Full text of Economic Trends (Federal Reserve Bank of Cleveland) : Economic Trends - February 2010

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

February 2010 (January 13, 2010 to February 9, 2010)

In This Issue:
Inflation and Prices

Economic Activity

 December Price Statistics

 The Employment Situation, January 2010
 Real GDP: Fourth-Quarter 2009 Advance Estimate

Financial Markets, Money and Monetary Policy

 What Is the Yield Curve Telling Us?...And Should We
Have Listened?
 A Sign of Normalization
International Markets

 Imports and Economic Growth

Regional Activity

 Fourth District Employment Conditions
 Seriously Delinquent Mortgages in the Fourth District

Inflation and Prices

December Price Statistics
01.28.10
by Brent Meyer

December Price Statistics
Percent change, last
1mo.a

3mo.a

6mo.a

12mo.

5yr.a

2008
average

All items

1.6

3.3

2.9

2.7

2.6

0.3

Less food and energy

1.4

1.3

1.8

2.2

1.8

Medianb

0.6

0.7

0.9

1.2

2.6

2.9

1.1

1.4

1.2

1.3

2.4

2.7

Consumer Price Index

16% trimmed

meanb

Producer Price Index
Finished goods

2.0

9.5

5.0

4.4

3.2

0.2

Less food and energy

0.0

−0.5

−0.1

0.9

2.2

4.3

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
7
6
5
4

CPI
Core CPI

Median CPIa

3
2
1

16% trimmed-mean CPIa

0
-1
-2
-3
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
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 CPI rose at an annualized rate of 1.6 percent in
December, as both food and energy prices posted
modest increases. Over the past 12 months, the
CPI has risen 2.7 percent. The core CPI rose 1.4
percent in December and is up a mere 1.3 percent over the past three months, somewhat of a
downward trend compared to a still-modest 1.8
percent over the past year. Measures of underlying
inflation trends produced by the Federal Reserve
Bank of Cleveland, the median and the 16 percent trimmed-mean CPI, rose 0.6 percent and 1.1
percent, respectively, in December, consistent with
recent softness seen over the past six months or
so. Also, there is little evidence of pricing pressure
feeding through from producer prices, as the core
PPI was flat in December and has been holding to a
virtually flat trend over the past six months.
In December, the bulk of the consumer market basket (by expenditure weight) continued to reside on
the low end of the distribution, as 40 percent of the
overall index posted outright price decreases and 23
percent rose at rates between 0 and 1 percent. Over
the past six months, the average share of the market basket exhibiting declines has been 42 percent.
Perhaps more remarkable (and illustrative of recent
price softness) is that over the past eight months,
the majority of items in the consumer market
basket have either been rising at rates less than 1.0
percent or decreasing, on average. On the other end
of the distribution, just 24 percent of the market
basket rose at rates exceeding 3 percent in December, leaving just 13 percent in the broad sweet spot
between 1 percent and 3 percent.
Roughly half of the overall increase in the core CPI
in December was due to a 35 percent increase in
used car and truck prices. The unusual strength in
used car and truck prices over the past five months
(up nearly 31 percent) has been somewhat of a
mystery. Initially, the story read as if the CARS
program negatively impacted used auto supply,
driving up auction prices. However, it’s hard to

Federal Reserve Bank of Cleveland, Economic Trends | February 2010

CPI Component Price Change Distribution
Weighted frequency
50

December 2009
Past 3 months
2009 average

40
30
20
10
0

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

Source: Bureau of Labor Statistics.

Used Cars and Trucks Prices
Annualized percent change

imagine that this is still the case. Perhaps the story
now is that there has been some substitution away
from new vehicles recently, possibly due to credit
constraints, as some used car purchases are cash
transactions. Either way, new vehicle prices slipped
down 3.1 percent in December.
Although there was a slight uptick in both the
short-term and longer-run average inflation expectations from the University of Michigan’s Survey
of Consumer Sentiment, they still appear to be
relatively “well-anchored.” One-year-ahead average inflation expectations rose from 3.0 percent to
3.3 percent in January, while the longer-run (5- to
10-year-ahead) expectations ticked up 0.2 percentage point to 3.2 percent, still well within historical
norms and very close to their average over the past
five years of 3.3 percent.

