proprietary and confidential. not for disclosure outside federal reserve. the national outlook—...

Proprietary and Confidential. Not for disclosure outside Federal Reserve.

The National Outlook—From a Forecast SkepticFederal Reserve Bank of Atlanta LEARN Conference

Michael F. BryanVice President and Economist

March 29, 2010

The views in this presentation do not necessarily reflect the views of the Federal Reserve Bank of Atlanta or the Board of Governors of the Federal Reserve System, though obviously I think they ought to.

2

Q1-07

Q2-07

Q3-07

Q4-07

Q1-08

Q2-08

Q3-08

Q4-08

Q1-09

Q2-09

Q3-09

Q4-09

Q1-10

Q2-10

Q3-10

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

-8

-6

-4

-2

0

2

4

6

8

Annualized quarterly percent change

Blue Chip GDP Forecast

SOURCES: Blue Chip panel of economists, March 10, 2010.

Actual

Q4 2009

Total GDP growth

5.9

PCE contribution

1.2

Inventory contribution

3.9

Net Exports contribution

0.3

GROWTH IN THE FOURTH QUARTER WAS QUITE STRONG—PUSHED HIGHER PRIMARILY FROM A LEVELING OFF OF INVENTORY REDUCTIONS.

Slowing in inventory liquidation

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 101.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

Total Business Manufacturers

Inventory-to-Sales Ratios, SAJanuary 2010

Source: U.S. Census Bureau *assumes recession ended June 2009

INVENTORIES APPEAR TO BE APPROACHING “NORMAL” LEVELS RELATIVE TO CURRENT SALES—A POSITIVE SIGN FOR NEAR-TERM GROWTH?

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 101.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

Total Business Manufacturers Retail

Inventory-to-Sales Ratios, SAJanuary 2010

Source: U.S. Census Bureau *assumes recession ended June 2009

HOWEVER, RETAIL INVENTORIES SEEM UNUSUALLY LEAN, WHILE MANUFACTURING STOCKS ARE STILL ELEVATED.

5

REAL FINAL SALES (GDP LESS INVENTORIES) HAS SHOWED MUCH MORE MODEST GROWTH. SPENDING IN THE U.S. ACTUALLY

MODERATED LAST QUARTER.

Q1.2008 Q2.2008 Q3.2008 Q4.2008 Q1.2009 Q2.2009 Q3.2009 Q4.2009-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Real GDP and Final Salesquarterly, annualized % change

Real GDP Final Sales to Domestic Purchasers

Source: Bureau of Economic Analysis, through Q4 09

WHAT’S PUSHING US FORWARD?

AND WHAT HAPPENS WHEN IT STOPS?

8

Q1-07

Q2-07

Q3-07

Q4-07

Q1-08

Q2-08

Q3-08

Q4-08

Q1-09

Q2-09

Q3-09

Q4-09

Q1-10

Q2-10

Q3-10

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

-8

-6

-4

-2

0

2

4

6

8

Estimated real GDP growth in the absence of fiscal stimulus(consensus from CEA)

estimate



Actual

MODERATE GROWTH IS ANTICIPATED THIS QUARTER AS THE IMPETUS OF FISCAL POLICY WANES

THE 2010-11 ECONOMIC FORECAST

The Fortune Teller (De La Tour)

-2

-1

0

1

2

3

4

5

6Annual Growth Rate

YEAR-AHEAD CONSENSUS GDP FORECAST

04030201009998979695949392

predicted

05 06 07

-2

-1

0

1

2

3

4

5

6Annual Growth Rate

YEAR-AHEAD CONSENSUS GDP FORECAST

04030201009998979695949392

predictedactual

05 06 07

RMSE = 1.4 percentage points

Forecaster Accuracy(t-stat of the average individual forecasters’ average percentile, n=85)

Average Inflation Accuracy

Av

era

ge

Gro

wth

Ac

cu

rac

y

Relatively Bad at Both

Relatively Good at Both

Relatively Good at CPIRelatively Bad at GDP

Relatively Good at GDPRelatively Bad at CPI

-2.50

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

-2.50 -2.00 -1.50 -1.00 -0.50 0.00 0.50 1.00 1.50 2.00 2.50

Probability of Repeating as a Good GDP Forecaster

observed expectedOne success 48.9% 49.5%Two successes 25.4% 24.5%Three successes 14.0% 12.1% Four successes 8.0% 6.0%Five successes 3.5% 3.0%

Probability of remaining ABOVE the median after…

1515

WHY BOTHER WITH A FORECAST?

