Economic Outlook

1. Economic Outlook Maria Akers Assistant Economist Federal Reserve Bank of Kansas City Omaha Branch www.kansascityfed.org September 22, 2008 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.

2. 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.

3. 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?

4. 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

5. Financial Markets Remain Volatile. Commercial Paper Rates and Fed Funds Rate Percent Discount rate cut Primary Dealer Credit Facility Term Security Lending Facility Discount Rate cut Term Auction Facility Source: Federal Reserve Board of Governors

6. Federal Reserve Injects Liquidity. Borrowing by all Financial Institutions Billions Source: Federal Reserve Board of Governors

7. Investors turned to Treasury Securities. Daily Treasury Yield Curve Rates Percent Source: Federal Reserve Board of Governors

8. Credit Standards have tightened. Net Percent of Domestic Banks Tightening Credit Standards Percent Source: Federal Reserve Board of Governors

9. Today’s Outline • The Ongoing Financial Market Crisis • The Housing Correction Continues

10. Home starts and sales are still dropping. Home Starts, Sales and Inventories Index (Jan-00=100) Month’s supply Existing Home Sales (Right Scale) Housing Starts (Right Scale) Housing Starts (Right Scale) Month’s Supply of New Homes (Left Scale) Source: Dept. of Commerce, National Association of Realtors

11. Nationally, home prices are falling. U.S. Home Price Indexes Percent change from previous year Case-Shiller OFHEO Source: OFHEO and Standard & Poor’s

12. Home foreclosures are still rising. Foreclosure Rates by Mortgage Type Percent of loans serviced Source: Mortgage Bankers Association

13. Credit standards on home mortgages have tightened. Credit Standards on Residential Real Estate Loans Net percent reporting tighter credit standards Source: Federal Reserve Board of Governors

14. Today’s Outline • The Ongoing Financial Market Crisis • The Housing Correction Continues • Energy and Food Price Inflation

15. Strong Global Economies are Driving Energy and Food Demand. . . World GDP Growth Percent change Forecast 5 year moving average Source: International Monetary Fund (July 2008 projections)

16. Especially in Developing Countries. World GDP Growth Percent Developing countries World Developed countries Source: International Monetary Fund (July 2008 projections)

17. Economic growth in developing countries is widespread. World GDP Growth Percent Source: International Monetary Fund (July 2008 projections)

18. Energy and farm commodity prices have surged. WTI Crude Oil Prices Farm Commodity Prices Dollars per barrel Index: 1980=100 Source: Department of Energy and USDA

19. Will Energy and Food Supplies Rise to Fulfill Increasing Global Demand? World Oil Balance 2004-2008 World Crop Inventories Million barrels per day Stocks-to-Use Ratio (Percent) Demand Supply Source: Department of Energy and USDA

20. A Decade of High Energy Inflation. Consumer Price Inflation – Food and Energy Components Annual percent change CPI - Energy CPI - Food Source: Bureau of Labor Statistics

21. Energy Costs are Driving Housing and Transportation Inflation. Source: Bureau of Labor Statistics

22. Food Price Inflation Across Categories. Consumer Price Inflation Annual percent change Dec 2007 Mar 2008 Aug 2008 1990 to 2006 average Source: Bureau of Labor Statistics

23. Inflation has jumped to its highest levels since the early 1990s. Consumer Price Inflation Annual percent change Core CPI: Less Food and Energy CPI Source: Department of Commerce

24. Today’s Outline • The Ongoing Financial Market Crisis • The Housing Correction Continues • Energy and Food Price Inflation • Employment and Consumer Spending

25. Will job losses slow consumer spending? U.S. Non-farm Job Growth and Unemployment Rate Change from previous month (Thousands) Percent Unemployment Rate (Right Scale) Job Change (Left Scale) Source: Bureau of Labor Statistics

26. Wage growth will have significant influence on inflation and growth. Employment Cost Index Percent change from year ago Benefits Wages and Salary Source: Bureau of Labor Statistics

27. Retail sales are mixed. Source: Census Bureau

28. What stimulus is left after the rebates? Personal Consumption Expenditures Annualized percent change from previous quarter Blue Chip Forecast (Sept 2008) Source: Bureau of Economic Analysis and Blue Chip Forecast

29. 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

30. Business activity has slowed with rising input prices. Business Activity Prices Paid Index Index Source: Institute of Supply Management

31. Weaker profits have slowed business investment. Corporate Profits and Nonresidential Fixed Investment Percent change from year ago Corporate Profits After Tax Structures Equipment and Software Source: Bureau of Economic Analysis

32. The Weak Dollar Has Boosted Exports Dollar Value and U.S. Net Exports Index Billions of Dollars Dollar Index Value (Left Scale) Net Exports (Right Scale)

33. 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

34. Economic Projections of the Federal Reserve Governors and Bank Presidents Near-Term: Weaker Growth Long-Term: Stronger Growth Near-Term: Rising Inflation Long-Term: Falling Inflation 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.

35. Private Sector Forecasts Near-term: weaker growth & higher inflation Long-term: stronger growth & lower inflation Real GDP Growth Consumer Price Inflation Annualized percent change Annualized percent change Sept Forecast Sept Forecast April Forecast April Forecast Source: Blue Chip Economic Indicators

36. 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. 

37. 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?