50
40
30
20
10
0
-10
-20
-30
12/08

2/09

4/09

6/09

8/09

10/09

12/09

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 10-years-ahead
2.5
2.0
1.5
1.0
0.5
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: Mean expected change as measured by the University of Michigan’s
Survey of C onsumers.
Source: University of Michigan.

Federal Reserve Bank of Cleveland, Economic Trends | February 2010

Financial Markets, Money and Monerary Policy

What Is the Yield Curve Telling Us?...And Should We Have Listened?
02.01.10
by Joseph G. Haubrich and Kent Cherny
A new year has started, and by some reckoning, a
new decade, so it may be a natural time to take a
look back. This column has been around for three
years, giving a full two years of “year-ahead” predictions, and it’s time assess those predictions. First,
though, let’s look at the story for this month.

Yield Curve Spread and Real GDP
Growth
Percent
11
9
GDP growth
(year-over-year change)

7
5
3
1
-1

Ten-year minus three-month
yield spread

-3
-5
1953

1963

1973

1983

1993

2003

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

Yield Spread and Lagged Real GDP Growth
Percent
11
One-year lag of GDP growth
(year-over-year change)

Since last month, the yield curve has moved up
and gotten a bit steeper, with long rates rising a bit
more than short rates. The difference between these
rates, the slope of the yield curve, has achieved
some notoriety as a simple forecaster of economic
growth. 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 treasury bonds and three-month treasury
bills, bears out this relation, particularly when real
GDP growth is lagged a year to line up growth with
the spread that predicts it.

Since last month, the three-month rate has risen to
0.06 percent (for the week ending January 22), up
from December’s 0.04 percent, which was unchanged from November.

5
3
1
-1
Ten-year minus three-month
yield spread

-3
-5
1953

1963

1973

1983

1993

2003

Sources: Bureau of Economic Analysis, Federal Reserve Board.

Federal Reserve Bank of Cleveland, Economic Trends | February 2010

The 10-year rate increased to 3.66 percent, up from
December’s 3.56 percent and also from November’s 3.35 percent. The slope increased to 360
basis points (bp), up from December’s 352 bp and
November’s 331 bp. Projecting forward using past
values of the spread and GDP growth suggests that
real GDP will grow at about a 1.17 percent rate
over the next year, down a bit from December’s pre4

Yield Curve Predicted GDP Growth
Percent
5

GDP growth
(year-over-year change)

Predicted
GDP growth

3
2
1

diction of 1.62. Some of the change resulted from
recalibrating the model with the latest real GDP
numbers for the fourth quarter of 2009.
Although the time horizons do not match exactly,
this comes in on the more pessimistic side of other
forecasts, although, like them, it does show moderate growth for the year.

0
Ten-year minus three-month
yield spread

-1
-2
-3
-4

-5
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Sources: Bureau of Economic Analysis, Federal Reserve Board, authors’
calculations.

Recession Probability from Yield Curve

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. Thus, it is sometimes preferable to
focus on using the yield curve 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
is 5.1 percent, just down from December’s is 5.5
percent and just up from November’s 4.7 percent.

Percent probability, as predicted by a probit model
100
90
80
ty of recession
n
Probability

Now let’s take a look our track record. We’re going to skip the usual disclaimer about using these
numbers at your own risk, because looking at past
performance should make the point obvious.

60
st
Forecast

50
40
30
20
10
0
1960

1966 1972 1978 1984

1990 1996 2002 2008

Note: Shaded bars indicate recessions.
Sources: Bureau of Economic Analysis, Federal Reserve Board, authors’
calculations.

Comparison of Real GDP Predictors
Year-over-year growth rate
5
4

Yield curve forecast

3
2
1

Blue Chip forecast

0
-1

Actual GDP growth

-2
-3
-4
-5
1/08

5/08

9/08

1/09

5/09

9/09

Sources: Bureau of Economic Analysis, Federal Reserve Board, authors’
calculations, Blue Chip Newsletter.

