Download FedViews

Twelfth Federal Reserve District
Economic Research Department
Federal Reserve Bank of San Francisco
101 Market Street
San Francisco, CA 94105
FedViews
Also available upon release at
www.frbsf.org/publications/economics/fedviews/index.html
FedViews – June 11, 2009
Eric Swanson, research advisor at the Federal Reserve Bank of San Francisco, states his views on the
current economy and the outlook:
•
Over the past several weeks, forward-looking economic indicators such as stock prices, corporate bond
spreads, and the Institute for Supply Management (ISM) survey of manufacturers have been giving more
positive readings, while lagging economic indicators such as employment and unemployment have
continued to reflect the ongoing contraction in the U.S. economy.
•
In the manufacturing sector, output declined further in April, but at a less rapid pace than in previous
months. However, the new orders component of the ISM survey of manufacturers, which is a good
leading indicator, rose to 51.1 in May, implying that more than half of the survey respondents
experienced growth in new orders relative to the month before. This marks the first time that the index
has risen above 50 since November 2007.
•
The unemployment rate shot up to 9.4% in May from 8.9% in April, a dismal reading that was
substantially worse than expected. Part of the rise in unemployment was due to an increase in the
number of people entering the labor force, which can be a positive sign that people see a reasonable
chance of finding a job. Continuing claims for unemployment insurance have trended upward, much like
the overall unemployment rate, but initial claims for unemployment insurance have been coming down
since March, suggesting that new layoffs of workers may have passed their peak.
•
The number of workers on nonfarm payrolls fell by 345,000 in May, a marked slowing of the rate of job
losses relative to the past several months and better than forecasters expected. The number of jobs lost in
March and April were also revised down by about 50,000 and 30,000 respectively.
•
Autos and light trucks sold at a 9.9 million annual rate in May, a level broadly similar to the historically
low readings of the past several months. Aggregate vehicle registrations data from the Federal Highway
Administration can be used to infer how many vehicles were not re-registered from one year to the next,
and we refer to those vehicles as having been “scrapped.” Auto sales are running not only at the lowest
level in decades, they are running two to three million vehicles below reasonable estimates of scrappage
as well, suggesting that auto sales are likely to pick up soon. Indeed, several manufacturers have
announced plans to increase production in the third quarter.
•
Like auto sales, home sales continue to bounce along what appears to be a bottom. An important source
of support for home sales has been the historically low level of conforming mortgage interest rates for
the past several months. However, those rates leapt almost a full percentage point over the past two
weeks, and now stand at 5.69%. Although conforming mortgage rates are still low by historic standards,
the recent spike is likely to dampen sales and put further downward pressure on prices in the housing
market.
The views expressed are those of the author, with input from the forecasting staff of the Federal Reserve Bank of San Francisco. They are not intended to represent the views of others within the Bank or within the Federal Reserve System. FedViews generally appears around the middle of the month. The next FedViews is scheduled to be released on or before July 13, 2009. •
The recent spike in mortgage rates reflects an equally dramatic rise in long-term Treasury yields.
Reasons for the rise can be divided into three main categories: First, inflation expectations may
have increased due to rising oil prices and other factors, which causes nominal bond yields to
rise. Second, the large increase in the quantity of securities being issued by the Treasury to fund
record deficits may be pushing up interest rates in order to induce lenders to purchase the
growing supply of securities. Finally, domestic and international investors may be displaying an
increased appetite for riskier, higher-yielding assets, thereby reducing demand for Treasuries, the
traditional flight-to-safety investment, pushing their yields higher.
•
For example, despite the recent sharp rise in Treasury yields, AAA corporate bond yields are up
only slightly, BAA bond yields are down somewhat, and high-yield corporate bond yields are
down dramatically. These movements suggest an improvement in the U.S. economic outlook
and in the attractiveness of riskier, higher-yielding corporate bonds relative to Treasuries.
•
Short-term corporate financing rates have also been dropping steadily. The commercial paper
market, which was thrown into chaos following the Lehman Brothers bankruptcy in September,
has been showing signs of healing. Spreads on commercial paper relative to the federal funds
rate are now even lower than they were in the six months prior to Lehman’s collapse, although
still not as low as in the years prior to 2007.
•
Oil prices have rebounded from their lows of the past few months, and now stand at over $70 per
barrel. To some extent, this may reflect an improving economic outlook in the United States,
China, and elsewhere, but the price increase is also putting downward pressure on that outlook
through higher fuel and energy costs.
•
The data for the second quarter that have come in so far strongly suggest that GDP is contracting,
but at a much slower pace than in the past two quarters. We forecast that GDP will contract at
about a 1% annual rate in the second quarter and will post a small positive growth rate in the
third quarter. Looking further ahead, we expect GDP to grow at an above-trend rate for several
quarters as the economy returns to a more normal level of labor-force and capacity utilization.
•
This forecast is more sluggish than would be suggested by past recoveries for two main reasons:
First, firms and households are having a more difficult time obtaining credit from banks in the
current episode, a constraint we view as relaxing only gradually over time. Second, we forecast
that consumption will not grow as strongly as in years past as households increase their saving
rate to rebuild their balance sheets.
•
Given the weak level of retail sales, manufacturing, and output more broadly, we see substantial
downward pressure on prices outside the energy sector over the next several quarters. As a
result, we expect that inflation will continue the gradual downward trend that has been evident
since the middle of last year.
6/12/2009
Manufacturing Contracting Less Rapidly
Initial Claims Off Highs, Unemployment Still Rising
Job Losses Slowing
Auto Sales Bouncing Along the Bottom
Auto and Light Truck Sales
Millions
Seasonally adjusted annual rate
25
20
Light Vehicle Sales
May
15
10
Light Vehicle
Scrappage
5
1978
Home Sales Bouncing Along the Bottom
1988
1993
1998
2003
Thousands
6500
Mortgage and Auto Loan Rates
Percent
Effective Annual Rates
1400
6/11
30-yr. Jumbo Mortgage
New Homes
(left axis)
6000
1200
1000
2008
Treasury, Mortgage Rates Rising Recently
Home Sales
Seasonally adjusted annual rate
1983
4-yr. Auto Loan
8
7
5500
6
30-yr. Conforming Mortgage
800
April
5
5000
600
4
Existing Homes
(right axis)
400
4500
10-yr. Treasury
200
4000
2001
2002
2003
2004
2005
2006
2007
2008
3
2
2004
2005
2006
2007
2008
1
6/12/2009
Corporate Bond Spreads Falling
Commercial Paper Spreads Returning to Normal
Corporate Bond Yields
Effective Annual Rates
Percent
Commercial Paper Rates
Percent
30 Day Maturity
7
22
AA Asset-Backed
A2/P2 Nonfinancial
20
6
18
5
16
High-Yield
14
4
AA Financial
6/11 12
3
10
6/11
Fed Funds Target Rate
BAA
2
8
6
AAA
10-yr.Treasury
1
4
AA Nonfinancial
0
2
2004
2005
2006
2007
2004
2008
Oil Prices Off Lows, and Rising
2005
2006
2007
2008
We Forecast GDP Will Resume Growing in Q3
Real Gross Domestic Product (GDP)
Percent change at seasonally adjusted annual rate
Percent
8
FRBSF
Forecast
6
4
2
0
-2
-4
-6
-8
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
But More Slowly Than Previous Recoveries
And We Forecast Inflation Will Drift Downward
FRBSF Forecast Relative to Previous Recessions
108
1981
106
2001
1990
104
1974
102
100
98
2008
FRBSF
forecast
96
0
1
2
3
4
5
6
7
8
9
10
Quarters after GDP peak
2