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Economic Outlook
Maria Akers
Assistant Economist
Federal Reserve Bank of Kansas City
Omaha Branch
www.kansascityfed.org
September 22, 2008
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.
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.
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?
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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
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Financial Markets Remain Volatile.
Commercial Paper Rates and Fed Funds Rate
Percent
7.5
6.5
Discount
Rate cut
Term Auction
Facility
7.5
Discount rate cut
Primary Dealer Credit Facility
Term Security Lending Facility
6.5
5.5
5.5
4.5
4.5
3.5
2.5
3.5
AA Asset Backed 30 day
AA Nonfinancial 30 day
Intended Fed Funds Rate
2.5
1.5
1.5
Jun- Jul-07 Aug- Oct- Nov- Dec- Feb- Mar- May- Jun- Jul-08 Sep07
07
07
07
07
08
08
08
08
08
Source: Federal Reserve Board of Governors
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Federal Reserve Injects Liquidity.
Borrowing by all Financial Institutions
Billions
$140.0
Other
$120.0
Primary Dealer
$100.0
Primary
$80.0
$60.0
$40.0
$20.0
$0.0
19-Mar
16-Apr
14-May
Source: Federal Reserve Board of Governors
19-Jun
16-Jul
21-Aug
17-Sep
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Investors turned to Treasury Securities.
Daily Treasury Yield Curve Rates
Percent
5.0
5.0
4.5
4.5
4.0
9/11/08
9/17/08
4.0
9/19/08
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
h
1
t
on
m
3
th
n
o
m
h
6
t
on
m
1
a
ye
r
2
a
ye
r
3
a
ye
r
5
a
ye
r
7
a
ye
r
10
ar
e
y
20
ar
e
y
30
ar
e
y
Source: Federal Reserve Board of Governors
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Credit Standards have tightened.
Net Percent of Domestic Banks Tightening Credit Standards
Percent
100.0
100.0
All Mortgages/Prime Loans
80.0
80.0
Commercial Real Estate
C&I Loans
60.0
60.0
40.0
40.0
20.0
20.0
0.0
0.0
-20.0
-20.0
-40.0
-40.0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Source: Federal Reserve Board of Governors
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Today’s Outline
• The Ongoing Financial Market Crisis
• The Housing Correction Continues
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Home starts and sales are still dropping.
Home Starts, Sales and Inventories
Month’s supply
Index (Jan-00=100)
12
10
160
Existing Home Sales (Right Scale)
Housing Starts (Right Scale)
140
8
6
120
Housing Starts
(Right Scale)
100
4
2
80
Month’s Supply of New Homes
(Left Scale)
60
0
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07
40
Source: Dept. of Commerce, National Association of Realtors
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Nationally, home prices are falling.
U.S. Home Price Indexes
Percent change from previous year
25
25
20
Case-Shiller
20
15
15
10
10
OFHEO
5
5
0
0
-5
-5
-10
-10
-15
-15
-20
-20
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Source: OFHEO and Standard & Poor’s
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Home foreclosures are still rising.
Foreclosure Rates by Mortgage Type
Percent of loans serviced
18.0
18.0
Prime FRM
16.0
16.0
Subprime FRM
14.0
14.0
Subprime ARM
12.0
12.0
Prime ARM
10.0
10.0
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
0.0
0.0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Mortgage Bankers Association
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Credit standards on
home mortgages have tightened.
Credit Standards on Residential Real Estate Loans
Net percent reporting tighter credit standards
100
All
Subprime
80
100
Non-Traditional
Prime Loans
80
60
60
40
40
20
20
0
0
-20
-20
2000
2001 2002 2003
2004 2005 2006
2007 2008
Source: Federal Reserve Board of Governors
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Today’s Outline
• The Ongoing Financial Market Crisis
• The Housing Correction Continues
• Energy and Food Price Inflation
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Strong Global Economies are Driving
Energy and Food Demand. . .
World GDP Growth
Percent change
8
8
Forecast
7
7
6
6
5 year
moving
average
5
5
4
4
3
3
2
2
1
1
0
1970
0
1980
1990
2000
2010
Source: International Monetary Fund (July 2008 projections)
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Especially in Developing Countries.