Federal Reserve Bank of Cleveland, Economic Trends | February 2010

First, let’s compare at our year-ahead forecasts of
real GDP with the actual figures and the consensus
predictions of the Blue Chip panel. We’ve made
our predictions on a monthly basis, but GDP only
comes out quarterly, so for the comparison we’ve
taken quarterly averages. At the beginning, our
yield curve model was predicting lower growth than
Blue Chip, but neither predicted anything like the
negative numbers seen in this recession. Blue Chip
seemed to catch on to the length of the recession
faster than the yield curve model, which seemed to
expect a faster upturn.
The other prediction we make every month, on the
probability of a recession, fares somewhat better,
but shows a similar pattern. In December 2006,
our yield curve model was predicting a 44 percent
chance of recession in December 2007, which, as
it turns out, is when the NBER eventually ended
up dating the onset of the current recession. Many
people think the recession ended in the third
quarter of 2009, and our yield curve model put low
odds on the recession continuing that long.
How about our brush with greatness, when No5

bel Prize winner and New York Times columnist
Paul Krugman thought we were too optimistic in
December 2008? We predicted a year-over-year
growth rate of 3 percent for December 2009. The
actual number came out to be 0.1 percent—low,
but positive. So perhaps we should call it a tie.

Recession Probability Effectiveness
Recession probability as predicted in prior year
50
45
40
35
30
25

Yield curve probability
of a recession

Start of
recession

As usual, 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?”

20
15
10
5
0
12/07

4/08

12/08

4/09

8/09

12/09

Notes: Gray bar indicates recession. Yellow bar indicates possible recovery phase,
based on GDP numbers.
Sources: NBER, Federal Reserve Board, authors’ calculations.

To read more on other forecasts:
http://www.econbrowser.com/archives/2008/11/gdp_mean_estima.
html
For Paul Krugman’s column:
http://krugman.blogs.nytimes.com/2008/12/27/the-yield-curvewonkish/
“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 2010

Financial Markets, Money and Monetary Policy

A Sign of Normalization
02.02.10
by John B. Carlson and John Lindner
During the recent financial turmoil, the Federal
Reserve created several emergency credit facilities to
address the extreme demands for liquidity. Several
of these facilities involved lending to institutions
outside the set of those permitted by the Federal
Reserve Act in normal circumstances. To extend
credit to them, the Fed needed to invoke its authority under section 13(3) of the Act, which allows it
to expand the types of permissible borrowers under
exigent and emergency conditions.
Four of the Federal Reserve’s new credit facilities
were allowed to expire on February 1. These include the Asset-Backed Commercial Paper Money
Market Mutual Fund Liquidity Facility (AMLF),
the Commercial Paper Funding Facility (CPFF),
the Primary Dealer Credit Facility (PDCF), and
the Term Securities Lending Facility (TSLF). As
financial market functioning improved, private
sources of liquidity became sufficient and the demand for credit via the special facilities diminished.
It is important to note that credit extended through
these facilities required good collateral backing.
Moreover, to limit the use of the facilities, the terms
of lending were set to be less attractive than private
sources. In this sense, the facilities mimicked the
features of the Fed’s Discount Window—a facility
available to qualified depositories in normal times.

Expiring Liquidity Programs

The Primary Dealer Credit Facility (PDCF) and
the Term Securities Lending Facility (TSLF) were
created following the collapse of Bear Stearns and
its subsequent sale to JP Morgan in March 2008.
These two facilities gave primary dealers greater
access to credit as credit conditions worsened and
their private sources of liquidity dried up. Toward
the end of 2009 and into the beginning of this year,
spreads on most forms of credit abated, and financial markets are now functioning in an orderly way.

Billions of dollars
700
600

PDCF
TSLF
CPFF
AMLF

500
400
300
200
100
0
1/08

5/08

9/08

1/09

5/09

9/09

1/10

In September 2009, the collapse of Lehman Brothers spurred the formation of the Asset-Backed
Commercial Paper Money Market Mutual Fund

Source: Federal Reserve Board.

Federal Reserve Bank of Cleveland, Economic Trends | February 2010

Liquidity Facility (AMLF) and the Commercial
Paper Funding Facility (CPFF). Both of these
programs were designed to help assure the viability
of the commercial paper market. As the commercial
paper market normalized, private sources became
sufficient to sustain liquidity demands.

Federal Reserve Bank of Cleveland, Economic Trends | February 2010

International Markets

Imports and Economic Growth
02.02.10
by Owen F. Humpage and Caroline Herrell

Contribution to Percent Change in Real GDP, A quick look at the latest GDP data might suggest
that imports are slowing the domestic recovery. A
2009:4Q Advance Estimate
quick look might get it wrong.

