Photos courtesy of USDA Maria Akers Assistant Economist Federal Reserve Bank of Kansas City Omaha Branch September 22, 2008 Economic

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?



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



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 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


Borrowing by all Financial Institutions



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


Daily Treasury Yield Curve Rates



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


Net Percent of Domestic Banks Tightening Credit Standards



Today’s Outline

• The Ongoing Financial Market Crisis• The Housing Correction Continues



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)



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



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



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




Today’s Outline

• The Ongoing Financial Market Crisis• The Housing Correction Continues• Energy and Food Price Inflation



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



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


Developing countries

World GDP Growth

Especially in Developing Countries.



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


World GDP Growth



Energy and farm commodity prices have surged.


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


WTI Crude Oil Prices



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



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



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




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


Consumer Price Inflation

1990 to 2006 average

Dec 2007

Mar 2008

Aug 2008



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



Today’s Outline

• The Ongoing Financial Market Crisis• The Housing Correction Continues• Energy and Food Price Inflation• Employment and Consumer Spending



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)


U.S. Non-farm Job Growth and Unemployment Rate

Percent



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


Employment Cost Index



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



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)



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



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



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



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



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



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



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



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.



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?

Documents

Photos courtesy of USDA Maria Akers Assistant Economist Federal Reserve Bank of Kansas City Omaha Branch September 22, 2008 Economic