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Twelfth Federal Reserve District
FedViews
Economic Research Department
Federal Reserve Bank of San Francisco
101 Market Street
San Francisco, CA 94105
November 12, 2009
Also available upon release at
www.frbsf.org/publications/economics/fedviews/index.html
John C. Williams, executive vice president and director of research at the Federal Reserve Bank of San Francisco,
states his views on the current economy and the outlook:
•
The U.S. economy expanded at a 3.5% annual rate in the third quarter, ending a string of
four straight quarters of negative growth. Consumer spending increased at a robust 3.4%
annual rate in the third quarter, boosted by the cash-for-clunkers program. Not surprisingly,
sales of motor vehicles fell sharply after the program ended. But the decline was somewhat
less than expected, suggesting greater underlying strength in demand than previously
thought. Residential construction and exports were also areas of strength in the third
quarter.
•
Improvements in consumer and foreign demand have helped the manufacturing sector to
rebound from the worst recession in decades. Manufacturing production has increased in
each of the three months through September. Capacity utilization in this sector rose to
67.5% in September, 2.4 percentage points above the all-time low reached in June. The
most recent reading from the Institute for Supply Management manufacturing survey
suggests further gains in output in October.
•
In financial markets, risk spreads have come down since early this year. Spreads on
corporate bonds are now at levels comparable to the previous recession. Although
corporations have better access to capital, small businesses still find credit tight. Some
banks have continued to tighten loan standards, but the percentage reporting such
tightening has fallen significantly. The dollar has given up much of the gains it registered
against other currencies during the worst of the crisis. In real terms, the dollar’s exchange
value is about where it was at the beginning of the recession.
•
Although the National Bureau of Economic Research has yet to declare the recession over,
there is increasingly compelling evidence that the economy has entered an expansion stage.
The September reading of the Federal Reserve Bank of Chicago’s National Activity Index
rose slightly above the –0.7 level associated with recessions.
•
Forecasters generally expect the pace of recovery in the United States and other major
industrialized economies to be relatively modest compared to past recessions. In contrast,
several emerging market economies are already growing rapidly. In China, for example,
real GDP increased about 9% over the past year. And forecasters expect China’s economy
to continue growing rapidly for the next few years.
•
We expect real GDP growth in the United States to slow to about 3-1/4% in the current
quarter, but then to rise to 3-1/2% in 2010 and nearly 4-1/2% in 2011. In the near term,
federal fiscal policy, monetary policy, and inventory building are principal sources of
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 December 21,
2009.
growth. Looking further ahead, business spending, exports, and a return to normal levels of
home building will increasingly drive growth. This forecast is subject to a great deal of
uncertainty.
•
Consistent with the pattern of the early stages of expansions in past business cycles, the
labor market continues to be weak despite the return to positive GDP growth. Nonfarm
payrolls fell by 190,000 jobs in October, on par with the previous two months, but well
below the 560,000 jobs lost on average per month during the first half of the year. Since the
recession began, 7.3 million jobs have been lost. The rates of job openings and hiring show
little improvement so far. Businesses have continued to cut costs and have used
productivity improvements to expand output without adding to payrolls.
•
The unemployment rate rose 0.4 percentage point to 10.2% in October. Initial claims for
unemployment insurance, however, have been on a downtrend in recent months. Given our
forecast of solid real GDP growth over the next few years, the unemployment rate should
gradually decline, falling to a little above 8% by the end of 2011.
•
The high level of unemployment has put downward pressure on wage and price inflation.
Over the past year, the employment cost index for private workers rose by about 1-1/4%,
the smallest four-quarter percent increase since this measure started in 1980. Core price
inflation has decreased markedly as well, reflecting the effects of economic slack and
falling commodity prices. The core personal consumption expenditures price index rose a
mere 1.3% over the past 12 months through September. Significant slack will continue to
put downward pressure on inflation over the next few years, offset somewhat by the effects
of import price increases.
•
Inflation expectations remain stable. Longer-run inflation expectations have fluctuated in a
relatively narrow band during the past several years, despite the sizable swings in
commodity prices and the global financial crisis and recession.
Car Sales Better than Expected
Manufacturing Rebounds
Auto and Light Truck Sales
Manufacturing Sector
Seasonally adjusted annual rate
Millions
18
Percent
30
Index
80
20
Cash for Clunkers
Sept.
