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October 2009 (Covering September 11, 2009 to October 8, 2009)

In This Issue:
Inﬂation and Prices

August Price Statistics
Financial Markets, Money and Monetary Policy

The Yield Curve, September 2009
The Policy Statement: A Slowdown of Asset Purchases
The Supplemental Financial Program
Economic Activity

The Employment Situation, September 2009
Real GDP: Second-Quarter 2009 Final Estimate
The Effects of “Cash for Clunkers” on
the Auto Industry

International Markets

With Money Depreciating, Can Inﬂation be Far Behind?
Regional Acitivty

Pittsburgh’s Labor Market Performance over the
Recession
Fourth District Employment Conditions
Banking and Financial Institutions

The Availability and Proﬁtability of Credit Cards

Inﬂation and Prices

August Price Statistics
09.28.09
by Brent Meyer

August Price Statistics
Percent change, last
1mo.a

3mo.a

6mo.a

12mo.

5yr.a

2008
average

All items

5.5

4.9

2.3

−1.5

2.6

0.3

Less food and energy

0.8

1.4

1.9

1.4

2.2

1.8

Medianb

1.8

0.9

1.2

1.8

2.6

2.9

1.3

1.2

1.0

1.1

2.5

2.7

23.1

11.0

4.3

−4.3

3.3

0.2

2.1

2.4

1.4

2.3

2.4

4.3

Consumer Price Index

16% trimmed

meanb

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
7
6
5
4

CPI
Core CPI

Median CPIa

3
2
1

The CPI jumped up 9.3 percent (annualized rate)
The CPI jumped up 5.5 percent (annualized rate)
in August, almost entirely on a spike in gasoline
prices (the BLS says roughly 80 percent of the increase in the overall index was due to the increase in
gas prices). Still, the 12-month growth rate in the
series is down 1.5 percent. The core CPI (excluding
food and energy prices) rose 0.8 percent in August,
pushing its 12-month trend down 0.1 percentage
point to 1.4 percent.

16% trimmed-mean CPIa

0
-1
-2
-3
1990 1992 1994 1996 1998 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.

Federal Reserve Bank of Cleveland, Economic Trends | October 2009

There were a couple rather curious price moves
during the month. First, the price for new vehicles
fell 14.7 percent in August, its largest monthly
price decrease since the early 1970s. This is in part
due to how the BLS calculated the eﬀect of the
CARS rebate on the price of new vehicles. Also,
used car and truck prices jumped up 25 percent
in August (their largest increase since 2004). A
seasonal adjustment usually tamps down August
used car prices, and this month was not an exception, though without seasonal adjustment used
cars prices jumped up an outsized 33 percent. The
increase could be attributed to the fact that the
CARS rebate motivated consumers to head to the
dealership and those that didn’t qualify for the rebate ended up getting a “cherry of a deal” on a used
car, but it could simply be a measurement error as
well (perhaps because the sample may have been
skewed). Elsewhere, OER (owners’ equivalent rent),
which comprises roughly 25 percent of the overall
CPI market basket, rose 1.0 percent in August after
a virtually ﬂat reading in July.
The measures of underlying inﬂation trends produced by the Federal Reserve Bank of Cleveland—
the median CPI and the 16 percent trimmed-mean
CPI—rebounded a little from July’s relatively low
readings (both increased 0.2 percent). The median
CPI rose 1.8 percent in August, while the 16 percent trimmed-mean CPI was up 1.3 percent. Over
the last 12 months, they are up 1.8 percent and 1.1
percent, respectively.
2

CPI Component Price Change Distribution
Weighted frequency
50

August 2009
July 2009
2009 YTD average

40
30

The underlying price change distribution showed
less softness in August, as roughly 30 percent of the
index (by expenditure weight) exhibited outright
price decreases, compared to nearly one-half of the
index in July. Still, just 26 percent of the consumer
market basket rose at rates exceeding 3.0 percent in
August, compared to an average of 35 percent so
far this year.

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.

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
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Both one-year ahead and longer-term (5 to10
years ahead) average inﬂation expectations from
the University of Michigan’s Survey of Consumers
ticked up in early September. One-year-ahead expectations rose 0.1 percentage point to 3.1 percent,
while longer-term expectations increased from 3.1
percent in August to 3.3 percent. While short-term
expectations have bounced around over the past
year (likely following food and energy prices), it is
not clear that longer-term expectations have shifted
in any meaningful way recently, as the series has remained close to its ﬁve-year average of 3.4 percent.