World GDP Growth
Percent
10.0
10.0
9.0
Developing countries
9.0
8.0
8.0
7.0
7.0
6.0
World
6.0
5.0
5.0
4.0
4.0
3.0
3.0
2.0
2.0
1.0
Developed countries
0.0
1.0
0.0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008f
Source: International Monetary Fund (July 2008 projections)
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Economic growth in developing countries is
widespread.
World GDP Growth
Percent
14.0
12.0
2007
2008
2009
10.0
8.0
6.0
4.0
2.0
0.0
China
India
Russia
Africa
Middle
East
Brazil
Mexico
Source: International Monetary Fund (July 2008 projections)
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Energy and farm commodity prices
have surged.
WTI Crude Oil Prices
Dollars per barrel
Farm Commodity Prices
Index: 1980=100
200.0
160.0
140.0
180.0
120.0
160.0
100.0
140.0
80.0
60.0
120.0
40.0
100.0
20.0
0.0
Jan-81 Jan-86 Jan-91 Jan-96 Jan-01 Jan-06
80.0
Jan-81 Jan-86 Jan-91 Jan-96 Jan-01 Jan-06
Source: Department of Energy and USDA
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Will Energy and Food Supplies Rise to Fulfill
Increasing Global Demand?
World Oil Balance 2004-2008
World Crop Inventories
Million barrels per day
Stocks-to-Use Ratio (Percent)
86.0
35
Demand
Supply
Rice
Corn
Wheat
30
85.0
25
84.0
20
83.0
15
82.0
10
81.0
5
80.0
2004
2005
2006
2007
2008
1968
1978
1988
1998
0
2008
Source: Department of Energy and USDA
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A Decade of High Energy Inflation.
Consumer Price Inflation – Food and Energy Components
Annual percent change
50.0
50.0
40.0
40.0
CPI - Energy
30.0
20.0
30.0
20.0
CPI - Food
10.0
10.0
0.0
0.0
-10.0
-10.0
-20.0
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
-20.0
Source: Bureau of Labor Statistics
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Energy Costs are Driving Housing and
Transportation Inflation.
Category
Relative
Importance
Aug 2008
(Percent)
(Annual Percent
change)
42.4
3.8
Shelter
32.5
2.4
Furnishings
4.7
1.2
Household Fuel
5.1
17.3
17.7
12.1
Motor Vehicles
7.2
-0.9
Motor Fuel
5.5
35.9
Housing
Transportation
Source: Bureau of Labor Statistics
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Food Price Inflation Across Categories.
Consumer Price Inflation
Annual percent change
18.0
Dec 2007
16.0
Mar 2008
14.0
12.0
10.0
8.0
Aug 2008
1990 to 2006
average
6.0
4.0
2.0
0.0
Meat,
Poultry, Fish
Dairy
Cereal and
Bakery
Fats and Oils
Fruits and
Vegetables
Source: Bureau of Labor Statistics
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Inflation has jumped to its highest levels
since the early 1990s.
Consumer Price Inflation
Annual percent change
16.0
16.0
14.0
14.0
12.0
12.0
10.0
8.0
10.0
Core CPI:
Less Food and Energy
CPI
8.0
6.0
6.0
4.0
4.0
2.0
2.0
0.0
Jan-70 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05
0.0
Source: Department of Commerce
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Today’s Outline
•
•
•
•
The Ongoing Financial Market Crisis
The Housing Correction Continues
Energy and Food Price Inflation
Employment and Consumer Spending
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Will job losses slow consumer spending?
U.S. Non-farm Job Growth and Unemployment Rate
Percent
Change from previous month (Thousands)
600
10
Unemployment Rate
(Right Scale)
500
9
400
8
300
7
200
6
100
5
0
4
-100
3
-200
2
Job Change
(Left Scale)
-300
-400
Jul-96
Jul-98
Jul-00
Source: Bureau of Labor Statistics
Jul-02
Jul-04
1
Jul-06
0
Jul-08
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Wage growth will have significant influence
on inflation and growth.
