current economic conditions and a retrospective (?) on the ... presentation.pdf20081001 20081112...
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Current economic conditions
and
A retrospective (?) on the economic crisis
Jeff Fuhrer
Exec. VP and Director of Research
Federal Reserve Bank of Boston
October 1 2009
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Plan for the talk
Part I: Review economic conditions and their
implications for the outlook
Part II: Look back on the financial crisis (to date)
– Innovative Fed actions and market responses
– Is deflation a concern?
– Is inflation a concern? (Balance sheet issues)
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Part I
Economic conditions and outlook
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-800
-600
-400
-200
0
200
400
2000:Jan 2002:Jan 2004:Jan 2006:Jan 2008:Jan
3-mo. avg. chg., total employment
3-mo. avg. change, private employment
Sources: Bureau of Economic Analysis, Bureau of Labor Statistics, Global Insight
Employment is declining less and less rapidly
We are emerging from a very severe recession
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Housing market progress: It’s really happening
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300
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500
550
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900
1100
1300
1500
1700
1900
2000:Jan 2001:Jul 2003:Jan 2004:Jul 2006:Jan 2007:Jul 2009:Jan
Th
ou
san
ds
Th
ou
san
ds
Stock of 1-family houses for sale (right scale)
Single-family housing permits (left scale)
Source: Census Bureau
Improvements
in outstanding
inventory
Small
improvement
in
construction
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With reductions in inventories and some improvement in sales, I/S is clearly improving
Source: Census Bureau
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500
700
900
1100
1300
1500
0
2
4
6
8
10
12
14
2000:Jan 2001:Jul 2003:Jan 2004:Jul 2006:Jan 2007:Jul 2009:Jan
Months supply of homes for sale (left scale)
New single-family homes sold (right scale)
…and house prices have
flattened in many locations
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Some hopeful signs in recent investment data
40000
45000
50000
55000
60000
65000
70000
2008:Jan 2008:May 2008:Sep 2009:Jan 2009:May
Shipments
Orders
…improving orders
for capital goods
suggest an
improvement
in capital spending
next year
Source: New sales, permits, shipments and orders: Bureau of the Census; Existing sales: Nat’l Assoc. of Realtors
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Commercial real estate is still a serious
concern
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-8
-6
-4
-2
0
2
4
6
8
1990 - Q1 1993 - Q1 1996 - Q1 1999 - Q1 2002 - Q1 2005 - Q1 2008 - Q1
Qu
art
erl
y R
etu
rn
NACREIF Total Return on CRE
Total
Office
Retail
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Equity markets have responded favorably of late
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1200
20081001 20081112 20081224 20090204 20090318 20090429 20090610 20090722 20090902
•55% above March trough
• 17% above beginning of 2009
9/29
This helps to offset the significant loss to household wealth from fallen home prices
Source: S&P 500:New York Times; House prices: S&P Case Shiller
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0
10000
20000
30000
40000
50000
60000
70000
1990:Q1 1993:Q1 1996:Q1 1999:Q1 2002:Q1 2005:Q1 2008:Q1
Household Net Worth
HH net
worth down
over $12.2T
through June
A caveat: Despite the equity rally, overall
household net worth remains well down
Source: Board of Governors, Flow of Funds Accounts
…this is likely to restrain household spending in 2010
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The largest concern going forward:
Unemployment is likely to remain elevated
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5.0
6.0
7.0
8.0
9.0
10.0
11.0
2003:Q1 2005:Q1 2007:Q1 2009:Q1 2011:Q1 2013:Q1
Civilian Unemployment Rate
Macro Advisors
Global Insight
Full Employment Estimate
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Slow employment growth and slow wage
growth will challenge the consumer
0
1
2
3
4
5
6
7
2000:Q1 2003:Q1 2006:Q1 2009:Q1
Employment Compensation index, private industries
Total compensation
Wages
Source: Bureau of Labor Statistics
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High unemployment may also bear
implications for inflation
Disagreement on this: Too high or too low?
0
0.5
1
1.5
2
2.5
3
3.5
Jan-07 Jan-09
Blue Chip Forecast SurveyCPI inflation, 2 years out
Bottom 10
Median
Top 10
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Summary of conditions
The economy is recovering, likely slowly
Underlying fundamentals are still challenging
– Household net worth remains low
– Employment and wage growth remain weak
– Foreign growth remains weak
Expect a gradual recovery over the next several
years, with elevated unemployment
Inflation
– Balance sheet, deficit suggest higher inflation
– Lingering excess capacity suggests lower inflation
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Part II
A look back (and forward) at the
crisis
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What caused all this?
