This Recovery is for Real:
Solid, Sustainable, but Sub Par
October 2009
Chris Varvares
President, Macroeconomic Advisers, LLC
www.macroadvisers.com
© Macroeconomic Advisers
The US Economic Outlook: Bottom Line
• The recession is over (growth returns) & downside risks dwindle
• Above-trend growth in 2nd half of 2009: 3.5% a.r.
• Robust (but sub par) growth in 2010 (4.1%) & 2011 (4.2% )
• Unemployment rate peaks at 10% (or a bit higher) in 2009:q4
• Unemployment rate declines to 9.1% in ’10:q4 and to 7.7% in ’11:q4
• Core inflation very low: =1.4% in 2009,  0.8 in 2010 &  0.8 in 2011
• Revised higher versus recent forecasts --- but still below FOMC
• Fed: Still expecting a late exit; but will “end easing” long before
• Fiscal: Stimulus working for now; getting control of the deficit later
October 2009
© Macroeconomic Advisers
2
Back from the Abyss and Gaining Momentum
Deep U.S. Recession Followed by a Sub Par Recovery
10
Percent
10
8
8
Unemployment rate
6
6
4
4
2
2
0
0
-2
09:2H 2010 2011
GDP Growth: 3.5% 4.1% 4.2%
Real GDP growth
-4
Un. Rate (Q4):10.0% 9.1%
7.7%
-6
-2
-4
-6
History
Forecast
-8
-8
07
08
09
10
11
Source: Bureau of Economic Analysis, Macroeconomic Advisers, LLC; Forecast prepared on October 7, 2009.
October 2009
© Macroeconomic Advisers
3
Slack Keeps Downward Pressure on Inflation
Unit Labor Cost and Core PCE Inflation
4-quarter percent change
6
6
H
F
Core PCE inflation
4
4
2
2
0
0
-2
-2
Unit labor cost
-4
-4
-6
-6
90
95
00
05
10
Note:
The core PCE is Personal Consumption Expenditures Index excluding food and energy prices; the unit
labor cost is the compensation paid per unit of output produced in the nonfarm business sector.
Source: U.S. Department of Labor, Bureau of Economic Analysis, Macroeconomic Advisers, LLC;
Forecast prepared on October 7, 2009.
October 2009
© Macroeconomic Advisers
4
Below-Target Inflation & Lingering Slack Imply Late Exit
Long-Rates are on the Rise, but the Fed Stands Pat
Percent
10
10
H
Conventional mortgage rate
8
F
8
10-year Treasury yield
6
6
4
4
Fed funds rate
2
2
0
0
95
00
05
10
Source: Federal Reserve Board, Macroeconomic Advisers, LLC; Forecast prepared on October 7, 2009.
October 2009
© Macroeconomic Advisers
5
Forecast Comparison
09Q2
09Q3
09Q4
10Q1
GDP Growth
MacroAdvisers (Oct 7)
Blue Chip (Oct 10)
-0.7
-0.7
3.4
3.2
3.6
3.8
2.4
2.6
FOMC CT (Jul)
PCE Growth
MacroAdvisers
Blue Chip
-0.9
-0.9
2.7
2.5
1.2
0.8
4.6
1.7
2009
2010
Q4/Q4
-0.1
4.1
-0.4
2.8
−1.5-−1.0
2.1-3.3
Q4/Q4
0.9
3.5
0.7
2.1
Unemployment Rate
MacroAdvisers
Blue Chip
9.3
9.3
9.6
9.6
10.0
9.9
10.0
10.1
FOMC CT (Jul)
GDP Price Inflation
MacroAdvisers
Blue Chip
0.0
0.0
0.7
1.5
0.2
1.2
0.8
1.5
Q4 Average
10.0
9.1
10.0
9.6
9.8-10.1 9.5-9.8
Q4/Q4
0.7
0.6
1.1
1.5
Fed Funds Rate
MacroAdvisers
Blue Chip*
0.18
0.18
0.20
0.20
0.20
0.20
0.20
0.25
Q4 Average
0.20
0.20
0.20
1.00
3.56
3.7
Q4 Average
3.40
3.99
3.5
4.3
10-yr Note Yield
MacroAdvisers
Blue Chip
* Inferred from t-bill yield
October 2009
3.31
3.31
3.50
3.5
3.40
3.5
© Macroeconomic Advisers
6
Factors Contributing to Above-Trend GDP Growth
• Motor-vehicle production to rebound (with or without CARS)
• Inventory liquidation to slow sharply; X-auto: Q3=+$37b, Q4=+$56b
• Housing bounces off the bottom, will begin strong recovery
• Home prices are stabilizing, to remain flat (emergence of upside risk?)
