economic outlook for consumers william strauss senior economist and economic advisor federal reserve...

Economic Outlook for Consumers

William Strauss

Senior Economist

and Economic Advisor

Federal Reserve Bank of Chicago

University of Illinois Center for Economic and Financial EducationFinancial Fitness for LiveBloomington, ILApril 19, 2010

The “Great Recession” appears to have cometo an end around the middle of last year and

the economy expanded by 5.6% in the fourth quarter

-8

-6

-4

-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 '09

Real gross domestic productpercent

Quarterly change (saar)

Percent change from a year earlier

Fourth quarter GDP expanded at a fast pacewith contributions largely coming from

inventories, consumption and business fixed investment

5.6

1.20.5

0.1

3.8

-0.3

0.3

-1

0

1

2

3

4

5

6

GDP Consumption Business Fixed

Investment

Residential Investment

Inventories Government Net Exports

Contributions to real GDP growth in Q4:2009percentage points (annual rate)

The Chicago Fed National Activity Indexbottomed in January 2009 and has been rising

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

Monthly

Chicago Fed National Activity Index

Three month average

GDP is forecast to growabove trend in 2010 and 2011

-8

-6

-4

-2

0

2

4

6

8

10

2000 01 02 03 04 05 06 07 08 09 10 11

Real gross domestic productpercent

Quarterly change (saar)

Percent change from a year earlier

Q4-2009

Blue Chip GDP Forecast

Actual Forecast 2009 2010 2011

0.1 2.9 3.2

The forecast path of the current recovery is relatively muted compared with past deep recession recovery cycles

98

100

102

104

106

108

110

112

114

116

-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10

Business cycle recovery pathindex - business cycle trough = 100

1981-82

2008-09

Blue Chip forecast recovery path

1974-75

quarters before trough quarters after trough

Inflation has begun to move higher

-1

0

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 '09 '10

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 '10

Real West Texas Intermediate oil pricedollars per barrel. 2009 dollars

Removing the volatile food and energy components from the PCE,

“core” inflation remains contained

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 '09 '10

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

Inflation is anticipated to riseby 1.7 percent this year and 2.0 percent next year

-10

-8

-6

-4

-2

0

2

4

6

8

2000 01 02 03 04 05 06 07 08 09 10 11

Consumer price indexpercent

Quarterly change (saar)

Percent change from a year earlier Q1-2010Blue Chip CPI Forecast

Actual Forecast 2009 2010 20111.5 1.7 2.0

Employment has fallen by over 8.2 million jobssince December 2007

-7-6-5-4-3-2-10123456

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

Total employmentpercent

Monthly change (saar)

Percent change from a year earlier

The unemployment rate appears to havepeaked at 10.1% in October 2009

3

4

5

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 '09 '10

Unemployment ratepercent

The unemployment rate is believed to have peakedin the final quarter of 2009 and is forecast to edge lower

0

2

4

6

8

10

12

2000 01 02 03 04 05 06 07 08 09 10 11

Unemployment ratepercent

Unemployment ratepercent

Q1-2010

Blue Chip Forecast

Real disposable income growth remains weak

-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 '09

Real disposable personal incomepercent

Quarterly change (saar)

Percent change from a year earlier

Real disposable personal income is anticipatedto rise at a solid pace through 2011

-10-8-6-4-202468

1012

2000 01 02 03 04 05 06 07 08 09 10 11

Real disposable personal incomepercent

Quarterly change (saar)

Percent change from a year earlier

Q4-2009

Blue Chip DPI Forecast

Actual Forecast 2009 2010 20110.9 2.4 2.7

The standard of living in the United Statesremains near its record high

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

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

Real disposable personal income - per capita2005 chained dollars

Consumer spending improved in the second half of 2009

-4

-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 '09

Real personal consumption expenditurespercent

Quarterly change (saar) Percent change from a year earlier

Consumer spending growth is expected toimprove over the next two years

-4

-2

0

2

4

6

8

2000 01 02 03 04 05 06 07 08 09 10 11

Real personal consumption expenditurespercent

Quarterly change (saar)

Percent change from a year earlier

Q4-2009

Blue Chip PCE Forecast

Actual Forecast 2009 2010 20111.0 2.6 2.7

Personal savings rate has increased

0

2

4

6

8

10

12

14

16

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10

Personal savings as a percent of disposable personal incomepercent

What is your number?

