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Twelfth Federal Reserve District
FedViews
January 13, 2011
Economic Research Department
Federal Reserve Bank of San Francisco
101 Market Street
San Francisco, CA 94105
Also available upon release at
http://www.frbsf.org/publications/economics/fedviews/index.php
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 back, our 2010 economic forecast issued a year ago of moderate growth and low inflation
proved relatively accurate. We predicted that real GDP would grow 3.4% last year. Based on data
available today, growth appears to have been a bit below 3%. The slightly slower-than-expected
growth reflects the soft patch the economy went through during the middle part of the year following
the outbreak of the European fiscal crisis. Despite slight overoptimism on growth, our forecast of a
9.5% unemployment rate in the fourth quarter of 2010 missed by only 0.1 percentage point. Both core
and overall inflation rates appear to have been about ¼ percentage point below our forecasts from a
year ago.

Economic growth appears to have picked up to about a 3¼% rate in the fourth quarter of 2010.
Consumer spending posted solid gains in October and November and anecdotal reports indicate that
holiday sales were brisk. Sales of light vehicles continued their steady rise following sharp declines
during the recession. Real personal consumption expenditures likely increased at about a 4% annual
rate in the fourth quarter of 2010. An increase in net exports looks to make a large positive
contribution to fourth-quarter growth as well.

The housing sector remains dormant. New construction activity is stuck at very low levels and home
sales remain anemic. House prices continue to decline, with the CoreLogic house price index falling
about 5% over the 12 months through November 2010.

The economic expansion appears to be building steam. After increasing 2.8% in 2010, we expect real
GDP to grow nearly 4% this year and for growth to pick up to about 4½% in 2012. Pent-up demand
for durable goods and eventually housing, and improving confidence are contributing to a steady
improvement in the economy.

Monetary policy, in the form of near-zero short-term interest rates and the Federal Reserve’s
purchases of longer-term assets, is providing considerable support to the recovery. A recent San
Francisco Federal Reserve Bank research paper by Chung, Laforte, Reifschneider, and Williams
(http://www.frbsf.org/publications/economics/ papers/2011/wp11-01bk.pdf) finds that the Fed’s
large-scale asset purchases will boost real GDP by nearly 3% in 2012 relative to what would have
occurred absent the program. This translates into 3 million additional jobs and a 1.5 percentage point
reduction in the unemployment rate. In addition, this program is found to have reduced the
probability of a sustained episode of deflation in the United States.
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 14, 2011.

Despite moderate growth in the second half of last year, the pace of job creation remains
disappointingly slow. The economy added about 130,000 jobs per month in the final quarter of 2010,
a pace insufficient to make much of a dent in the unemployment rate. The pickup in growth this year
and next should bring more sizable job gains. We expect the unemployment rate to decline gradually
to a little below 9% late this year and to about 7½% in late 2012.

Inflation remains subdued. Commodity prices have increased significantly over the past year, in part
reflecting the global economic recovery. Nonetheless, with economic slack holding down labor costs,
we expect both core and overall measures of inflation to remain very low over this year and next.
Year in Review
Real GDP
Shoppers Hitting the Malls
Unemployment Rate
Q4/Q4 percent change
%
11
% Fourth Quarter
January 2010
FRBSF Forecast
Current FRBSF
Forecast
4
January 2010
FRBSF Forecast
0
-4
3
2007 2008 2009 2010 2011 2012
Overall PCE Price Index
Q4/Q4 percent change
Core PCE Price Index
% Q4/Q4 percent change
4
2
January 2010
FRBSF Forecast
1
%
3
2.5
2
1.5
1
0.5
0
Current FRBSF
Forecast
January 2010
FRBSF Forecast
0
2007 2008 2009 2010 2011 2012
325
5
2007 2008 2009 2010 2011 2012
Current FRBSF
Forecast
Nov.
7
-2
3
$, Billions
350
Seasonally adjusted
9
2
Current FRBSF
Forecast
Retail Sales
2007 2008 2009 2010 2011 2012
Auto Sales Continue to Climb Back
Auto and Light Truck Sales
275
250
225
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
But, Housing Sector Still Dormant
Millions
18
Seasonally adjusted annual rate
300
Single-Family Housing Starts and Permits
Seasonally adjusted annual rate
17
Thousands of units
2000
Starts
16
1500
15
14
Dec.
1000
13
12
Nov.
Permits
11
500
10
9
8
2006
2007
2008
2009
2010
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: Data refers to housing starts and permits in permit-issuing places.
Estimated Effects of the Fed’s Asset Purchases
Gradual Expansion on Track
Real GDP
Effects of SOMA Portfolio Expansion
Percent change at seasonally adjusted annual rate
FRBSF
Forecast
Q3
Percent
10
% Pts
3.5
Increase in Real GDP
8
3
6
2.5
4
2
2
1.5
0
-2
1
-4
0.5
-6
-8
00 01 02 03 04 05 06 07 08 09 10 11 12
0
2009
2010
2011
2012
2013
2014
2015
2016
Estimated Effects of the Fed’s Asset Purchases
Estimated Effects of the Fed’s Asset Purchases
Effects of SOMA Portfolio Expansion
Effects of SOMA Portfolio Expansion
Millions
3.5
Increase in Private Payroll Employment
% Pts
1.2
Increase in Core PCE inflation (four-quarter change)
3
1
2.5
0.8
2
0.6
1.5
0.4
1
0.2
0.5
0
0
2009
2010
2011
2012
2013
2014
2015
-0.2
2016
2009
Job Creation Still Slow
Change in Nonfarm Payroll Employment
Monthly change in payrolls
Change
Aug.
-1K
Sept.
-24K
Oct.
+210K
Nov.
+71K
Dec.
+103K
Dec. 2007Dec. 2009 -8.4M
2010
2006
+1.1M
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Initial Claims Dropping Off
Thousands
500
Dec.
400
300
200
100
0
-100
-200
-300
-400
-500
-600
-700
-800
2010
Unemployment Indicators
Percent
10.5
Thousands
650
Dec.
9.5
550
450
5.5
350
4.5
Unemployment rate
(right scale)
250
3.5
00 01 02 03 04 05 06 07 08 09 10 11 12
*Monthly average
Inflation Subdued
PCE Price Inflation
Index
400
2000 = 100
7.5
6.5
Commodity Prices Recover With Economy
Real Commodity Prices
8.5
FRBSF
Forecast
Initial claims*
(left scale)
Percent
5
Percent change from four quarters earlier
4
Overall PCE
Price Index
300
FRBSF
Forecasts
3
Q3
2
Oil (WTI)
200
Core PCE
Price Index
Non-oil commodities
1
100
0
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: Real prices are nominal prices relative to CPI excluding
food and energy.
-1
00
01
02
03
04
05
06
07
08
09
10
11
12