1. The New Economic Landscape William Strauss Senior Economist and Economic Advisor Federal Reserve Bank of Chicago The Progressive Manufacturing Summit 2009 Sarasota, FL June 10, 2009

2. The economy entered a recession in the first quarter of 2008

3. First quarter GDP was driven down by large decreases in business fixed investment and inventories

4. GDP growth is forecast to be quite weak this year, but then grow closer to trend in 2010

5. Potential Historical Context Historical 1 Blue Chip Forecast for Current Episode AverageRangeConsensus Duration (months) 116 to 1618-24 Change in GDP 2 -1.7-0.4 to -3.1-3.6 3 Maximum Unemployment Rate 2 7.86.1 to 10.89.9 Change in payroll employment 2 -2.1-1.3 to -3.1-4.5 to -5.0 4 1. Calculated over the 1960-61, 1969-70, 1973-75, 1980, 1981-82, 1990-91, and 2001 recessions. 2.Percent change from peak to trough of GDP. 3.Starting from the peak of GDP in the second quarter of 2008. 4.My guess. – through May 2009 employment is down 4.3%

6. ARS Question Do you believe the recession will be over by the middle of this year?

7. ARS Question Do you think the recession will be over by the end of this year?

8. The Chicago Fed National Activity Index bottomed in January 2009 and has begun to rise

9. Consumer confidence rose quite sharply in May

10. Inflation has reversed its upward trajectory

11. In large part due to the movement of oil prices

12. Adjusted for inflation - current oil prices are well below early 1980s prices

13. Expenditures on energy increased over the past few years, and they are currently well below the historical average

14. Removing the volatile food and energy components from the PCE, core inflation has remained in the comfort zone

15. Inflation is anticipated to moderate this year and then rise by just under two percent in 2010

16. Employment has fallen by over 6 million jobs since December 2007

17. The unemployment rate has risen to the highest level since August 1983

18. The unemployment rate is forecast to peak at 9.9% early next year and then begin to edge lower

19. Employment recoveries have taken much longer over the past two cycles

20. Light vehicle sales collapsed

21. In an attempt to keep inventories in line with falling sales light vehicle production has been cut back quite severely

22. Consumer attitudes about buying a vehicle is very low

23. Increases in new domestic production share has offset losses in Detroit-3 market share

24. Manufacturing production fell off sharply beginning in the second half of 2008

25. Manufacturing capacity utilization has fallen to the lowest levels in more than 70 years

26. ARS Question Are your inventories at or below desired levels?

27. Purchasing managers composite index has improved

28. The new orders component has improved significantly

29. Residential investment fell off sharply beginning in 2006

30. Residential investment as a share of GDP is very low

31. The supply of new single family homes is extremely high

32. Housing starts have been cut-back sharply

33. Housing starts have fallen to a new post WWII low

34. When you take into account the growth of households, it is an even more dramatic decline

35. Mortgage rates are very low

36. Home price declines are large

37. Home price have fallen by over eight percent over the past year with large differences across regions

38. Housing affordability has improved dramatically

39. Yet, consumer attitudes for buying a home remain very low

40. Lending standards for mortgage loans remain tight

41. Corporate High Yield rates increased beginning in June 2007

42. Credit spreads between Corporate High Yield securities and Corporate Aaa securities rose by over 1,400 basis points, but have been improving over the past several months

43. The Fed has been very aggressive, lowering the Fed Funds rate by nearly 525 basis points

44. The Feds balance sheet has expanded in size and in composition

45. The outlook is for the U.S. economy to struggle through most of this year and then grow at a solid pace next year Summary Employment is expected to remain weak this year, leading to a continued rise in the unemployment rate Slackness in the economy will lead to a relatively low inflation rate over the coming year The volatile credit markets and the weak housing market are the biggest risk on the horizon for the U.S. economy

46. www.chicagofed.org www.federalreserve.gov