• Broad financial conditions improving:
– Especially equities
– But spreads are narrowing too
• Implies improving balance sheets for households
• Helps stabilize & then boost consumer spending (pent-up demand!)
• ARRA actually is providing stimulus
• Global nature of the recovery
• Despite “Minsky Moment,” recession/recovery dynamics at work!
October 2009
© Macroeconomic Advisers
7
Recession Dynamics Hint at Upside Risk
Strength of Early Recovery Depends on Depth of Recession
10
4-quarter percent change
1957-58
9
y = 2.1x + 1.5
R2 = 0.7337
8
1981-82
1960-61
7
1953-54
1973-75
6
5
1970
1980
4
MA forecast
3
1990-91
2
NABE Consensus
2001
1
0
0
1
2
3
Peak-to-trough decline in real GDP (%)
4
•* All other includes interest, dividend and transfer income. Forecast prepared on October 7, 2009.
October 2009
© Macroeconomic Advisers
8
Significant Downside Risks Remain
• Securitization markets in key segments still “dependent” or broken
• CMBS market still facing a potential refi squeeze, with spillovers
• RMBS spreads may widen sharply as Fed unwinds balance sheet
• Bank lending to consumer remains stingy; More HH de-leveraging?
• Home price stabilization could prove temporary, drag housing lower
• Recovery in equities could falter; further erode HH balance sheets
• Energy price increases still are a drag on growth
• Foreign demand for $ assets could fall short, pressure $  and rates
• Expiring Bush tax cuts could add drag
• Back side of ARRA stimulus implies drag; will recovery have legs?
• What about health care reform? Cap and Trade?
October 2009
© Macroeconomic Advisers
9
Q1 was not as Bad as it Appeared; Set up Q2 “Firming”
MA’s Monthly GDP Index
13.6
Trillions of chained (2005) dollars
13.6
13.2
13.2
12.8
12.8
12.4
12.4
12.0
12.0
11.6
11.6
11.2
Jan.2001
11.2
Jan.2003
Jan.2005
Jan.2007
Jan.2009
Source: Macroeconomic Advisers, LLC; Last data plotted for August 2009
October 2009
© Macroeconomic Advisers
10
Q3 Has the Makings of a Real Recovery
GDP
Final Sales of Domestic Product
October
Releases
Total
Final Sales to Domestic Purchasers
Total PCE
Reference
Release Title
Date
MA Base Forecast
Construction
Unit Vehicle Sales
Man. Ship, Inv, Orders
Wholesale Trade
International Trade
Retail Sales
Business Inventories
Consumer Price Index
Industrial Production
Boeing Deliveries & Ords
Monthly Treasury Statement
Housing Starts
Existing Home Sales
Durable Goods Orders
New Home Sales
CQ Forecast as of
BEA's Advance Est.
7-Oct-09
1-Oct-09
1-Oct-09
2-Oct-09
8-Oct-09
9-Oct-09
14-Oct-09
14-Oct-09
15-Oct-09
16-Oct-09
16-Oct-09
19-Oct-09
20-Oct-09
23-Oct-09
28-Oct-09
28-Oct-09
20-Oct-09
29-Oct-09
Month
Aug
Sep
Aug
Aug
Aug
Sep
Aug
Sep
Sep
Aug
Sep
Sep
Sep
Sep
Sep
Change % ch
Fixed Investment
Nonresidential
Total Struct. E&S
110
na
na
na
100
98
109
109
109
103
104
112
112
3.4
na
na
na
3.1
3.1
3.4
3.4
3.4
3.2
3.3
3.5
3.5
1.8
na
na
na
1.8
1.9
2.2
2.2
2.2
2.2
2.3
2.5
2.5
2.0
na
na
na
2.0
2.2
2.5
2.5
2.5
2.5
2.5
2.7
2.7
3.2
112
3.5
2.5
2.7
2.7
na
-14.9
3.2
3.2
3.2
-5.7
na
na
na
-5.7
-4.6
-4.6
-4.6
-4.6
-4.6
-4.5
-4.5
-4.5
3.2
-4.5
-14.9
na
na
2.7
2.7
3.2
3.2
3.2
na
na
na
-14.9
-14.9
-14.9
-14.9
-14.9
-14.9
-14.9
-14.9
-14.9
Resi-
Net Exports
Govern.
