Economic Assessment

Wade Rousse

Economic Outreach Specialist

Federal Reserve Bank of Chicago

IASETChicago, ILDecember 12, 2008

The economy entered a recession in the first quarter of 2008

-4-3-2-1012345678

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Real gross domestic productpercent

Quarterly change (saar)

Percent change from a year earlier

Home price declines are larger outside the Midwest

-15

-10

-5

0

5

10

15

20

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Midwest

Median sales price - existing single family home3-month smoothed - percent change from a year earlier

United States

Housing starts have fallen sharply

500

750

1,000

1,250

1,500

1,750

2,000

2,250

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Housing startsthousands - 3-month smoothed

The supply of new single family homes is extremely high

3

4

5

6

7

8

9

10

11

12

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Months supply of new single family homesmonths

Home price changes over the past year has been mixed

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

Mortgage rates remain low

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6

7

8

9

10

11

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Mortgage rate - 30-year fixedpercent

Housing affordability has improved quite a bit

90

100

110

120

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150

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Composite housing affordability indexindex=100 when median family income qualifies for an 80% mortgage

on a median priced existing single family home

Lending standards for mortgage loanshave tightened considerably

-20

0

20

40

60

80

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Senior Loan Officer Opinion Surveynet percentage of domestic respondents tightening mortgage loan standards

Consumer attitudes for buying a home remain very low

0

1

2

3

4

5

6

1980 '85 '90 '95 '00 '05

Consumer attitudes - plan to buy a home in next six monthspercent of respondents

Residential investment growth fell off sharply,subtracting a full percentage point

off of GDP growth over the past year

-30-25-20-15-10

-505

10152025

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Real residential investmentpercent

Quarterly change (saar)

Percent change from a year earlier

Residential investment as a share of GDPis approaching previous lows

3

4

5

6

7

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05

Residential investment as a share of GDPpercent

Inflation has reversed its upward trajectory

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1

2

3

4

5

6

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Personal consumption expenditure - chain price indexpercent change from a year earlier

In large part due to the movement of oil prices

0

20

40

60

80

100

120

140

1970 '75 '80 '85 '90 '95 '00 '05

West Texas Intermediate oil pricedollars per barrel

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

0

20

40

60

80

100

120

140

1970 '75 '80 '85 '90 '95 '00 '05

Real West Texas Intermediate oil pricedollars per barrel. 2007 dollars

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

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6

7

8

9

10

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05

Energy goods and services expenditures as a share oftotal consumptionpercent

4

5

6

7

8

9

10

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05

Energy goods and services expenditures as a share oftotal consumptionpercent

60s 70s80s

90s 00s

1960-2008

Removing the volatile food and energy components from the PCE,

“core” inflation has been averaging just above two percent

0

1

2

3

4

5

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Personal consumption expenditure - less food and energy -chain price indexpercent change from a year earlier

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

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1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Total employmentpercent

Monthly change (saar)

Percent change from a year earlier

The unemployment rate has been rising

3

4

5

6

7

8

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Unemployment ratepercent

Productivity growth remains solid

-4

-2

0

2

4

6

8

10

12

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Nonfarm business productivitypercent

Quarterly change (saar)

Percent change from a year earlier

Real incomes are unchanged with a year earlier

-10-8-6-4-202468

1012

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Real disposable personal incomepercent

Quarterly change (saar)

Percent change from a year earlier

The stock market losses are significant

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-10

0

10

20

30

40

50

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

S&P 500 stock indexpercent change from a year earlier

Consumer spending fell sharply in the third quarter

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-2

0

2

4

6

8

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Real personal consumption expenditurespercent

Quarterly change (saar) Percent change from a year earlier

Third quarter GDP edged lower, weighed downby a decline in consumption and residential investment

-0.5

-2.7

-0.2-0.7

0.9 1.1 1.1

-3

-2

-1

0

1

2

GDP Consumption Business Fixed

Investment

Residential Investment

Inventories Government Net Exports

Contributions to real GDP growth in Q3:2008percentage points (annual rate)

Corporate profits have been declining

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-25

0

25

50

75

100

125

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Nonfinancial corporate profitspercent

Quarterly change (saar)

Percent change from a year earlier

Given the large trade deficit, the dollar has beenunder pressure since the beginning of 2002,

losing 14.1% of its value over this period

-800

-600

-400

-200

0

200

400

600

1974 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08

billions of chained real dollars

Real net exports and change in real value of the dollar

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10

5

0

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-10

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-20

percent change from a year earlier

dollar (right axis)

net exports (left axis)

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5

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15

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1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Real exports and importspercent change from year ago

Exports

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0

5

10

15

20

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Real exports and importspercent change from year ago

Exports

Imports

Import growth has been belowexport growth since early 2005

Net exports contributed quite a bit to GDP growth last year

-1.5

-1.0

-0.5

0.0

0.5

1.0

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07

Net exports contribution to percent change in real GDPpercent

Manufacturing output has fallen quite sharply

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-30

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-10

0

10

20

30

40

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Industrial output - manufacturingpercent

Monthly change (saar)

Percent change from a year earlier

New orders for capital goods has begun to slipand shipments have been edging lower

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40

45

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60

65

70

1992 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Manufacturers' new orders

Nondefense capital goods, excluding aircraft and parts

Manufacturers' shipments

billions of dollars

Corporate High Yield rates increased beginning in June 2007

468

1012141618202224

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Corporate Aaa and Corporate High Yield ratespercent

2007 2008

High Yield

Corporate Aaa

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

02468

1012141618

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Credit spreads between Corporate High Yield and Corporate Aaapercent

2007 2008

The “flight to quality” drove down Treasury yields

3

4

5

6

7

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Corporate Aaa and 10-year Treasury ratespercent

2007 2008

10-year Treasury

Corporate Aaa

Causing credit spreads between themto increase by more than 200 basis points

0.500.751.001.251.501.752.002.252.502.75

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Credit spreads between Corporate Aaa and 10-year Treasurypercent

2007 2008

The three-month average of theChicago Fed National Activity Index

has weakened substantially over the past couple of months

-3.5-3.0-2.5-2.0-1.5-1.0-0.50.00.51.01.52.0

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Monthly

Chicago Fed National Activity Index

Three month average

Concerned that the tightening of credit conditionshas the potential to slow economic growth,

the Fed lowered the Fed Funds rate by 425 basis points

0

1

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3

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5

6

7

8

9

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Fed Funds ratepercent

Real GDP

-8

-6

-4

-2

0

2

4

6

8

1994 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09

percent change, annual rate

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

Unemployment rate

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5

6

7

8

9

1994 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09

percent

With economic growth being well below trend,the unemployment rate is projectedto continue rising throughout 2009,

reaching 7.8% in the final quarter of next year

Forecasts are from the Twenty-second Annual Economic Outlook Symposium

•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

www.chicagofed.org www.federalreserve.gov