“It is clear that the U.S. will leave no policy stone unturned in the attempt to put the economic show back on the road, so there should be no Japanese-style lost decade in North America.

That is a very positive message for the global economy.”

John PlenderFinancial Times

Dec. 24, 2008, p.18

“The next few months are among the most important in U.S. history. Because of the financial crisis, Barack Obama has the bi-partisan support to spend $1 trillion in stimulus. But we must make certain that every bailout dollar, which we’re borrowing from our kids’ future, is spent wisely. …If we allow this money to be spent on pork, it will be the end of us.”

Thomas L. FriedmanNew York Times

Dec. 24, 2008, p.A21

The Economic Outlook for 2009

Presented to:APICS: The Association for Operations

Management, Dallas ChapterJanuary 8, 2009

By:Harvey Rosenblum

Executive Vice President & Director of Research

and Jessica Renier, Research AnalystFederal Reserve Bank of Dallas

Overview

• Tough year ahead in 2009, noticeable improvement in 2010

• Consumption to bear the brunt of the adjustment

• Housing cycle will turn by year-end• Mild deflation likely in 2009• Monetary policy beginning to work• Fiscal policy and lower energy costs

will add to stimulus

Themes for 2009

Most likely scenario• Stuck in recession much of the year• Inflation near, or below, zero• Financial headwinds subside, but

slowly• Housing correction runs another

year• 40% probability

Themes for 2009 (cont.)

Two other plausible and equally-likely scenarios

• Recession ends in Spring 2009– Credit flows resume– Monetary and fiscal medicine impact

quickly– Year of weak growth, but unemployment

rate peaks around 8%– 30% probability

Themes for 2009 (cont.)

• Recession grinds on until Spring 2010– Banking, financial, and credit headwinds

do not subside– Fiscal stimulus takes too long to come and

politics/ideology squander its impact– Global economy suffers prolonged negative

growth– Monetary stimulus cannot offset a liquidity

trap– 30% probability

Global Growth Outlook

Source: IMF World Economic Outlook, October 2008

The U.S. Outlook: 2009-2010

Two-Year Growth Outlook

Source: Harvey Rosenblum

2009 Quarterly Growth Patterns

Source: Harvey Rosenblum

• Consumption grew from 62.4% of GDP in 1966 to 71.6% of GDP in 2007.

• Can this consumption binge be sustained?

• No!

Shop ‘Til You Drop: The Consumer Has Dropped!

*Change from year-end 2007, based on the average of first three quarters of 2008

Increase in Unemployment Likely to be Worst in the Post-War Era

Note: Stacked bar denotes GS forecast for the current business cycle.Source: Department of Labor and Goldman Sachs

Anecdotes on Downward Wage Pressures

• Pay freezes– Dell: extended unpaid holiday– Cisco: four-day year-end shutdown– The Seattle Times: unpaid furloughs

• Pay cuts– Brandeis suggests professors give up 1% of their pay

• No contributions to pensions• Suspended employer match on 401(k) plans• Bonus cuts

– Credit Suisse pays bonus in toxic securities– BOA and Citigroup top executives forgo 2008

bonuses

Negative Fundamentals Will Weigh on the Consumption Outlook in 2009

• Rising unemployment, job insecurity• Tight credit conditions• Loss of wealth, need to save------------------------------------------------------------

---Bottom line: Consumption will decline

in 2009, only the 8th time since 1930? (assuming no decline in 2008??)

Time Magazine: June 13, 2005

Longest and Deepest Housing Bust on Record

Current downturn'05:12-'08:11

'73:03-'75:03'78:08-'80:06'80:12-'82:02

'66:02-'66:12'90:03-'91:03

Average of 11 prior episodes

'68:12-'70:03

'99:04-'00:09

'94:04-'95:05'87:05-'88:01'84:06-'84:11'89:02-'89:07

-80

-70

-60

-50

-40

-30

-20

-10

0

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38

Duration, in months

Per

cent

dec

line,

pea

k to

tro

ugh

*Treats housing slowdowns of ’78:08-’80:06 and ’80:12-’82:02 as separate, and the housing slowdowns of ’87:05-’88:01 and ’89:02-’89:07 and ’90:03-’91:03 as separate.

Potential Good News for Housing

• 30-year conventional mortgage rate hits 5.10 during week of January 2, 2009, the lowest since 1972.

• Refinancing activity is up 136.7% from a year ago.• Mortgage applications up 62% from a year ago.• Home sales in California are up 83% from last

year, although prices have had to fall 42%.• Housing affordability, due to mortgage rates,

income growth, and lower housing prices, has moved up sharply and is not far from its early '70s high.

