The Economic Outlook Sam Kahan, Senior Economist Federal Reserve Bank of Chicago: Detroit Branch Wisconsin Bankers Association Madison, Wisconsin Jan. 14, 2010 The comments and opinions that I will be expressing are my own and the do not reflect the thinking or policy posture of the Federal Reserve System nor of the Federal Reserve Bank Of Chicago, (7th District).

Presentation Current Situation 1

Real GDP Growth Real GDP (percent change, annual rate) 2

Labor Market Nonfarm Payroll Employment (change, thousands) Unemployment and Participation Rates (percent) 3 monthly change 3-month average Unemployment rate (percent of labor force) Participation rate (percent of population 16 and over)

The Economic Outlook 2010

Summary: Recession probably ended around June Debate whether recovery will be moderate and less robust than prior recoveries or not. –Considerable uncertainty surrounding this assessment. Pitfalls to growth still exist in the form of –a weak business sector, vulnerable commercial real estate market, and a financial system that is still at risk. Inflationary concerns likely but threat is low –Considerable economic slack. –Inflationary expectations subdued.

Prognostication Terms of Debate (Discussion) Key Issue of Debate Inflation Outlook 6

Attention Focus WALL STREET –Economic Activity MAIN STREET –Labor Market

The Debate on the economy Positive albeit moderate growth? – OR strong recovery following a sharp decline

GDP: Decline and Recovery

Household Balance Sheets Ratio of Household Net Worth to DPI (hundreds of percent) Household Debt and Savings Rate (percent) 10 Financial Obligations Ratio Personal Savings Rate

Bank Lending Total Loans and Credit Outstanding (three month percent change in MA3) C&I Loans Outstanding (three month percent change in MA3) 11 Shading corresponds with NBER recession periods

Bank Lending Continued Real Estate Loans Outstanding (3-month percent change in 3-month MA) Consumer Loans Outstanding (3-month percent change in 3-month MA) 12 Shading corresponds with NBER recession periods

Real GDP Growth Real GDP (percent change, annual rate) 13 Consensus Blue Chip Forecasts As of Dec 2009

Is Inflation on the Horizon? CPI Price Index (12-month percent change) 14 Total Core

15 Inflation Threat? Civilian Unemployment Rate and NAIRU (percent) CBO NAIRU Unemployment Rate

US Budget Deficit, CBO Projections (% of GDP, )

US Debt Held by Public, CBO Projections (% of GDP, )

Home Sales and Inventories Single Family Home Sales (thousands) Inventory of Unsold Homes (months supply) 18 New Existing New Homes Existing Homes

Residential Investment Single Family Housing Market (millions, annual rate) Home Price Indexes (Q1-2000=100) 19 Permits Starts Case-Shiller Composite 20 Price Index FHFA Purchase Only Price Index Loan Performance Home Price Index

Vehicle Sales

Lessons Learned Business cycle is alive and well. There is a need to understand better the risk/reward facing participants. Financial system and banks are an essential cog in the proper functioning of the economy. The Federal Reserve is not just the “lender of last resort”. 21

Thank You ! ! ! and now the Questions and Comments!