Cons. &
dential Gross Inv
-0.4
na
19.9
1.5
na
na
na
na
na
na
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.6
1.6
na
na
19.9
19.9
19.9
19.9
19.9
19.9
19.9
19.9
2.7
19.9
1.6
19.9
-0.4
1.5
1.5
1.5
1.5
1.4
1.6
Change in
Private
Inventories
% ch
Level
Change
Ex
Im
-339
na
na
-9
na
na
12.7
na
na
12.4
na
na
na
na
na
na
12.7
12.4
-339
-9
-341
-10
16.6 15.9
-341
-341
-341
-341
-10
-10
-10
-10
16.6
16.6
16.6
16.6
-339
-9
16.9
2.7
-339
-339
-9
-9
16.9
16.9
2.7
-339
-9
16.9 15.9
15.9
15.9
15.9
15.9
15.9
15.9
15.9
Level Change
-109
na
51
na
na
na
-119
-123
na
na
41
37
-123
37
-123
37
-123
37
-130
30
-130
-130
-130
30
30
30
-130
30
Construction: These data were available when we prepared our base forecast and incorporated therein.
Unit Vehicle Sales: These data were available when we prepared our base forecast and incorporated therein.
Man Ship, Inv, and Ords: These data were available when we prepared our base forecast and incorporated therein.
Wholesale Trade: These data were revised lower for July and WTE for August, this suggests less CIPI in Q3 than previously forecast.
International Trade: Both ex. and im. were STE, about a wash for the chg. in net exports; net im. of autos were WTE lowering CIPI. Net capital goods imports were STE, raising E&S.
Retail Sales: Core sales rose sharply in September, in contrast to our previous assumption of a decline.
Business Inventories: The data on nonautomotive retail inventories were consistent with our previous estimate for Q3.
Consumer Price Index: The components of the CPI that we use to deflate retail sales were, on balance, consistent with our previous estimate for real retail sales and PCE in September.
Industrial Production: NSA motor-vehicle assemblies were in line with expectations, but revised seasonal factors implies less of a SA increase in motor-vehicle output in Q3.
Boeing Deliveries and Ords: Boeing delivered 52 civilian aircraft in Sep, 11 more than assumed, but at lower average value than assumed.
Monthly Treasury Statement: Defense outlays and defense-related outlays of the Dept. of Energy were well above expectations in Sep, implying more defense consumption and gross inv. in Q3.
Housing Starts: Starts were below expectations in Sep, but 1-family starts were revised higher for previous months. On balance, residential investment was little effected in Q3.
Existing Home Sales:
Durable Goods Orders:
New Home Sales:
October 2009
© Macroeconomic Advisers
11
Q4 Too!
GDP
Final Sales of Domestic Product
October
Releases
Total
Final Sales to Domestic Purchasers
Total PCE
Reference
Release Title
Date
MA Base Forecast
Construction
Unit Vehicle Sales
Man. Ship, Inv, Orders
Wholesale Trade
International Trade
Retail Sales
Business Inventories
Consumer Price Index
Industrial Production
Boeing Deliveries & Ords
Monthly Treasury Statement
Housing Starts
Existing Home Sales
Durable Goods Orders
New Home Sales
NQ Forecast as of
BEA's Advance Est.
7-Oct-09
1-Oct-09
1-Oct-09
2-Oct-09
8-Oct-09
9-Oct-09
14-Oct-09
14-Oct-09
15-Oct-09
16-Oct-09
16-Oct-09
19-Oct-09
20-Oct-09
23-Oct-09
28-Oct-09
28-Oct-09
20-Oct-09
29-Jan-10
Month
Aug
Sep
Aug
Aug
Aug
Sep
Aug
Sep
Sep
Aug
Sep
Sep
Sep
Sep
Sep
Change % ch
Fixed Investment
Nonresidential
Total Struct. E&S
115
na
na
na
115
116
123
123
123
124
120
120
114
3.6
na
na
na
3.6
3.6
3.8
3.8
3.8
3.9
3.7
3.7
3.5
1.1
na
na
na
1.1
1.2
1.5
1.5
1.5
1.5
1.3
1.3
1.1
1.7
na
na
na
1.7
1.7
2.0
2.0
2.0
2.0
2.0
2.0
1.8
1.2
na
-7.5
1.7
1.7
1.7
-0.1
na
na
na
-0.1
-0.5
-0.5
-0.5
-0.5
-0.5
-0.8
-0.8
-0.8
1.7
114
3.5
1.1
1.8
1.7
-0.8
-7.5
na
na
1.2
1.2
1.7
1.7
1.7
na
na
na
-7.5
-7.5
-7.5
-7.5
-7.5
-7.5
-7.5
-7.5
-7.5
Resi-
Govern.
