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February 2009
(Covering January 9, 2008 to February 12, 2009)

In This Issue
Inﬂation and Prices
December Price Statistics
Financial Markets, Money, and Monetary Policy
The Yield Curve, January 2009
Credit Easing: A Policy for a Time of Financial Crisis
International Markets
Weaker Still
Economic Activity and Labor Markets
Employment Situation, December 2008
Labor Turnover
Dating a Recession and Predicting its Demise
Real GDP: Fourth-Quarter 2008 Advance Estimate
The Employment Situation, January 2009
Regional Activity
Ohio’s Local Labor Markets

Inﬂation and Prices

December Price Statistics
01.27.09
by Brent Meyer

December Price Statistics
Percent change, last
1mo.a

3mo.a

6mo.a

12mo.

5yr.a

2007
avg.

−8.5
−0.2

−12.7

−5.4

0.1

2.7

4.2

0.3

1.2

1.8

2.2

2.4

Medianb

0.6

1.6

2.7

2.9

2.8

3.1

16% trimmed meanb

0.1

−0.2

1.5

2.5

2.6

2.8

−20.7

−24.3

−13.2

−1.2

3.1

7.1

2.1

2.9

4.4

4.3

2.4

2.1

Consumer Price Index
All items
Less food and energy

Producer Price Index
Finished goods
Less food and energy

a. Annualized.
b. Calculated by the Federal Reserve Bank of Cleveland.
Sources: U.S. Department of Labor, Bureau of Labor Statistics; and Federal
Reserve Bank of Cleveland.

CPI, Core CPI, and Trimmed-Mean CPI
Measures
12-month percent change
6
5
4

Median CPIa

0
1998

The core CPI was virtually unchanged during the
month, falling just 0.2 percent at an annualized
rate. Over the past three months, the core CPI
has actually decreased 0.3 percent, its ﬁrst negative growth rate since September 1960. It seems,
at least on the surface, that retail prices on many
nonessential consumer goods fell in December:
Apparel prices decreased 10.7 percent (annualized
rate), recreation prices fell 2.4 percent (the largest
decrease in a little over nine years), and personal
care product prices (toiletries, perfumes, haircuts,
and so on) fell 2.1 percent (their steepest decline on
record, though this series, in its current form, goes
back only to 1999).

CPI

After posting a decline of 8.5 percent (annualized
rate) in December, the CPI ﬁnished the year up
only 0.1 percent on a year-over-year basis, its lowest
yearly price appreciation since 1945. This comes
just months after the 12–month growth rate of the
CPI was running at a 17-year high of 5.6 percent.
As expected, plummeting energy prices (namely
a 17 percent slide (nonannualized) in gas prices)
caused much of the headline decrease in December.

Core CPI

16% trimmedmean CPIa
2000

2002

2004

2006

2008

a. Calculated by the Federal Reserve Bank of Cleveland.
Sources: U.S. Department of Labor, Bureau of Labor Statistics, Federal Reserve
Bank of Cleveland.

The Federal Reserve Bank of Cleveland’s measures
of underlying inﬂation trends, the median CPI and
the 16 percent trimmed mean rose 0.6 percent and
0.1 percent, respectively. This is a much tighter
dispersion than during the prior ﬁve months. The
average absolute diﬀerence (since 1983) between
the annualized percent change in the median CPI
and the 16 percent trimmed-mean measure is about
0.5 percentage point. From July to November, the
average absolute diﬀerence between the two measures was 2.2 percentage points.
The underlying price distribution shows that more
than half of the index (53 percent, by expenditure
weight) rose at rates of less than 1.0 percent in
December, up a bit from November’s 44 percent,
while 34 percent exhibited price decreases in December (up from November’s 30 percent). On the

Federal Reserve Bank of Cleveland, Economic Trends | February 2009

CPI Component Price Change Distributions
Weighted frequency
50
45
40

December 2008
2007 average
2008 average

As mentioned before, the longer-term trend (12month growth rate) in the CPI plummeted all the
way to 0.1 percent during December. Measures of
underlying inﬂation (core, median, and trimmedmean CPI measures) all ticked down in December and are ranging between 1.8 percent and 2.9
percent.

35
30
25
20
15
10
5
0
<0

0 to 1
1 to 2
2 to 3
3 to 4
4 to 5
Annualized monthly percentage change

other side of the distribution, just 24 percent of the
CPI increased in excess of 3.0 percent in December,
down substantially from 49 percent in November.

Source: Bureau of Labor Statistics.

Household Inflation Expectations
12-month percent change
7.5
7.0
6.5
6.0
5.5
5.0
4.5
One year ahead
4.0
3.5
3.0
Five-to-ten years ahead
2.5
2.0
1.5
1.0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Given the recent downward momentum in consumer prices, consumer inﬂation expectations
curiously jumped in January (according to the
preliminary release by the University of Michigan).
One-year-ahead average inﬂation expectations increased to 2.5 percent, up from a recent low of 1.7
percent in December. Longer-term (5- to 10-year)
average inﬂation expectations, after a brief stint below 3.0 percent last month, spiked up 1.1 percentage points to 3.7 percent in January.

Note: Mean expected change as measured by the University of Michigan’s
Survey of C onsumers.
Source: University of Michigan.

Financial Markets, Money, and Monetary Policy

The Yield Curve, January 2009
01.20.09
by Joseph G. Haubrich and Kent Cherny
In the midst of all the depressing news about the
economy, the yield curve might provide a slice of
optimism. Not everyone sees it that way, however.
Nobel prize winner and New York Times columnist
Paul Krugman disagreed with our assessment last
month of the yield curve’s implications for economic growth.

Federal Reserve Bank of Cleveland, Economic Trends | February 2009

Yield Spread and Real GDP Growth
Percent
12
R eal G DP growth
(year-to-year percent change)

10
8
6
4
2
0

Ten-year minus three-month
yield s pread

-2
-4
1953

1963

1973

1983

1993

2003

Note: Shaded bars represent recessions.
Sources: Bureau of Economic Analysis, Federal Reserve Board.

Yield Spread and One-Year Lagged
Real GDP Growth Source
Percent
12
10

O ne-year lagged real G DP growth
(year-to-year percet change)

8
6
4
2
0
Ten-year minus three-month
yield s pread

-2
-4
1953

1963

1973

1983

1993

2003

Sources: Department of Commerce, Bureau of Economic Analysis; Board of
Governors of the Federal Reserve System.

So what’s the argument about? Many ﬁnancial analysts have come to view the slope of the yield curve
(the diﬀerence between long and short rates) as a
simple forecaster of economic growth. Krugman
questions how well it does so in the current ﬁnancial environment.
The rule of thumb is that an inverted yield curve
(short rates above long rates) indicates a recession
in about a year, and yield curve inversions have
preceded each of the last seven recessions (as deﬁned by the NBER). In particular, the yield curve
inverted in August 2006, a bit more than a year
before the current recession started in December
2007. There have been two notable false positives:
an inversion in late 1966, and a very ﬂat curve in
late 1998. More generally, a ﬂat curve indicates
weak growth, and conversely, a steep curve indicates strong growth. One measure of slope, the
spread between 10-year bonds and 3-month T-bills,
bears out this relation, particularly when real GDP
growth is lagged a year to line up growth with the
spread that predicts it.
Professor Krugman thinks the zero bound on
nominal interest rates makes the current prediction
suspect, at best. He argues that since short rates
can’t go down any further, long rates—as (more or
less) the average of expected short rates—have to be
above current short rates. This is a good point, but
not decisive, for two reasons.
First, we don’t know for sure that the information
content of the yield curve represents solely the
expectations of future short rates—it might include
a residual component of the long rate, sometimes
called the risk premium. Also, the length of time
short rates remain low will aﬀect the level of long
rates—which means that higher long rates could
indicate that market participants see an improving economy, with short rates moving up relatively
soon.
Secondly, Krugman points out that in Japan, the
yield curve had a positive slope all through its “lost
decade.” Another good point, but it’s not clear that
Japan’s situation is all that comparable with that
of the United States. Has Japan’s yield curve been
a useful predictor of economic growth, even outside zero-bound times? In the U.S., the yield curve