Percentage points
4.0
3.5
3.0
2.5
Exports

2.0 Personal
1.5

consumption

1.0
Residential
investment

0.5
0.0
-0.5
-1.0

Business
fixed
investment

Imports
Change in
inventories

Government
spending

-1.5
-2.0
Source: Bureau of Economic Analysis.

Contribution of Imports to Percent Change
in Real GDP
Percentage points
1.0

Real GDP—the chief barometer of our nation’s
economic health—increased 5.7 percent in the
fourth quarter of 2009, according to advance
estimates. In a standard analysis of the data, the
Commerce Department calculates the contribution
that each spending category in the accounts makes
to the overall GDP growth rate. In the fourth quarter of 2009, inventory accumulation alone added
a whopping 3.4 percentage points to the overall
growth rate. Expanding exports, personal consumption expenditures, and business and residential
investment together added another 3.7 percentage
points to the quarter’s growth. In stark contrast to
these growth contributors, expanding imports seem
to have pulled overall economic growth down by
1.4 percentage points to the observed 5.7 percent.
Expanding imports always appear as a drag on overall economic growth.
This unfortunate false perception results because
imports enter the GDP account with a negative
sign. Consequently, whenever imports increase,
which is typically the case in a growing, open
economy, they appear to take bite out of GDP
growth. Appearances can indeed be deceiving. In
fact, imports promote economic growth.

0.5
0.0
-0.5
-1.0
-1.5
-2.0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: Bureau of Economic Analysis.

Federal Reserve Bank of Cleveland, Economic Trends | February 2010

Interpreting imports in the GDP accounts requires
some care. GDP measures the value of all final
goods and services produced in the United States
over each quarter. Last quarter, for example, the
United States produced $13.2 trillion worth of output, as measured in 2005 dollars. Since imported
goods are not produced here, they do not belong
in the tally, but taking them out creates a small
perceptual problem. The key expenditure categories of the GDP accounts, like personal consumption, business-fixed investment, and government
spending, do not distinguish between outlays for
goods and services produced in the United States
9

and spending on goods produced abroad. That is,
imports are already in these categories. Instead of
removing imports from each individual spending
category, the Commerce Department lists imports
as a separate component in the accounts, which then
gets subtracted from the total.
This methodology actually seems a superior way for
handling imports, but interpreting the impact of
foreign purchases on U.S. economic growth then
requires giving some considerable thought to how
we pay for these imports. To be sure, if American
households buy $500 million worth of goods and
services abroad during a particular quarter, they
spend that much less on domestic goods and services. Still, the United States as a nation must pay for
these imported products. If we happen to produce
and export $500 million worth of goods and services in exchange, then trade overall—imports plus exports—will have no net impact on GDP. The value
of output in this case would be exactly the same as if
Americans had spent all of their income on domestic
output and no trade had taken place. When balanced trade occurs, we have simply swapped some
domestically produced goods and services for some
foreign-made goods and services.

Investment and Saving
Percent of nominal GDP
24
22

Gross domestic investment

20
18
16
14

Gross saving

12
10
8
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: Bureau of Economic Analysis.

The process is somewhat more complicated, but
essentially the same, when our imports exceed our
exports, which is typically the case. When a country
runs a trade deficit, it pays for the surfeit of imports
by issuing financial claims—corporate stocks and
bonds, Treasury securities, bank accounts, and the
like—to the rest of the world. The funds made available when foreigners accept these financial claims
on the United States do not sit idle in some U.S.
bank account. They will end up financing additional
investments or consumption in the United States.
In fact, the U.S. current account deficit—essentially
a broad measure of our nation’s trade shortfall—
exactly equals the difference between gross domestic
investment and gross domestic savings in the United
States, allowing for measurement error. So what
imports seem to subtract from the value domestic
output (GDP) always reappears as exports, domestic
spending, or domestic investment.
Ben Franklin never looked at a GDP account,
but he got it right: “No nation was ever ruined by
trade.”