• Most forecasts can beat a coin flip.

• I can’t beat the consensus (and neither can anyone else.)

• Forecasts are useful for risk assessment.

• Forecasts are useful as a means for evaluating policy options.

AFTER A STRONG QIV, EVEN THE “OPTIMISTS” THINK THE ECONOMY WILL FOLLOW A MODERATE GROWTH PATH.

Q1-07

Q2-07

Q3-07

Q4-07

Q1-08

Q2-08

Q3-08

Q4-08

Q1-09

Q2-09

Q3-09

Q4-09

Q1-10

Q2-10

Q3-10

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

-8

-6

-4

-2

0

2

4

6

8




ForecastActual

--- top ten--- bottom ten

AFTER A STRONG QIV, EVEN THE “OPTIMISTS” THINK THE ECONOMY WILL FOLLOW A MODERATE GROWTH PATH.

Q1-07

Q2-07

Q3-07

Q4-07

Q1-08

Q2-08

Q3-08

Q4-08

Q1-09

Q2-09

Q3-09

Q4-09

Q1-10

Q2-10

Q3-10

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

-8

-6

-4

-2

0

2

4

6

8




Actual

YEAH, OUR MODELS DON’T HANDLE NON-LINEARITIES WELL…

Q1-07

Q2-07

Q3-07

Q4-07

Q1-08

Q2-08

Q3-08

Q4-08

Q1-09

Q2-09

Q3-09

Q4-09

Q1-10

Q2-10

Q3-10

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

-8

-6

-4

-2

0

2

4

6

8




ForecastActual


Q1-07

Q2-07

Q3-07

Q4-07

Q1-08

Q2-08

Q3-08

Q4-08

Q1-09

Q2-09

Q3-09

Q4-09

Q1-10

Q2-10

Q3-10

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

-8

-6

-4

-2

0

2

4

6

8




ForecastActual

70%


Q1-07

Q2-07

Q3-07

Q4-07

Q1-08

Q2-08

Q3-08

Q4-08

Q1-09

Q2-09

Q3-09

Q4-09

Q1-10

Q2-10

Q3-10

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

-8

-6

-4

-2

0

2

4

6

8

90%




ForecastActual

70%

2121

SO WHAT ARE THE RISKS?

• Risk 1: History beats economics (+)

• Risk 2: The housing correction still has a way to go (-)

• Risk 3: Business Investment languishes (-)

• Risk 4: Foreign economies continue to struggle.

• Risk 5: Fiscal and other imbalances including state and local governments(-)

22

Q1-07

Q2-07

Q3-07

Q4-07

Q1-08

Q2-08

Q3-08

Q4-08

Q1-09

Q2-09

Q3-09

Q4-09

Q1-10

Q2-10

Q3-10

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

-8

-6

-4

-2

0

2

4

6

8




ForecastActual

“ECONOMIC” MODELS, HOWEVER, POINT TO A BREAK FROM OUR STATISTICAL HISTORY

23

Q1-07

Q2-07

Q3-07

Q4-07

Q1-08

Q2-08

Q3-08

Q4-08

Q1-09

Q2-09

Q3-09

Q4-09

Q1-10

Q2-10

Q3-10

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

-8

-6

-4

-2

0

2

4

6

8




ForecastActual

“ECONOMIC” MODELS, HOWEVER, POINT TO A BREAK FROM OUR STATISTICAL HISTORY

Statistical (BVAR) model projection

24

Q1-07

Q2-07

Q3-07

Q4-07

Q1-08

Q2-08

Q3-08

Q4-08

Q1-09

Q2-09

Q3-09

Q4-09

Q1-10

Q2-10

Q3-10

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

-5

-3

-1

1

3

5

7annualized quarterly percent change

Blue Chip Real PCE Forecast

SOURCES: Blue Chip panel of economists, January 10, 2010.