Cons. &
dential Gross Inv
4.0
na
22.1
2.1
na
na
na
na
na
na
2.1
2.1
2.1
2.1
2.1
2.1
2.1
2.8
2.8
na
na
22.1
22.1
22.1
22.1
22.1
22.1
22.1
22.1
2.1
14.0
2.8
14.0
4.0
3.3
3.3
3.3
3.3
3.2
2.8
Change in
Net Exports
Private
Inventories
% ch
Level
Change
Ex
Im
-360
na
na
-21
na
na
2.9
na
na
7.2
na
na
na
na
na
na
-360
-21
2.9
7.2
-359
-360
-18
-20
3.3
-360
-360
-360
-20
-20
-20
3.3
3.3
3.3
3.3
6.9
7.2
-362
-23
2.4
2.1
-362
-362
-23
-23
2.4
2.4
7.2
7.2
7.2
7.2
7.2
7.2
2.1
-362
-23
2.4
7.2
Level Change
-32
na
78
na
na
na
-41
-45
-48
-48
na
na
78
78
75
75
-48
75
-54
76
-54
-54
-54
76
76
76
-54
76
Construction: These data were available when we prepared our base forecast and incorporated therein.
Unit Vehicle Sales: These data were available when we prepared our base forecast and incorporated therein.
Man Ship, Inv, and Ords: These data were available when we prepared our base forecast and incorporated therein.
Wholesale Trade: These data were revised lower for July and WTE for August, this suggests less CIPI in Q3 than previously forecast; we maintained the same CIPI delta in Q4 as before.
International Trade: Net trade was STE, but near enough to expectations, after allowing for stronger Q3 E&S and slightly weaker Q4 E&S, to leave GDP tracking unchanged.
Retail Sales: The unexpected strength in core sales in September implies more growth of PCE in Q4, but also more growth of imports and less inventory investment.
Business Inventories: The data on nonautomotive retail inventories were consistent with our previous forecast for Q4.
Consumer Price Index: The components of the CPI that we use to deflate retail sales were consistent with our previous estimate of real PCE in September and, hence, Q4.
Industrial Production: Given previous motor-vehicle production plans, revised seasonal factors imply slightly more of an increase of motor-vehicle output in Q4.
Boeing Deliveries and Ords: Unexpected strength in deliveries in Sep implies fewer deliveries in Q4 than previously assumed, given latest annual guidance from Boeing.
Monthly Treasury Statement: The unexpected strength in defense outlays through September did not persuade us to change our forecast of growth of government spending in Q4.
Housing Starts: Single-family starts and permits were below expectations in Sep, implying less growth of residential investment in Q4.
Existing Home Sales:
Durable Goods Orders:
New Home Sales:
October 2009
© Macroeconomic Advisers
12
Q3: Even Without CARS MVO Was Set to Jump
Motor Vehicle Output Swings to the Plus Column
3.2
Millions of units, annual rate
2.4
80
60
Contributions to GDP
growth (left)
1.6
40
0.8
20
0.0
0
-0.8
-20
-1.6
-40
Change
(right)
-2.4
-3.2
-60
-80
2004
2005
2006
2007
2008
2009
Forecast prepared on October 7, 2009.
October 2009
© Macroeconomic Advisers
13
2nd Half and Beyond – Lift from Inventories
Nonfarm Inventory Investment excl. Motor Vehicles & Parts
Billions of chain-type (2005) dollars
100
H
100
F
50
50
0
0
-50
-50
-100
-100
-150
-150
00
01
02
03
04
05
06
07
08
09
10
11
Source: Bureau of Economic Analysis, Macroeconomic Advisers, LLC; Forecast prepared on October 7, 2009.
October 2009
© Macroeconomic Advisers
14
2nd Half and Beyond – Lift from Housing!
New and Existing Home Sales Turn Up
SAAR, thousands
SAAR, thousands
8000
7200
1425
1275
Existing
(left)
6400
1125
5600
975
4800
825
4000
675
New
(right)
3200
525
2400
375
1600
225
97
98
99
00
01
02
03
04
05
06
07
08
09
Source: Census Bureau; Last data plotted for August 2009.
October 2009
© Macroeconomic Advisers
15
2nd Half and Beyond – Lift from Housing!
Housing Starts and Residential Investment Turn Up
SAAR, thous. units
4-quarter percent change
2200
H
F
2000
50
40
Private housing starts
(left)
1800
30
1600
20
1400
10
1200
0
Residential investment
(right)
1000
09:2H
Cont. to GDP Growth: 0.5pp
800
600
2010
0.8pp
-10
2011
0.7pp
-20
-30
400
-40
90
95
00
05
10
Source: U.S. Census Bureau; U.S. Department of Commerce; Macroeconomic Advisers, LLC;
Forecast prepared on October 7, 2009.