Federal Reserve Bank of Cleveland, Economic Trends | February 2009

Probability of Recession Based on the
Yield Spread
Percent
100
90
P robability of recession

80
70

F orecas t

60
50
40
30
20
10
0
1960

1966

1972

1978

1984

1990

1996

2002

2008

Note: Estimated using probit model.
Sources: Department of Commerce, Bureau of Economic Analysis;
Board of Governors of the Federal Reserve System; author’s calculations

Yield Spread and Predicted GDP Growth
Percent
6
5

R eal G DP growth
(year-to-year percent change)

P redicted G DP growth

3
2
1
0
Ten-year minus
three-month yield s pread

-1
-2
2002

2003

2004

2005

2006

2007

2008

2009

Sources: Department of Commerce, Bureau of Economic Analysis; Board of
Governors of the Federal Reserve System; author’s calculations.

has been a good predictor of growth, even going
back to the 19th century (as pointed out here1 and
here2). The curve’s forecasting power is more than
just as a predictor of where the Fed will move the
federal funds rate, because it worked even before
there was a Fed. Still, given it is a statistical relationship (however robust), we can’t be sure why it
works, or the circumstances under which it won’t.
Though the slope of the yield curve has ﬂattened
since last month, with long rates falling and short
rates inching up, the diﬀerence between them
remained strongly positive. The 3-month rate edged
up from the miniscule 0.02 percent to a still tiny
0.11 percent (for the week ending January 9). The
10-year rate dropped from 2.67 percent to 2.48.
Consequently, the slope decreased to 237 basis
points, down from December’s 265 basis points
and November’s 331. The ﬂight to quality, the zero
bound, and the turmoil in the ﬁnancial markets
may impact the reliability of the yield curve as an
indicator, but projecting forward using past values
of the spread and GDP growth suggests that real
GDP will grow at about a 3.3 percent rate over the
next year. This remains on the high side of other
forecasts, many of which are predicting reductions
in real GDP.
While such an approach predicts when growth
is above or below average, it does not do so well
in predicting the actual number, especially in the
case of recessions. But the yield curve can also be
used to predict a discrete event: whether or not the
economy is in recession. Looking at that relationship, the expected chance of the economy being
in a recession next January stands at a low 1.11
percent, up a bit from December’s 0.5 percent.
The probability of recession coming out of the yield
curve is very low, and may seem strange the in the
midst of the recent ﬁnancial news, but one aspect
of those concerns has been a ﬂight to quality, which
lowers Treasury yields. Furthermore, both the
federal funds target rate and the discount rate have
remained low, which tends to result in a steep yield
curve. Remember also that the forecast is for where
the economy will be next year, not where it is now.
Consider that, in the spring of 2007, the yield

Federal Reserve Bank of Cleveland, Economic Trends | February 2009

curve was predicting a 40 percent chance of a recession in 2008, something that looked out of step
with other forecasters at the time.
To compare the 1.11 percent to some other probabilities, and learn more about diﬀerent techniques
of predicting recessions, head on over to the Econbrowser blog.
Of course, it might not be advisable to take this
number quite so literally, for two reasons. (Not
even counting Paul Krugman’s concerns.) First,
this probability is itself subject to error, as is the
case with all statistical estimates. Second, other
researchers have postulated that the underlying
determinants of the yield spread today are materially diﬀerent from the determinants that generated
yield spreads during prior decades. Diﬀerences
could arise from changes in international capital
ﬂows and inﬂation expectations, for example. The
bottom line is that yield curves contain important
information for business cycle analysis, but, like
other indicators, should be interpreted with caution.
For more detail on these and other issues related to
using the yield curve to predict recessions, see the
Commentary “Does the Yield Curve Signal Recession? ”
1. For more on the yield curve as a predictor of growth:
http://www.mitpressjournals.org/doi/abs/10.1162/rest.90.1.182
2.

http://www.sciencedirect.com/science?_ob=MImg&_
imagekey=B6V84-4NVT9PD-1-1&_cdi=5860&_user=6754171&_
orig=browse&_coverDate=04%2F30%2F2008&_
sk=999009998&view=c&wchp=dGLbVlb-zSkzS&md5=764d5e9c5a
38faba494ec88a0ba63cee&ie=/sdarticle.pdf
For Paul Krugman’s column:
http://krugman.blogs.nytimes.com/2008/12/27/the-yield-curvewonkish/
For the NBER’s recession dating procedure:
http://www.nber.org/cycles/recessions.html
To read more on other forecasts:
http://www.econbrowser.com/archives/2008/11/gdp_mean_estima.
html
For more on predicting recessions at the Econbrowser blog:
http://www.econbrowser.com/archives/2008/02/predicting_rece.html
“Does the Yield Curve Yield Signal Recession?,” by Joseph G.
Haubrich. 2006. Federal Reserve Bank of Cleveland, Economic
Commentary is available at:
http://www.clevelandfed.org/Research/Commentary/2006/0415.pdf

Federal Reserve Bank of Cleveland, Economic Trends | February 2009

Financial Markets, Money, and Monetary Policy

Credit Easing: A Policy for a Time of Financial Crisis
02.11.09
by John B. Carlson, Joseph G. Haubrich, Kent
Cherny, and Sarah Wakeﬁeld
In a lecture at the London School of Economics on
January 13, 2009, Federal Reserve Chairman Ben
Bernanke added some clarity to the Fed’s policy
response to the current ﬁnancial crisis. Against the
backdrop of its traditional policy tools—changes
to the federal funds rate target and loans made
through the discount window—the chairman
described a framework for understanding the new
tools that have been created and employed to
support credit markets and restore their functioning. These tools, he pointed out, enable the Fed to
respond aggressively to the crisis even though the
federal funds rate stands near zero.
One common feature of the new tools is that “They
all make use of the asset side of the Federal Reserve’s balance sheet. That is, each involves the Fed’s
authorities to extend credit or purchase securities.”
In this way, the Fed can supplement its traditional
monetary policy tools by changing the mix of the
ﬁnancial assets it holds, stimulating speciﬁc troubled markets in the process. Chairman Bernanke
calls the approach “credit-easing” to distinguish it
from the one taken by the Bank of Japan (“quantitative easing”) when it was in a similar, zero-interest-rate environment. Quantitative easing focuses
on the quantity of reserves generated by policy
actions, rather than the mix of assets.
While many new, seemingly diverse credit-easing
tools have been introduced, Bernanke divides them
into three groups: lending to ﬁnancial institutions,
providing liquidity to key credit markets, and purchasing longer-term securities. Most of the tools are
an extension of the Fed’s traditional role as lender
of last resort, the purpose of which is to ensure that
healthy ﬁnancial institutions have access to suﬃcient short-term credit, particularly during times of
ﬁnancial stress. The use of the new lending facilities
has dramatically aﬀected both the composition and
size of the Fed’s balance sheet.

Federal Reserve Bank of Cleveland, Economic Trends | February 2009

Credit Easing Policy Tools
Billions of dollars
2600
2400
Longer-Term Security Purchases
2200
2000
Providing Liquidity to Key Credit Markets
1800
1600
1400
1200
1000
800
Lending to Financial Institutions
600
Traditional Security Holdings
400
Net of Securities Lent
200
0
6/07
9/07
12/07
3/08
6/08
9/08
12/08
Source: Federal Reserve Board

Lending to Financial Institutions
Billions of dollars
1600

Other credit extensions and AIG

1400
Securities lent to dealers and TSLF

1200
1000

Term auction facility

800
Primary dealer credit

600
Currency swaps and other assets

400

Primary, secondary, and seasonal credit

200
0
1/07

Repurchase Agreements

5/07

9/07

1/08

5/08

9/08

Source: Federal Reserve Board.

