1. Photos courtesy of USDA Maria Akers Assistant Economist Federal Reserve Bank of Kansas City Omaha Branch www.kansascityfed.org September 22, 2008 Economic Outlook The views expressed are those of the author and do not necessarily reflect the opinions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.

2. Photos courtesy of USDA ? ? ? Economic Outlook The views expressed are those of the author and do not necessarily reflect the opinions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.

3. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Outline from September 2007 Housing and the financial market crisis Risks to the Outlook –Will housing market weakness spread to the overall economy? –Will inflationary pressures remain contained?

4. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Today’s Outline The Ongoing Financial Market Crisis The Housing Correction Continues Energy and Food Price Inflation Employment and Consumer Spending Business and Export Activity Risks to the Outlook

5. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Percent Financial Markets Remain Volatile. Commercial Paper Rates and Fed Funds Rate Discount Rate cut Discount rate cut Primary Dealer Credit Facility Term Security Lending Facility Term Auction Facility Source: Federal Reserve Board of Governors

6. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Federal Reserve Injects Liquidity. Billions Source: Federal Reserve Board of Governors Borrowing by all Financial Institutions

7. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Investors turned to Treasury Securities. Percent Source: Federal Reserve Board of Governors Daily Treasury Yield Curve Rates

8. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Credit Standards have tightened. Percent Source: Federal Reserve Board of Governors Net Percent of Domestic Banks Tightening Credit Standards

9. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Today’s Outline The Ongoing Financial Market Crisis The Housing Correction Continues

10. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Home starts and sales are still dropping. Month’s supply Source: Dept. of Commerce, National Association of Realtors Home Starts, Sales and Inventories Month’s Supply of New Homes (Left Scale) Index (Jan-00=100) Housing Starts (Right Scale) Existing Home Sales (Right Scale) Housing Starts (Right Scale)

11. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Nationally, home prices are falling. Percent change from previous year Case-Shiller OFHEO Source: OFHEO and Standard & Poor’s U.S. Home Price Indexes

12. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Home foreclosures are still rising. Percent of loans serviced Source: Mortgage Bankers Association Foreclosure Rates by Mortgage Type

13. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Credit standards on home mortgages have tightened. Net percent reporting tighter credit standards Credit Standards on Residential Real Estate Loans Source: Federal Reserve Board of Governors

14. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Today’s Outline The Ongoing Financial Market Crisis The Housing Correction Continues Energy and Food Price Inflation

15. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Strong Global Economies are Driving Energy and Food Demand... Percent change Source: International Monetary Fund (July 2008 projections) 5 year moving average World GDP Growth Forecast

16. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Percent World Developed countries Source: International Monetary Fund (July 2008 projections) Developing countries World GDP Growth Especially in Developing Countries.

17. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Economic growth in developing countries is widespread. Percent Source: International Monetary Fund (July 2008 projections) World GDP Growth

18. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Energy and farm commodity prices have surged. Dollars per barrel Source: Department of Energy and USDA Farm Commodity Prices Index: 1980=100 WTI Crude Oil Prices

19. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Will Energy and Food Supplies Rise to Fulfill Increasing Global Demand? Million barrels per day Source: Department of Energy and USDA World Crop Inventories Stocks-to-Use Ratio (Percent) World Oil Balance 2004-2008 Demand Supply

20. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA A Decade of High Energy Inflation. Annual percent change Source: Bureau of Labor Statistics CPI - Energy CPI - Food Consumer Price Inflation – Food and Energy Components

21. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Energy Costs are Driving Housing and Transportation Inflation. Category Relative Importance (Percent) Aug 2008 (Annual Percent change) Housing42.43.8 Shelter32.52.4 Furnishings4.71.2 Household Fuel5.117.3 Transportation17.712.1 Motor Vehicles7.2-0.9 Motor Fuel5.535.9 Source: Bureau of Labor Statistics

22. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Food Price Inflation Across Categories. Annual percent change Source: Bureau of Labor Statistics Consumer Price Inflation 1990 to 2006 average Dec 2007 Mar 2008 Aug 2008

23. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Inflation has jumped to its highest levels since the early 1990s. Annual percent change Source: Department of Commerce CPI Core CPI: Less Food and Energy Consumer Price Inflation

24. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Today’s Outline The Ongoing Financial Market Crisis The Housing Correction Continues Energy and Food Price Inflation Employment and Consumer Spending

25. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Will job losses slow consumer spending? Change from previous month (Thousands) Job Change (Left Scale) Unemployment Rate (Right Scale) Source: Bureau of Labor Statistics U.S. Non-farm Job Growth and Unemployment Rate Percent

26. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Wage growth will have significant influence on inflation and growth. Percent change from year ago Wages and Salary Benefits Source: Bureau of Labor Statistics Employment Cost Index

27. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Retail sales are mixed. Retail Sales Percent Change from Aug 2008 to Aug 2007 Retail and Food Services +1.6 Gasoline Stations+22.5 General Merchandise Stores +4.3 Food and Beverage Stores +6.9 Food Services and Drinking Places +4.3 Motor Vehicle and Parts Dealers -13.5 Furniture and Home Furnishings Stores -6.8 Building Material and Garden Equipment Dealers -2.3 Department Stores (ex. L.D.) -4.2 Source: Census Bureau

28. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA What stimulus is left after the rebates? Personal Consumption Expenditures Annualized percent change from previous quarter Source: Bureau of Economic Analysis and Blue Chip Forecast Blue Chip Forecast (Sept 2008)

29. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Today’s Outline The Ongoing Financial Market Crisis The Housing Correction Continues Energy and Food Price Inflation Employment and Consumer Spending Business and Export Activity

30. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Index Source: Institute of Supply Management Prices Paid Index Business activity has slowed with rising input prices. Business Activity

31. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Weaker profits have slowed business investment. Structures Equipment and Software Corporate Profits and Nonresidential Fixed Investment Percent change from year ago Source: Bureau of Economic Analysis Corporate Profits After Tax

32. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA The Weak Dollar Has Boosted Exports IndexBillions of Dollars Dollar Index Value (Left Scale) Net Exports (Right Scale) Dollar Value and U.S. Net Exports

33. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Today’s Outline The Ongoing Financial Market Crisis The Housing Correction Continues Energy and Food Price Inflation Employment and Consumer Spending Business and Export Activity Risks to the Outlook

34. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Economic Projections of the Federal Reserve Governors and Bank Presidents Central Tendency 1 2007 (Percent) 2008 (Percent) 2009 (Percent) 2010 (Percent) Real GDP growth Apr. 2008 projections Oct. 2007 projections 2.4 1.0 to 1.6 0.3 to 1.2 1.8 to 2.5 2.0 to 2.8 2.3 to 2.7 2.5 to 3.0 2.6 to 3.1 2.5 to 2.6 Unemployment rate Apr. 2008 projections Oct. 2008 projections 4.8 5.5 to 5.7 4.8 to 4.9 5.3 to 5.8 5.2 to 5.7 4.8 to 4.9 5.0 to 5.6 4.9 to 5.5 4.7 to 4.9 PCE inflation Apr. 2008 projections Oct. 2008 projections 3.4 3.8 to 4.2 3.1 to 3.4 1.8 to 2.1 2.0 to 2.3 1.9 to 2.3 1.7 to 2.0 1.8 to 2.0 1.6 to 1.9 Core PCE inflation Apr. 2008 projections Oct. 2008 projections 2.1 2.2 to 2.4 1.7 to 1.9 2.0 to 2.2 1.9 to 2.1 1.7 to 1.9 1.8 to 2.0 1.7 to 1.9 1.6 to 1.9 Source: Federal Reserve Board of Governors, June 25, 2008 FOMC Minutes Note: Projections of the growth of real GDP, of PCE inflation, and of core PCE inflation are percent changes from the fourth quarter of the previous year to the fourth quarter of the year indicated. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. 1 The central tendency excludes the three highest and three lowest projections for each variable in each year. Near-Term: Weaker Growth Near-Term: Rising Inflation Long-Term: Stronger Growth Long-Term: Falling Inflation

35. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Private Sector Forecasts Near-term: weaker growth & higher inflation Long-term: stronger growth & lower inflation Real GDP Growth Annualized percent change Source: Blue Chip Economic Indicators Sept Forecast Consumer Price Inflation Annualized percent change Sept Forecast April Forecast April Forecast

36. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA FOMC Statement (September 16, 2008) Economic growth … slowed recently. –Reflecting a softening of household spending. –Tight credit conditions, the ongoing housing contraction, and some slowing in export growth. Inflation has been high, spurred by earlier increases in the prices of energy and some other commodities. –Expects inflation to moderate, but –Outlook remains highly uncertain. Downside risks to growth and the upside risks to inflation are both of significant concern.

37. FEDERAL RESERVE BANK OF KANSAS CITY Regional, Public, and Community Affairs Photos courtesy of USDA Conclusion Housing risks fueled financial market volatility – when will they stabilize? Commodity prices soared with strong global demand and limited supply gains. Rising energy prices have sapped U.S. economic growth and boosted inflation. Will consumer spending and business investment slow further?