Transcript Midwest Economic Outlook
Economic Assessment
IASET
Chicago, IL December 12, 2008
Wade Rousse
Economic Outreach Specialist Federal Reserve Bank of Chicago
The economy entered a recession in the first quarter of 2008 Real gross domestic product
percent 0 -1 -2 -3 -4 8 7 3 2 1 6 5 4 Percent change from a year earlier Quarterly change (saar) 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Home price declines are larger outside the Midwest Median sales price - existing single family home
3-month smoothed - percent change from a year earlier 20 United States 15 10 5 0 Midwest -5 -10 -15 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Housing starts have fallen sharply Housing starts
thousands - 3-month smoothed 2,250 2,000 1,750 1,500 1,250 1,000 750 500 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
The supply of new single family homes is extremely high Months supply of new single family homes
months 12 11 10 9 8 7 6 5 4 3 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
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 Mortgage rate - 30-year fixed
percent 11 10 9 8 7 6 5 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Housing affordability has improved quite a bit Composite housing affordability index
index=100 when median family income qualifies for an 80% mortgage on a median priced existing single family home 150 140 130 120 110 100 90 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Lending standards for mortgage loans have tightened considerably Senior Loan Officer Opinion Survey
net percentage of domestic respondents tightening mortgage loan standards 80 60 40 20 0 -20 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Consumer attitudes for buying a home remain very low Consumer attitudes - plan to buy a home in next six months
6 percent of respondents 5 4 3 2 1 0 1980 '85 '90 '95 '00 '05
Residential investment growth fell off sharply, subtracting a full percentage point off of GDP growth over the past year Real residential investment
percent 25 20 15 10 5 0 -5 -10 -15 -20 -25 -30 Percent change from a year earlier Quarterly change (saar) 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Residential investment as a share of GDP is approaching previous lows Residential investment as a share of GDP
7 percent 6 5 4 3 1960 '65 '70 '75 '80 '85 '90 '95 '00 '05
Inflation has reversed its upward trajectory Personal consumption expenditure - chain price index
percent change from a year earlier 6 5 4 3 2 1 0 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
In large part due to the movement of oil prices West Texas Intermediate oil price
dollars per barrel 140 120 100 80 60 40 20 0 1970 '75 '80 '85 '90 '95 '00 '05
Adjusted for inflation current oil prices are well below early 1980s prices Real West Texas Intermediate oil price
dollars per barrel. 2007 dollars 140 120 100 80 60 40 20 0 1970 '75 '80 '85 '90 '95 '00 '05
Expenditures on energy increased over the past few years, and they currently are at the historical average
60s 70s 80s 1960-2008 90s 00s
Removing the volatile food and energy components from the PCE, “core” inflation has been averaging just above two percent Personal consumption expenditure - less food and energy -
percent change from a year earlier
chain price index
5 4 3 2 1 0 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Employment decreased by 1,870,000 jobs over the past year Total employment
percent 6 5 4 3 2 1 0 -1 -2 -3 -4 -5 Monthly change (saar) Percent change from a year earlier 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
The unemployment rate has been rising Unemployment rate
8 percent 7 6 5 4 3 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Productivity growth remains solid Nonfarm business productivity
percent 12 Quarterly change (saar) 10 Percent change from a year earlier 8 2 0 6 4 -2 -4 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Real incomes are unchanged with a year earlier Real disposable personal income
percent 12 10 8 6 -4 -6 -8 -10 4 2 0 -2 Percent change from a year earlier Quarterly change (saar) 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
The stock market losses are significant S&P 500 stock index
percent change from a year earlier 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
Consumer spending fell sharply in the third quarter Real personal consumption expenditures
