Download 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
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
Quarterly 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
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
15
United States
10
5
0
-5
Midwest
-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
percent of respondents
6
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
Quarterly 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
Residential investment as a share of GDP
is approaching previous lows
Residential investment as a share of GDP
percent
7
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
Energy goods and services expenditures as a share of
percent
total consumption
10
9
8
60s
80s
70s
7
1960-2008
6
5
00s
90s
4
1960
'65
'70
'75
'80
'85
'90
'95
'00
'05
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 chain price index
percent change from a year earlier
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
percent
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
Productivity growth remains solid
Nonfarm business productivity
percent
12
10
Quarterly change (saar)
Percent change from a year earlier
8
6
4
2
0
-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
2
0
-2
-4
-6
-8
-10
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)
Percent change from a year earlier
6
4
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
Contributions to real GDP growth in Q3:2008
percentage points (annual rate)
2
0.9
1
1.1
1.1
0
-1
-0.2
-0.5
-0.7
-2
-3
-2.7
GDP
Consumption
Business Residential Inventories Government Net Exports
Fixed
Investment
Investment
Corporate profits have been declining
Nonfinancial corporate profits
percent
125
100
75
Quarterly change (saar)
50
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
Real net exports and change in real value of the dollar
billions of chained real dollars
percent change from a year earlier
600
15
dollar (right axis)
400
10
200
5
0
0
-200
-5
-400
-10
-600
-15
net exports (left axis)
-20
-800
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
Real exports and imports
percent change from year ago
20
15
Imports
10
5
0
Exports
-5
-10
-15
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
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
30
Monthly change (saar)
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
Manufacturers' shipments
40
35
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
percent
24
22
20
18
16
14
12
10
8
6
4
High Yield
Corporate Aaa
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
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
percent
18
16
14
12
10
8
6
4
2
0
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
The “flight to quality” drove down Treasury yields
Corporate Aaa and 10-year Treasury rates
percent
7
6
Corporate Aaa
5
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
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
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
percent
9
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
6
4
2
0
-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
Unemployment rate
percent
9
8
7
6
5
4
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
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