Nondefense Capital Goods Orders

Source: Census Bureau

Net Exports Growth Contribution to Real GDP

Inflation/Deflation Risks

CPI Rollercoaster

Headline CPI

Forecast: Harvey Rosenblum

Pricing: From a Seller’s to a Buyer’s Market

Source: Institute of Supply Management

Manufacturing Prices Paid

Pricing: From a Seller’s to a Buyer’s Market

Source: Institute of Supply Management

Nonmanufacturing Prices Paid

Manufacturing Prices Paid

ISM Manufacturing Prices Paid Index

Prices paid index at lowest level since 1949:

• From 29-year high (91.5) to 59-year low (18.0) in just six months

• 14.0 points below previous multi-decade low

• Inflation fell about 2-3 percentage points during the 1990-91 and 2000-2001 recessions

• During the current recession, inflation has already fallen about 4 percentage points from its peak

S&P GSCI Commodity Price Index

S&P GSCI Commodities Indices

S&P GSCI Commodities Indices

Bottom line:Perhaps a full year of mild

deflation.

From Financial Tailwinds (2005)

…to Headwinds (2007)

…to Gale-Force Headwinds (Sept. 2008).

“First, we need to stabilize his spine!”

Source: The New Yorker

What’s Working

• Global banking recap plans have reduced Libor spreads

• Fed’s purchase program for GSE mortgage-backed securities has reduced fixed-rate mortgages by 75 b.p.

• Fed commercial paper and money market fund facilities show signs of reviving commercial paper market

• Low short-term interest rates spurring investors to go to investment-grade corporate bonds

Since Oct. 1:• 90-day commercial paper rate down

3.5 percentage points

• 3-month Libor rate down 2.7 percentage points

Mortgage Rates Came Down

Source: Bloomberg

Corporate Bond Spreads Hit Historic Highs

Source: Federal Reserve Board, Merrill Lynch and Moody’s

Fed Easing

Federal Reserve’s Growing Balance Sheet (Assets)

Source: Federal Reserve Board, H.4.1 Release.

Securities lent to dealers, including TSLF

(off-balance sheet)

Week ended:

Money Growth Rates, Last Six Months Annualized

• Monetary Base 308%

• M1 33%

• M2 12.6%

Fed Easing

A Humble Note

“The way events have unfolded over the past few months simply has no precedent… No one knows the outcomes of an unprecedented event. No one.”

Zachary Karabell“The Economic News Isn’t All Bleak”

Wall Street JournalDec. 26, 2008, p.A13

Fiscal Stimulus

• Federal budget deficit expected to exceed $1 trillion this year before special stimulus package

• Obama likely to get additional fiscal stimulus of $800 billion spread over ‘09/’10

Oil Prices Acting as Tax & Stimulus(based on average annual price, difference from prior yr)

2008 Estimated Losses• to economy: $170 billion• to consumers: $86 billion

2009 Projected Gains• to economy: $355 billion• to consumers: $250 billion

Murphy’s Law/Casey’s Law

• Murphy’s Law:– If anything can go wrong, it will.

• Casey’s Law:– If something can go right, it should.

Conclusions

• Tough year ahead in 2009, noticeable improvement in 2010

• Consumption to bear the brunt of the adjustment

• Housing cycle will turn by year-end• Mild deflation likely in 2009• Monetary policy beginning to work• Fiscal policy and lower energy costs

will add to stimulus

Back of Tray

This Could Be the Longest Recession Since 1933

Manufacturing and Services in a Steep Decline

Source: Institute for Supply Management

Manufacturing and Services in a Steep Decline

Source: Institute for Supply Management

Manufacturing and Services New Orders

Source: Institute for Supply Management

Manufacturing and Services New Orders

Source: Institute for Supply Management

Despite continuing declines in starts and permits…

Source: Census Bureau

…months’ supply of new homes remains near record highs.

Nov.11.5

Source: Census Bureau

Home Prices Still Falling

Median existing single-family home sales price

S&P/Case-Shiller 20-city home price index

Source: The National Association of Realtors, S&P, Fiserv and MacroMarkets LLC

Housing as Percentage of GDP

Source: Bureau of Economic Analysis

Leading Economic Indicators

Advanced Economies Officially in Recession

• United States• United Kingdom• Euro Area• Japan

December 19 Global Policy Actions

• U.S. – Obama stimulus package my hit $850 billion

• Japan– Government to buy up to $223 billion bank shares– Bank of Japan cut rate 0.1%, increased purchases

of government debt, plans to buy commercial paper

• ECB– Cut interest rate paid to overnight deposits and

raised emerging lending rate• Danish

– Cut rate by 50 bp to 3.75%

December 19 Global Policy Actions (cont.)

• Turkey– Cut rate by 125 bp to 15%

• Vietnam– Cut rate by 150 bp to 15%

• France– Sarkozy may add to December’s $37 billion

stimulus package• U.K.

– Government tax cuts• India

– Considering fiscal stimulus plan

Silver linings

• Deflation raises standard of living in short-run

• Oil price decline “stimulus”• Monetary policy beginning to take

hold• Some thaw in short-term borrowing

Stealth Smoot-Hawley

• Credit• Monetary policy• Basel• Auto company lifelines• Bank Holding Company status

• Baltic Dry Index down 93% from peak in May, near its lowest in 22 years (Dec. 5)

• Smoot-Hawley Tariff Act of June 17, 1930