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 | October 2009

Financial Markets, Money and Monetary Policy

The Yield Curve, September 2009
Yield Curve Spread and Real GDP Growth

09.23.09
by Joseph G. Haubrich and Kent Cherny

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

Sources: Bureau of Economic Analysis, Federal Reserve Board.

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

9
7
5
3
1
-1

Ten-year minus three-month
yield spread

-3
-5
1953

1963

1973

1983

1993

2003

Since last month, the yield curve has steepened
slightly, with long rates edging up as short rates
edged down. 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
ten-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 dipped to
0.11 percent (for the week ending September 18),
down from August’s 0.17 percent and July’s 0.19
percent.

Sources: Bureau of Economic Analysis, Federal Reserve Board.

Yield-Curve-Predicted GDP Growth
Percent
5
4

GDP growth (yearover-year change)

Predicted
GDP growth

3
2
1
0
-1
-2

Ten-year minus three-month
yield spread

-3
-4
-5
2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: Bureau of Economic Analysis, Federal Reserve Board,
authors’ calculations.

Federal Reserve Bank of Cleveland, Economic Trends | October 2009

The ten-year rate dropped to 3.46 percent, down a
mere 2 basis points from August’s 3.48 and still below July’s 3.62 percent. The slope increased to 335
basis points, up from August’s 331 basis points but
still down from July’s 343 basis points. Projecting
forward using past values of the spread and GDP
growth suggests that real GDP will grow at about a
2.3 percent rate over the next year, the same prediction as last month. This is a bit below, but not that
far from other forecasts.
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
4

Recession Probability from Yield Curve
Percent probability, as predicted by a probit model
100
90
80

Probability of recession

70
60

Forecast

50
40
30
20
10
0
1960

1966 1972

1978 1984

1990 1996

2002 2008

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

Durations of Yield Curve Inversions and
Recessions
Duration (months)
Recessions
Recessions

Yield curve inversion
(before and during recession)

1970

1973-1975

1980

1981-1982

1990-1991

2001

20
(through August 2009)

2008-present

Note: Yield curve inversions are not necessarily continuous month-to-month
periods.
Sources: Bureau of Economic Analysis, Federal Reserve Board, and authors’
calculations.

To read more on other forecasts:
http://www.econbrowser.com/archives/2008/11/gdp_mean_estima.html
Econbrowser’s The Administration’s Economic Forecast against Updated
Alternatives:
http://www.econbrowser.com/archives/2009/05/the_administrat_2.html
For Paul Krugman’s column:
http://krugman.blogs.nytimes.com/2008/12/27/the-yield-curve-wonkish/

event: whether or not the economy is in recession.
Looking at that relationship, the expected chance
of the economy being in a recession next August
stands at 3.0 percent, up from August’s 2.6 percent,
which was up from July’s very low 1.8 percent.
GDP revisions account for some of the increase in
the numbers since July. See this article for more on
the revisions.
The probability of recession coming out of the yield
curve is very low, but remember that the forecast is
for where the economy will be in a year, not where
it is now. However, consider that in the spring of
2007, the yield curve was predicting a 40 percent
chance of a recession in 2008, something that
looked out of step with other forecasts at the time.
Another way to get at the question of when the
recovery will start is to compare the duration of
past recessions with the duration of the preceding
interest rate inversions. The chart below makes the
comparison for the recent period. The 1980 episode
is anomalous, but in general longer inversions tend
to be followed by longer recessions. Following this
pattern, the current recession is already longer than
expected.
Of course, it might not be advisable to take these
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?”

“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 | October 2009

Financial Markets, Money and Monetary Policy

The Policy Statement: A Slowdown of Asset Purchases
09.23.09
by John B. Carlson and John Lindner

Mortgage-Backed Securities Purchases
Billions of dollars
1400

Policy after meeting

1200

Scheduled
end of
program

1000
Policy before meeting

800
Gross purchases

600
400
200
0
1/14

3/18

5/20

7/22

9/23

11/25

1/27

3/31

6/2

Source: Federal Reserve Bank of New York.