October 2009
© Macroeconomic Advisers
16
Are House Prices About to Turn Up?
…An Upward Revision to the Forecast of House Prices
105 2005:Q1 = 100
105
LoanPerformance House Price Index
A firming in home prices lowers the current user cost
of housing and boosts demand for housing in a model
that well understands the boom and bust…when fed
the actual path of house prices!
100
95
100
95
90
90
Model predicted value
85
Base 909
80
Base 907
75
2006
2008
2010
85
80
75
2012
Source: LoanPerformance; Macroeconomic Advisers, LLC;
October 2009
© Macroeconomic Advisers
17
2nd Half and Beyond – Lift from Housing!
Single-Family Housing Starts
2000 SAAR, thous. units
2000
1800
1800
1600
1600
1400
1400
1200
1200
Current forecast
1000
1000
800
800
600
600
400
400
Counterfactual assuming further 7½%
decline in house prices
200
0
200
0
2004
2006
2008
2010
Forecast prepared on October 7, 2009
October 2009
© Macroeconomic Advisers
18
2nd Half and Beyond – Lift from Housing!
Contributions to Real GDP Growth
6
Percentage points
6
H
F
4
4
2
2
0
0
Residential investment
-2
-4
-2
-4
GDP excluding residential
investment
-6
-6
05
06
07
08
09
10
11
Forecast prepared on October 7, 2009.
October 2009
© Macroeconomic Advisers
19
Financial Conditions: Healing Apace
Credit Conditions Still Improving
Percent
4
4
H
F
Conventional mortgage rate –
10-yr treasury spread
3
3
2
2
1
1
AAA – 10-yr treasury spread
0
0
80
85
90
95
00
05
10
Source: Federal Reserve Board, Macroeconomic Advisers, LLC; Forecast prepared on October 7, 2009.
October 2009
© Macroeconomic Advisers
20
Financial Conditions: Healing Apace
Senior Bank Loan Officer Survey Diffusion Indexes
60
Index
60
Net percentage “loosening”
terms on C&I loans
40
40
20
20
0
0
-20
-20
-40
-40
-60
-80
-100
1975
October 2009
Net percentage “loosening”
Terms on real estate loans
Willingness to make
consumer installment loans
1979
1983
1987
1991
1995
© Macroeconomic Advisers
-60
-80
-100
1999
2003
2007
21
Financial Conditions: Healing Apace
Interest Rates & Equity Values
24000
Billions of dollars
Percent
Conventional mortgage rate
(right)
20000
H
F
Equity wealth
(left)
10
8
16000
6
12000
4
8000
2
10-year Treasury yield
(right)
4000
0
95
00
05
10
Source: Federal Reserve Board, Macroeconomic Advisers, LLC; Forecast prepared on October 7, 2009.
October 2009
© Macroeconomic Advisers
22
Household Net Worth: Stop the Pain!
Household Net Worth
Trillions
80
80
H
F
60
-$14 tril.
(-1.2)
60
40
-$5 tril.
(-0.5)
40
Other
Total
20
20
-$11 tril.
-$9 tril.
Equities
0
0
90
95
00
05
10
Source: Macroeconomic Advisers, LLC; Forecast prepared on October 7, 2009.
October 2009
© Macroeconomic Advisers
23
PCE Aided by Improving Financial Conditions
PCE Growth & Contributions from Wealth
6
4-quarter percent change
Percentage points 6
H F
3
3
0
0
-3
1991
-3
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
Bureau of Economic Analysis, Macroeconomic Advisers, LLC; Forecast prepared on October 7, 2009.
October 2009
© Macroeconomic Advisers
24
PCE Reset Lower; Saving Rate Reset Higher
Personal Saving Rate
Percent
12.5
H
F
12.5
10.0
10.0
7.5
7.5
5.0
5.0
2.5
2.5
0.0
0.0
65
70
75
80
85
90
95
00
05
10
Source: Bureau of Economic Analysis, Macroeconomic Advisers, LLC; Forecast prepared on October 7, 2009.
