The Outlook for the U.S. Economy
2009 FRB St. Louis Professors Conference
Zero Bound, Credit Easing and Quantitative Easing
St. Louis, MO
November 5, 2009
Kevin L. Kliesen
Federal Reserve Bank of St. Louis
Not an official document
Overview of Today’s Talk
• The Big Picture
• Current Developments
• Risks to the Outlook (Things to Worry About)
• A New Era in Financial Regulation?
2
Disclaimer
3
The Big Picture
1. The worldwide financial crisis and recession is
unwinding.
2. Helped by a massive global policy response . . .
3. . . . And natural market forces.
4. It was an unusual recession . . . Unusual policy
responses . . . Might be an unusual recovery.
5. Policy reactions will occur on several fronts.
6. Inflation appears contained . . . For now.
7. A looming problem: Big budget deficits.
4
Current
Developments
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Current Developments
1. The Recession is (“Technically”) Over
•
“From a technical perspective, the recession is very
likely over at this point.” (Chairman Bernanke, Sept.
15, 2009)
•
This month’s FOMC statement . . .
•
The public may see things differently.
6
Current Developments
3.5%
growth in
2009:Q3
7
Current Developments
8
Current Developments
2. The U.S. and world economies are returning to
normal (but is this normal the old normal?).
•
•
•
•
•
Consumers starting to spend again . . . tentatively
A manufacturing rebound!
Firms are not yet too eager to spend . . . uncertainty
Bulk of govt. stimulus in the pipeline
Housing usually leads the economy out of the
recession.
9
Current Developments
• Good news in the housing sector—sort of
A hook!
10
Current Developments
• Efforts to Stem the Foreclosure Tide
Retention
actions rose
nearly 22
percent in
2009-Q2.
11
Current Developments
3. Has the economy experienced a sugar high over
the past few months?
•
A concern about temporary measures to boost growth.

•
Production gains devoted to inventory re-stocking?

•
Will the first-time homebuyer’s tax credit do to the housing market
what Cash for Clunkers did to auto sales?
A sizable chunk of growth over the second half of 2009 is expected to
come from inventory gains (e.g., automotive).
Where will the impetus to growth come from after
these stimulants fade away?

Maintaining forward momentum will be crucial.
12
Current Developments
4. Will the consumer come roaring back? Some
considerations.
a) Labor market conditions remain weak, though
improving from earlier this year.

Unemployment rate may surpass 10%.
9.8% in
Sept.
13
Current Developments
4. Will the consumer come roaring back? Some
considerations.
b) Energy prices on the upswing.

One indication of stronger aggregate demand growth
worldwide, but . . .

Higher energy prices are like a tax on consumers; need to
see after-tax income growth rising to offset this tax.

The sharp increase in real energy prices in 2007-08 was
one of the factors pushing the economy over the edge.
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Current Developments
Oil Prices (WTI): Actual and Forecasted
Dollars per barrel
140.0
120.0
Actual
Futures
EIA
100.0
Oil prices are
already
around $80
per barrel.
80.0
60.0
40.0
20.0
2004
2005
2006
2007
2008
2009
2010
2009:Q2
Actual was
About
$68/bbl
Source: WSJ/NYMEX/EIA
Note: Futures as of 10/27/2009
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Current Developments
4. Will the consumer come roaring back? Some
considerations.
c) Consumers continue to pay down debt
(“deleveraging”).
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Current Developments
Income and Household Debt Per Person in the United States
Thousands of dollars per person
$50,000
$40,000
Debt
$30,000
Living
beyond our
means!
Income
$20,000
$10,000
$0
1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008
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Current Developments
4. Will the consumer come roaring back? Some
considerations.
Consumption as a Share of the U.S. Economy at an All-Time High
An all-time high!
0.72
0.72
0.70
0.70
0.68
0.68
0.66
0.66
0.64
0.64
0.62
0.62
0.60
Rebalancing
the economy
away from
consumption
to business
investment.
0.60
50
55
60
Source: Haver Analytics
65
70
75
80
85
90
95
00
05
10
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Current Developments
4. Will the consumer come roaring back? Some
considerations.
b) Are consumers saving in preparation for future tax
increases or are they finally realizing that
retirement is not that far off?

