Economic Outlook William Strauss Senior Economist and Economic Advisor Federal Reserve Bank of Chicago Multi-Chamber Economic Outlook Luncheon Downers Grove, IL February 10, 2010

The Chicago Fed National Activity Index bottomed in January 2009 and has been rising

The “Great Recession” appears to have come to an end around the middle of last year and the economy expanded by 5.7% in the fourth quarter

Fourth quarter GDP expanded at a fast pace with contributions largely coming from inventories, consumption and net exports

Personal savings has increased sharply

The stock market has improved since March 2009, but remains well below previous levels

GDP is forecast to grow above trend in 2010 and 2011

The forecast path of the current recovery is relatively muted compared with past deep recession recovery cycles

Employment has fallen by over 8.4 million jobs since December 2007

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

The unemployment rate is forecast to peak at 10.2% early this year and then begin to edge lower

Employment recoveries have taken much longer over the past two cycles

Michigan’s job losses are significant, losing 860,400 jobs since June 2000, amounting to 18.3% of their jobs

Michigan has the highest state unemployment rate in the nation

Inflation has begun to move higher

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

Removing the volatile food and energy components from the PCE, “core” inflation remains contained

Inflation is anticipated to rise by 1.8 percent this year and 2.1 percent next year

Industrial output fell quite sharply during the recession, but has risen strongly over the past six months

The downturn in manufacturing was the deepest and close to the longest decline over the past 50 years

Manufacturing capacity utilization fell to the lowest level in more than 70 years

Industrial production is forecast to rise at a solid pace through the end of 2011

Light vehicle sales collapsed with 2009 sales off 21%

Yet, light vehicle production has been cut back by 34%

The inventory to GDP ratio has fallen to record low readings

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

In the third quarter of last year, residential investment had its first increase since 2005

Residential investment as a share of GDP is very low

The supply of new single family homes has fallen from very high levels

Housing starts have been cut-back sharply

Housing starts have fallen to a 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 have been large

Home price declines in the second quarter, compared with a year-earlier, were quite large in the West and Florida 7 Red States 4 Light Blue States

Conditions improved in the third quarter with prices down around 4% compared with a year-earlier 4 Red States 7 Light Blue States

Housing affordability improved dramatically

Home sales have been moving higher

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 steadily since March 2009

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 expand at a solid pace this year and next year Summary Employment is expected to rise moderately this year and next year, with the unemployment rate edging lower through 2011 Slackness in the economy will lead to a relatively low inflation rate over the next two years Growth in manufacturing output will be solid in 2010 and 2011 due to improving demand and rebuilding of depleted inventories The volatile credit markets, concerns about commercial real estate, and the weak housing market are some of the biggest risks on the horizon for the U.S. economy