-10-8-6-4-202468
1012
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Real disposable personal incomepercent
Quarterly change (saar)
Percent change from a year earlier
The stock market losses are significant
-50
-40
-30
-20
-10
0
10
20
30
40
50
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
S&P 500 stock indexpercent change from a year earlier
Consumer spending fell sharply in the third quarter
-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
Real personal consumption expenditurespercent
Quarterly change (saar) Percent change from a year earlier
Third quarter GDP edged lower, weighed downby a decline in consumption and residential investment
-0.5
-2.7
-0.2-0.7
0.9 1.1 1.1
-3
-2
-1
0
1
2
GDP Consumption Business Fixed
Investment
Residential Investment
Inventories Government Net Exports
Contributions to real GDP growth in Q3:2008percentage points (annual rate)
Corporate profits have been declining
-50
-25
0
25
50
75
100
125
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Nonfinancial corporate profitspercent
Quarterly change (saar)
Percent change from a year earlier
Given the large trade deficit, the dollar has beenunder pressure since the beginning of 2002,
losing 14.1% of its value over this period
-800
-600
-400
-200
0
200
400
600
1974 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08
billions of chained real dollars
Real net exports and change in real value of the dollar
15
10
5
0
-5
-10
-15
-20
percent change from a year earlier
dollar (right axis)
net exports (left axis)
-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
Real exports and importspercent change from year ago
Exports
-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
Real exports and importspercent change from year ago
Exports
Imports
Import growth has been belowexport growth since early 2005
Net exports contributed quite a bit to GDP growth last year
-1.5
-1.0
-0.5
0.0
0.5
1.0
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07
Net exports contribution to percent change in real GDPpercent
Manufacturing output has fallen quite sharply
-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
Industrial output - manufacturingpercent
Monthly change (saar)
Percent change from a year earlier
New orders for capital goods has begun to slipand shipments have been edging lower
30
35
40
45
50
55
60
65
70
1992 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Manufacturers' new orders
Nondefense capital goods, excluding aircraft and parts
Manufacturers' shipments
billions of dollars
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
Corporate Aaa and Corporate High Yield ratespercent
2007 2008
High Yield
Corporate Aaa
Credit spreads between Corporate High Yield securitiesand Corporate Aaa securities rose by over 1,400 basis points
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
Credit spreads between Corporate High Yield and Corporate Aaapercent
2007 2008
The “flight to quality” drove down Treasury yields
3
4
5
6
7
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Corporate Aaa and 10-year Treasury ratespercent
2007 2008
10-year Treasury
Corporate Aaa
Causing credit spreads between themto increase by more than 200 basis points
0.500.751.001.251.501.752.002.252.502.75
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Credit spreads between Corporate Aaa and 10-year Treasurypercent
2007 2008
The three-month average of theChicago Fed National Activity Index
has weakened substantially over the past couple of months
-3.5-3.0-2.5-2.0-1.5-1.0-0.50.00.51.01.52.0
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Monthly
Chicago Fed National Activity Index
Three month average
Concerned that the tightening of credit conditionshas the potential to slow economic growth,
the Fed lowered the Fed Funds rate by 425 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
Fed Funds ratepercent
Real GDP
-8
-6
-4
-2
0
2
4
6
8
1994 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
percent change, annual rate
Real GDP growth is expected to:decline quite considerably in the current quarter;
fall by nearly half as much in the first quarter of next year; remain unchanged in the second quarter;
and then increase in the second half of 2009
Forecasts are from the Twenty-second Annual Economic Outlook Symposium
Unemployment rate
3
4
5
6
7
8
9
1994 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
percent
With economic growth being well below trend,the unemployment rate is projectedto continue rising throughout 2009,
reaching 7.8% in the final quarter of next year
Forecasts are from the Twenty-second Annual Economic Outlook Symposium
•The outlook is for the U.S. economy to struggle through
most of next year with an elevated risk of recession
Summary
•Employment is expected to remain weak this year and next,
leading to a continued rise in the unemployment rate
•Slackness in the economy will lead to a lower 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
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