Forecast

Actual


AMONG THE MODERATING INFLUENCES, CONSUMER SPENDING IS EXPECTED TO RECOVER RELATIVELY SLOWLY THROUGH 2010-11

25

Q1-07

Q2-07

Q3-07

Q4-07

Q1-08

Q2-08

Q3-08

Q4-08

Q1-09

Q2-09

Q3-09

Q4-09

Q1-10

Q2-10

Q3-10

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

-5

-3

-1

1

3

5

7

Statistical model projection

annualized quarterly percent change

Blue Chip Real PCE Forecast

SOURCES: Blue Chip panel of economists, January 10, 2010.

Forecast

Actual


THIS WOULD BE A HUGE BREAK FROM HISTORICAL EXPERIENCE.

*assumes recession ended in July 2009

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Real Personal Income and Real PCEYear-over-Year % Change

Real Disposable Personal Income, Jan 2010 = 0.0% Real Labor Income, Jan 2010 = -1.0%

26Source: Bureau of Economic Analysis

REAL INCOMES HAVE BEEN HELD UP BY TRANSFERS, BUT REAL LABOR INCOME, THOUGH IMPROVING, WAS STILL DOWN YEAR-OVER-YEAR IN JANUARY.

27

Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10-$25

-$15

-$5

$5

$15

$25

Consumer Credit - Monthly Change SA, through January 2010

Nonrevolving Revolving

Billions

Source: Federal Reserve Board

Monthly Changes on Left Axis


YET CONSUMER CREDIT EXTENTIONS WERE STILL DECLINING IN DECEMBER AND WERE SOFT IN JANUARY.


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-4%

-2%

0%

2%

4%

6%

8%

Real Personal Income and Real PCEYear-over-Year % Change

Real PCE, Jan 2010 = 1.4% Personal Saving Rate, Jan 2010 = 3.3%

28Source: Bureau of Economic Analysis

AFTER RISING ABOVE 6% LAST YEAR, THE HOUSEHOLD SAVING RATE HAS FALLEN BACK UNDER 4% AS CONSUMER SPENDING HAS GROWN.

2929







January 2010

HOME SALES HAVE SLOWED OVER THE PAST THREE MONTHS AND THE STOCK OF UNSOLD HOMES IS RISING AGAIN.

00 01 02 03 04 05 06 07 08 09 103,000

4,000

5,000

6,000

7,000

3

4

5

6

7

8

9

10

11

12

Sales and Months' Supply of Existing Single-Family Home

Sales

Source: National Association of Realtors

sale

s,

thousands,

SA

AR

month

s,

nsa

Inven-tory

Existing Sales

00 01 02 03 04 05 06 07 08 09 100

200

400

600

800

1,000

1,200

1,400

1,600

0

2

4

6

8

10

12

14

Sales and Months' Supply of New Single-Family Home

Sales

Source: U.S. Census Bureau

sale

s,

thousands,

SA

AR

month

s,

sa

New Sales

Inventory

31

THE PENDING HOME SALES CONFIRMS A SHARP SLOWING IN SALES ACTIVITY OVE THE NEAR-TERM.

01 02 03 04 05 06 07 08 09 1060

80

100

120

140

90.4

January 2010 Pending Home Sales Indexan index of 100 is equal to the average level of

