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Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
Economic Update Boston 2011
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Economic Update Boston 2011

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  • 1. 1
  • 2. FED ECONOMIST2012 Jeff 2
  • 3.  The outlook  Tepid growth likely  Recent data suggest growth of 2-2.5% in second half  High unemployment for a while—Structural?  Housing likely to be weak for some time  Elevated inflation (how to interpret recent rises?)  Concern over developments in Europe 70000 500 Some recent positive signs 67500 400 65000 300  Initial claims down, capital goods 62500 Cap. Goods orders 200 orders up, ISM up a bit 60000 Initial Claims 100 ISM index  Suggests continued slow growth 57500 2011:Jan 2011:May 0 2011:Sep 3
  • 4. (cats and dogs living together—a sign of the Apocalypse) 4
  • 5. 4.5 4.0 GDP growth 3.5 Long-run sustainable growth 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2009:Q3 2010:Q1 2010:Q3 2011:Q1Sources: Bureau of Economic Analysis, Haver Analytics 5
  • 6. Labor markets 400 11 3-month average change in employment Civilian unemployment rate, % of labor 200 10 0 9 -200 8 force Employment growth -400 Total Private 7 August 0 17 -600 June-Aug avg 35 83 6 3-mo. Avg. change, total employment -800 3-mo. Avg. change, private employment 5 Unemployment rate (right scale) -1000 4 2008:Jan 2008:Sep 2009:May 2010:Jan 2010:Sep 2011:MaySources: Bureau of Labor Statistics (employment, initial claims), Haver Analytics 6
  • 7. Peak-to-trough employment declines during the recession were large and widespread, across almost all sectors GovernmentLeisure and hospitality Educ. And HealthProf. and Bus. Services Financial Information Transportation MV Retail trade Wholesale trade Manufacturing Construction -30 -25 -20 -15 -10 -5 0 5Sources: Bureau of Labor Statistics, Haver Analytics Percent 7
  • 8.  Wages have decelerated noticeably over the past two years  Despite rather strong productivity growth4.5 8.0 4 7.03.5 6.0 3 5.0 Avg. hourly earnings2.5 4.0 ECI (right scale) 2 3.0 Productivity growth1.5 2.0 1 1.00.5 0.0 0 -1.0 2006:Q1 2007:Q1 2008:Q1 2009:Q1 2010:Q1 2011:Q1 8Sources: Bureau of Labor Statistics , Haver Analytics
  • 9.  Likely some increase in structural unemployment But most of the rise has been due to very weak demand However, a prolonged state of weak demand could turn cyclical unemployment into structural unemployment This is a risk to monitor 9
  • 10. I know you were expecting me to huff and puff and all that.But it is the 21st century, so I’m just going to foreclose on you. And then roast you with a nice honey glaze. 10
  • 11. Housing 1800 20 Single-family sales (left) 1600 Single-family permits 15 National house price index excl. distressed sales (Core Logic, right scale) 1400 10 including distressed sales (right scale) 12-month pctg. change 1200 5 Thousands 1000 0 800 -5 600 -10 400 -15 200 -20 0 -25 2006:Jan 2008:Jan 2010:JanSources: Census Bureau (permits), National Association of Realtors (home sales), Core Logic (house price indexes), Haver Analytics 11
  • 12.  Low housing demand, sizable vacant stock  1/3-1/2 of existing home sales are REO, etc. Why is demand weak?  Unemployment  Fear of job loss  Low and falling house prices  Weak house price expectations mute demand  Low house prices affect equity What will help?  We will return to this 12
  • 13.  Eliminates Equity position as of 2011:Q2 (Core Logic) some down payments and thus weakens 22.5 Negative equity sales 5 72.5 Near-negative  Limits or Positive equity eliminates refinancing optionsSources: Core Logic 13
  • 14. Real residential investment spending 900 800 Historical data 700 Macro Advisers Forecast 600 500 400 300 2004:Q1 2006:Q1 2008:Q1 2010:Q1 2012:Q1Sources: Census Bureau, Macroeconomic Advisers 14
  • 15. 24.0 Sovereign spreads over comparable German rates Greece 19.0 Ireland Portugal 14.0 Spain Italy 9.0 4.0 -1.0 20080101 20080729 20090224 20090922 20100420 20101116 20110614Sources: Reuters, Haver Analytics 15
  • 16.  Both overall and so-called “core” measures have risen of late 4 3.5 3 2.5 2 1.5 1 Core CPI, 3-mo. Chg 0.5 Core CPI, 6-mo. Chg. Core CPI, 12-mo. Chg. 0 Cleveland Fed weighted median, year-over-year -0.5 2005:Jan 2006:Jan 2007:Jan 2008:Jan 2009:Jan 2010:Jan 2011:JanSources: Bureau of Labor Statistics (CPI), Federal Reserve Bank of Cleveland (weighted median), Haver Analytics 16