Agency Debt Purchases
Billions of dollars
250
Policy after meeting

200
Scheduled
end of
program

Policy before meeting

150
100
Gross purchases

50
0
11/26

2/4

4/15

6/24

9/2

11/11

1/20

3/31

Until the federal funds rate hit its zero bound,
open market operations at the Trading Desk of the
Federal Reserve Bank of New York were guided by
a target federal funds rate set by the FOMC at its
meetings. Since late 2008, however, the Fed has
been purchasing a wider scope of assets, and open
market operations have been guided by policy
directives that specify both the quantity limit and
the timing of those purchases. Today, the Fed
announced that it would change the timing but
not the purchase limits for both mortgage-backed
securities and agency debt:

6/9

Source: Federal Reserve Bank of New York

“To provide support to mortgage lending and
housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of
agency mortgage-backed securities and up to
$200 billion of agency debt. The Committee
will gradually slow the pace of these purchases
in order to promote a smooth transition in
markets and anticipates that they will be executed by the end of the ﬁrst quarter of 2010.”
The change was similar to the one made for Treasury securities at the August meeting. While today’s
statement reaﬃrmed the target pace for reaching
the $300 billion limit for those purchases (the end
of October), it allowed for ﬂexibility in responding
to ﬁnancial and economic conditions with future
changes in both the timing and quantity limits.
To read more on the change made to treasury securities in August visithttp://www.clevelandfed.org/research/
trends/2009/0909/02monpol.cfm

Federal Reserve Bank of Cleveland, Economic Trends | October 2009

Financial Markets, Money and Monetary Policy

The Supplemental Financing Program
09.28.09
by Joseph Haubrich and John Lindner
Prior to the ﬁnancial crisis, the Federal Reserve
balance sheet had followed a steady growth path of
about 5.5 percent per year, and its total value had
topped $900 billion. During the ﬁnancial crisis,
the assets side of the Fed’s books saw an enormous
expansion when it began to extend its lending and
liquidity programs, growing at an average rate large
enough to double its value each year and exceeding
the $2 trillion mark. The most notable expansion
occurred immediately following the collapse of
Lehman Brothers in mid-September 2008.
Growth in the liabilities side followed suit, keeping the balance sheet, well, balanced. A large part
of this liability growth occurred in the balance of
excess reserves held at the Federal Reserve.
When Lehman Brothers collapsed, there was an
instant need for an inﬂux of extra liquidity into the
market. The Federal Reserve expanded its existing
credit-easing policies and extended new programs
to provide this liquidity and to lend to struggling
ﬁnancial institutions. These institutions would in
turn keep the liquidity as reserves with the Federal Reserve, providing a backstop for them in the
adverse economy.
At the time, a concern about the mounting excess
reserves, and thus the monetary base, began to
surface. In normal times, the Federal Reserve could
have drained the excess reserves by selling Treasury
securities to the public. (Payments for these securities would clear by having the Fed reduce the
reserve account of the purchaser’s bank.) With no
public market for Treasury securities, though, an
alternative was created. The Treasury announced its
Supplemental Financing Program (SFP) two days
after the collapse of Lehman Brothers.
Established to help the Federal Reserve manage
the expansion of the reserve accounts being created
by the infusion of new liquidity, the program is
actually an extension of the typical Treasury deposits held at the Federal Reserve. Treasury bills were
Federal Reserve Bank of Cleveland, Economic Trends | October 2009

sold at special auctions designed speciﬁcally for the
program to dealers and depository institutions already associated with the Federal Reserve. Proceeds
from the auctions were deposited at the Fed by the
Treasury into the SFP account, reducing the total
excess reserves.
The Treasury has continued to fund credit-easing
policies in this way, and it now ﬁnds itself approaching its legal debt limit of $12.1 trillion. A
temporary solution to this limit is to start to trim
down the supplemental account held with the
Federal Reserve. Almost exactly a year after the
program’s inception, the Treasury announced its
intent to reduce the balance of the account to $15
billion, a reduction of nearly $185 billion. Such
an action will create a chain eﬀect throughout the
market that will ultimately produce a change on the
Federal Reserve’s balance sheet.

Supplemental Financing Program
Trillions of dollars, seasonally adjusted
2.25
2.00
Federal Reserve liabilities
1.75
1.50
1.25
1.00
0.75

Supplemental Treasury deposits

0.50
0.25
0.00
12/07

3/08

6/08

9/08

12/08

3/09

6/09

9/09

Note: Liabilities do not include Treasury cash holdings, foreign official deposits,
service-related balances and adjustments or other liabilities and capital.
Source: Federal Reserve Board.

