1. Economic Assessment Wade Rousse Economic Outreach Specialist Federal Reserve Bank of Chicago IASET Chicago, IL December 12, 2008

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

3. Home price declines are larger outside the Midwest

4. Housing starts have fallen sharply

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

6. Home price changes over the past year has been mixed

7. Foreclosure filings are quite high in California, Florida, Nevada and Arizona

8. Mortgage rates remain low

9. Housing affordability has improved quite a bit

10. Lending standards for mortgage loans have tightened considerably

11. Consumer attitudes for buying a home remain very low

12. Residential investment growth fell off sharply, subtracting a full percentage point off of GDP growth over the past year

13. Residential investment as a share of GDP is approaching previous lows

14. Inflation has reversed its upward trajectory

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

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

17. Expenditures on energy increased over the past few years, and they currently are at the historical average

18. Removing the volatile food and energy components from the PCE, “core” inflation has been averaging just above two percent

19. Employment decreased by 1,870,000 jobs over the past year

20. The unemployment rate has been rising

21. Productivity growth remains solid

22. Real incomes are unchanged with a year earlier

23. The stock market losses are significant

24. Consumer spending fell sharply in the third quarter

25. Third quarter GDP edged lower, weighed down by a decline in consumption and residential investment

26. Corporate profits have been declining

27. Given the large trade deficit, the dollar has been under pressure since the beginning of 2002, losing 14.1% of its value over this period

28. Import growth has been below export growth since early 2005

29. Net exports contributed quite a bit to GDP growth last year

30. Manufacturing output has fallen quite sharply

31. New orders for capital goods has begun to slip and shipments have been edging lower

32. Corporate High Yield rates increased beginning in June 2007

33. Credit spreads between Corporate High Yield securities and Corporate Aaa securities rose by over 1,400 basis points

34. The “flight to quality” drove down Treasury yields

35. Causing credit spreads between them to increase by more than 200 basis points

36. The three-month average of the Chicago Fed National Activity Index has weakened substantially over the past couple of months

37. Concerned that the tightening of credit conditions has the potential to slow economic growth, the Fed lowered the Fed Funds rate by 425 basis points

38. Real GDP growth is expected to: decline quite considerably in the current quarter; fall by nearly half as much in the first quarter of next year; remain unchanged in the second quarter; and then increase in the second half of 2009 Forecasts are from the Twenty-second Annual Economic Outlook Symposium

39. With economic growth being well below trend, the unemployment rate is projected to continue rising throughout 2009, reaching 7.8% in the final quarter of next year Forecasts are from the Twenty-second Annual Economic Outlook Symposium

40. The outlook is for the U.S. economy to struggle through most of next year with an elevated risk of recession Summary Employment is expected to remain weak this year and next, leading to a continued rise in the unemployment rate Slackness in the economy will lead to a lower 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

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