Federal Reserve Bank of Cleveland, Economic Trends | February 2009

1/09

Initially, as lending to ﬁnancial institutions expanded in response to the crisis, it merely displaced
securities held outright—the traditionally dominant asset in the Fed’s portfolio. With the failure
of Lehman Brothers in September 2008, lending
to ﬁnancial institutions rose sharply, increasing
the size of the Fed’s portfolio. Soon after, the size
of the assets accumulated as the other two groups
of policy tools began to increase as well. Since the
beginning of December, however, the total size of
the portfolio has diminished, as several of the newly
created lending facilities have begun to unwind.
Lending to Financial Institutions
Over the course of the ﬁnancial crisis, innovative
approaches have been needed to ensure that ﬁnancial institutions have access to short-term credit.
Traditionally, the Fed has oﬀered short-term loans
to banks through its discount window—most
typically over a business day. Such loans are usually
secured with very high-quality collateral. Loans to
depository institutions in pristine ﬁnancial condition are classiﬁed as primary credit, and banks that
do not qualify for primary credit or need to resolve
severe ﬁnancial issues must apply for secondary
credit. Unfortunately, there is a stigma associated with discount-window borrowing, and as the
ﬁnancial crisis progressed, the Fed grew concerned
that banks were reluctant to tap this critical source
of liquidity.
To overcome the stigma problem, the Federal
Reserve unveiled the Term Auction Facility (TAF)
in December 2007. The TAF auctions funds to
depository institutions against the same kinds of
collateral that can be used to secure funds at the
discount window. But because healthy banks are
just as likely to participate in the auction as those
in trouble, individual banks are not assumed to be
under distress just because they use the facility. The
facility has promoted an eﬃcient distribution of
liquidity.
At the same time it introduced the TAF, the Federal
Reserve announced it would extend currency swap
lines with the European Central Bank and the Swiss
National Bank. The swap lines provide these central
banks with dollars, which they can use to supply
liquidity to credit markets in their jurisdictions that
8

are based on dollars.
Despite the success of the TAF, ﬁnancial conditions worsened in early 2008, especially in March
when Bear Stearns collapsed. Liquidity became
scarce again when a highly leveraged hedge fund
defaulted on a loan, making creditors even more
cautious. Another problem emerged as a shortage
of Treasury securities in the marketplace threatened
to interfere with the process of reducing leverage.
In more tranquil times, both U.S. Treasury securities and triple-A rated private mortgage-backed
securities serve as collateral in private borrowing arrangements. Not so in today’s environment. Many
lenders will now accept only Treasury securities as
collateral, and shun the triple-A rated mortgagebacked securities. Some creditworthy borrowers are
shut oﬀ because they do not have Treasury securities. To deal with the shortage of collateral, the
Federal Reserve introduced two new policies: the
Term Securities Lending Facilities (TSLF) and the
Primary Dealer Credit Facility (PDCF).
The TSLF extended the borrowing term and
expanded the types of collateral primary dealers
could provide in order to borrow Treasury securities from the Fed. Primary dealers can now hold the
securities for up to 28 days (extended from overnight) and provide less-liquid securities as collateral, including federal agency debt, federal agency
mortgage-backed securities, and non-agency AAA
private mortgage-backed securities.
The PDCF authorized the Federal Reserve Bank
of New York to create a lending facility for primary dealers. Under the PDCF, credit extended
to primary dealers can be collateralized by a broad
range of investment-grade debt securities. This
facility extended the Fed’s typical liquidity support
facilities to the nonbank broker-dealers and investment banks that the Fed and Treasury transact with
on a regular basis. In eﬀect, it created a temporary
“discount window” for the some of the largest
non-depository institutions. Because the new facilities involved lending to institutions not explicitly
allowed for under the Federal Reserve Act, the Fed
needed to invoke its authority under section 13(3)
of the Act which allows such credit under exigent
and emergency conditions.
Federal Reserve Bank of Cleveland, Economic Trends | February 2009

In September of 2008, the Board of Governors
expanded the types of collateral that would be
accepted at the TSLF and the PDCF. The TSLF
now accepts all investment-grade securities and the
PDCF accepts any collateral acceptable in tri-party
repo systems. The currency swap lines with the
ECB and SNB were also increased at that time,
and new swap lines with other central banks were
authorized, including the Bank of Japan, the Bank
of England, and the Bank of Canada.
Under section 13(3) of the Federal Reserve Act, the
Federal Reserve was able to extend loans directly to
a distressed ﬁnancial institution, namely AIG. The
loan is collateralized by all of AIG’s assets, and the
U.S. government received a 77.9 percent equity
interest in AIG.
Providing Liquidity to Key Credit Markets

Providing Liquidity to Key Credit Markets
Billions of dollars
600
500

Maiden Lane II

400

Maiden Lane III

300
CPFF
200
ABCP/MMF

100
0
1/07

Maiden Lane
5/07

9/07

1/08

5/08

9/08

Source: Federal Reserve Board.

Federal Reserve Bank of Cleveland, Economic Trends | February 2009

7/09

In spite of these creative devices and their success in
funneling massive amounts of liquidity to ﬁnancial
institutions, credit markets were still faltering. One
problem was that Fed-supplied liquidity was not
necessarily being transferred to credit markets by
the ﬁnancial institutions that had obtained it. Another was that lending to ﬁnancial institutions was
not addressing credit strains in nonbank markets.
Over the past two decades, ﬁnancial intermediation
has gradually shifted away from bank lending and
toward the capital markets. Because of this shift,
stabilizing the ﬁnancial system requires the Federal
Reserve to target the speciﬁc lending markets that
many companies depend on for short- and longterm ﬁnancing. The Fed introduced a number of
tools intended to support the functioning of these
credit markets by providing them access to liquidity.
The ﬁrst of these markets was money market
mutual funds. These funds hold trillions of dollars
of short-term government and private sector debt,
earning a low-but-steady return for investors who
favor the preservation of principal over longerterm, higher-return investments. Following the
Lehman Brothers failure, some of these funds sustained losses when they found themselves holding
nearly-worthless Lehman debt. The news of losses
was threatening to freeze the market (most investors choose money market funds to avoid losses of
10

any kind). Four days after Lehman Brothers ﬁled
for bankruptcy, the Federal Reserve announced a
new lending facility intended to provide a liquidity backstop for these funds. The facility provides
a way for banks to ﬁnance the purchase of assetbacked commercial paper from the money funds.
The eﬀect of the announcement was to permit
an orderly management of withdrawals from the
money funds, preventing a liquidation of assets at
distressed prices, which could have destabilized the
funds’ net asset values.
The Fed’s Commercial Paper Funding Facility
(CPFF) was introduced on October 7 to support
the commercial paper market. Commercial paper
is short-term (overnight to 270-day maturity) debt
issued by corporations, often to manage cash needs
in the short run, such as payroll obligations. It is
most often unsecured, but in recent years many
ﬁnancial institutions secured their paper (called
“asset-backed commercial paper”) with their holdings of long-term assets, most notably mortgagebacked bonds. Uncertain credit markets in the fall
of 2008 led to concerns that companies that had
issued unsecured paper or asset-backed commercial
paper would be unable to roll it over into new debt.
At the time the CPFF was announced, the market
would only allow paper to be rolled over one night
and at very high interest rates. The CPFF is intended to alleviate the rollover risk. The facility purchases 3-month unsecured and asset-backed commercial
paper that carries credit ratings in the top tier.
Interest rates ﬂoat at levels intended to make shortterm ﬁnancing costs reasonable for issuing companies, but high enough that the private commercial
paper market will be the better economic choice as
it returns to normalcy.
The Maiden Lane LLCs are some of the most esoteric components of the Federal Reserve’s balance
sheet. All three are tied to pools of assets that the
Fed has lent against to stabilize speciﬁc companies
and asset classes. The Maiden Lane LLC consists
of a loan to J.P. Morgan that is backed by a pool of
securities that were obtained from the acquisition
of Bear Stearns in March 2008. The pool consists
primarily of investment-grade residential and commercial mortgage-backed securities. According to
the agreement with J.P. Morgan, the ﬁrst $1 billion
Federal Reserve Bank of Cleveland, Economic Trends | February 2009