When the Treasury deposits are withdrawn from
the Federal Reserve’s balance sheet, the Treasury
will use the cash recovered from the operation to
pay oﬀ part of its debt. As mentioned, the debt was
in the form of Treasury bills issued to the public. In
the midst of a slow recovery, the cash that will be
returned to the public will ﬁnd its way to the depository institutions that work closely with the Fed.
Following this would be the return of those funds
to the Federal Reserve’s balance sheet as reserve liabilities.
What results is a growth in the monetary base, but
the transition will have very little if any eﬀect on
the Fed’s credit-easing policies. It might be harder
to see, but it is true that the consequences of this
action are far from a simple printing of money. The
growth in the monetary base that results is a shifting of funds between Federal Reserve accounts.
Based upon the current state of the economy, the
growth will likely go unrealized.
Two major factors will help to keep the growth in
check. First and foremost, the depository institutions that receive these new deposits are still facing
very large capital constraints. These constraints will
discourage institutions from lending their reserve
balances as they continue to work to stabilize their
operations. Secondly, the ability of the Fed to pay
interest on reserves should allow the Fed to control

Federal Reserve Bank of Cleveland, Economic Trends | October 2009

the expansion of the monetary base, even though
the applicability of this practice is still largely untested. So, at the present time, it appears as if the
transformation of the Federal Reserve’s liabilities
will be only a simple transition in account balances
and will have little eﬀect on credit-easing policy.

Monetary Base
Trillions of dollars, seasonally adjusted
2.25
2.00
1.75

Supplemental Treasury
deposits

1.50
Excess reserves

1.25
1.00

Required reserves

To see the Federal Reserve Bank of Cleveland’s credit easing
policy tools visit
http://www.clevelandfed.org/research/data/credit_easing/index.cfm

0.75
0.50

Currency component

0.25
0.00
12/07

3/08

6/08

9/08

12/08

3/09

6/09

9/09

Source: Federal Reserve Board.

Federal Reserve Bank of Cleveland, Economic Trends | October 2009

Economic Activity

The Employment Situation, September 2009
Average Nonfarm Employment Change
Change, thousands of jobs
300
200
100
0
-100
-200
-300
-400
-500
-600
-700
-800
2006 2007 2008 YTD Q:1
2009

Revised
Previous estimate
Current estimate

Q:2
2009

Q:3 June August September

Nonfarm payroll losses picked up pace in September, falling by a larger-than-expected 263,000 jobs
after a loss of 201,000 in August. Net revisions
tacked an additional 13,000 losses onto estimates
for July and August, mostly stemming from downward revisions in the government sector. Payroll
employment has now fallen by 7.2 million since the
start of the recession. However, monthly losses in
the third quarter have averaged 256,000, compared
to 691,000 in the ﬁrst quarter and 428,000 in the
second.
The unemployment rate ticked up 0.1 percentage
point to 9.8 percent, as the number of unemployed
people grew by 214,000, and 571,000 people
exited the labor force. This is the highest rate
since June 1983 and is the result of a steady climb
begun in May 2008, with the exception of just one
month. The lone exception was July 2009, when
the rate did not climb only because a large number
of the unemployed left the labor force.

Source: Bureau of Labor Statistics.

Unemployment Rate
Percent
12
10

Meanwhile, the employment-to-population ratio,
considered a less volatile measure of labor market
duress, fell to 58.8 percent, the lowest it’s been
since 1984. Average weekly hours of production
workers were again cut back and now stand at 33.0,
matching the series low set in June.

8
6
4
2
1980

10.02.09
by Murat Tasci and Beth Mowry

1985

1990

1995

2000

2005

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

September’s uptick in payroll decline was not
broadly experienced across industries. While losses
nearly tripled in government and trade, transportation, and utilites, most other industries have
actually improved since August. Goods-producing
industries shed 116,000 jobs last month, split
roughly between construction and manufacturing.
Losses at motor vehicle and parts manufacturers
lessened considerably, from 16,000 in August to
3,500 in September, perhaps owing to the resumption of production after the Cash-for-Clunkers
program drained dealer inventories.
Service-providing industries lost 147,000 jobs over
the month. The greatest decline in services occurred

Federal Reserve Bank of Cleveland, Economic Trends | October 2009

in trade, transportation, and utilities (−60,000), with
retail trade contributing the majority of those losses.
Industries that saw a smaller drop in September were
ﬁnancial activities (−10,000), leisure and hospitality
(−9,000), professional and business services (−8,000),
and information, which broke even with zero losses
for the ﬁrst time since February 2008. The professional and business services category has seen substantial improvement since June, when job decline had
been in the triple-digits for over half a year. Gains in
education and health services slowed to just 3,000,
compared to 46,000 in August, due to a loss of 16,900
in educational services. Health care by itself, though,
added 20,000 jobs. The government shed jobs for the
ﬁfth straight month (−53,000), after having been one
of the few job creators earlier in the recession, along
with healthcare.

