1. Economic Assessment The Transformer Association William Strauss
Rosemont, IL
May 13, 2009
William Strauss
Senior Economist
and Economic Advisor
Federal Reserve Bank of Chicago

2. The three-month average of the Chicago Fed National Activity Index weakened substantially in the second half of 2008

3. The economy entered a recession in the first quarter of 2008

4. First quarter GDP was driven down by large decreases in business fixed investment and inventories

5. GDP growth is forecast to be quite weak this year, but then grow closer to trend in 2010

6. Potential Historical Context Blue Chip Forecast for Current Episode
Average
Range
Consensus
Duration (months) 11
6 to 16
18-24
Change in GDP2
-1.7
-0.4 to -3.1
-3.73
Maximum Unemployment Rate2
7.8
6.1 to 10.8
9.8
Change in payroll employment2
-2.1
-1.3 to -3.1
-4.5 to -5.04
1. Calculated over the , , , 1980, , , and 2001 recessions.
Percent change from peak to trough of GDP.
Starting from the peak of GDP in the second quarter of 2008.
My guess. – through April 2009 employment is down 4.2%
How does this add up?
Longer than average –
less GDP decline –
not a record unemployment rate (though base is likely 1 percentage point less)
Max employment losses (though due to less working age population growth, the base is x.x percent lower now)

7. Inflation has reversed its upward trajectory

8. In large part due to the movement of oil prices

9. Adjusted for inflation - current oil prices are well below early 1980s prices

10. Expenditures on energy increased over the past few years, and they are currently well below the historical average

11. Removing the volatile food and energy components from the PCE, “core” inflation has entered the “comfort zone”

12. Inflation is anticipated to moderate this year and then rise by two percent in 2010

13. Employment has fallen by over 5.7 million jobs since December 2007

14. The unemployment rate has risen to the highest level since September 1983

15. The unemployment rate is forecast to peak at 9
The unemployment rate is forecast to peak at 9.8% early next year and then begin to edge lower

16. Employment recoveries have taken much longer over the past two cycles

17. Light vehicle sales collapsed

18. In an attempt to keep inventories in line with falling sales light vehicle production has been cut back quite severely

19. Consumer attitudes about buying a vehicle is very low

20. Increases in new domestic production share has offset losses in Detroit-3 market share

21. Manufacturing production fell off sharply beginning in the second half of 2008

22. Manufacturing capacity utilization has fallen to the lowest levels in more than 70 years

23. Purchasing managers’ composite index has improved

24. The new orders component has improved significantly

25. Residential investment fell off sharply beginning in 2006

26. Residential investment as a share of GDP is very low

27. The supply of new single family homes is extremely high

28. Housing starts have been cut-back sharply

29. Housing starts have fallen to a new post WWII low

30. When you take into account the growth of households, it is an even more dramatic decline

31. Mortgage rates are very low

32. Home price declines are large

33. Home price have fallen by over eight percent over the past year with large differences across regions

34. Housing affordability has improved dramatically

35. Yet, consumer attitudes for buying a home remain very low

36. Lending standards for mortgage loans remain tight

37. Corporate High Yield rates increased beginning in June 2007

38. Credit spreads between Corporate High Yield securities and Corporate Aaa securities rose by over 1,400 basis points, but have been improving over the past several months

39. Last fall’s volatility in LIBOR rates was in large part due to a “flight to quality”

40. Credit spreads between LIBOR and Treasury rates have substantially improved

41. The Fed has been very aggressive, lowering the Fed Funds rate by nearly 525 basis points

42. The Fed’s balance sheet has expanded in size and in composition

43. Summary The outlook is for the U.S. economy to struggle through
most of this year and then grow at a solid pace next year
Employment is expected to remain weak this year,
leading to a continued rise in the unemployment rate
Slackness in the economy will lead to a relatively
low 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

44. www.chicagofed.org www.federalreserve.gov