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Twelfth Federal Reserve District
FedViews
January 14, 2010
Economic Research Department
Federal Reserve Bank of San Francisco
101 Market Street
San Francisco, CA 94105
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:
•
Looking at the outlook from a year ago, our forecasts for economic growth and inflation
proved to be reasonably on target, but the unemployment rate rose far more than we had
expected. According to currently available data, real GDP growth was close to zero last
year, with a sharp contraction in the first half of the year offsetting strong positive growth
in the second half. Based on past experience, zero real GDP growth implies an increase in
the unemployment rate of between 1 and 1-1/2 percentage points, consistent with our
forecast from a year ago. In fact, the unemployment rate rose 3 percentage points from the
fourth quarter of 2008 to the fourth quarter of 2009. The main factor driving this unusual
rise in unemployment was very rapid productivity growth that allowed businesses to cut
back sharply on labor while maintaining output levels.
•
Both overall and core measures of inflation were a touch higher than we had forecast a year
ago, reflecting the effects of unexpected increases in oil and other import prices. In
addition, methodological changes in the definition of core inflation boosted this measure of
inflation a bit, explaining part of the change in our forecast.
•
Consumers relaxed their grips on their wallets during the holiday shopping season. Retail
sales increased strongly over the final three months of 2009. Motor vehicle sales continued
to trend upward, after dropping back following the expiration of the cash-for-clunkers
program.
•
The manufacturing sector has likewise started to rebound from last summer’s depressed
level. Leading indicators of business spending have moved up in recent months. The
Institute for Supply Management’s new orders index rose to a very high level in December,
and orders and shipments of nondefense capital goods, excluding aircraft, recorded robust
increases in November.
•
Various signs indicate that the economic recovery is broad based. Increases in consumer
spending, residential investment, and government purchases all contributed to real GDP
growth in the third quarter of 2009. We expect that this pattern has continued in the fourth
quarter and into this year. In addition, swings in inventory accumulation have added
significantly to growth in the fourth quarter. Our forecast is for real GDP to increase by
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 February 16, 2010.
about 5-1/2 percent (annual rate) in the fourth quarter of 2009 and by about 3 percent in
the first quarter of this year.
•
Ebbing financial headwinds, greater consumer and business confidence, and substantial
support from monetary and fiscal policy should propel the economy to grow about 3-1/2
percent this year and about 4-1/2 percent in 2011. A key risk to this forecast is whether
household and business spending will improve sufficiently to offset waning fiscal stimulus
over the next two years.
•
Although the economy’s output expanded during the second half of last year, the labor
market has yet to turn upward. Nonfarm payrolls declined by 85,000 jobs in December.
Other labor market indicators, such as the rates of hiring, job openings, and quits, were at
very low levels in November. The labor market’s lagged response to turning points in
spending is typical of the early stages of recoveries from recessions. Given our forecast of
solid output growth this year, the labor market soon should start to revive. However, in
view of the depth of the recession, substantial labor market slack will likely persist for the
next few years.
•
The prolonged, deep recession has contributed to a decline in the inflation rate that is likely
to continue for some time. Stable inflation expectations and rising prices of oil and other
imports have partially offset the downward pressure on prices from slack in labor and
goods markets.
•
Improvements in the economic outlook and an increased appetite for risk have pushed
yields on Treasury securities higher. However, mortgage rates remain low. Yield spreads
on corporate bonds relative to Treasury securities have continued to decline. Based on
futures contracts, financial market participants expect the Federal Reserve and central
banks in other major industrial economies to start raising short-term interest rates sometime
later this year and to steadily increase rates in 2011.
Year in Review
Real GDP
%
6
Q4/Q4 percent change
Current FRBSF
Forecast
08
09
10
%
11
Fourth Quarter
Current FRBSF
Forecast
9
3
Jan. 2009
FRBSF Forecast
07
Cash Registers Ring in the Holidays
Unemployment Rate
Jan. 2009
FRBSF Forecast
3
07
%
4
Q4/Q4 percent change
08
09
10
Core PCE Price Index
%
3
Current FRBSF
Forecast
2
08
09
10
11
250
1
225
0
0
07
275
2
Jan. 2009
FRBSF Forecast
1
300
11
Q4/Q4 percent change
3
Current FRBSF
Forecast
07
08
09
10
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
11
Motor Vehicle Sales Rev Up
Manufacturing Rebounds
Manufacturing Sector
Auto and Light Truck Sales
Millions
18
Seasonally adjusted annual rate
17
16
15
14
Dec.
13
12
11
10
9
2007
2008
2009
ISM New Orders
Index*
(right axis)
20
Percentage points
7
6
Real GDP Growth
5
4
3
2
1
0
-1
-2
FRBSF Forecast
Consumption
Residential Investment
-3
Non-residential Investment
-4
Government
-5
Net Exports
-6
Inventories
-7
2009H1
2009Q3
2009Q4
2010Q1
Seasonally adjusted annual rates
Nov.
Dec.
10
70
60
0
50
Manufacturing
Production**
(left axis)
-10
-20
40
30
-30
20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
*Index above 50 means new orders are increasing
**Annualized percent change from three months earlier
Broad-Based Recovery
Contributions to Real GDP Growth
Index
80
Percent
30
8
2006
325
Dec.
5
-3
11
Overall PCE Price Index
$, Billions
350
Seasonally adjusted
7
Jan. 2009
FRBSF Forecast
0
Retail Sales
Expansion Under Way
Real GDP
Percent change at seasonally adjusted annual rate
Percent
10
FRBSF
Forecast
8
6
4
Q3
2
0
-2
-4
-6
-8
00
01
02
03
04
05
06
07
08
09
10
11
12
Labor Market Nears Trough…
And Should Soon Start to Recover
Nonfarm Payroll Employment
Job Openings and Labor Turnover Survey
Millions of employees; seasonally adjusted
139
Change
-304k
July
-154k
August
September -139k
-127k
October
+4k
November
December -85k
Percent
5
Total private; Seasonally adjusted
138
136
135
Nov.
Job Openings
3
133
2.5
2
Quits
131
1.5
130
129
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
1
2001 2002 2003 2004 2005 2006 2007 2008 2009
Still, Sustained Slack to Persist
Inflation Subdued
Unemployment Rate
PCE Price Inflation
Percent
11
Seasonally adjusted
Dec.
Percent
5
Percent change from four quarters earlier
10
4
9
FRBSF
Forecast
FRBSF
Forecasts
Overall PCE
Price Index
8
Q3
7
6
1
0
4
3
01
02
03
04
05
06
07
08
09
10
11
-1
12
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Longer-term Interest Rates Edge Up
Interest Rates
Markets Expect Rate Hikes in 2010
Percent
8
Weekly average
30-year Mortgage Rate
7
1/7
Ten-year Treasury
6
3
2004
2005
2006
Short-term Interest Rates
Federal Funds
Bank of England Target Rate
Target Rate
Percent
7
Bank of Canada
Target Rate
Futures as of
Jan. 6, 2010
5
4
Federal Funds
2
Two-year
Treasury
2007
1
ECB
EONIA
Bank of Japan
Official Lending Rate
0
2008
2009
2010
3
2
Core PCE
Price Index
5
00
4
3.5
134
132
Dec.
4.5
Hires
137
6
5
4
3
2
1
0
2003 2004 2005 2006 2007 2008 2009 2010 2011