Federal Reserve Bank of Cleveland, Economic Trends | February 2010

Economic Activity

The Employment Situation, January 2010
02.09.10
by Murat Tasci and Beth Mowry

Average Nonfarm Employment Change
Change, thousands of jobs
300

Revised
Previous estimate
Current estimate

200
100

Nonfarm employment was essentially unchanged
in January, declining by just 20,000 jobs, following a downwardly revised loss in December (from
85,000 to 150,000) and an upwardly revised gain
in November (from 4,000 to 64,000). Monthly
revisions result from additional sample reports and
the monthly recalculation of seasonal factors. In the
case of the current Employment Situation release,
the annual benchmark process also contributed to
November and December’s revisions. Since the start
of the recession in December 2007, payroll employment has fallen by 8.4 million. Over the past three
months, however, average employment decline has
slowed considerably.
In January, the number of unemployed persons
dropped a substantial 430,000, while the labor
force expanded by 111,000, resulting in a decline
in the unemployment rate of 0.3 percentage point,
to 9.7 percent.

0
-100
-200
-300
-400
-500
-600
2006 2007 2008 2009 Q:2

Q:3
2009

Q:4 November

January

December

Source: Bureau of Labor Statistics.

The improvement in January payrolls from December’s much larger loss was due almost entirely to
progress in service-providing industries. Job losses
in goods-producing industries as a whole remained
roughly the same month-to-month, at 60,000.
Losses steepened in construction, from 32,000 in
December to 75,000 in January, while the manufacturing industry actually added to payrolls for the
first time in three years (11,000).
Service industries tacked on 40,000 jobs in January after a 96,000-drop just one month earlier.
The improvement was broadly shared, resulting
from a turnaround in retail trade (from −18,000
to +42,000 jobs), a larger gain in professional
and business services (from 20,000 to 44,000),
and from smaller losses in leisure and hospitality
(from −41,000 to −14,000) and government (from
−27,000 to −8,000). Temporary help services has
charted solid gains for four straight months now,
adding 52,000 jobs in January.

Federal Reserve Bank of Cleveland, Economic Trends | February 2010

Labor Market Conditions and Revisions
Average monthly change (thousands of employees, NAICS)
November
current

Revision to
November

December
current

Revision to
December

January
current

Payroll employment

−150

−65

−20

Goods-producing

−33

−54

−60

Construction

−15

−32

−75

Heavy and civil engineering

4.1

−9

Residentiala

−2.8

−2

−15

Nonresidentialb

−16.5

−20

−4

−60

−25

−23

Durable goods

−23

−15

Nondurable goods

−2

−8

−2

Service-providing

−96

−92

Retail trade

−18

−8

−7

−11

−16

Manufacturing

Financial

activitiesc

PBSd

106

−30

Temporary help services

Education and health services

−6

−9

Leisure and hospitality

−21

−8

−41

−16

−14

Government

−11

−15

−27

−6

−8

Local educational services

−2

−13

−11

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.

The Diffusion Index of Employment Change rose
5.5 points to 46.8, a step closer to striking a balance between industries increasing and decreasing employment. The index currently matches its
recent high of November 2009 and has climbed all
the way from a record low of 19.6 in March of that
year.
This month’s Employment Situation release coincides with the Bureau of Labor Statistics’ annual
benchmark revision process. Establishment survey
data since April 2008 have been revised to reflect
unemployment insurance tax records and updated
adjustments to models of net business births and
deaths. Also, data from January 2005 forward
incorporate updated seasonal adjustment factors.
Revision caused average monthly payroll losses for
2008 and 2009 to increase by roughly 50,000. In
2008 an average 302,000 jobs were lost on net each
month, and average losses in 2009 were 398,000.
Federal Reserve Bank of Cleveland, Economic Trends | February 2010

Adjustments for August through October 2008
were particularly substantial, adding a total of
470,000 additional losses to those months’ figures.

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

2007

2008

2009

January
2010

172

−302

−398

−20

Goods-producing

−37

−139

−199

−60

Construction

Payroll employment

−17

−66

−84

−75

Heavy and civil engineering

−7

−10

Residentiala

−5

−23

−43

−32

−15.1

Nonresidentialb

−16

−42

−60.2

−16

−23

−75

−108

Durable goods

−5

−17

−54

−84

Nondurable goods

−11

−6

−21

−24

−2

Service-providing

170

126

−163

−199

Retail trade

−59

−42

42.1

Manufacturing

Financial

activitiesc

−10

−19

−28

−16

−69

−61

Temporary help services

−8

−42

−11

52.0

Education and health services

PBSd

Leisure and hospitality

−24

−22

−14

Government

−7

−8

Local educational services

−4

−10.4

9.2

9.7

Average for period

Civilian unemployment rate

4.6

5.8

Federal Reserve Bank of Cleveland, Economic Trends | February 2010

Economic Activity

Real GDP: Fourth-Quarter 2009 Advance Estimate
02.08.10
by John Lindner

Real GDP and Components, 2009:Q4
Advance Estimate
Annualized percent change, last:
Quarterly change
(billions of 2000$)