of collateral losses will be borne by the acquiring
bank.
Maiden Lane III LLC was created after billions
were loaned to AIG. The insurer had extended
credit protection—in the form of credit default
swaps—on billions of dollars’ worth of collateralized debt obligations (CDOs). When AIG’s credit
rating was downgraded, the credit default swap
holders ordered collateral postings at levels that
threatened the company’s solvency. Beginning
in late November 2008, the Fed loaned funds to
Maiden Lane III so that it could begin to purchase
the CDOs upon which the credit default swap
contracts had been written (the CDOs also serve as
collateral for the Fed loan). The entity could then
begin the process of unwinding the swaps—since it
held the assets they derived value from—to stabilize
both the derivatives market and AIG.
Maiden Lane II LLC’s purpose also traces back to
AIG. In previous years, the insurer had lent some of
its large securities holdings to other companies in
exchange for cash collateral, which it then invested
in mortgage-backed debt products. This produced
higher yields than more traditional investments like
Treasury securities. However, increasing residential
delinquencies and defaults caused the mortgage
investments to lose both value and liquidity. Many
securities borrowers stopped rolling over their loans
and instead demanded their cash back, particularly
after AIG was downgraded in September 2008. In
December, the Federal Reserve extended a loan to
AIG to meet cash redemptions and stabilize the
value of the mortgage-backed securities. The loan
collateral (mortgage bonds) is represented in the
Maiden Lane II LLC vehicle.
Finally, the Federal Reserve announced in November 2008 the creation of the Term Asset-Backed
Securities Loan Facility (TALF). Though not yet
operational, the program will provide both liquidity and capital to the consumer and small business
loan asset-backed securities markets. The Fed will
lend money against asset-backed securities that
are backed by student, auto, credit card, and SBA
loans. What’s more, the Treasury Department has
agreed to provide $20 billion in credit protection
from its Troubled Asset Relief Program (TARP) to
Federal Reserve Bank of Cleveland, Economic Trends | February 2009

the TALF—a cushion against losses on the ABS
collateral. This capital will allow the Federal Reserve
to revive the market for securitized consumer loans,
which has been essentially shut down since last fall.
Purchasing Longer-term Securities
In addition to lending to ﬁnancial institutions
and providing liquidity directly to key ﬁnancial
markets, the Federal Reserve employed a third
set of policy tools aimed at improving conditions
in private credit markets. These tools involve the
purchase of long-term securities in these markets.
In November 2008, the Federal Reserve announced
plans to purchase the direct obligations of the
housing-related government-sponsored enterprises
(GSEs), speciﬁcally Fannie Mae, Freddie Mac,
and the Federal Home Loan Banks. In principle,
the extra demand for these obligations is designed
to increase the price of the securities and thereby
lower rates paid for mortgages. Additionally, the
Fed outlined plans to purchase mortgage-backed
securities backed by Fannie Mae, Freddie Mac, and
Ginnie Mae. These actions were designed to improve the availability of credit for the purchase of
houses, therefore supporting the housing markets
and ﬁnancial markets in general.

Buying Longer-Term Securities
Billions of dollars
50
45

Mortgage-backed
securities

40
35
30

Federal
agency
debt securities

25
20
15
10
5
0
6/08

7/08

8/08

9/08

10/08 11/08 12/08

1/09

Source: Federal Reserve Board.

2/09

In January 2009, the Federal Reserve began purchasing mortgage-backed securities. Purchases up to
$100 billion in GSE obligations and $500 billion
in mortgage-backed securities are expected to take
place over several quarters. The mortgage market
has responded favorably to the Federal Reserve’s
program.
Each of the Federal Reserve’s “credit easing” strategies—lending to ﬁnancial institutions, providing
liquidity to key credit markets, and purchasing
long-term securities—has helped to restore liquidity to impaired markets and to push down lending
spreads to more typical levels. Moreover, the Fed
has shown that its policy arsenal can be greatly
expanded by changing the composition of its balance sheet assets. With the target federal funds rate
now near zero, credit easing will undoubtedly play
a leading role in promoting the full recovery of the
economy and ﬁnancial markets.

Federal Reserve Bank of Cleveland, Economic Trends | February 2009

International Markets

Weaker Still
02.11.09
by Owen F. Humpage and Michael Shenk

World GDP Growth
Annual percent change
10

Projections

8
Developing countries

World

4
2
0
Advanced economies

-2
-4
1980

1985

1990

1995

2000

2005

2010

Note: Dotted lines are January 2008 revisions for 2009 and 2010.
Source: International Monetary Fund, World Economic Outlook Database, October 2008.

World GDP Growth
Projections
2007

2008

2009

5.2

3.4

0.5

3.0

2.7

1.0

United States

2.0

1.1

Euro area

2.6

1.0

Japan

2.4

−0.3

−2.0
−1.6
−2.0
−2.6

1.1

United Kingdom

3.0

0.7

−2.8

0.2

Canada

2.7

0.6

−1.2

1.6

World
Advanced economies

Emerging and developing economies

2010

1.6
0.2
0.6

8.3

6.3

3.3

5.0

China

13.0

9.0

6.7

8.0

India

9.3

7.3

5.1

6.5

ASEAN-5

6.3

5.4

2.7

4.1

Western Hemisphere

5.7

4.6

1.1

3.0

Note: GDP growth is measured as a year-over-year percent change.
Source: International Monetary Fund, World Economic Outlook Update July
2008.

Federal Reserve Bank of Cleveland, Economic Trends | February 2009

With world trade and industrial production falling
precipitously, the International Monetary Fund has
again pared its forecast for global economic growth.
The agency now expects world economic activity
to expand by only 0.5 percent in 2009, the slowest
growth rate since World War II. The agency believes that economic activity will pick up in 2010,
but only to a paltry 3.0 percent. The outlook is
highly uncertain with risks clearly to the downside.
Output among the advanced economies is likely to
contract by 2 percent in 2009, another post–World
War II ﬁrst. All of the large developed countries
are likely to experience a contraction this year but
return to growth in 2010. The IMF now estimates
that the cumulative output shortfalls from potential
between 2008 and 2010 will be on par with those
sustained in the 1974–75 and 1980–83 recessions.
With worldwide export demand falling, with lower
commodity prices, and with ﬁnancial conditions
substantially tighter, emerging and developing
countries are feeling the pinch. These countries
came into the current economic malaise in a substantially stronger position than in the past. Consequently, their growth rates are likely to remain
above levels reached during previous worldwide recessions. The IMF expects economic growth among
the emerging and developing countries to slow to
3.3 percent in 2009 and 5.0 percent in 2010.
The IMF sees the deteriorating economic situation
as a continuing problem in credit markets. The
adverse feedback from slower economic growth
continues to overwhelm ﬁnancial institutions’ attempts to improve their balance sheets. As long as
this problem continues, the credit ﬂows necessary
to support domestic and international economic
activity will remain scarce. The IMF recommends
that policy focus on the provision of liquidity, bank
recapitalization, and eﬀorts to address problem assets.