October 2009
© Macroeconomic Advisers
25
Consumption Ratios Reset Lower
Comparative Consumption/Income Ratios
98
Percent
Percent
H
96
94
20
F
18
EC$/YPD$
(left)
16
CON$/YPD$
(left)
92
14
90
12
ECD$/YPD$
(right)
88
86
84
1985
October 2009
10
EC$ - Consumer expenditures
ECD$ - Consumer expenditures durables
CON$ - Service concept consumption
YPD$ - Pers. Disposable Income
1989
1993
1997
2001
© Macroeconomic Advisers
8
6
2005
2009
26
Diminishing Drag as HH Balance Sheets Stabilize
Contributions of Error-Correction Term to Growth of CON
1.5
Percent change, annual rate
1.5
H
F
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
-1.0
-1.0
-1.5
-1.5
-2.0
-2.0
2005
October 2009
2006
2007
2008
2009
© Macroeconomic Advisers
2010
2011
27
Durables Bear Much of the Burden
Light Vehicle Sales
Millions of units, annual rate
22.5
22.5
Monthly sales
20.0
20.0
17.5
17.5
Quarterly sales and
MA forecast
15.0
15.0
12.5
12.5
10.0
10.0
7.5
7.5
01
02
03
04
05
06
07
08
09
10
11
Source: Bureau of Economic Analysis; Macroeconomic Advisers, LLC; Forecast prepared on October 7, 2009.
October 2009
© Macroeconomic Advisers
28
Global Recovery, Dollar Decline “Help”
Foreign Growth and the Dollar
.
4-quarter percent change
Index
10
145
H
F
8
135
6
125
4
115
2
105
Real foreign GDP
(left)
0
95
Real trade-weighted
exchange rate
(right)
-2
85
-4
75
95
00
05
10
Forecast prepared on October 7, 2009.
October 2009
© Macroeconomic Advisers
29
Sharply Rising Imports Depress Net Exports
Exports, Imports, and Net Exports
Billions of chain-type (2005) dollars
4-quarter percent change
400
20
Exports
(right)
Imports
(right)
200
H
F
10
0
0
-200
-10
-400
-20
Net exports
(left)
-600
-30
-800
-40
95
00
05
10
Source: Bureau of Economic Analysis, Macroeconomic Advisers, LLC; Forecast prepared on October 7, 2009.
October 2009
© Macroeconomic Advisers
30
Pent-up Demand Helps CapEx Tepid Recovery
Growth of Nonresidential Fixed Investment
4-quarter percent change
40
40
Computers and software
H
F
20
20
0
0
Structures
-20
-20
“Other” equipment
-40
-40
95
00
05
10
Source: Bureau of Economic Analysis, Macroeconomic Advisers, LLC; Forecast prepared on October 7, 2009.
October 2009
© Macroeconomic Advisers
31
Not Quite a Jobless Recovery!
Employment, Labor Force, and Unemployment
Percent
4-quarter percent change
10
10
8
8
Unemployment rate
(right)
6
6
H
F
4
4
Labor force growth
(left)
2
2
0
0
Employment growth
(left)
-2
-2
-4
-4
99
00
01
02
03
04
05
06
07
08
09
10
11
Forecast prepared on October 7, 2009.
October 2009
© Macroeconomic Advisers
32
Not Quite a Jobless Recovery!
Output per Hour in the Nonfarm Business Sector
4-quarter percent change
7
6
5
7
Overshoot on productivity in recession
(cyclical anomaly) as firms shed workers
quicker than typically (fearing deeper
slump) argues for quicker re-hiring with
recovery…somewhat slower productivity
H
F
6
5
4
4
3
3
2
2
1
1
0
0
-1
-1
90
95
00
05
10
Forecast prepared on October 7, 2009.
October 2009
© Macroeconomic Advisers
33
MA’s Unemployment Path versus Okun’s Law
Simulation Results and MA Forecast
12
Percent
12
H
F
11
11
+2 standard error
10
10
9
9
Base 909
8
8
Predicted value
7
7
-2 standard error
6
6
5
5
4
4
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2008
2009
2010
2011
October 2009
© Macroeconomic Advisers
34
Not Quite a Jobless Recovery!
Blue Chip Forecast Compared to Okun’s Law Predicted Values
12
Percent
12
H
F
11
11
Blue Chip forecast
10
10
9
9
Predicted value from Okun’s Law model
using Blue Chip GDP forecast
8
8
7
7
6
6
5
5
4
4
Q1
October 2009
Q2
Q3
2008
Q4
Q1
Q2
Q3
2009
Q4
© Macroeconomic Advisers
Q1
Q2
Q3
2010
Q4
35
Rising Energy Prices Marginally Boost Inflation
Refiners’ Acquisition Cost of Imported Oil
$/Barrel
120
120
Current $
100
100
80
80
60
60
40
40
2005 $
20
20
H
F
0
0
80
85
90
95
00
05
10
Source: Department of Energy; Macroeconomic Advisers, LLC; Forecast prepared on October 7, 2009.
