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Transcript of Photos courtesy of USDA Maria Akers Assistant Economist Federal Reserve Bank of Kansas City Omaha...
Photos courtesy of USDA
Maria AkersAssistant Economist
Federal Reserve Bank of Kansas City
Omaha Branch
www.kansascityfed.org
September 22, 2008
Economic Outlook
The views expressed are those of the author and do not necessarily reflect the opinions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.
Photos courtesy of USDA
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Economic Outlook
The views expressed are those of the author and do not necessarily reflect the opinions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Outline from September 2007
• Housing and the financial market crisis
• Risks to the Outlook– Will housing market weakness spread to the
overall economy?– Will inflationary pressures remain contained?
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Today’s Outline
• The Ongoing Financial Market Crisis• The Housing Correction Continues• Energy and Food Price Inflation• Employment and Consumer Spending• Business and Export Activity• Risks to the Outlook
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
1.5
2.5
3.5
4.5
5.5
6.5
7.5
Jun-07
Jul-07 Aug-07
Oct-07
Nov-07
Dec-07
Feb-08
Mar-08
May-08
Jun-08
Jul-08 Sep-08
1.5
2.5
3.5
4.5
5.5
6.5
7.5
AA Asset Backed 30 dayAA Nonfinancial 30 day
Intended Fed Funds Rate
Percent
Financial Markets Remain Volatile.
Commercial Paper Rates and Fed Funds Rate
Discount Rate cut
Discount rate cutPrimary Dealer Credit FacilityTerm Security Lending Facility
Term AuctionFacility
Source: Federal Reserve Board of Governors
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Federal Reserve Injects Liquidity.
$0.0
$20.0
$40.0
$60.0
$80.0
$100.0
$120.0
$140.0
19-Mar 16-Apr 14-May 19-Jun 16-Jul 21-Aug 17-Sep
Other
Primary Dealer
Primary
Billions
Source: Federal Reserve Board of Governors
Borrowing by all Financial Institutions
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Investors turned to Treasury Securities.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
9/11/08 9/17/08 9/19/08
Percent
Source: Federal Reserve Board of Governors
Daily Treasury Yield Curve Rates
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Credit Standards have tightened.
-40.0
-20.0
0.0
20.0
40.0
60.0
80.0
100.0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
-40.0
-20.0
0.0
20.0
40.0
60.0
80.0
100.0
All Mortgages/Prime Loans
Commercial Real Estate
C&I Loans
Percent
Source: Federal Reserve Board of Governors
Net Percent of Domestic Banks Tightening Credit Standards
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Today’s Outline
• The Ongoing Financial Market Crisis• The Housing Correction Continues
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
0
2
4
6
8
10
12
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07
40
60
80
100
120
140
160
Home starts and sales are still dropping.
Month’s supply
Source: Dept. of Commerce, National Association of Realtors
Home Starts, Sales and Inventories
Month’s Supply of New Homes(Left Scale)
Index (Jan-00=100)
Housing Starts(Right Scale)
Existing Home Sales (Right Scale)Housing Starts (Right Scale)
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Nationally, home prices are falling.
-20
-15
-10
-5
0
5
10
15
20
25
Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08
-20
-15
-10
-5
0
5
10
15
20
25Percent change from previous year
Case-Shiller
OFHEO
Source: OFHEO and Standard & Poor’s
U.S. Home Price Indexes
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Home foreclosures are still rising.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0Prime FRM
Subprime FRM
Subprime ARM
Prime ARM
Percent of loans serviced
Source: Mortgage Bankers Association
Foreclosure Rates by Mortgage Type
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Credit standards on home mortgages have tightened.
-20
0
20
40
60
80
100
2000 2001 2002 2003 2004 2005 2006 2007 2008
-20
0
20
40
60
80
100
All Non-Traditional
Subprime Prime Loans
Net percent reporting tighter credit standards
Credit Standards on Residential Real Estate Loans
Source: Federal Reserve Board of Governors
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Today’s Outline
• The Ongoing Financial Market Crisis• The Housing Correction Continues• Energy and Food Price Inflation
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
0
1
2
3
4
5
6
7
8
1970 1980 1990 2000 2010
0
1
2
3
4
5
6
7
8
Strong Global Economies are Driving Energy and Food Demand. . .