For the IMF’s World Economic Outlook Update:
http://www.imf.org/external/pubs/ft/weo/2009/update/01/index.htm
For the IMF’s Global Financial Stability Report:
http://www.imf.org/external/pubs/ft/fmu/eng/2009/01/index.htm

Economic Activity

The Employment Situation, December 2008
01.13.09
by Yoonsoo Lee and Beth Mowry

Average Nonfarm Employment Change
Change, thousands of jobs
300
200
100
0
-100
-200
-300
-400
-500
-600
-700

Revised
Previous estimate

2006 2007 2008

III

December
IV October
November

2008
Source: Bureau of Labor Statistics.

December employment fell by 524,000, roughly
meeting expectations and bringing the year’s total
losses to 2.6 million. Downward revisions to both
October and November ﬁgures leave those months’
losses at 423,000 and 584,000, respectively. The
revised numbers for October and November,
coupled with December’s newly reported losses,
reveal fourth–quarter 2008 declines exceeding 1.5
million jobs. The unemployment rate also jumped
0.4 percentage point from 6.8 to 7.2 percent in
December, the highest rate since January 1993.
The number of unemployed rose by 632,000, even
as the labor force contracted by 173,000. Unemployment rates for the prior two months were also
revised higher, to 6.6 percent in October and 6.8
percent in November.
The diﬀusion index of employment change also
sank a little further from 27.2 to an unprecedented
low of 25.4, meaning that only about one–quarter
of industries are expanding, while the rest are trimming positions.
Job losses were about evenly split between the
goods–producing sector (251,000) and the service–
providing sector (273,000). Within the goods
sector, onstruction lost 101,000 jobs and anufacturing lost 149,000. Residential construction losses
(54,000) were heavier than nonresidential losses
(34,000). The greatest manufacturing declines were
seen in durable goods (−114), particularly within
the motor vehicles and parts and fabricated metal
products. Nondurable goods shed 35,000 jobs,
with food manufacturing suﬀering the heaviest
casualties.
Last month’s service–sector payroll loss of 273,000

Federal Reserve Bank of Cleveland, Economic Trends | February 2009

follows November’s even larger loss of 402,000,
larger than any loss experienced since August of
1983. Total net losses in the sector this year now
total over 1.2 million. The biggest service–sector
losers last month were trade, transportation and
utilities (−121,000) and professional and business
services (−113,000). Auto dealers alone accounted
for about one–third of retail trade’s 67,000 payroll
cuts. The drop–oﬀ in professional and business
services this year has been uncharacteristically
steep, even in comparison to past recessions. Also
within services, information lost 20,000 jobs and
ﬁnancial activities lost 14,000. Declines last month
in Leisure and hospitality (22,000) slowed down a
bit from the previous few months. The only bright
spots in the report, as usual, were in education and
health (which gained 45,000) and government
(which gained 7,000).

Private Sector Employment Growth
Change, thousands of jobs: three-month moving average
300
250
200
150
100
50
0
-50
-100
-150
-200
-250
-300
-350
-400
-450
-500
-550
2003

2004

2005

2006

2007

2008

Source: Bureau of Labor Statistics.

Labor Market Conditions
Average monthly change (thousands of employees, NAICS)
Payroll employment

2006

2007

2008

December 2008

175

−216

−524

Goods-producing

−38

−113

−251

Construction

−19

−53

−101

Heavy and civil engineering

−1

−7

−12.6

Residentiala

−5

−20

−31

−53.6

Nonresidentialb

−15

−34.3

Manufacturing

−14

−22

−66

−149

Durable goods

−4

−16

−50

−114

Nondurable goods

−10

−6

−16

−35

Service-providing

172

130

−102

−273

Retail trade

−44

−66.6

Financial activitiesc

−9

−12

−14

PBSd

−57

−113

Temporary help services

−7

−41

−80.9

Education and health services

Leisure and hospitality

−14

−22

Government

Local educational services

2.2

Average for period (percent)
Civilian unemployment rate

4.6

5.8

7.2

a. Includes construction of residential buildings and residential specialty trade contractors.
b. Includes construction of nonresidential buildings and nonresidential specialty trade contractors.
c. Includes the finance, insurance, and real estate sector and the rental and leasing sector.
d. PBS is professional business services (professional, scientific, and technical services, management of companies
and enterprises, administrative and support, and waste management and remediation services.
Source: Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | February 2009

The three–month moving average of private–sector
employment growth dropped to an almost unprecedented low of −516,600 last month. Greater losses
were seen only back in February 1975, ﬁve recessions ago.

Economic Activity

Labor Turnover
02.02.09
by Murat Tasci and Beth Mowry

Labor Turnover
Percent
4
Separations rate

The Bureau of Labor Statistics tracks the hiring and
ﬁring activity of establishments across the nation in
its Job Openings and Labor Turnover (JOLTS) series. One important statistic from JOLTS is the net
hires rate, the diﬀerence between the hires rate and
the separations rate. A positive net hires rate indicates an increase in aggregate employment across
establishments. Up until May 2008, the net hires
rate had been positive for almost ﬁve years.

Hires rate

3.5
3
Job openings rate
2.5
2
1.5
2001

2002

2003

2004

2005

2006

2007

2008

Note: Shaded bars indicate recessions.
Sources: U.S. Department of Labor, Bureau of Labor Statistics.

Net Employment Change
Thousands
800
600

JOLTS

400

More recently, other JOLTS statistics have been
painting a clearly deteriorating picture of the
labor market. This is true of turnover numbers,
such as separations and hires, as well as labor
demand measures such as job openings. Aggregate
hires registered their largest decline in November
2008 (607,000) and now stand at an all-time low
of 3,548,000. Similarly, job openings declined
208,000 in November—their lowest level since
September 2003.

200
0
CES
-200
-400
-600
-800
2001

2002

2003

2004

2005

2006

2007

2008

Notes: JOLTS (Job Openings and Labor Turnover Survey) net employment change
is the monthly number of hires minus separations; CES net change is taken from
the Current Employment Statistics survey; Shaded bars indicate recessions.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

One well-known problem with the JOLTS dataset
is that it overestimates net job creation relative to
the Current Employment Survey (CES). Hence, a
change in the net hires rate may not imply a similar
change in CES payroll numbers from one month
to the next. For instance, the CES entered negative
territory in January 2008, while JOLTS implied
net employment gains until four months later.
Nevertheless, JOLTS provides our only measure
of aggregate turnover, and more importantly, job
openings data.
Since the beginning of the JOLTS series, there have
been two clear downturns in aggregate employ-

Federal Reserve Bank of Cleveland, Economic Trends | February 2009

ment. The ﬁrst was from December 2000 to June
2003, and the second is the ongoing downturn that
started in January 2008. When we look at the behavior of labor turnover and job openings in both
of these downturns and the expansion in between,
several patterns emerge.

Total Nonfarm Employment
Payrolls, millions
140
138
136

First of all, for the aggregate economy, average
monthly job openings, separations, and hires were
all higher in the expansion than in either downturn. At the sector level however, this is not always
the case. A secular increase in the education and
health services sector, for instance, provided robust
growth and reallocation in the sector over time.
In fact, the demand for workers in this sector, as
measured by job openings, was higher during the
downturns than in the expansion.

134
132
130
128
2001 2002 2003

2004

2005 2006 2007 2008

Notes: Shaded bars indicate recessions; Dotted lines indicate peaks and
troughs in CES payroll employment (June 2003 and December 2007).
Source: U.S. Department of Labor, Bureau of Labor Statistics.

