1. Economic Outlook William Strauss Senior Economist and Economic Advisor Federal Reserve Bank of Chicago Multi-Chamber Economic Outlook Luncheon Downers Grove, IL February 10, 2010

2. The Chicago Fed National Activity Index bottomed in January 2009 and has been rising

3. The “Great Recession” appears to have come to an end around the middle of last year and the economy expanded by 5.7% in the fourth quarter

4. Fourth quarter GDP expanded at a fast pace with contributions largely coming from inventories, consumption and net exports

5. Personal savings has increased sharply

6. The stock market has improved since March 2009, but remains well below previous levels

7. GDP is forecast to grow above trend in 2010 and 2011

8. The forecast path of the current recovery is relatively muted compared with past deep recession recovery cycles

9. Employment has fallen by over 8.4 million jobs since December 2007

10. The unemployment rate has risen to the highest level since April 1983

11. The unemployment rate is forecast to peak at 10.2% early this year and then begin to edge lower

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

13. Michigan’s job losses are significant, losing 860,400 jobs since June 2000, amounting to 18.3% of their jobs

14. Michigan has the highest state unemployment rate in the nation

15. Inflation has begun to move higher

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

17. Removing the volatile food and energy components from the PCE, “core” inflation remains contained

18. Inflation is anticipated to rise by 1.8 percent this year and 2.1 percent next year

19. Industrial output fell quite sharply during the recession, but has risen strongly over the past six months

20. The downturn in manufacturing was the deepest and close to the longest decline over the past 50 years

21. Manufacturing capacity utilization fell to the lowest level in more than 70 years

22. Industrial production is forecast to rise at a solid pace through the end of 2011

23. Light vehicle sales collapsed with 2009 sales off 21%

24. Yet, light vehicle production has been cut back by 34%

25. The inventory to GDP ratio has fallen to record low readings

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

27. In the third quarter of last year, residential investment had its first increase since 2005

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

29. The supply of new single family homes has fallen from very high levels

30. Housing starts have been cut-back sharply

31. Housing starts have fallen to a post WWII low

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

33. Mortgage rates are very low

34. Home price declines have been large

35. Home price declines in the second quarter, compared with a year-earlier, were quite large in the West and Florida 7 Red States 4 Light Blue States

36. Conditions improved in the third quarter with prices down around 4% compared with a year-earlier 4 Red States 7 Light Blue States

37. Housing affordability improved dramatically

38. Home sales have been moving higher

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

40. Lending standards for mortgage loans remain tight

41. Corporate High Yield rates increased beginning in June 2007

42. Credit spreads between Corporate High Yield securities and Corporate Aaa securities rose by over 1,400 basis points, but have been improving steadily since March 2009

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

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

45. The outlook is for the U.S. economy to expand at a solid pace this year and next year Summary Employment is expected to rise moderately this year and next year, with the unemployment rate edging lower through 2011 Slackness in the economy will lead to a relatively low inflation rate over the next two years Growth in manufacturing output will be solid in 2010 and 2011 due to improving demand and rebuilding of depleted inventories The volatile credit markets, concerns about commercial real estate, and the weak housing market are some of the biggest risks on the horizon for the U.S. economy

46. www.chicagofed.org www.federalreserve.gov