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2010 Economic Outlook: Prospects for an Enduring Recovery

2010 Economic Outlook: Prospects for an Enduring Recovery. William Testa Vice President and Economic Advisor Federal Reserve Bank of Chicago. Indianapolis May 5, 2010. www.chicagofed.org/midwest.

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2010 Economic Outlook: Prospects for an Enduring Recovery

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  1. 2010 Economic Outlook:Prospects for anEnduring Recovery • William Testa • Vice President • and Economic Advisor • Federal Reserve Bank of Chicago Indianapolis May 5, 2010 www.chicagofed.org/midwest

  2. The “Great Recession” appears to have cometo an end around the middle of last year andthe economy expanded by 3.2% in the first quarter

  3. First quarter GDP expanded at a solid pacewith contributions largely coming from consumption and inventories

  4. The inventory to GDP ratio has fallen to record low readings

  5. The pace of inventory accumulation ispredicted to continue to increase through 2011

  6. GDP is forecast to growabove trend in 2010 and 2011

  7. What will recovery look like? • “Shallow in-Shallow out violated, a weak recovery • -- exports gaining, and consumer, business equipment • -- financial sector stabilizing (non bank esp.) • What will hold us back? • -- Previous wealth destruction/consumption spending weak • -- Overhang in housing and CRE • -- Fragile capital markets

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

  9. Consumer Sector

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

  11. Home price declines have been large

  12. In the fourth quarter, home prices fell by just overone percent over the past year 3 Red States 19 Light Blue States

  13. Household Balance Sheets Household Debt and Savings Rate (percent) Ratio of Household Net Worth to DPI (hundreds of percent) Financial Obligations Ratio Personal Savings Rate FOR: Ratio of hh debt payments to DPI

  14. Consumer spending is expected torise at a slower pace in the fourth quarter of 2009and then gradually improve through 2011

  15. Labor Market

  16. Employment has fallen by over 8.2 million jobssince December 2007

  17. Job Performance by state

  18. The unemployment rate has risen tothe highest level since April 1983

  19. Unemployment Unemployment Rate (percent) FOMC Forecasts as of late January 2010 Late Jan April FOMC BC BC 2010 9.6 9.7 9.6 2011 8.3 8.9 8.8 2012 7.1 Long-run 5.0 – 2.8

  20. The unemployment rate is forecast to peak at 10.2%early this year and then begin to edge lower

  21. Industrial Production

  22. Industrial output fell quite sharply during the recession,but has risen strongly over the past eight months

  23. Export growth has been rising over the past year

  24. Industrial production is forecast torise at a solid pace through the end of 2011

  25. Housing

  26. Housing starts have been cut-back sharply

  27. Mortgage rates are very low

  28. Housing affordability improved dramatically

  29. The forecast calls for a very slow recovery in housing

  30. CRE, Financial Sector and Bank Lending

  31. CRE is a banking issue • Unlike residential mortgages that were heavily securitized, most CRE is on bank balance sheets • Smaller banks tend to have larger concentrations • A major source of recent growth & profits for community banks

  32. Nonresidential Investment: Structures Vacancy Rates (percent) Nonresidential Private Construction (billions of dollars, three month moving average) Office Industrial j

  33. CMBS delinquency rises to record levels • Delinquency rates rising across all property types to record levels • Over 50% of current maturities unable/unwilling to refinance • CMBS Special Servicers have limited ability to extend maturities

  34. Bank Lending Total Loans and Credit Outstanding (three month percent change in MA3) C&I Loans Outstanding (three month percent change in MA3) Shading corresponds with NBER recession periods Shading corresponds with NBER recession periods

  35. Inflation

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

  37. Inflation has begun to move higher

  38. Removing the volatile food and energy components from the PCE, “core” inflation remains contained

  39. Inflation is anticipated to riseby 1.8 percent this year and 2.1 percent next year

  40. Summary • The outlook is for the U.S. economy to expand at a • solid pace this year and next year • 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 • Growth in manufacturing output will be solid in 2010 and 2011 • due to improving demand and rebuilding of depleted inventories • The volatile credit markets, concerns about commercial • real estate, and the weak housing market are some of • the biggest risks on the horizon for the U.S. economy

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