October 2009
© Macroeconomic Advisers
36
Inflation Revisions Reveal More Disinflation
Pre-revised vs. Revised: 12-month Core PCE Inflation
2.75
12-month percent change
2.75
Revised
2.50
2.50
2.25
2.25
Pre-revised
2.00
2.00
1.75
1.75
1.50
1.50
1.3% - lowest since September 2001
1.25
1.25
2007
2008
2009
Source: Bureau of Economic Analysis
October 2009
© Macroeconomic Advisers
37
Model Uncertainty and the Inflation Forecast
Simulated Core PCE Inflation
From Models Estimated over Alternative Samples
3.5
12-month percent change
3.5
3.0
3
2.5
1996 - 2008
2.5
2.0
2
1.5
1.5
1986 - 2008
1.0
1
0.5
0.5
1981 - 2008
0.0
0
-0.5
-0.5
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: Bureau of Economic Analysis; Macroeconomic Advisers, LLC
October 2009
© Macroeconomic Advisers
38
Split the Difference…Lean Toward Intermediate Result
Unit Labor Cost and Core PCE Inflation
4-quarter percent change
6
6
H
F
Core PCE inflation
4
4
2
2
0
0
-2
-2
Unit labor cost
-4
-4
-6
-6
90
95
00
05
10
Note:
The core PCE is Personal Consumption Expenditures Index excluding food and energy prices; the unit
labor cost is the compensation paid per unit of output produced in the nonfarm business sector.
Source: U.S. Department of Labor, Bureau of Economic Analysis, Macroeconomic Advisers, LLC;
Forecast prepared on October 7, 2009.
October 2009
© Macroeconomic Advisers
39
Below-Target Inflation & Lingering Slack Imply Late Exit
Long-Rates are on the Rise, but the Fed Stands Pat
Percent
10
10
H
Conventional mortgage rate
8
F
8
10-year Treasury yield
6
6
4
4
Fed funds rate
2
2
0
0
95
00
05
10
Source: Federal Reserve Board, Macroeconomic Advisers, LLC; Forecast prepared on October 7, 2009.
October 2009
© Macroeconomic Advisers
40
The US Economic Outlook: Bottom Line
• The recession is over (growth returns) & downside risks dwindle
• Above-trend growth in 2nd half of 2009: 3.5% a.r.
• Robust (but sub par) growth in 2010 (4.1%) & 2011 (4.2% )
• Unemployment rate peaks at 10% (or a bit higher) in 2009:q4
• Unemployment rate declines to 9.1% in ’10:q4 and to 7.7% in ’11:q4
• Core inflation very low: =1.4% in 2009,  0.8 in 2010 &  0.8 in 2011
• Revised higher versus recent forecasts --- but still below FOMC
• Fed: Still expecting a late exit; but will “end easing” long before
• Fiscal: Stimulus working for now; getting control of the deficit later
October 2009
© Macroeconomic Advisers
41
Back-up Slides
MA Forecast Details
Real GDP & Components
Gross domestic product
Contributions to Real GDP Growth
Final sales
Change in inventories
Personal consumption expenditures
Fixed investment
Inventory investment*
Net exports*
Exports
Imports
Gov't consumption & gross invest.
Private housing starts (thous. units)
Light vehicle sales (mil. units)
Industrial production (% change a.r.)
Capacity utilization (mfg)
Nonfarm payroll employment (mil)
Unemployment rate (civilian, percent)
GDP price index
CPI (all urban)
Core CPI (all urban)
Core PCE
Compensation per hour
Output per hour
Unit labor cost
Exchange rate (FRB broad nominal)
Price of Imported oil ($/barrel)
Federal funds rate
10-year Treasury note yield
Aaa corporate bond yield
Corporate profits w/iva & ccadj
Disposable Personal Income (bil chained 00$)
Personal Saving as Percentage of Disposable Person
HH equity net worth (eop)**
Federal surplus (unified, FY. bil $)
Q4/Q4 % change or annual avg.