Many causes– Over-priced residential real estate
– Over-priced commercial real estate
– Over-building in residential real estate
– Heavy leverage in all of the above—borrowers in precarious positions
– A significant decline in house prices (a result of the over-building above)
– Households in trouble due to job loss, falling prices, default
– Financial firms in trouble due to losses on mortgage-related securities
– Similar problems at many foreign financial institutions
– Some missed supervisory opportunities
– Reliance on ratings agencies for new, untested products
– Contagion from mortgage-related to all other securities
– Loss of confidence among consumers and businesses—PANIC
– Loss of short-term credit at major financial institutions
– Pull back in hiring, spending, etc.
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What caused this? Housing and Debt:
Over-building, Inventory overhang
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1500
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14
2000:Jan 2001:Jul 2003:Jan 2004:Jul 2006:Jan 2007:Jul 2009:Jan
Months supply of homes for sale (left scale)
New single-family homes sold (right scale)
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What caused this?
Housing and Debt: Price rise and fall
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50
100
150
200
250
1990:Jan 1993:Jan 1996:Jan 1999:Jan 2002:Jan 2005:Jan 2008:Jan
Jan
. 2000 =
100
Composite 20
Boston
Las Vegas
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As prices fell and unemployment rose,
delinquencies and foreclosures surged
Subprime ARMs showed the
most dramatic rise in
foreclosures…
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1998:Q1 2001:Q1 2004:Q1 2007:Q1
90 days delinquent
Foreclosure initiated
Prime, 90-days
Prime, foreclosure
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Losses at financial institutions soared,
especially for mortgage-related securities
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14000
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1.00
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1991:Q1 1994:Q1 1997:Q1 2000:Q1 2003:Q1 2006:Q1 2009:Q1
Commercial Banks
Delinquency rate (left)
Charge-offs, $millions (right)The losses are ongoing, and
imply significant risk going
forward
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Some mortgage lenders disappeared
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Financial markets freaked out
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0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0Spread, 3-mo. $ Libor over 3-mo. OIS
"Spread, 1-mo. $ Libor over 1-mo. OIS"
Normally secure short-
term lending dried upBut note the
recent
improvement
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Widespread loss of confidence;
Real activity plummeted
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60.0
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100.0
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2007:Jan 2008:Jan 2009:Jan
Michigan sentiment index
Conference Board sentiment index
Confidence measures
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2002:Q1 2004:Q1 2006:Q1 2008:Q1
Unemployment Rate
4-qtr. % chg. In real GDP (right)
Real activity measures
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Policy Responses
The Fed
– Lowered the funds rate to zero—can’t get any lower!
– Pursued liquidity policies (short-term lending)
– Rescued individual firms (good or bad?)
– Tried some substitutes for conventional policy
(purchased MBS)
The Treasury
– Pumped capital into the banking system
– Insured deposits, secured lending
– Provided fiscal stimulus package
– Bailed out auto companies
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Fed Responses, itemized
Term Auction Facility (TAF)
– Lend to banks, but remove stigma of discount window
borrowing
Commercial paper (CPFF)/MMMF (AMLF) facilities
– Help commercial-paper and ABCP-based MMMF’s to meet
redemptions, continue funding (over $300B)
ABS facilities (TALF)
– Facilitate new-issue AAA ABS purchases, up to $200B
– ―Legacy securities‖ (with PPIP program)—CMBS, RMBS
MBS, Treasury purchases (LSAP: up to $1.25T, $300B)
– 30-year conforming rates down 1-1.25 ppts., refis up
FRMLFFA (Facility for Restricting Multi-Letter Fed Facility Acronyms)
Provide
short-
term
liquidity
Provide
longer-
term
credit,
macro
stimulus
Maintain
sanity
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Summary
The economy is in better shape than it was
The recovery is likely to be characterized by
– High unemployment for an extended period
– Risk of falling inflation—but some disagree
The crisis: A post-mortem
– Many causes
– Hard to predict many of the consequences
– Some appropriate policy responses
– Some are debatable