Quarter

Four quarters

Real GDP

182.0

5.7

0.1

Personal consumption

45.9

2.0

1.1

Durables

−2.4

−0.9

4.0

Nondurables

21.3

4.3

1.4

25.8

1.7

0.6

Services

9.1

2.9

−14.6

Equipment

27.9

13.3

−8.7

Structures

−15.6

−15.4

−24.7

Business fixed investment

Residential investment

5.0

5.7

−12.1

Government spending

−1.1

−0.2

1.6

National defense

−6.2

−3.5

3.1

16.3

—

Exports

62.8

18.1

−1.7

Imports

46.5

10.5

−7.7

Change in private
inventories

−33.5

—

Net exports

Source: Bureau of Economic Analysis.

Contribution to Percent Change in Real GDP
Percentage points
4.0
3.5
3.0
2.5
2.0
1.5

2009:Q2 advance estimate
2009:Q3 third estimate
2009:Q2 third estimate
Exports

Imports

Business

1.0
fixed
investment
0.5
0.0
-0.5
Residential
-1.0 Personal
investment
consumption
-1.5
Change in
-2.0
inventories
-2.5
-3.0

Government
spending

Source: Bureau of Economic Analysis.

Federal Reserve Bank of Cleveland, Economic Trends | February 2010

GDP had its strongest quarter in more than six
years, coming in above the majority of analysts’
estimates at an annualized rate of 5.7 percent
for the fourth quarter of 2009. The four-quarter
growth rate returned to positive levels for the first
time since the third quarter of 2008. The big jump
was largely driven by a 3.4 percentage point (pp)
increase in private inventories, which happened to
be that component’s largest contribution to GDP
growth since the first quarter of 1984. Smaller
positive contributions also came in from all components except for government spending, and even
that negative contribution (−0.02 pp) was minimal.
Personal consumption rose another 2.0 percent in
the fourth quarter, adding 1.4 pp to real growth.
Residential investment grew 5.7 percent this
quarter, much less than its third-quarter growth of
18.9 percent, but still contributing 0.1 pp to GDP
growth.
Two interesting developments in the latest release
were net exports and business fixed investment
(BFI). Exports grew 18.1 percent in the fourth
quarter, adding 1.9 pp to real GDP growth and
matching their third-quarter performance. This
was partially offset by growth in imports of 10.5
percent, but net exports still added 0.5 pp to real
growth. BFI also made a positive contribution to
GDP despite opposing components. Equipment
and software grew at a steady clip of 13.3 percent
after having reversed their negative trend last quarter, while structures dropped for the sixth straight
quarter, this time by 15.4 percent. On net, BFI
added a total of 0.3 pp to GDP.
The final reading for 2009 real GDP growth was
−2.4 percent, slightly ahead of December’s Blue
Chip consensus forecast. The consensus estimate
for 2010 growth ticked up 0.1 pp in January to 2.8
percent, while no quarter in 2010 is currently forecasted to top 3.0 percent. According to forwardlooking forecasts, real GDP growth is first expected
to reach its long-run trend again in the
14

fourth quarter of 2010. January’s survey also started
a forecast for 2011 growth and that value came in
at 3.1 percent. Overall, these forecasts match the
overwhelming concern that a recovery from the
current recession will be a slow one.

Real GDP Growth
Annualized quarterly percent change
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
-7

Real GDP average
long-run growth rate
Q:4 advance estimate
Blue Chip consensus
Final estimate
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2009
2010
2007
2008

Sources: Blue Chip Economic Indicators, December 2009; Bureau of Economic Analysis.

Final Sales
Percent
8.0

GDP

6.0
4.0
2.0
0.0
-2.0

Final sales of domestic
Product

-4.0
-6.0

A deeper look into the larger-than-expected
growth for the fourth quarter of 2009 shows what
some economists have been calling an “inventory
blip.” When looking at the final sales of domestic
products—which is just GDP less the change in
inventories—it shows that demand for domestic
goods grew only 2.3 percent. Comparing this to
the third quarter numbers, what appears to be a
3.5 pp quarter-to-quarter increase in GDP translates into only a 0.8 pp increase in final sales. The
picture turns even bleaker in looking at a measure
of domestic demand for domestic goods, or final
sales to domestic purchasers, which nets out exports
and imports. In this case, there is a 0.5 pp drop
from third-quarter to fourth-quarter sales, and final
domestic sales grew only 1.8 percent. Effectively,
this means that there is a more muted return to
demand. Growth through 2010 should reflect such
a soft return, as forecasters are predicting growth
rates closer to the long-run average in all four quarters of the year.