What is the optimal household saving rate?
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Current Developments
Some Good News For Households:
• House prices in many areas have bottomed and are rising
slightly.
• Stock prices have rebounded sharply since March.
• Interest rates remain low.
• Credit conditions are improving (but the banking sector
still remains under some duress).
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Current Developments
Financial conditions have improved modestly further . .
in one dimension.
FSI is comprised
of 18 weekly,
interest rates,
yield spreads,
and other
financial market
indicators (e.g.,
equities).
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Current Developments
Forecasts for Real GDP Growth over the Second Half of 2009
Percent change, annual rate
3.0
The outlook
over the second
half of 2009
continues to
improve!
2.5
2.0
1.5
1.0
Growth in 2010
likely to be
around 3%.
0.5
0.0
Jan.
June
Aug.
Sept.
Oct.
Forecast Date
22
Current Developments
5. Is Inflation Dead and Buried?
23
24
Current Developments
Pump priming by the Fed
– Interest rates are low . . . A normal development
during a low-inflation, low-growth environment
– FOMC pledges to keep its interest rate target low for
“an extended period”
– Continue to “provide support to mortgage lending and
housing markets and to improve overall conditions in
private credit markets.”
– The Fed’s dilemma!
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Current Developments
26
Current Developments
27
Current Developments
Growth of the M2 Money Supply and Monetary Base ("HighPowered Money")
80.0%
70.0%
Zoom,
Zoom!
60.0%
50.0%
M2
Growth
40.0%
Base
Growth
30.0%
20.0%
10.0%
0.0%
1960
1967
1974
1981
1988
1995
2002
2009
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Current Developments
Question asked of Blue Chip Forecasters:
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Current Developments
What's the Forecast for Inflation?
Percent change, annual rate
8
6
4
2
Actual
0
Forecast
-2
2009:Q3
-4
-6
-8
There is some
risk of much
higher
inflation
beginning in
mid-2010 and
continuing
into early
2011.
-10
2005Q1
2006Q3
2008Q1
2009Q3
2011Q1
2012Q3
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Risks to the Outlook
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Things to Think About
•
The nation’s economic and financial sectors are
evolving in the aftermath of the deep recession.


•
These factors suggests a weaker-than-normal recovery.



•
Implications for consumers
Implications for business
Deep recessions are typically followed by strong recoveries.
3% growth vs. 5% growth
Slow improvement in labor markets
However, once a recovery starts, it lasts for a while.

Firms producing more with fewer workers.
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Things to Think About
Another “Jobless Recovery?”
Monthly Changes in Employment: Actual and Forecast
Thousands of jobs
200
100
0
-100
-200
-300
-400
-500
-600
-700
-800
Feb-08 Jul-08
Positive job
growth not
likely until
early 2010
Sept. 2009
Dec-08 May-09 Oct-09 Mar-10 Aug-10
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Things to Think About
The View that Prevailed in August
How Likely is a Double-Dip Recession?
(Risk of a negative growth during indicated quarter)
Percent
30
26
25
About a 1-in-6
chance of a
double-dip in
2010.
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20
18
16
15
14
10
5
0
2009:Q3
2009:Q4
2010:Q1
2010:Q2
2010:Q3
SOURCE: Survey of Professional Forecasters (Aug. 14, 2009)
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Things to Think About
•
Inflation (and thus interest rates) tend to rise during a
recovery; non-food/non-energy price pressures are
percolating at the producer level.

•
The Fed is walking a tightrope!

•
A Key: Keeping inflation expectations in check.
When to start putting policy on a sustainable basis?
As the economy strengthens, financial markets—both
here and abroad—will begin to focus on the U.S. budget
deficit.

Large deficits reduce the amount of saving available to the
private sector, which is the raw material for investment and
thus rising living standards over time.
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Yes, Please Worry!
Federal Debt as a Percent of GDP, 1790 to 2083 (Projected)
Percent
350
300
250
Actual
Projected
200
Something
has got to
change!
150
100
50
0
1790 1820 1850 1880 1910 1940 1970 2000 2030 2060
SOURCE: Congressional Budget Office (June 2009)
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Financial Regulatory Reform
•
Too Big to Fail (TBTF)—a key issue




•
The Role of the Fed


•
Moral hazard and other issues
Break-up firms vs. More Regulation?
Should banks be required to adopt a “living will?”
Large banks also provide benefits
Fed’s role as the nation’s central bank gives it considerable
expertise in identifying key risks to the financial system
Expertise in supervision and regulation of banks
Don’t fix what’s not broken

Deposit insurance
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Questions?
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