activity during 2001

Index, sa

ListingsREO

ListingsAuction Listings

Notice of Defaults

Total Shadow

InventoryTotal

Inventory

Inventory % Actual Listings

Las Vegas, NV 13,021 11,646 2,360 18,008 32,014 45,035 346%

San Diego, CA 11,059 4,372 2,857 5,707 12,936 23,995 217%

Los Angeles, CA 41,523 14,213 10,624 22,189 47,026 88,549 213%

San Francisco, CA 4,047 1,725 742 1,782 4,249 8,296 205%

Phoenix, AZ 28,773 12,645 19,587 -

32,232 61,005 212%

Detroit, MI 19,027 9,171 3,973 275 13,419 32,446 171%

Chicago, IL 40,349 6,195 5,750 23,591 35,536 75,885 188%

Miami, FL 33,409 3,747 1,894 13,332 18,973 52,382 157%

Cleveland, OH 13,127 2,704 110 2,636 5,450 18,577 142%

Denver, CO 21,242 2,571 8,106 -

10,677 31,919 150%

Tampa, FL 29,727 1,485 561 9,308 11,354 41,081 138%

Minneapolis, MN 9,004 1,342 2,087 -

3,429 12,433 138%

Portland, OR 12,275 1,971 1,924 -

3,895 16,170 132%

Washington, DC 13,755 1,274 1,538 335 3,147 16,902 123%

Atlanta, GA 32,590 4,682 4,895 -

9,577 42,167 129%

Seattle, WA 10,579 1,640 659 -

2,299 12,878 122%

Boston, MA 12,115 745 -

-

745 12,860 106%

Dallas, TX 30,684 4,234 2,287 -

6,521 37,205 121%

New York, NY 67,837 993 1,158 11,623 13,774 81,611 120%

Charlotte, NC 23,540 2,318 1,672 102 4,092 27,632 117%

Total 467,683 89,673 72,784 108,888 271,345 739,028 158%

March 2010

THE “SHADOW” INVENTORY OF UNSOLD HOMES MAY BE UNUSUALLY LARGE, AND DOWNWARD PRICE PRESSURE COULD BE PERSISTENT.

00 01 02 03 04 05 06 07 08 09$0

$50

$100

$150

$200

$250

$300

Radar Logic 28-Day Home Price Indexesthrough January 19, 2010

25-MSA Composite Atlanta JacksonvilleMiami Tampa

pri

ce

pe

r sq

ua

re f

oo

tHOME PRICES, WHICH STABILIZED EARLY LAST YEAR, HAVE RECENTLY TILTED DOWNWARD AGAIN.

3434







35

Q1-07

Q2-07

Q3-07

Q4-07

Q1-08

Q2-08

Q3-08

Q4-08

Q1-09

Q2-09

Q3-09

Q4-09

Q1-10

Q2-10

Q3-10

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

-8

-6

-4

-2

0

2

4

6

8




ForecastActual

OUR “ECONOMIC” MODEL, ALSO POINTS TO A BREAK FROM STATISTICAL HISTORY, WITH WEAK INVESTMENT (RELATIVE TO HISTORY)

Statistical model projection

DSGE model

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-25

-20

-15

-10

-5

0

5

10

15

year-over-year (lhs) 3-month annual rate (lhs)

Core* Capital Goods Orders, SA*nondefense, ex aircraft and parts, January 2010

Source: U.S. Census Bureau 36

BUSINESS SPENDING ON CAPITAL GOODS, WHICH HAD BEEN SHOWING SIGNS OF IMPROVEMENT HAS BEEN FLAT OVER THE PAST TWO MONTHS.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 201020

30

40

50

60

70

80

ISM Manufacturing Index50+ = expansion, February 2010

February Component ValuesTotal Index: 56.5New orders: 59.5Production: 58.4

Employment: 56.1

Diffusion In-dex


BUT PURCHASING MANAGERS AT MANUFACTURING ESTABLISHMENTS ARE REPORTING GOOD ACTIVITY—AND ORDERS—FOR FEBRUARY.

Source: Institute for Supply Management 37

3838







2008 2009 2010 2011-6

-4

-2

0

2

4

Euro Area Japan United Kingdom United States

Source: Blue Chip Consensus , March 10, 2009

Global GDP Growth Forecast

year/year % change FORE-

CAST

GROWTH IS EXPECTED ABROAD AS WELL, BUT AT AN EVEN MORE SUBDUED PACE THAN WHAT IS EXPECTED FOR THE U.S. AND LIKELY WITH A MORE FRAGILE BANKING SECTOR.

4040







41

Mar-99Mar-00Mar-01Mar-02Mar-03Mar-04Mar-05Mar-06Mar-07Mar-08Mar-09-1%

0%

1%

2%

3%

4%

5%

6%

State & Local Government Spendingyear-over-year % change, through Q4

2009

Source: Bureau of Economic Analysis

STATE BUDGET PROBLEMS REMAIN A MAJOR RISK TO THE ECONOMIC OUTLOOK IN 2010-2011.