Final sales to
domestic purchasers

-8.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: January 2010 Blue Chip survey.

Federal Reserve Bank of Cleveland, Economic Trends | February 2010

Regional Activity

Fourth District Employment Conditions
02.08.10
by Kyle Fee

Unemployment Rate
Percent
11
10
9
8
7

Fourth District

6
5
4

United States

3
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Notes: Shaded bars indicate recessions. Seasonally adjusted using the Census
Bureau’s X-11 procedure. Some data reflect revised inputs, reestimation, and new
statewide controls. For more information, see http://www.bls.gov/lau/launews1.htm.
Sources: U.S. Department of Labor, Bureau of Labor Statistics.

County Unemployment Rates
U.S. unemployment rate = 10.0%

7.7% - 9.5%
9.6% - 10.6%
10.7% - 11.8%
11.9% - 12.9%
13% - 14%
14.1% - 22.3%
Note: Data are seasonally adjusted using the Census Bureau’s X-11 procedure.
Sources: U.S. Department of Labor, Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | February 2010

The District’s unemployment rose 0. 1 percent to
10.8 percent for the month of December. Compared to the national rate, the District’s unemployment rate was 0.8 percentage point higher. The
District’s unemployment rate has been consistently
higher since early 2004. Since the start of the
recession, the nation’s monthly unemployment
rate has averaged 0.6 percentage point lower than
the Fourth District unemployment rate. Since this
same time last year, the Fourth District unemployment rate has increased by 3.1 percentage points
and the national unemployment rate has increased
and 2.8 percentage points.
There are significant differences in unemployment
rates across counties in the Fourth District. Of the
169 counties that make up the District, 40 had
an unemployment rate below the national rate in
December and 129 counties had a rate higher than
the national rate. There were 134 District counties
reporting double-digit unemployment rates in December, indicating large portions of the Fourth District have high levels of unemployment. Geographically isolated counties in Kentucky and southern
Ohio have seen rates increase as economic activity
is limited in these remote areas. Distress from the
auto industry restructuring can be seen along the
Ohio-Michigan border. Outside of Pennsylvania,
lower levels of unemployment are limited to the
interior of Ohio or the Cleveland-Columbus-Cincinnati corridor.
The distribution of unemployment rates among
Fourth District counties ranges from 7.7 percent
(Allegheny County, Pennsylvania) to 22.3 percent
(Magoffin County, Kentucky), with the median
county unemployment rate at 11.9 percent. Counties in Fourth District Pennsylvania generally
populate the lower half of the distribution, while
the few Fourth District counties in West Virginia
are scattered across the distribution. Fourth District
Kentucky continues to dominate the upper half of
the distribution with Ohio counties becoming
16

County Unemployment Rates
Percent
24
20
16

Ohio
Kentucky
Pennsylvania
West Virginia

more dispersed throughout the distribution. These
county-level patterns are reflected in state-wide
unemployment rates as Kentucky and Ohio have
unemployment rates of 10.7 percent and 10.9 percent, respectively, compared to Pennsylvania’s 8.9
percent and West Virginia’s 9.1 percent.

Median unemployment rate = 11.9%

12
8
4
0

County

Note: Data are seasonally adjusted using the Census Bureau’s X-11 procedure.
Sources: U.S. Department of Labor, Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | February 2010

Regional Activity

Seriously Delinquent Mortgages in the Fourth District
02.09.10
by Kyle Fee
Much of the recent commentary on the economy
has been focused on the recovery, while seriously
delinquent mortgages have quietly crept upwards.
(McDash/LPS defines seriously delinquent mortgages as those that are 90 or more days delinquent
plus those that are in foreclosure.) As of December
2009, 7.9 percent of mortgages in the nation and
7.6 percent of mortgages in the Fourth District
were considered seriously delinquent. Since December 2008, seriously delinquent mortgages have
increased 75 percent (3.42 percentage points)
nationally, whereas in the Fourth District they have
increased 48 percent (2.45 percentage points).