Oct.
ISM New Orders Index*
(right axis)
16
10
70
60
14
0
12
Oct.
50
Manufacturing Production**
(left axis)
-10
40
-20
10
30
-30
2007
2008
November 12, 2009
2001
2002
2003
2004
2005
2006
2007
2008
2009
*Index above 50 means new orders are increasing
**Annualized percent change from three months earlier
2009
Federal Reserve Bank of San Francisco
20
2000
8
1
November 12, 2009
Risk Spreads Normalize
Federal Reserve Bank of San Francisco
2
Fears Abate, Dollar Declines
Corporate Bond Rate Spreads
Real Broad Trade Weighted Dollar
Difference between bond yield and ten-year Treasury
March 1973 = 100
Percent
22
Index
115
20
110
High-Yield
18
16
105
11/5
14
100
12
10
95
8
90
6
BAA
Oct.
4
85
AAA
2
0
2000
2001
2002
2003
November 12, 2009
2004
2005
2006
2007
2008
80
2009
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Federal Reserve Bank of San Francisco
3
Recession is Over
November 12, 2009
Federal Reserve Bank of San Francisco
4
China Gallops while Others Amble
Chicago Fed National Activity Index
Real GDP
Three month moving average
2007Q4 = 100
Index
1.5
Index
140
1
130
0.5
0
Sept.
Recession cutoff
-0.5
120
September
Consensus
Forecast
-1
110
-1.5
-2
US
Canada
100
-2.5
Euro Area
Japan
-3
90
China
-3.5
-4
2000
2001
November 12, 2009
2002
2003
2004
2005
2006
2007
2008
Federal Reserve Bank of San Francisco
80
2009
2006
5
November 12, 2009
2007
2008
2009
2010
Federal Reserve Bank of San Francisco
2011
6
1
Moderate Growth Ahead
Job Losses Slow
Real GDP
Nonfarm Payroll Employment
Percent change at seasonally adjusted annual rate
Millions of employees; seasonally adjusted
Percent
10
139
Change
Average
Jan.-June -560k
July
-304k
August
-154k
September -219k
October
-190k
8
FRBSF
Forecast
6
Q3
4
138
137
136
135
2
134
0
133
-2
132
-4
131
Oct.
-6
130
-8
2000
2001
2002
2003
November 12, 2009
2004
2005
2006
2007
2008
2009
2010
129
2011
2000
Federal Reserve Bank of San Francisco
7
2001
2002
2003
November 12, 2009
But Few are Hiring
2004
2005
2006
2007
2008
2009
Federal Reserve Bank of San Francisco
8
Unemployment Still Rising
Job Hirings and Openings
Unemployment Indicators
Job Openings and Labor Turnover Survey; monthly, seasonally adjusted
Seasonally adjusted
Percent
5
Thousands
700
Percent
11
Oct.
4.5
10
Sept.
Total Private
Hiring Rate
600
9
4
Initial Unemployment
Claims*
500
3.5
3
8
10/24
FRBSF
Forecast
400
6
2.5
Total Private Job
Opening Rate
5
300
Unemployment Rate
4
2
200
1.5
2001
2002
2003
2004
November 12, 2009
2005
2006
2007
2008
3
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
2009
2011
*Four-week moving average of initial claims
Federal Reserve Bank of San Francisco
9
Inflation Subdued
November 12, 2009
Federal Reserve Bank of San Francisco
10
Long-run Inflation Expectations Stable
PCE Price Inflation
Long-run Inflation Expectations
Percent change from four quarters earlier
Percent
4
Percent
5
3.5
TIPS inflation compensation
5-10 ahead
4
3
3
Overall PCE
Price Index
FRBSF
Forecasts
2.5
2
Q3
Consensus Forecast
6-10 years ahead CPI forecast
Core PCE
Price Index
2
1
SPF median CPI 5-year-forward/
5-year-ahead forecast
1.5
0
-1
95
96
97
November 12, 2009
98
99
7
00
01
02
03
04
05
06
07
08
Federal Reserve Bank of San Francisco
09
10
1
11
2000
11
2001
November 12, 2009
2002
2003
2004
2005
2006
2007
2008
Federal Reserve Bank of San Francisco
2009
12
2