• To date state budgets which tend to rely on income and sales taxes have suffered collapsing revenue and (to a lesser extent) increasing service demands (especially Medicaid).

• Local property taxes have held up better because of assessments lags and more flexible millage rates but local governments have greater service demands, less state aid and shrinking property digests.– -Rockefeller Institute of Government

• States had to close a collective $145 billion gap in the 2009-10 budgets. States budget officers currently project an additional shortfall of $28.2 billion for 2010-11. – -National Conference of State Legislatures

BUT THIS IS A VERY FRAGILE SOURCE OF SPENDING

•Despite this, budget cuts and tax increases have been mitigate by the ARRA (stimulus) which provided $60B and $73B in 2009 and 2010 but falls to $30B for 2011 on.

-CEA, CBO.

•California, which has the lowest credit score of any US state (BBB,Baa1,A-), pays a risk premium on its debt between that of Spain and Greece.

-FRBA calculation

•State reserves are largely depleted and public employee pension are heavily underfunded suggesting that state and local budgets will be especially lean in coming years as these balances are re-built.

BUT THIS IS A VERY FRAGILE SOURCE OF SPENDING

THE OUTLOOK FOR UNEMPLOYMENT

Oct07 Feb08 Jun08 Oct08 Feb09 Jun09 Oct09 Feb10-800

-700

-600

-500

-400

-300

-200

-100

0

100

200

300

-36

Month to Month Change in Payroll Em-ployment

thousands, February 2010

Source: U.S. Bureau of Labor Statistics

Industry Jan Feb

Mfg 20 1

Const. -77 -64

Retail 41.8 -0.4

Prof & bus(Incl. temps)

30 51

Edu & Health23 32

Leisure & Hosp

0 7

Gov 7 -18

JOBS REDUCTIONS HAVE IMPROVED, BUT “GROWTH” IS STILL NOT IN THE PICTURE.

46

THERE HAS BEEN A NOTABLE RISE IN THE HIRING OF TEMPORARY WORKERS—PERHAPS A SIGN OF IMPROVING LABOR DEMAND AMID UNCERTAINTY ABOUT THE SUSTAINABILITY OF THE EXPANSION

1500

1700

1900

2100

2300

2500

2700

2900

50

60

70

80

90

100

110

120

Employment in Temporary Help ServicesBLS vs. ASA Staffing Index (monthly avg of weekly index)

thousands

BLS (left axis)

ASA Staffing Index (right axis)

Source: Bureau of Labor Statistics (BLS), American Staffing Association (ASA)

index=100 on June 2006

through February 2010

Oct07 Feb08 Jun08 Oct08 Feb09 Jun09 Oct09 Feb10-800

-700

-600

-500

-400

-300

-200

-100

0

100

200

300

-36

Month to Month Change in Payroll Em-ployment

thousands, February 2010

Source: U.S. Bureau of Labor Statistics

Industry Jan Feb

Mfg 20 1

Const. -77 -64

Retail 41.8 -0.4

Prof & bus(Incl. temps)

30 51

Edu & Health23 32

Leisure & Hosp

0 7

Gov 7 -18

WHAT KIND OF JOB GROWTH IS NECESSARY TO BRING DOWN UNEMPLOYMENT?

Threshold to materially reduce unemployment under “ordinary” assumptions`

48

ADDING THE INVOLUNTARY PART-TIMERS AND DISCOURAGED WORKERS TO OFFICIALLY UNEMPLOYED WORKERS RAISES THE RATE OF JOBLESSNESS TO NEAR 17 PERCENT.