2008
2009
2010
2011
2009.1
2009.2
2009.3
2009.4
2010.1
2010.2
2010.3
2010.4
-6.4
-0.7
3.4
3.6
3.8
3.8
4.1
4.6
-1.9
-0.1
4.1
4.2
-4.1
-2.4
0.7
-1.4
1.9
1.6
1.2
2.4
3.8
0.0
3.2
0.6
3.4
0.7
4.1
0.5
-1.4
-0.5
-0.1
0.0
3.6
0.5
3.9
0.3
0.6
-39.0
-113.9
-386.5
-29.9
-36.4
-2.6
-0.9
-12.5
-160.2
-330.4
-4.1
-14.7
6.7
2.7
-1.0
-109.2
-339.0
12.7
12.4
1.5
1.2
4.2
-31.6
-360.0
2.9
7.2
2.1
4.6
9.2
-30.5
-388.4
6.0
11.4
1.8
2.9
11.5
-10.6
-404.1
8.7
10.4
1.5
3.0
13.9
12.7
-420.2
8.7
10.4
0.7
3.5
16.2
29.7
-434.1
10.4
11.1
0.7
-1.8
-9.6
-25.9
-494.3
-3.4
-6.8
3.0
0.9
-13.9
-103.7
-354.0
-6.1
-10.1
1.9
3.5
12.7
0.3
-411.7
8.5
10.8
1.2
3.4
14.7
58.8
-455.4
11.0
9.9
-0.9
528
9.5
-19.0
66.7
133.7
8.1
540
9.6
-10.5
65.3
132.1
9.2
614
11.5
4.2
66.6
131.2
9.6
767
10.4
9.7
68.5
130.8
10.0
873
11.5
6.7
69.7
131.2
9.9
986
12.0
5.8
70.7
131.9
9.7
1113
12.5
5.8
71.6
132.7
9.4
1210
13.1
6.3
72.7
133.7
9.1
900
13.2
-6.7
75.1
137.0
5.8
612
10.2
-4.6
66.8
131.9
9.2
1046
12.3
6.1
71.2
132.4
9.5
1442
14.0
5.5
74.6
136.4
8.2
1.9
-2.4
1.5
1.1
-4.7
0.3
-5.0
0.0
1.3
2.4
2.0
0.5
7.0
-6.1
0.7
3.5
1.4
1.3
2.7
7.8
-4.7
0.2
0.8
0.9
1.0
2.0
5.2
-3.1
0.8
0.8
0.9
0.8
2.1
2.1
0.0
0.5
1.0
0.9
0.9
2.0
1.6
0.5
0.6
1.1
0.9
0.8
2.0
1.3
0.7
0.6
0.9
0.8
0.8
1.8
1.2
0.6
1.9
1.5
2.0
2.0
2.6
0.9
1.6
0.7
0.8
1.6
1.4
0.1
5.0
-4.7
0.6
0.9
0.9
0.8
2.0
1.5
0.4
0.8
0.9
0.8
0.8
1.9
1.0
0.9
111.1
40.5
107.1
57.6
103.7
67.1
103.1
66.2
102.6
66.1
101.8
66.8
101.5
68.0
101.3
68.7
99.8
92.3
106.2
57.8
101.8
67.4
101.6
69.9
0.18
2.74
5.27
0.18
3.31
5.51
0.20
3.50
5.27
0.20
3.40
5.11
0.20
3.56
5.17
0.20
3.71
5.22
0.20
3.86
5.29
0.20
3.99
5.37
1.93
3.67
5.64
0.19
3.24
5.29
0.20
3.78
5.26
0.43
4.31
5.68
22.8
0.2
3.7
-11.5
-1796.0
15.7
3.8
4.9
22.1
-1220.0
46.6
-2.9
3.6
15.8
-1663.0
25.0
-0.4
3.3
0.6
-1349.0
9.6
2.9
3.0
0.4
-1544.0
7.4
3.8
3.2
-0.1
-1018.0
7.4
1.7
2.9
-0.1
-1200.0
8.9
3.9
3.1
1.2
-1278.0
-25.1
0.3
2.7
-39.0
-455.0
27.0
0.2
3.9
25.8
-1502.0
8.3
3.1
3.0
1.4
-1278.0
5.5
4.2
3.8
7.0
-1235.0
*Billions of chained (2005) dollars
**Percent change quarterly rate
October 2009
© Macroeconomic Advisers
43
Below-Target Inflation & Lingering Slack Imply Late Exit
Real Fed Funds Rate and Real 10-year T-note Yield*
Percent
12
12
H
F
8
8
Real 10-year
T-note yield
4
4
0
0
-4
-4
Real fed funds rate
-8
-8
60
65
70
75
80
85
90
95
00
05
10
*Real long rate calculated as nominal rate less 10-year inflation expectations, real funds rate
calculated as nominal rate less 4-quarter percent change in the core CPI.
October 2009
© Macroeconomic Advisers
44
Wage & Salary Income Poised to Turn Up
Contributions to Real Disposable Personal Income
10
4-quarter percent change
10
H
F
8
8
Real disposable personal income
6
6
4
4
2
2
0
0
-2
Taxes
-2
Wage, salary & proprietors’ income
-4
-4
-6
1982
-6
October 2009
1985
1988
1991
1994
1997
2000
© Macroeconomic Advisers
2003
2006
2009
45