Percent change
Source: International Monetary Fund (July 2008 projections)
5 year moving average
World GDP Growth
Forecast
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008f
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Percent
World
Developed countries
Source: International Monetary Fund (July 2008 projections)
Developing countries
World GDP Growth
Especially in Developing Countries.
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Economic growth in developing countries is widespread.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
China India Russia Africa MiddleEast
Brazil Mexico
2007 2008 2009
Percent
Source: International Monetary Fund (July 2008 projections)
World GDP Growth
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Energy and farm commodity prices have surged.
Jan-81 Jan-86 Jan-91 Jan-96 Jan-01 Jan-06
80.0
100.0
120.0
140.0
160.0
180.0
200.0Dollars per barrel
Source: Department of Energy and USDA
Farm Commodity Prices
Index: 1980=100
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
Jan-81 Jan-86 Jan-91 Jan-96 Jan-01 Jan-06
WTI Crude Oil Prices
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Will Energy and Food Supplies Rise to Fulfill Increasing Global Demand?
1968 1978 1988 1998 2008
0
5
10
15
20
25
30
35
Rice Corn Wheat
Million barrels per day
Source: Department of Energy and USDA
World Crop Inventories
Stocks-to-Use Ratio (Percent)
80.0
81.0
82.0
83.0
84.0
85.0
86.0
2004 2005 2006 2007 2008
World Oil Balance 2004-2008
Demand
Supply
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
A Decade of High Energy Inflation.
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0Annual percent change
Source: Bureau of Labor Statistics
CPI - Energy
CPI - Food
Consumer Price Inflation – Food and Energy Components
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Energy Costs are Driving Housing and Transportation Inflation.
CategoryRelative
Importance(Percent)
Aug 2008(Annual Percent
change)
Housing 42.4 3.8
Shelter 32.5 2.4
Furnishings 4.7 1.2
Household Fuel 5.1 17.3
Transportation 17.7 12.1
Motor Vehicles 7.2 -0.9
Motor Fuel 5.5 35.9
Source: Bureau of Labor Statistics
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Food Price Inflation Across Categories.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
Meat,Poultry, Fish
Dairy Cereal andBakery
Fats and Oils Fruits andVegetables
Annual percent change
Source: Bureau of Labor Statistics
Consumer Price Inflation
1990 to 2006 average
Dec 2007
Mar 2008
Aug 2008
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Inflation has jumped to its highest levels since the early 1990s.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Jan-70 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0Annual percent change
Source: Department of Commerce
CPI
Core CPI:Less Food and Energy
Consumer Price Inflation
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Today’s Outline
• The Ongoing Financial Market Crisis• The Housing Correction Continues• Energy and Food Price Inflation• Employment and Consumer Spending
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Will job losses slow consumer spending?
-400
-300
-200
-100
0
100
200
300
400
500
600
Jul-96 Jul-98 Jul-00 Jul-02 Jul-04 Jul-06 Jul-08
0
1
2
3
4
5
6
7
8
9
10Change from previous month (Thousands)
Job Change(Left Scale)
Unemployment Rate(Right Scale)
Source: Bureau of Labor Statistics
U.S. Non-farm Job Growth and Unemployment Rate
Percent
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Wage growth will have significant influence on inflation and growth.
0
1
2
3
4
5
6
7
8
2002 2003 2004 2005 2006 2007 2008
0
1
2
3
4
5
6
7
8
Percent change from year ago
Wages and Salary
Benefits
Source: Bureau of Labor Statistics
Employment Cost Index
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Retail sales are mixed.
Retail SalesPercent Change from Aug 2008
to Aug 2007
Retail and Food Services +1.6
Gasoline Stations +22.5
General Merchandise Stores +4.3
Food and Beverage Stores +6.9
Food Services and Drinking Places +4.3
Motor Vehicle and Parts Dealers -13.5
Furniture and Home Furnishings Stores -6.8
Building Material and Garden Equipment Dealers -2.3
Department Stores (ex. L.D.) -4.2
Source: Census Bureau
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
What stimulus is left after the rebates?
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
2006 2007 2008 2009
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
Personal Consumption Expenditures
Annualized percent change from previous quarter
Source: Bureau of Economic Analysis and Blue Chip Forecast
Blue Chip Forecast(Sept 2008)
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Today’s Outline
• The Ongoing Financial Market Crisis• The Housing Correction Continues• Energy and Food Price Inflation• Employment and Consumer Spending• Business and Export Activity
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
40
45
50
55
60
65
70
Jan-05 Jan-06 Jan-07 Jan-08
Nonmanufacturing
Manufacturing
Jan-05 Jan-06 Jan-07 Jan-0840
50
60
70
80
90
100Nonmanufacturing
Manufacturing
Index
Source: Institute of Supply Management
Prices PaidIndex
Business activity has slowed with rising input prices.
