the outlook for the u.s. economy
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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 - PowerPoint PPT PresentationTRANSCRIPT
The Outlook for the U.S. Economy
2009 FRB St. Louis Professors Conference Zero Bound, Credit Easing and
Quantitative Easing
St. Louis, MONovember 5, 2009
Kevin L. KliesenFederal Reserve Bank of St. Louis
Not an official document
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Overview of Today’s Talk
• The Big Picture
• Current Developments
• Risks to the Outlook (Things to Worry About)
• A New Era in Financial Regulation?
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Disclaimer
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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.
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Current Developments
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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.
Current Developments
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Current Developments
3.5% growth in 2009:Q3
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Current Developments
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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.
Current Developments
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• Good news in the housing sector—sort of
Current Developments
A hook!
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• Efforts to Stem the Foreclosure Tide
Current Developments
Retention actions rose nearly 22 percent in 2009-Q2.
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3. Has the economy experienced a sugar high over the past few months?
• A concern about temporary measures to boost growth.
Will the first-time homebuyer’s tax credit do to the housing market what Cash for Clunkers did to auto sales?
• Production gains devoted to inventory re-stocking?
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.
Current Developments
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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%.
Current Developments
9.8% inSept.
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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.
Current Developments
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Current Developments
20.0
40.0
60.0
80.0
100.0
120.0
140.0
2004 2005 2006 2007 2008 2009 2010
Actual Futures EIA
Oil Prices (WTI): Actual and ForecastedDollars per barrel
Source: WSJ/NYMEX/EIANote: Futures as of 10/27/2009
Oil prices are already around $80 per barrel.
2009:Q2Actual wasAbout $68/bbl
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4. Will the consumer come roaring back? Some considerations.
c) Consumers continue to pay down debt (“deleveraging”).
Current Developments
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Current Developments
Living beyond our
means!
$0
$10,000
$20,000
$30,000
$40,000
$50,000
1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008
Debt
Income
Income and Household Debt Per Person in the United StatesThousands of dollars per person
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4. Will the consumer come roaring back? Some considerations.
Current Developments
Consumption as a Share of the U.S. Economy at an All-Time High
10050095908580757065605550
Source: Haver Analytics
0.72
0.70
0.68
0.66
0.64
0.62
0.60
0.72
0.70
0.68
0.66
0.64
0.62
0.60
Rebalancing the economy away from consumption to business investment.
An all-time high!
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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?
Current Developments
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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).
Current Developments
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Financial conditions have improved modestly further . . in one dimension.
Current Developments
FSI is comprised of 18 weekly, interest rates, yield spreads, and other financial market indicators (e.g., equities).
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Current Developments
The outlook over the second half of 2009 continues to improve!
Growth in 2010 likely to be around 3%.
Forecast Date
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Jan. June Aug. Sept. Oct.
Forecasts for Real GDP Growth over the Second Half of 2009Percent change, annual rate
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5. Is Inflation Dead and Buried?
Current Developments
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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
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Current Developments
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Zoom, Zoom!
Current Developments
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
1960 1967 1974 1981 1988 1995 2002 2009
M2 Growth
Base Growth
Growth of the M2 Money Supply and Monetary Base ("High-Powered Money")
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Current Developments
Question asked of Blue Chip Forecasters:
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There is some risk of much higher inflation beginning in mid-2010 and continuing into early 2011.
Current Developments
-10
-8
-6
-4
-2
0
2
4
6
8
2005Q1 2006Q3 2008Q1 2009Q3 2011Q1 2012Q3
Actual
Forecast
2009:Q3
What's the Forecast for Inflation?Percent change, annual rate
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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. Implications for consumers Implications for business
• These factors suggests a weaker-than-normal recovery. 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
Positive job growth not likely until early 2010
Another “Jobless Recovery?”
-800-700-600-500-400-300-200-100
0100200
Feb-08 Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10
Monthly Changes in Employment: Actual and ForecastThousands of jobs
Sept. 2009
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Things to Think About
2624
18 1614
0
5
10
15
20
25
30
2009:Q3 2009:Q4 2010:Q1 2010:Q2 2010:Q3
How Likely is a Double-Dip Recession?(Risk of a negative growth during indicated quarter)Percent
SOURCE: Survey of Professional Forecasters (Aug. 14, 2009)
About a 1-in-6 chance of a double-dip in 2010.
The View that Prevailed in August
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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. A Key: Keeping inflation expectations in check.
• The Fed is walking a tightrope! 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!
Something has got to change!
0
50
100
150
200
250
300
350
1790 1820 1850 1880 1910 1940 1970 2000 2030 2060
Federal Debt as a Percent of GDP, 1790 to 2083 (Projected)Percent
SOURCE: Congressional Budget Office (June 2009)
Actual Projected
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Financial Regulatory Reform• Too Big to Fail (TBTF)—a key issue
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
• The Role of the Fed 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?