00 01 02 03 04 05 06 07 08 092

4

6

8

10

12

14

16

18

9.7%

16.8%

Unemployment RatesFebruary 2010percent

Civilian Unemployment Rate

Unemployed+Marginally Attached + Part-time for Economic Reasons Rate

*Note: Marginally attached workers currently want a job and have looked for work within the last 12 months. This primarily includes discouraged workers (those not currently looking for work because they believe no work is available given their circumstance), and persons not now working due to family responsibilities, ill-health, or are in school.Source: U.S. Bureau of Labor Statistics

49

Q1-07

Q2-07

Q3-07

Q4-07

Q1-08

Q2-08

Q3-08

Q4-08

Q1-09

Q2-09

Q3-09

Q4-09

Q1-10

Q2-10

Q3-10

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

4

6

8

10

12

4.1% growth

Quarter Average

Blue Chip Unemployment Rate Forecast


FORECASTACTUAL UNEMPLOYMENT RATE

RISING PRODUCTIVITY AND LABOR FORCE GROWTH IMPLY THAT THE MODEST GROWTH SCENARIO WILL BE INSUFFICIENT TO SIGNIFICANTLY CUT INTO THE RATE OF JOBLESSNESS

2.2% growth

3% growth

FORECASTING INFLATION

The conventional approach to forecasting inflation is called, variously, a Phillips curve forecast, an expectations augmented Phillips curve, and the New Keynesian Phillips curve.

While there may be significant theoretical motivations that distinguish these approaches, they all tend to share three common elements that, with varying degrees of weight, determine the inflation prediction:

π = f (slack in the economy, inflation expectations, commodity prices)

GDPGAP

Unemployment relative to NAIRU(“Phillips curve”)

CapacityUtilization

Laggedinflation

Surveydata

Oilprices

Raw materials

Importprices

FORECASTING INFLATION

π = f (slack in the economy, inflation expectations, commodity prices)

Input prices and wages Productivity Unit Costs Markups

The rate of price

increase

Greenbook Approach

Gordon Triangle Model

pt = a(L)pt-1 + b(L)Dt + c(L)zt + et

THOUGHTS ON INFLATION FROM THE FOMC

Most participants anticipated that substantial slack in labor and product markets, along with well-anchored inflation expectations, would keep inflation subdued in the near term, although they had differing views as to the relative importance of those two factors.

Minutes of the FOMCDecember 15-16, 2009

ECONOMISTS SEE LONGER-TERM INFLATION IN THE 1% to 3% RANGE—BUT THERE ARE SKEPTICS ON EITHER SIDE OF THIS RANGE.

53

Q1-07

Q2-07

Q3-07

Q4-07

Q1-08

Q2-08

Q3-08

Q4-08

Q1-09

Q2-09

Q3-09

Q4-09

Q1-10

Q2-10

Q3-10

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

-10

-8

-6

-4

-2

0

2

4

6

8annualized quarterly percent change

SOURCE: Blue Chip panel of economists, March 10, 2010.

FORECASTACTUAL CPI

--- Top 10 forecasts

--- Bottom 10 forecasts

FOMC Objective

Blue Chip Inflation Forecast

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

1970Q1 1976Q1 1982Q1 1988Q1 1994Q1 2000Q1 2006Q1

Percent

ESTIMATES OF THE UNEMPLOYMENT RATE GAP

CBO NAIRU

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

1970Q1 1976Q1 1982Q1 1988Q1 1994Q1 2000Q1 2006Q1

Percent

ESTIMATES OF THE UNEMPLOYMENT RATE GAP

CBO NAIRU

ALTERNATIVE NAIRU BASED ON:1) Job vacancies

2) Surveys of Job Perceptions3) “Core-based” dynamic Phillips curve

1)

3)

2)

-6

-3

0

3

6

9

-2 -1 0 1 2 3 4 5 6

12-month percent change

CPI Phillips Curve: ‘83-09

Source: Bureau of Labor Statistics; CBO; authors’ calculationsUnemployment GAP

ESTIMATES OF THE PHILLIPS CURVE VARY WIDELY AND, ARGUABLY, HAVE NOT GIVEN MUCH INSIGHT INTO FUTURE INFLATION IN THE POST-82 PERIOD.

-6

-3

0

3

6

9

-2 -1 0 1 2 3 4 5 6


CPI Phillips Curve: ‘83-09

Source: Bureau of Labor Statistics; CBO; authors’ calculationsUnemployment GAP

HOWEVER, UNUSUALLY HIGH LEVELS OF JOBLESSNESS MAY STILL BE INFORMATIVE ABOUT THE OUTLOOK FOR INFLATION.

