Economic Assessment William Strauss Senior Economist and Economic Advisor Federal Reserve Bank of Chicago Not So Silent Partners: Libraries and Local Economic Development Chicago, IL July 13, 2009

The economy entered a recession in the first quarter of 2008

The personal savings rate increased sharply

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

Potential Historical Context Historical 1 Blue Chip Forecast for Current Episode AverageRangeConsensus Duration (months) 116 to Change in GDP to Maximum Unemployment Rate to Change in payroll employment to to Calculated over the , , , 1980, , , and 2001 recessions. 2.Percent change from peak to trough of GDP. 3.Starting from the peak of GDP in the second quarter of My guess. – through June 2009 employment is down 4.7%

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

Inflation has reversed its upward trajectory

In large part due to the movement of oil prices

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

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

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

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

Employment has fallen by nearly 6.5 million jobs since December 2007

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

The unemployment rate is forecast to peak at 10.1% early next year and then begin to edge lower

Real disposable personal incomes are anticipated to continue to rise a moderate pace

Consumer spending is expected to edge down in the second quarter of this year and then begin to rise

Light vehicle sales collapsed

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

Consumer attitudes about buying a vehicle is very low

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

Residential investment fell off sharply beginning in 2006

Residential investment as a share of GDP is very low

The supply of new single family homes is extremely high

Housing starts have been cut-back sharply

Housing starts have fallen to a new post WWII low

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

Mortgage rates are very low

Home price declines are large

Home price have fallen by over seven percent over the past year with large differences across regions

Housing affordability has improved dramatically

Yet, consumer attitudes for buying a home remain very low

Lending standards for mortgage loans remain tight

Corporate High Yield rates increased beginning in June 2007

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

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

The Fed’s balance sheet has expanded in size and in composition

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