Business Activity
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Weaker profits have slowed business investment.
-30
-20
-10
0
10
20
30
40
50
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-30
-20
-10
0
10
20
30
40
50
Structures
Equipment and Software
Corporate Profits and Nonresidential Fixed Investment
Percent change from year ago
Source: Bureau of Economic Analysis
Corporate ProfitsAfter Tax
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
80
85
90
95
100
105
110
115
120
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
-1000
-900
-800
-700
-600
-500
-400
-300
-200
-100
0
The Weak Dollar Has Boosted Exports
Index Billions of Dollars
Dollar Index Value(Left Scale)
Net Exports(Right Scale)
Dollar Value and U.S. Net Exports
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Today’s Outline
• The Ongoing Financial Market Crisis• The Housing Correction Continues• Energy and Food Price Inflation• Employment and Consumer Spending• Business and Export Activity• Risks to the Outlook
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Economic Projections of the Federal Reserve Governors and Bank Presidents
Central Tendency1 2007(Percent)
2008(Percent)
2009(Percent)
2010(Percent)
Real GDP growth Apr. 2008 projections Oct. 2007 projections
2.41.0 to 1.60.3 to 1.21.8 to 2.5
2.0 to 2.82.0 to 2.82.3 to 2.7
2.5 to 3.02.6 to 3.12.5 to 2.6
Unemployment rate Apr. 2008 projections Oct. 2008 projections
4.85.5 to 5.75.5 to 5.74.8 to 4.9
5.3 to 5.85.2 to 5.74.8 to 4.9
5.0 to 5.64.9 to 5.54.7 to 4.9
PCE inflation Apr. 2008 projections Oct. 2008 projections
3.43.8 to 4.23.1 to 3.41.8 to 2.1
2.0 to 2.31.9 to 2.31.7 to 2.0
1.8 to 2.01.8 to 2.01.6 to 1.9
Core PCE inflation Apr. 2008 projections Oct. 2008 projections
2.12.2 to 2.42.2 to 2.41.7 to 1.9
2.0 to 2.21.9 to 2.11.7 to 1.9
1.8 to 2.01.7 to 1.91.6 to 1.9
Source: Federal Reserve Board of Governors, June 25, 2008 FOMC Minutes
Note: Projections of the growth of real GDP, of PCE inflation, and of core PCE inflation are percent changes from the fourth quarter of the previous year to the fourth quarter of the year indicated. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.
1 The central tendency excludes the three highest and three lowest projections for each variable in each year.
Near-Term: Weaker Growth
Near-Term: Rising Inflation
Long-Term: Stronger Growth
Long-Term: Falling Inflation
FEDERAL RESERVE BANK OF KANSAS CITY
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Private Sector Forecasts Near-term: weaker growth & higher inflation Long-term: stronger growth & lower inflation
0
1
2
3
4
5
6
2007 2008 2009
0
1
2
3
4
5
6
Real GDP GrowthAnnualized percent change
Source: Blue Chip Economic Indicators
Sept Forecast
0
1
2
3
4
5
6
7
2007 2008 2009
0
1
2
3
4
5
6
7
Consumer Price InflationAnnualized percent change
Sept Forecast
April Forecast
April Forecast
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
FOMC Statement(September 16, 2008)
• Economic growth … slowed recently.– Reflecting a softening of household spending. – Tight credit conditions, the ongoing housing
contraction, and some slowing in export growth.
• Inflation has been high, spurred by earlier increases in the prices of energy and some other commodities.– Expects inflation to moderate, but– Outlook remains highly uncertain.
• Downside risks to growth and the upside risks to inflation are both of significant concern.
FEDERAL RESERVE BANK OF KANSAS CITY
Regional, Public, and Community AffairsPhotos courtesy of USDA
Conclusion
• Housing risks fueled financial market volatility – when will they stabilize?
• Commodity prices soared with strong global demand and limited supply gains.
• Rising energy prices have sapped U.S. economic growth and boosted inflation.
• Will consumer spending and business investment slow further?