58

1995 1997 1999 2001 2003 2005 2007 20090%

1%

2%

3%

4%Core Consumer Price Index

percent change, through February 2010

year-over-year 3-month annual rateSource: U.S. Bureau of Labor Statistics


MODEST DISINFLATIONARY PRESSURE IS STILL SEEN IN THE RETAIL PRICE DATA.

0.0

0.3

0.50.8

1.0

1.3

1.51.8

2.0

2.3

2.5

2.83.0

3.3

3.5

CPI 5 10 15 20 25 30 35 40 45 MedianCPI

Annualized monthly percent change

Trimmed-Mean Estimates of the CPI

Percent “trimmed” from each tail of the CPI

Jan. – Apr.HeadlineCPI

Ignoring the highest and lowest 3% of the marketbasket

0.0

0.3

0.50.8

1.0

1.3

1.51.8

2.0

2.3

2.5

2.83.0

3.3

3.5

CPI 5 10 15 20 25 30 35 40 45 MedianCPI




Jan. – Apr.

May – Aug.

0.0

0.3

0.50.8

1.0

1.3

1.51.8

2.0

2.3

2.5

2.83.0

3.3

3.5

CPI 5 10 15 20 25 30 35 40 45 MedianCPI




Jan. – Apr.

May – Aug.

Sep.-Dec.

The CPI Marketbasket (by degree of price stickiness)

Motor fuel 0.7 3.2Car and truck rental 1.2 0.1Fresh fruits and vegetables 1.3 0.9Fuel oil and other fuels 1.5 0.3Gas (piped) and electricity 1.6 4.2Meats, poultry, fish, and eggs 1.9 1.9Used cars and trucks*** 2.0 1.6Leased cars and trucks* 2.0 0.6New vehicles 2.0 4.5Women's and girls' apparel 2.3 1.5Dairy and related products 2.6 0.9Nonalcoholic beverages and beverage materials 2.7 1.0Lodging away from home 3.1 2.5Processed fruits and vegetables 3.2 0.3Men's and boys' apparel 3.2 0.9Cereals and bakery products 3.3 1.2Footwear 3.4 0.7Other food at home 3.6 2.0Jewelry and watches 3.9 0.4Motor vehicle parts and equipment 4.1 0.4Tobacco and smoking products 4.2 0.8

Infants' and toddlers' apparel 5.3 0.2

Household furnishings and operations 5.3 4.8

Motor vehicle maintenance and repair 5.8 1.2

Motor vehicle insurance 5.9 2.0

Medical care commodities 6.2 1.6

Personal care products 6.7 0.7

Alcoholic beverages 7.3 1.1

Recreation 7.9 5.7

Miscellaneous personal goods 8.1 0.2

Communication 8.4 3.2

Public transportation 9.4 1.1

Tenants' and household insurance 10.1 0.3

Food away from home 10.7 6.5

Rent of primary residence** 11.0 6.0

OER, Northeast ** 11.0 5.3

OER, Midwest ** 11.0 4.5

OER, South** 11.0 7.7

OER, West** 11.0 6.9

Education 11.1 3.1

Medical care services 14.0 4.8

Water and sewer and trash collection services 14.3 1.0

Motor vehicle fees 16.4 0.5

Personal care services 23.7 0.6

Miscellaneous personal services 25.9 1.1

Freq. of Rel. Freq. of Rel.Flexible-price Items adjust. Imp. Sticky-price Items adjust. Imp.

Total flexible price 29.8Core flexible price items 14.0

Total sticky-price 70.1Non-OER sticky-price 45.7

CAN WE GET ANY INFLATION INFORMATION OUT OF PARTICULAR PRICES?

-12

-9

-6

-3

0

3

6

9

12

-2 -1 0 1 2 3 4 5 6


Flexible CPI

Disaggregated CPI Phillips Curves: ‘83-09

CPI

Source: Bureau of Labor Statistics; CBO; authors’ calculations

Sticky CPI

Unemployment GAP

WHILE FLEXIBLE PRICES RESPOND RATHER SHARPLY TO ECONOMIC CONDITIONS, THE STICKY PRICE MEASURES APPEAR TO BE, WELL, STICKY

Differing Variances of Alternative CPI Components

*The variance was calculated from the 1-month annualized percent changes in each variable.

