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
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)
Part I
Economic conditions and outlook
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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
Housing market progress: It’s really happening
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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
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
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
Commercial real estate is still a serious
concern
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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
Equity markets have responded favorably of late
600
700
800
900
1000
1100
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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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
The largest concern going forward:
Unemployment is likely to remain elevated
4.0
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
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
High unemployment may also bear
implications for inflation
Disagreement on this: Too high or too low?
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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
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
Part II
A look back (and forward) at the
crisis
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.
What caused this? Housing and Debt:
Over-building, Inventory overhang
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1100
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1500
0
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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)
What caused this?
Housing and Debt: Price rise and fall
0
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
As prices fell and unemployment rose,
delinquencies and foreclosures surged
Subprime ARMs showed the
most dramatic rise in
foreclosures…
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0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
1998:Q1 2001:Q1 2004:Q1 2007:Q1
90 days delinquent
Foreclosure initiated
Prime, 90-days
Prime, foreclosure
Losses at financial institutions soared,
especially for mortgage-related securities
0
2000
4000
6000
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10000
12000
14000
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
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10.00
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
Some mortgage lenders disappeared
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
Widespread loss of confidence;
Real activity plummeted
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20.0
40.0
60.0
80.0
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120.0
2007:Jan 2008:Jan 2009:Jan
Michigan sentiment index
Conference Board sentiment index
Confidence measures
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4
5
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5.0
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10.0
2002:Q1 2004:Q1 2006:Q1 2008:Q1
Unemployment Rate
4-qtr. % chg. In real GDP (right)
Real activity measures
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
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
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
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