  • 17.  Many temporary factors—auto prices (Japan), energy, food—have led to spikes in overall inflation But no acceleration in wages—2/3 of production cost4.5 43.5 32.5 2 ECI (right scale)1.5 Avg. hourly earnings 10.5 0 2006:Q1 2008:Q1Sources: Bureau of Labor Statistics , Haver Analytics 2010:Q1 17
  • 18.  Commodity price pressures are easing  We will see a gradual decline in inflation to somewhere between 1 and 2% 160 150 Copper 140 Wheat Index, Jan 2011 = 100 130 Oil 120 Cotton 110 100 90 Jan. 2011 80 70 60 20110103 20110214 20110328 20110509 20110620 20110801 20110912Sources: The Wall Street Journal, Haver Analytics 18
  • 19. 14.0 Civilian unemployment rates RI 12.0 US CT 10.0 New England 8.0 MA ME 6.0 NH VT 4.0 … although 2.0 the states vary 0.0 significantly 2007:Jan 2007:Jul 2008:Jan 2008:Jul 2009:Jan 2009:Jul 2010:Jan 2010:Jul 2011:JanSources: Bureau of Labor Statistics, Haver Analytics 19
  • 20. 280 House prices indexes, 1995=100 Boston (Case-Shiller) 260 NE (FHFA) 240 Index, 1995:Q1=100 US (Case-Shiller) 220 CT (FHFA) 200 180 160 140 120 100 1995:Q1 1998:Q1 2001:Q1 2004:Q1 2007:Q1 2010:Q1Sources: Case-Shiller, FHFA, Haver Analytics 20
  • 21. 6 Delinquent 90 days or more, % of all mortgages RI 5 US NE 4 CT 3 2 1 0 2007:Q1 2008:Q1 2009:Q1 2010:Q1 2011:Q1Sources: Mortgage Bankers’ Association, Haver Analytics 21
  • 22.  HAMP has not worked as well as hoped, HARP has not worked as well as hoped, Hope for Homeowners didn’t work at all HAMP-UP has had very limited take-up What to do?  Forbearance for unemployed/economically stressed homeowners  Expedite unavoidable foreclosures  Incentives to convert owner-occupied stock to rental stock  House price insurance that limits exposure to severe price declines  Limit late “push-backs” by Fannie/Freddie (e.g. after 2 or 3 years)  More dramatic measures? 22
  • 23. 23
  • 24.  Quick tour of our liquidity and alternative monetary policy efforts The Crisis evolved in two phases: 1. Liquidity crisis (shortage of short-term funds) 2. Macro crisis  Made more complicated by the Zero Lower Bound We responded to the two phases with two types of tools  Lending to institutions that couldn’t get short-term funds  Pursuing policies to lower longer-term interest rates (QE1, QE2, “Twist”) 24
  • 25.  Enormous effort to fix short-term credit markets (“liquidity”) 1200 Assets on the Federal Reserve Balance Sheet 1000 CB Swaps CPFF TAF 800 Billions of $ 600 400 200 0 2009:Jan 2009:May 2009:Sep 2010:Jan 2010:May 2010:SepSources: Federal Reserve Board H.4.1 Release, Haver Analytics 25
  • 26. Target federal funds rate 6 5 4 3 2 1 At the “zero lower bound” 0 2007:Jan 2008:Jan 2009:Jan 2010:JanSources: Haver Analytics 26
  • 27.  Liquidity policies phase out, macro stimulus policies phase in, viz our balance sheet 3000000 Agency and MBS 2500000 CB Swaps 2000000 CPFF 1500000 TAF Treasuries 1000000 500000 0 2008:Jan 2008:Jul 2009:Jan 2009:Jul 2010:Jan 2010:Jul 2011:Jan 2011:JulSources: Federal Reserve Board H.4.1 Release, Haver Analytics 27
  • 28.  We’re stuck at the ZLB How do we normally affect the economy?  By moving the federal funds rate  This in turn affects key borrowing rates:  Auto loans  Mortgages  Business loans  Education loans  Also effects equity valuations, the exchange value of the dollar When stuck at the ZLB, pursue policies to affect these rates directly 28
  • 29.  Leaves size of balance sheet the same  Sell short-term Treasuries, buy long-term  Goal: to lower long-term interest rates Fed Balance Sheet: Assets Before Twist After Twist Short-term Treasury securities $535B $135B (3 years or less, incl. Bills) Long-term Treasury securities $567B $967B (6 years or greater) Mortgage-backed securities $995B $995B  Likely effects  Lower long-term rates (15-25bps)—pretty confident  Spur spending, increase jobs 0.5-0.7M—less confidentSources: Federal Reserve Bank of New York, http://www.newyorkfed.org/markets/soma/sysopen_accholdings.html 29
  • 30.  Re-investing maturing/prepaid MBS back into MBS  Reverse some of the widening spread between mortgage rates and Treasuries 5.5 2.4 5.0 2.2 4.5 30-year fixed rate mortgage (left scale) 2.0 4.0 3.5 Spread, 30-year mortage over 10-year Treasury (right scale) 1.8 3.0 1.6 2.5 2.0 1.4 1.5 1.2 20110103 20110228 20110425 20110620 20110815Sources: Federal Reserve Board H.15 Release (10-year Treasury yield), NY Times (30-year mortgage rate), Haver Analytics 30
  • 31.  It has been a fascinating period The Fed has done things it never did before To accomplish two goals:  Keep financial markets working, so that business can continue  To directly stimulate the economy, to create economic growth and employment 31

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