Average Job Openings and Labor
Turnover by Industry
Job openings

Total private
Mininga

Hires

Total separations

12/006/03

7/0312/07

1/0811/08

12/006/03

7/0312/07

1/0811/08

12/006/03

7/0312/07

1/0811/08

2845

3253

3023

3962

4362

3961

4012

4164

4085

Construction

115

132

101

370

385

315

388

383

394

Manufacturing

232

282

232

340

352

276

457

367

355

Trade, transportation,
and public utilities

514

325

557

322

1006

867

355

981

954

Informationa

100

Finance, insurance,
and real estatea

176

231

193

177

197

190

173

192

197

Professional and
business services

544

640

638

672

841

795

611

775

773

Education and health
services

635

621

661

440

470

496

391

410

430

a. Not seasonally adjusted.
Note: December 2000 to June 2003 indicates the first downturn in aggregate employment. July 2003 to December 2007 is
the expansion. January 2008 to November 2008 is the second downturn.
Sources: U.S. Department of Labor, Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | February 2009

We also see the eﬀects of a booming housing sector
in the data on construction jobs for the ﬁrst seven
years of the series. More speciﬁcally, hires and
separations were very stable between the ﬁrst downturn and the following expansion. However, as the
problems grew in the housing sector, construction
employment declined, as did the demand for workers and overall turnover.

Aggregate Economy
Thousands of hirings/openings
5500
Actual hiring
5000
Hiring trend
4500
4000
Job openings trend

3500

Actual job openings
3000
2500
2000
2001

2002

2003

2004

2005

2006

2007

2008

Note: Shaded bars indicate recessions.
Sources: U.S. Department of Labor, Bureau of Labor Statistics.

Construction Sector
Thousands of hirings/openings
600
500

Hiring trend

Actual hiring

400
300
Actual job openings
200

Job openings trend

100
0
2001

2002

2003

2004

2005

2006

2007

2008

Note: Shaded bars indicate recessions.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

Finance, Insurance, and Real Estate Sector
Thousands of hirings/openings
400
Actual job openings
300

Job openings trend

200

It is often hard to get a meaningful understanding
of labor turnover by looking at monthly levels of
hiring, separations, and job openings in isolation
of the broader trends. If we look at the trends in
hiring and job openings, we see that both have
been declining gradually since the end of 2006. The
declining trend seems to be sharper for job openings than hires.
As we noted, aggregate trends can disguise differences across sectors. For instance, consider the
construction and ﬁnancial services sectors, which
are expected to be hardest hit by the turmoil in
the housing and ﬁnancial markets. Employment
activity in the construction sector is slightly diﬀerent from the aggregate economy’s. First, the construction sector does not seem to have large swings
in trend like the aggregate economy. Unlike the
aggregate economy, hiring in construction started
to trend down in November 2004.

Actual hiring

100

0
2001

Even though it is far from complete, the current
downturn shows a lot of similarity with the previous one with respect to measures of turnover and
job openings. Average monthly hires and separations are about the same in the aggregate and in
some sectors (such as mining; trade, transportation,
and utilities; and education and health services).
Even though total job openings have been higher
on average in the current downturn, they have
stayed at relatively the same level for some sectors,
most notably for manufacturing. However, we need
to be cautious here, since low demand for labor
might persist for some time, signiﬁcantly changing
the picture.

Hiring trend

2002 2003

2004

2005

2006

2007

2008

Notes: Shaded bars indicate recessions; Data are not seasonally adjusted.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | February 2009

Employment in the ﬁnancial services sector also behaved diﬀerently than the aggregate economy. For
one thing, ﬁnancial services employment did not
experience a sharp decline in its trend during the
2001 recession. Instead, most of the decline in the
19

demnd for workers in this industry coincided with
the onset of housing and ﬁnancial market troubles
starting in mid-2006.

Economic Activity

Dating a Recession and Predicting Its Demise
02.02.09
by Paul Bauer and Michael Shenk

Real GDP and GDI
Percent change, annual rate
20
15
GDI
10
5
0
GDP
-5
-10
-15
1947

1954

1961

1968

1975

1982

1989

1996

2003

Few were surprised when the NBER’s Business
Cycle Dating Committee announced on December
1, 2008, that the U.S. economy was in recession.
However, what may have surprised some observers
is that the committee dated the last business cycle
peak, and hence the beginning of the recession, to
December 2007. After all, the ﬁrst of the two consecutive negative quarters of real GDP growth (the
common rule-of-thumb deﬁnition of a recession)
did not come until the third quarter of 2008 (when
it fell to -0.5 percent). The previous two quarters
had posted growth of 0.9 percent and 2.8 percent,
respectively.

Source: Bureau of Economic Analysis.

Employment
12-month percent change
6
5
4

Household employment

3
2
1
0
-1
-2

Payroll employment

-3
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Note: Shaded bars indicate recessions.
Source: Bureau of Labor Statistics.

The simple answer is that the committee’s deﬁnition is both broader and less precise: “A recession is a signiﬁcant decline in economic activity
spread across the economy, lasting more than a few
months, normally visible in real GDP, real income,
employment, industrial production, and wholesaleretail sales.”
The performance of the two main employment
series, nonfarm payroll employment and the BLS’s
household survey, certainly look consistent with
a recession dating to late 2007. The related unemployment rate series sends a similar signal. If
anything, it suggests an even earlier date for the
start of the recession. As of now, unemployment
has already risen above the peak it hit in the last
recession and is fast approaching the one it hit in
the 1991 recession.
The signal is less pronounced in the two main
measures of output, GDP (gross domestic product)
and GDI (gross domestic income). Theoretically,
the two should be equivalent, as sales of products
generate income for ﬁrms and workers equal to

Federal Reserve Bank of Cleveland, Economic Trends | February 2009

Industrial Production and Capacity Utilization
12-month percent change
15

Percent of capacity
90

-5

-10

-15
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Note: Shaded bars indicate recessions.
Source: The Federal Reserve Board.

Unemployment Rate
Percent of labor force
12

the amount of sales, but in practice they diﬀer
by a “statistical discrepancy,” which in this case is
enough to provide a muddied signal for the start
of the recession. GDI was just enough weaker than
GDP over the past year to indicate a downturn.
GDI data for the fourth quarter of 2009 are not yet
available, but GDP data for that quarter (−3.8%)
leaves no doubt that the U.S. economy is in a recession now.
The Federal Reserve produces some narrower
output-related measures (industrial production and
capacity utilization series for manufacturing, mining, and utilities), and looking only at them would
shift the dating of the recession’s onset only one
month forward to January 2009. Even though both
are likely to fall further, they have already dropped
below their respective troughs in the last two recessions and seem likely to reach the depths of the
most severe postwar recessions.

11
10
9
8
7
6
5
4
3
2
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Note: Shaded bars indicate recessions.
Source: Bureau of Labor Statistics.

Business Fixed Investment

Going forward, there are at least three questions
on everyone’s mind: How long? How deep? and
What will be the lasting eﬀects? While no one can
answer any of these questions with any certainty,
some broad outlines are possible. With most series
still headed south, this will certainly be among the
deepest—if not the deepest—postwar downturn.
When the recovery comes, evidence from past
ﬁnancial crises suggest that the recession is unlikely
to be V–shaped (a quick snap back). The best we
can hope for seems to be a U-shaped one (more
time spent in the trough). As unpromising as that
may sound, that outcome would be better than an
L-shaped one (a long protracted recovery).

Percent of GDP

As for lasting eﬀects, there are likely to be many.
Assuming liquidity is mopped up in a timely
fashion—and much of the added liquidity is set
up with incentives for that to happen as ﬁnancial
markets recover—then inﬂation should remain
tamed. Also, there will be permanent changes in
ﬁnancial and housing markets, but what those will
be depends crucially on regulatory reforms and
changes in participants’ behavior that are beyond a
simple summary here.

15
14
13
12
11
10
9
8
1947

1954

1961

1968

1975

1982

1989

1996

2003

Note: Shaded bars indicate recessions.
Source: Bureau of Economic Analysis.