Employment Cost Index
Percent change from year ago
8
8
7
7
Benefits
6
6
5
5
4
4
3
3
2
2
Wages and
Salary
1
1
0
0
2002
2003
2004
Source: Bureau of Labor Statistics
2005
2006
2007
2008
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Retail sales are mixed.
Retail Sales
Retail and Food Services
Gasoline Stations
Percent Change
from Aug 2008
to Aug 2007
+1.6
+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
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What stimulus is left after the rebates?
Personal Consumption Expenditures
Annualized percent change from previous quarter
5.0
5.0
Blue Chip Forecast
(Sept 2008)
4.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
0.0
-1.0
-1.0
2006
2007
2008
2009
Source: Bureau of Economic Analysis and Blue Chip Forecast
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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
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Business activity has slowed with
rising input prices.
Business Activity
Prices Paid
Index
Index
100
70
Nonmanufacturing
Manufacturing
Nonmanufacturing
Manufacturing
65
90
60
80
55
70
50
60
45
50
40
40
Jan-05
Jan-06
Jan-07
Jan-08
Jan-05
Jan-06
Jan-07
Jan-08
Source: Institute of Supply Management
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Weaker profits have slowed
business investment.
Corporate Profits and Nonresidential Fixed Investment
Percent change from year ago
50
40
50
Corporate Profits
After Tax
40
Structures
30
30
20
20
10
10
0
0
-10
Equipment
and Software
-20
-30
-10
-20
-30
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Bureau of Economic Analysis
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The Weak Dollar Has Boosted Exports
Dollar Value and U.S. Net Exports
Index
Billions of Dollars
120
0
Dollar Index Value
(Left Scale)
115
110
-100
-200
-300
105
-400
100
-500
95
-600
-700
90
-800
Net Exports
(Right Scale)
85
80
1990
-900
-1000
1992
1994
1996
1998
2000
2002
2004
2006
2008
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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
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Economic Projections of the Federal
Reserve Governors and Bank Presidents
Central Tendency1
2007
2008
2009
2010
(Percent)
(Percent)
(Percent)
(Percent)
Real GDP growth
Apr. 2008 projections
Oct. 2007 projections
1.0 to 1.6 2.0 to 2.8 2.5 to 3.0
2.4
0.3 to 1.2
2.0 to 2.8
2.6 to 3.1
Near-Term:
Weaker
Growth
1.8 to 2.5 2.3 to 2.7 2.5 to 2.6
Unemployment rate
Apr. 2008 projections
Oct. 2008 projections
5.5 to 5.7 5.3 to 5.8 5.0 to 5.6
4.8
5.5 to 5.7
5.2 to 5.7 Growth
4.9 to 5.5
Long-Term:
Stronger
4.8 to 4.9 4.8 to 4.9 4.7 to 4.9
PCE inflation
Apr. 2008 projections
Oct. 2008 projections
3.8 to 4.2 2.0 to 2.3 1.8 to 2.0
3.4
3.1 to 3.4
1.9 to 2.3
1.8 to 2.0
Near-Term:
Rising
Inflation
1.8 to 2.1 1.7 to 2.0 1.6 to 1.9
Core PCE inflation
Apr. 2008 projections
Oct. 2008 projections
2.2 to 2.4 2.0 to 2.2 1.8 to 2.0
2.1
2.2 to 2.4Falling
1.9 to 2.1
1.7 to 1.9
Long-Term:
Inflation
1.7 to 1.9 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.
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Private Sector Forecasts
Near-term: weaker growth & higher inflation
Long-term: stronger growth & lower inflation
Real GDP Growth
Consumer Price Inflation
Annualized percent change
6
Sept Forecast
Annualized percent change
6
5
5
4
4
April
Forecast
3
7
7
Sept Forecast
6
6
5
April
Forecast
5
4
4
3
3
2
2
3
2
2
1
1
1
1
0
0
0
0
2007
2008
2009
Source: Blue Chip Economic Indicators
2007
2008
2009
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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.
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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?
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