percent 8 Quarterly change (saar) 6 4 Percent change from a year earlier 2 0 -2 -4 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Third quarter GDP edged lower, weighed down by a decline in consumption and residential investment
0 -1 -2 -3
Contributions to real GDP growth in Q3:2008
percentage points (annual rate) 2 0.9
1 -0.5
-0.2
-0.7
1.1
1.1
GDP -2.7
Consumption Business Fixed Investment Residential Investment Inventories Government Net Exports
Corporate profits have been declining Nonfinancial corporate profits
percent 125 100 75 50 Quarterly change (saar) 25 0 -25 Percent change from a year earlier -50 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Given the large trade deficit, the dollar has been under pressure since the beginning of 2002, losing 14.1% of its value over this period
billions of chained real dollars 600 400
Real net exports and change in real value of the dollar
percent change from a year earlier 15 dollar (right axis) 10 200 5 0 -200 0 -5 -400 -10 -600 -800 -15 net exports (left axis) -20 1974 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08
Import growth has been below export growth since early 2005
Imports
Net exports contributed quite a bit to GDP growth last year Net exports contribution to percent change in real GDP
percent 1.0
0.5
0.0
-0.5
-1.0
-1.5
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07
Manufacturing output has fallen quite sharply Industrial output - manufacturing
percent 40 Monthly change (saar) 30 Percent change from a year earlier 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
New orders for capital goods has begun to slip and shipments have been edging lower Nondefense capital goods, excluding aircraft and parts
billions of dollars 70 Manufacturers' new orders 65 60 55 50 45 40 35 Manufacturers' shipments 30 1992 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Corporate High Yield rates increased beginning in June 2007 Corporate Aaa and Corporate High Yield rates
24 22 20 18 16 14 12 10 8 6 4 percent J a n F e b M a r A p r M a y J u n J u l A u g S e p O c t
2007
N o v D e c J a n F e b M a r A p r M a y J u n l J u High Yield Corporate Aaa A u g S e p
2008
O c t N o v
Credit spreads between Corporate High Yield securities and Corporate Aaa securities rose by over 1,400 basis points Credit spreads between Corporate High Yield and Corporate Aaa
18 16 14 12 10 8 6 4 2 0 percent J a n F e b M a r A p r M a y J u n J u l A u g S e p O c t
2007
N o v D e c J a n F e b M a r A p r M a y J u n l J u A u g S e p
2008
O c t N o v
The “flight to quality” drove down Treasury yields
7
Corporate Aaa and 10-year Treasury rates
percent 6 5 Corporate Aaa 4 10-year Treasury 3 J a n F e b M a r A p r M a y J u n J u l A u g S e p O c t
2007
N o v D e c J a n F e b M a r A p r M a y J u n J u l A u g S e p
2008
O c t N o v
Causing credit spreads between them to increase by more than 200 basis points Credit spreads between Corporate Aaa and 10-year Treasury
percent 2.75
2.50
2.25
2.00
1.75
1.50
1.25
1.00
0.75
0.50
J a n F e b M a r A p r M a y J u n l J u A u g S e p
2007
O c t N o v D e c J a n F e b M a r A p r M a y J u n J u l A u g S e p
2008
O c t N o v
The three-month average of the Chicago Fed National Activity Index has weakened substantially over the past couple of months Chicago Fed National Activity Index
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
-3.5
Monthly Three month average 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Concerned that the tightening of credit conditions has the potential to slow economic growth, the Fed lowered the Fed Funds rate by 425 basis points Fed Funds rate
9 percent 8 7 6 5 4 3 2 1 0 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
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 Real GDP
percent change, annual rate 8 0 -2 6 4 2 -4 -6 -8 1994 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Forecasts are from the Twenty-second Annual Economic Outlook Symposium
With economic growth being well below trend, the unemployment rate is projected to continue rising throughout 2009, reaching 7.8% in the final quarter of next year
8 5 4 7 6
Unemployment rate
9 percent 3 1994 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Forecasts are from the Twenty-second Annual Economic Outlook Symposium
Summary
•The outlook is for the U.S. economy to struggle through most of next year with an elevated risk of recession •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