Federal Reserve Bank of Cleveland, Economic Trends | February 2009

It is crucial to get these reforms right because they
will determine, in part, investment going forward.
Investment is keenly watched because of its inﬂu21

Productivity Growth
Percentage points
3.0
2.5

Contribution of capital intensity

2.0
1.5
1.0
0.5
0.0
-0.5

Contribution of labor composition

ence on labor productivity—the main source of
improving living standards over time. Directly,
investment is needed to increase the capital-labor
ratio (capital deepening), which boosts labor productivity. Indirectly, investment is often required to
realize the gains that appear as multifactor productivity growth, the main source of gains in labor
productivity in the long run. Productivity held up
surprisingly well in the last recession even though
investment as a share of GDP fell, though the gains
from capital deepening did fall. If we are fortunate,
the same will happen this time around.

-1.0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Source: Bureau of Labor Statistics

Productivity Growth
Annual percent change
6
5
Labor productivity

4
3
2
1
0
-1

Multi-factor productivity

-2
-3
-4
1960

1965 1970

1975 1980

1985 1990

1995 2000

2005

Source: Bureau of Labor Statistics

Economic Activity

Real GDP: Fourth-Quarter 2008 Advance Estimate
02.09.09
by Brent Meyer
Real GDP decreased at an annualized rate of 3.8
percent in the fourth quarter of 2008. While this
marks the statistic’s worst quarterly performance
since 1982, it is much less than the −5.5 percent
that was expected.
The four-quarter growth rate in real GDP turned
negative for the ﬁrst time since the third quarter of
1991, falling to −0.2 percent. Personal consumption expenditures, which comprise roughly 70
Federal Reserve Bank of Cleveland, Economic Trends | February 2009

Real GDP and Components, 2008:Q4
Advance Estimate
Annualized percent change, last:
Quarterly change
(billions of 2000$)

Quarter

Four quarters

Real GDP

−113.0

−3.8

−0.2

Personal consumption

−73.7

−3.5

−1.3

Durables

−72.4

−22.4

−11.4

Nondurables

−43.5

−7.1

−2.8

Services

20.3

1.7

1.2

Business fixed investment

−73.5

−19.1

−4.4

Equipment

−82.5

−27.8

−10.9

Structures

−1.5

−1.7

8.5

Residential investment

−23.0

−23.6

−19.7

Government spending

9.6

1.9

3.4

National defense

2.9

2.1

8.5

−3.3

—

Exports

−83.3

−19.8

0.6

Imports

−79.9

−15.7

−7.0

Private inventories

6.2

—

Net exports

Source: Bureau of Economic Analysis.

Contribution to Percent Change in Real GDP
Percentage points
4
2008:Q4 (advance)
2008:Q3
3
Average over last 4 quarters
2
1
0

Government
spending
Personal
consumption

Residential
investment
Change in
inventories

-1

Exports
Imports

-2
-3

Business
fixed
investment

-4
Source: Bureau of Economic Analysis.

percent of real GDP, decreased 3.5 percent, following a 3.8 percent decline in the previous quarter.
The investment picture grew substantially darker,
as business ﬁxed investment plummeted 19.1
percent, compared to just a −1.7 percent decline
in the previous quarter. Residential investment fell
23.6 percent (−16.1 percent last quarter). Private
inventories rose by $6.2 billion (−$29.6 billion last
quarter). International trade seemed to fall oﬀ the
map, with the largest quarterly decreases in exports
and imports since 1974 and 1980, respectively.
Exports plunged 19.8 percent, while imports fell by
15.7 percent.
Personal consumption subtracted 2.5 percentage
points from real GDP growth, all of which came
from goods consumption, as services added 0.7
percentage point. This is a slight improvement over
the third quarter’s 2.8 percentage point subtraction.
Private inventories added 1.3 percentage points to
output growth, which far exceeded the average addition to growth of this component (0.2 percentage
point) over the past four quarters. While there were
wild swings in the contributions of both exports
and imports, net exports actually added 0.1 percentage point to growth in the fourth quarter.
The fourth quarter of 2008 saw some of the most
dramatic price swings on record for the GDP
chain-type price indexes. First, the PCE price index
decreased 5.5 percent in the fourth quarter, a record by far (core PCE prices rose 0.6 percent). The
next-closest quarterly decrease in the PCE (−3.0
percent) occurred in the ﬁrst quarter of 1949. Also,
the price indexes for imports and exports shattered
previous records, falling 36.7 percent and 20.7
percent, respectively. For comparison, the previous
record declines were −15.2 percent for imports and
−9.6 percent for exports, both happening in the
ﬁrst quarter of 1952.
The latest Blue Chip consensus forecast for real
GDP is a −3.3 percent decrease in the ﬁrst quarter
of 2009. However, given the modest upside surprise
in the fourth-quarter growth estimate (especially
the large run-up in private inventories) and the
relatively negative recent forward-looking economic
indicators, the ﬁrst-quarter forecast will likely get
revised down. That said, the Blue Chip panelists

Federal Reserve Bank of Cleveland, Economic Trends | February 2009

generally see the recession ending in mid-2009
and growth rebounding to its longer-term trend in
2010.

PCE Price Index
Annualized percent change
15
PCE
10
Core PCE
5

-5

-10
1947 1953 1959 1965 1971 1977 1983 1989 1995 2001 2007
Source: Bureau of Economic Analysis.

Import and Export Chain Price Indexes
Annualized percent change

Real GDP Growth
Annualized quarterly percent change
6

90
70
Import prices

Final estimate
Advance estimate
Blue Chip consensus forecast

50
2
30
10

Export prices

-10

-2

-30
-50
1947 1953 1959 1965 1971 1977 1983 1989 1995 2001 2007
Source: Bureau of Economic Analysis.

-4
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2007
2010
2009
2008
Source: Blue Chip Economic Indicators, January 2009; Bureau of Economic Analysis.

Economic Activity

The Employment Situation, January 2009
02.09.09
by Murat Tasci and Beth Mowry
The labor market shed 598,000 jobs in January,
coming in worse than expected and bringing this
downturn’s total losses to 3.6 million. Downward
revisions subtracted an additional 66,000 jobs from
November and December’s ﬁgures, which now
amount to losses of 597,000 and 577,000. Roughly
half the losses in the current downturn have come
in the past three months. Additionally, the unemployment rate jumped from 7.2 to 7.6 percent, the
Federal Reserve Bank of Cleveland, Economic Trends | February 2009

Average Nonfarm Employment Change

highest rate since September 1992.

Change, thousands of jobs

Meanwhile, the diﬀusion index of employment
change continued to hit new record lows since its
creation in 1991. It sank from 25.5 to 25.3 last
month, meaning that only 25.3 percent of industries are increasing their payrolls.

300
Revised
Previous estimate

200
100
0
-100
-200
-300
-400
-500
-600
-700
2006 2007 2008

Q2
Q3
2008

Nov. Dec.