Seriously Delinquent Mortgage Rates
Percent
9

While it might be natural to suspect that subprime
mortgages are responsible for the increase in seriously delinquent loans, this would be misleading.
Currently, prime loans account for 83 percent of seriously delinquent mortgages in the Fourth District
and 84 percent of mortgages in the nation.

8
7
6
Fourth District

5
4
3

Nation

2
1
0
9/07

1/08

5/08

9/08

1/09

5/09

9/09

1/10

Source: McDash/LPS.

Seriously Delinquent Mortgage Rate
Composition
Percent that is attributed to prime loans
86
84
82
80
Fourth District

Nation

76
74
72
70
9/07

1/08

5/08

9/08

1/09

5/09

9/09

1/10

Source: McDash/LPS.

Federal Reserve Bank of Cleveland, Economic Trends | February 2010

Delinquencies in prime loans are rising mainly for
two reasons: “underwater” mortgages and unemployment. Declines in home prices have left many
homeowners with underwater mortgages. A homeowner with an underwater mortgage may choose
to stop making mortgage payments because the
value of the mortgage is worth more than the actual
house. Eventually, the decision to walk away from
an underwater mortgage leads to delinquencies and
then on to foreclosure. The decision to walk away
from an underwater mortgage is a personal decision involving many different variables (mortgage
terms, the amount of the drop in home price, credit
history, and so on), which makes estimating the
potential number of underwater mortgages challenging. The usefulness of such estimates are thus
limited.
A more informative indicator of seriously delinquent mortgages would be local unemployment
rates. Conceptually this relationship is straightforward. If unemployment increases in an area, wages
18

Seriously Delinquent Mortgage Rate and
Unemployment Rates
Country unemployment rate, December 2009 (percent)
20

0
0

5
10
15
Percent of mortgages that are seriously delinquent,
December 2009

Sources: McDash/LPS, Bureau of Labor Statistics.

Seriously Delinquent Mortgage Rates
in the Fourth District, September 2007

No data
Less than 2.5%

decrease. Falling wages inhibit homeowners’ ability
to pay their mortgages and delinquencies increase.
In the Fourth District, county unemployment
rates have a strong correlation (0.47) with seriously
delinquent mortgages.
Like the nation, many counties in the Fourth
District began to see their rates of seriously delinquent mortgages increase at the end of 2008 and
accelerate throughout 2009. Many of the same
geographic patterns that characterize unemployment rates across the Fourth District also characterize seriously delinquent mortgage rates. In recent
reports on Fourth District employment conditions
[link on “employment conditions” to /research/
trends/2010/0210/01regact.cfm], for example,
we have noted a pattern that applies equally well
to unemployment rates as to seriously delinquent
mortgage rates: “Distress from the auto industry
restructuring can be seen along the Ohio-Michigan
border. Outside of Pennsylvania, lower levels of
unemployment are limited to the interior of Ohio
or the Cleveland-Columbus-Cincinnati corridor.”
Surprisingly, there are pockets of lower rates of
serious delinquency in Fourth District Kentucky
despite the state’s high unemployment rate (10.7
percent). Overall, a majority (56 percent) of
Fourth District counties reported 7.5 percent of all
mortgages as seriously delinquent.

2.6% - 5.0%
5.1% - 7.5%
7.6% - 10.0%
Greater than 10.0%

Seriously Delinquent Mortgage Rates
in the Fourth District, December 2009

No data
Less than 2.5%
2.6% - 5.0%
5.1% - 7.5%
7.6% - 10.0%
Greater than 10.0%

Federal Reserve Bank of Cleveland, Economic Trends | February 2010

Economic Trends is published by the Research Department of the Federal Reserve Bank of Cleveland.
Views stated in Economic Trends are those of individuals in the Research Department and not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System. Materials may be reprinted
provided that the source is credited.
If you’d like to subscribe to a free e-mail service that tells you when Trends is updated, please send an empty email message to econpubs-on@mail-list.com. No commands in either the subject header or message body are required.
ISSN 0748-2922

Federal Reserve Bank of Cleveland, Economic Trends | February 2010

Full text of Economic Trends (Federal Reserve Bank of Cleveland) : Economic Trends - February 2010

FRASER