Flexible CPI

Core Flexible CPI

Sticky CPI

Core Sticky CPI

Sticky CPI ex Shelter

Core Sticky CPI ex Shelter

total sample 67.29 19.90 10.63 11.56 6.89 7.621983-forward 71.46 15.79 1.70 1.90 2.10 2.58

“STICKY” PRICES HAVE BEEN MORE STICKY IN THE POST-1982 PERIOD.

RMSEs from Phillip’s Curves

*The RMSEs are reported relative to the forecasts obtained from the CPI Phillips Curve benchmark

Out-of-Sample Forecast period: 2000:01 to 2007:12 (Estimated over 1983:01 to 1999:12 )

Flexible Core Flexible Sticky Core Sticky Core CPI

1 month ahead 1.002 1.025 1.007 1.025 1.010

3 months ahead 1.049 1.006 0.988 0.996 0.994

12 months ahead 1.116 1.052 0.955 0.969 0.953

24 months ahead 1.355 1.165 0.858 0.869 0.987

THESE PRICES SEEM TO BE A BETTER GAUGE OF MEDIUM-TERM INFLATION.

67

COMMODITY PRICES HAVE BEEN RISING, PERHAPS A REFLECTION OF STRONGER WORLD INDUSTRIAL ACTIVITY

1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 20100

100

200

300

400

500

600

700

800

900

1000

Commodity Spot IndexesAverage, Monthly through February 2010, 1967=100

All Commodities Metals Textiles and fibers Raw Industrial Materials

Source: Commodity Research Bureau (CRB)

TIPS-BASED MEASURES OF LONG-TERM INFLATION EXPECTATIONS HAVE BEEN STEADY (AND RECENTLY MOVING LOWER).

These are in your macroeconomics textbook

These things aren’t

Tools of Fed policy

WE’RE NOT A SLEEPY LITTLE $900 BILLION CENTRAL BANK ANYMORE

Dec-07 Feb-08Apr-08 Jun-08 Aug-08Oct-08Dec-08 Feb-09Apr-09 Jun-09 Aug-09Oct-09Dec-09 Feb-10$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

Federal Reserve Assets (Uses of Funds)$ billions

Agency Debt & MBSLending to Nonbank Credit MarketsShort-Term lending to Fi-nancials

Through Mar 10

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

Federal Reserve Liabilities (Sources of Funds)$ billions

Treasury SFPOtherBanks Reserve Balances

SFP = Supplementary Financing Program Through Mar 10

AND WE GOT BIG THE OLD FASHIONED WAY—WE PRINTED MORE MONEY.

72

FUTURES MARKETS DON’T SEE THE FOMC RAISING THE FUNDS RATE UNTIL LATE THIS SUMMER

Feb 10 Mar 10 April 10 May 10 June '10 July '10 Aug '10 Sept '10 Oct '10 Nov '100.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

On 12/14

On 1/13

On 2/12

On 11/13

Fed Funds Futures Ratespercent

Contract Month

Source: Wall Street Journal/Haver Analytics

SUMMARY OF THE OUTLOOK

1. The national growth outlook is for a modest recovery—unusual following a recession of such great magnitude.

2. Many downside risks exist but balanced against a notable large upside risk—history.

3. The inflation outlook is exceptionally varied and seems to depend upon whether you think economic slack, or lack of central bank credibility is the dominant influence.

4. As of today, markets see little chance of a rate hike from the Fed before the fourth quarter.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Unemployment Rate(by status of unemployment compensation)

Not Collecting Insurance Continuing Claims Extended Benefits Unemployment Rate

Source: BLS 74

THE PROPORTION OF WORKERS WHO HAVE EXHAUSTED THEIR UNEMPLOYMENT COMPENSATION, AND ARE NOW ON EXTENDED BENEFITS, HAS GROWN SHARPLY.

proprietary and confidential. not for disclosure outside federal reserve. the national outlook—...

Documents

actual slide

tour slide

cpi slide

blue chip gdp forecast

inventory liquidation

economic forecast

good gdp forecaster

blue chip panel of economists