Source: Bureau of Labor Statistics

Jan.
2009

January’s payroll decline was the worst since 1974,
with losses spread broadly across most industries.
Goods-producing employment fell by 319,000,
with the manufacturing sector accounting for twothirds of those losses (207,000) and experiencing
its largest monthly decline since October 1982.
Durable goods bore the brunt of losses within
manufacturing, owing largely to the subcategories
of fabricated metal products (−37,000) and transportation equipment (−41,000). Construction had
its second-worst month of the current downturn,
shedding 111,000 jobs.
Losses in service-providing industries (279,000)
were spread across all major sectors, with the lone
exceptions of education and health (+54,000)—
which has not contracted since September
2004—and the government, which made a small
contribution of 6,000 jobs. The biggest losses were
in trade, transportation, and utilities (−118,000)
and professional and business services (−121,000).
Within the trade, transportation, and utilities sector, truck transportation lost 25,000 jobs, its sharpest monthly drop since the trucking strike in April
1994 (when losses reached 49,000). Retail trade
continued its poor performance, losing 45,000
jobs. A huge portion of the losses within professional and business services came from employment
services (−89,000). The ﬁnancial activities sector
lost 42,000 jobs, its second-largest drop of the current downturn.
The three-month moving average of private sector
employment growth dropped to an all-time low of
−590,670 last month. The only losses in the private
sector greater than that date way back to 1945.
In addition to the usual Employment Report
information out today, the Bureau of Labor Statistics released its annual benchmark revisions to
nonfarm employment, which aﬀect data back to
January 2004. These more comprehensive counts

Federal Reserve Bank of Cleveland, Economic Trends | February 2009

of employment are derived from unemploymentinsurance tax records compiled by the Quarterly
Census of Employment and Wages (QCEW) program. This year’s revision resulted in anadditional
loss of 385,000 jobs for the entire 2008 calendar
year. About two-thirds of this loss was in services,
most of which was due to additional losses in
ﬁnancial activities (79,000) and leisure and hospitality (71,000). Within goods-producing industries,
manufacturing had the largest downward revision
(66,000).

Labor Market Conditions
Average monthly change (thousands of employees, NAICS)
2006
Payroll employment

2007

2008

January 2009

178

−248

−598

Goods-producing

−34

−123

−319

Construction

−16

−56

−111

Heavy and civil engineering

−6

−3

Residentiala

−5

−23

−34

−61

Nonresidentialb

−15

−46.9

−14

−22

−71

−207

Durable goods

−4

−16

−52

−157

Nondurable goods

−10

−5

−19

−50

Service-providing

173

130

−125

−279

Retail trade

−44

45.1

−10

−19

−42

−61

−121

Temporary help services

−7

−44

−76.4

Education and health services

Leisure and hospitality

−20

−28

Government

Local educational services

2.8

Manufacturing

Financial

activitiesc

PBSd

Average for period (percent)
Civilian unemployment rate

4.6

5.8

7.8

Unemployment continued to increase during
January, following its upward trend in the past
nine months. As of now, the unemployment rate
stands 2.7 percentage points higher than a year
ago, almost a 55 percent increase. This is the highFederal Reserve Bank of Cleveland, Economic Trends | February 2009

est year-over year change since August 1975. This
jump resulted from an increase in the number of
unemployed workers (508,000) and the largest
labor force contraction since May 1995 (731,000).

Private Sector Employment Growth
Change, thousands of jobs: 3-month moving average
300
200
100
0
-100
-200
-300
-400
-500
-600
2003

2004

2005

2006

2007

2008

2009

Source: Bureau of Labor Statistics.

Unemployment Rate
Percent
12
10
8
6
4
2
0
1980

1985

1990

1995

2000

2005

Note: Seasonally adjusted rate for the civilian population, age 16+.
Source: Bureau of Labor Statistics

Regional Acrivity

Ohio’s Local Labor Markets
02.05.09
by Kyle Fee
Since the recession started in December 2007, the
U.S. economy has shed 2.5 million jobs, or 1.9 percent of nonfarm payroll employment, and Ohio has
reduced its payrolls by 1.6 percent. However, not
all areas of Ohio have experienced similar employment losses.
Looking at nonfarm payroll data from the Bureau
of Labor Statistics for the three largest metropolitan
areas in Ohio, we see that Cleveland has experiFederal Reserve Bank of Cleveland, Economic Trends | February 2009

Nonfarm Payroll Employment:
Large Ohio MSAs
Index, Dec. 2007 = 100
102
December 2007
101

Columbus

100
Cincinnati

Ohio
USA

98
Cleveland
97
1/1/2007

7/1/2007

1/1/2008

7/1/2008

Note: metro area data has been seasonally adjusted using X-11.
Source: Bureau of Labor Statistics.

Nonfarm Payroll Employment:
Smaller Ohio MSAs
Index, Dec. 2007 = 100
102
December 2007
101
Canton

Youngstown

100
99

Akron
Dayton

98
Toledo

97
96
1/1/2007

7/1/2007

enced the steepest decline in employment since the
recession began (−2.1 percent). This is worse than
Ohio’s overall rate of decline (−1.6 percent) but is
in line with the percentage change at the national
level. Meanwhile, Cincinnati’s and Columbus’s labor markets have held up relatively well, with each
metropolitan area losing less than 1 percent of its
employment over the course of the current recession.

1/1/2008

7/1/2008

Note: Metro area data has been seasonally adjusted using X-11.
Source: Bureau of Labor Statistics.

Examining the BLS data for the state’s smaller
metropolitan areas, we see considerable dispersion
in job losses. Akron, Canton, and Youngstown have
experienced job losses of less than 1 percent, while
Dayton and Toledo have experienced considerably
higher losses of −1.9 percent and −3.3 percent,
respectively.
The source of the diﬀerences in job losses across
Ohio’s metropolitan areas lies in the manufacturing sector. Job losses in this sector also account for
why the declines in nonfarm payroll employment
are much steeper in Cleveland, Dayton, and Toledo
than other Ohio metropolitan areas. In Cleveland,
Dayton, and Toledo, for example, job losses in the
manufacturing sector accounted for 40 to 55 percent of the decline in employment for sectors that
were contracting.
There are two possible explanations for this pattern. A negative shock to the manufacturing sector
could be aﬀecting all metropolitan areas equally,
but if Cleveland, Dayton, and Toledo have higher
shares of their workforces employed in manufacturing than other areas have, the shock would subtract
more from the overall growth of those cities with
more manufacturing employment.
Alternatively, metropolitan areas like Cleveland,
Dayton, and Toledo may have suﬀered much larger
negative shocks to their manufacturing industries.
This could be the case if manufacturing in these
metropolitan areas is more tied to heavy industries
that have experienced large negative shocks over the
last several months, such as automobiles and steel.
The ﬁrst possibility does not look likely. Areas hardest hit by employment losses in manufacturing do
not have higher shares of manufacturing employment than areas not so hard hit. Cleveland’s,

Federal Reserve Bank of Cleveland, Economic Trends | February 2009

Sector Components of Employment Growth
Percent
2.0

Educational & health

1.5 services
1.0

Financial Activities
Other services

Trade, transportation Leisure
Professional &
& hospitality
business services & utilities
Information
Natural resources,
Government
mining & construction
Manufacturing

0.5
0.0
-0.5

Dayton’s, and Toledo’s shares of manufacturing
employment, for example, are similar to Ohio’s.
Meanwhile, Canton and Youngtown—areas with
the highest share of manufacturing employment—
have held up relatively well. Columbus’s low share
of manufacturing employment, however, has likely
had a mitigating eﬀect on the overall employment
loss in that metropolitan area.

-1.0
-1.5
-2.0
-2.5
-3.0
-3.5

-0.8

-4.0

Akron

-0.8

-2.1

-0.4

-1.9

-3.3

-0.2

-1.6

Cincinnati Columbus
Toledo
Ohio
Cleveland
Dayton
Youngtown
Canton

-1.9
US

Note: metro area data has been seasonally adjusted using X-11.
Source: Bureau of Labor Statistics.

Employment Growth and Sector Shares
Manufacturing as a percent of
total employment (
2007)

Manufacturing
employment growth
(percent)

Non-manufacturing
employment growth
(percent)

Akron

13.7

–1.7

–0.7

Canton

17.6

0.1

–1.1

Cincinnati

11.5

–2.8

–0.5

Cleveland

13.3

–7.8

–1.2

Columbus

8.0

–3.2

–0.2

Dayton

13.1

–6.4

–1.2

Toledo

14.5

–13.6

1.6

Youngstown

15.2

1.1

–0.1

Ohio

14.2

–5.5

–1.0

Nation

10.0

–5.7

–1.4

Source: Bureau of Labor Statistics.

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Federal Reserve Bank of Cleveland, Economic Trends | February 2009

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