The stock market has improved since March 2009,but remains well below previous levels

0

200

400

600

800

1,000

1,200

1,400

1,600

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

S&P 500 stock indexIndex: 1941-43 = 10

After peaking in June 2005, home prices have fallen 28%

$90,000

$110,000

$130,000

$150,000

$170,000

$190,000

$210,000

$230,000

$250,000

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

Median sales price - existing single family home3-month smoothed

Homeowners’ equity stake plunged over the past four years

30

35

40

45

50

55

60

65

70

75

80

1955 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05

Homeowners' equity as a percent of real estate valuepercent

The home ownership rate has been moving lower

62

63

64

65

66

67

68

69

70

1965 '70 '75 '80 '85 '90 '95 '00 '05

Homeownership ratepercent

Mortgage rates are very low

4

5

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 '09 '10

Mortgage rate - 30-year fixedpercent

Home price declines have been large

-20

-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 '09 '10

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

Home price declines in the second quarter, compared with a year-earlier, were quite large in the West and Florida

7 Red States4 Light Blue States

Conditions improved in the third quarter with prices down around 4% compared with a year-earlier

4 Red States7 Light Blue States

In the fourth quarter, home prices fell by just overone percent over the past year

3 Red States19 Light Blue States

Housing affordability improved dramatically

90

100

110

120

130

140

150

160

170

180

190

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

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

on a median priced existing single family home

Consumer attitudes for buying a home remain very low

0

1

2

3

4

5

6

1980 '85 '90 '95 '00 '05 '10

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

Lending standards for mortgage loans remain tight

-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 '09 '10

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

The forecast calls for a very slow recovery in housing

0

500

1,000

1,500

2,000

2,500

1980 '85 '90 '95 '00 '05 '10

Housing startsthousands

Blue Chip Housing StartsForecast (thousands)

Actual Forecast 2009 2010 2011553 685 952

The financial obligation ratio has been moving lower

10

15

20

25

30

35

1980 '85 '90 '95 '00 '05

Household financial obligations divided by disposable incomepercent

renting households

all households

homeowning households

Both mortgage and consumer loan obligationshave been improving for homeowning households

0

5

10

15

20

1980 '85 '90 '95 '00 '05

Homeowning households financial obligations divided bydisposable incomepercent

consumer loans

mortgages

Total

Debt as a share of financial assets has been falling over the past year

15

20

25

30

35

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09

Total household debt as a percent of financial assetspercentpercent

Low mortgage rates, greater home ownershipparticipation and a strong housing market led consumersto increase their mortgage debt load over the past decade,

however deleveraging is currently underway

55

60

65

70

75

80

85

90

95

100

1990 '93 '96 '99 '02 '05 '08

Mortgage debt as a percentage of disposable incomepercent

Financial stress remains a major problem for thehousing sector across all categories,

but especially for adjustable rate mortgagesand largely in subprime mortgages

0

5

10

15

20

25

30

35

40

45

1998 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09

Delinquencies on Mortgagespercent of loans 90 or more days past due or in foreclosure

Subprime - ARM

Prime - ARM

Subprime - FRM

Prime - FRM

Consumer credit as a share of disposable incomehas been moving lower over the past few years

16

17

18

19

20

21

22

23

24

25

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

Consumer credit as a percentage of disposable incomepercent

Household net worth has begun to improve

400

450

500

550

600

650

1955 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05

Households net worth divided by disposable incomepercent

The bank card delinquency rate have begun to move lower

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09

Delinquency rate - bank card loanspercent

The direct auto loan delinquency rate have also been falling

1.0

1.5

2.0

2.5

3.0

3.5

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09

Delinquency rate - automobile direct loanspercent

Indirect vehicle loan delinquency ratehas been slowly improving

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

3.75

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09

Delinquency rate - automobile indirect loanspercent

Personal loan delinquency rate appears to have peakedand is beginning to improve

1.5

2.0

2.5

3.0

3.5

4.0

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09

Delinquency rate - personal loanspercent

The Fed has been very aggressive, lowering theFed Funds rate by nearly 525 basis points

0

1

2

3

4

5

6

7

8

9

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

Fed Funds ratepercent

The Fed’s balance sheet has expandedin size and in composition

0

500

1,000

1,500

2,000

2,500

Assets of the Federal ReserveBillions of dollars

Term Auction Credit Securities Held Outright

Central Bank Swaps

Maiden Lane II & III

Commercial Paper Facility

2007 2008 2009

Term Asset-Backed SecuritiesLoan Facility

AIG Support

Maiden Lane

2010

•The outlook is for the U.S. economy to expand at a

solid pace this year and next year

Summary

•Employment is expected to rise moderately this year and next

year, with the unemployment rate edging lower through 2011

•Slackness in the economy will lead to a relatively

low inflation rate over the next two years

•A big question remains about consumer spending/savings

over the next several years

•The consumer does appear to be putting their financial house

in order – is this by their choice?

www.chicagofed.org www.federalreserve.gov