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

Revision to
July

August
current

Revision to
August

September
2009

Payroll employment

−304

−28

−201

−263

Goods-producing

−116

−132

−116

Construction

−69

−60

−64

Heavy and civil engineering

−7.7

−6

−12

Residentiala

−19.8

−20

−13

−42

−1

−34

−39

Nonresidentialb
Manufacturing

−41

−66

−3

−51

Durable goods

−23

−55

−4

−43

Nondurable goods

−18

−11

−8

Service-providing

−188

−31

−69

−147

Retail trade

−45

−1

−9

−39

Financial activitiesc

−14

−25

−10

PBSd

−31

−19

−8

Temporary help services

−6

−7

−2

Education and health services

−7

−6

Leisure and hospitality

−14

−9

Government

−58

−30

−19

−1

−53

Local educational services

−55

−24

−17

−8

−13

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 | October 2009

Economic Activity

Real GDP: Second-Quarter 2009 Final Estimate
10.05.06
by John Lindner

Real GDP and Components, 2009:Q2
Revised Estimate
Annualized percent change, last:
Quarterly change
(billions of 2000$)

Quarter

Four quarters

Real GDP

−23.9

−0.7

−3.8

Personal consumption

−20.2

−0.9

−1.7

Durables

−15.5

−5.6

−8.8

Nondurables

−9.8

−1.9

−2.7

2.8

0.2

−0.2

−32.8

−9.6

−19.7

Equipment

−11.0

−4.9

−20.2

Structures

Services
Business ﬁxed investment

−19.4

−17.3

−18.9

Residential investment

−23.5

−23.2

−25.6

Government spending

41.4

6.7

2.5

National defense

22.4

14.0

7.7

56.1

—

Exports

−15.0

−4.1

−15.0

Imports

−71.2

−41.7

−18.5

Private inventories

−160.2

—

Net exports

Source: Bureau of Economic Analysis.

Contribution to Percent Change in Real GDP
Percentage points
2.5
2.0

2009:Q2 advance estimate
2009:Q2 second estimate
2009:Q2 third estimate

1.5
1.0
0.5 Personal
0.0

consumption

Residential
investment

Exports
Imports

-0.5

Government
spending

-1.0
-1.5
-2.0

Business
fixed
investment

Change in
inventories

Source: Bureau of Economic Analysis

Federal Reserve Bank of Cleveland, Economic Trends | October 2009

Real GDP was revised upward in the ﬁnal secondquarter revision. Instead of falling at an annualized
rate of −1.0 percent as reported in the second estimate, it now is estimated to have fallen only −0.7
percent. Nonresidential investment in equipment
was revised up from an 8.4 percent decrease to a
4.9 percent decline, helping to bring the growth
rate in overall business ﬁxed investment up 1.3 percentage points (pp) to −9.6 percent. The consumer
side looked nearly the same after the revision. Real
personal consumption was revised up again, from
−1.0 percent to −0.9 percent. Residential investment was revised down from −22.8 percent to
−23.2 percent and looks to have somewhat oﬀset
the change in personal consumption. There were
also upward revisions to exports and government
spending. The upward revision to government
spending added an additional 0.3 pp to its growth,
while exports subtracted 0.9 pp less from net exports.
Revisions to export and import growth oﬀset each
other in terms of real GDP growth. Gains in the
growth of consumption, business ﬁxed investment,
and government spending contributed a substantial
portion to real GDP growth in the third estimate,
each adding about 0.1 pp to the total.
The Blue Chip consensus forecast for 2009 real
GDP growth remained at −2.6 percent in the September survey, though the projection for the second
half of 2009 increased again, likely due to some
optimism about recent data releases. Most noticeable was the 0.6 pp increase in the third-quarter
consensus forecast, which came in at 3.0 percent.
The consensus estimate for 2010 growth ticked
up again, this month by 0.1 pp to 2.4 percent, its
fourth upward revision in ﬁve months, though—
at 2.4 percent—that remains below its long-run
trend. Looking ahead through the rest of the year,
even pessimists are predicting positive GDP growth
for the rest of this year and into 2010.
12

Results from two special questions on the Blue
Chip survey support the view that employment
growth will again lag during this recovery. The
consensus forecast was for a peak unemployment
rate of 10.1 percent in this cycle. Over 80 percent
of respondents predict that the unemployment rate
will not fall back below 7 percent until the second
half of 2012 (the natural rate of unemployment
is estimated to be somewhere around 6 percent).
Currently, the unemployment rate is at 9.8 percent,
and anecdotes suggest that employers are reluctant
to hire people back.

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

Final estimate
Blue Chip consensus

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2009
2010
2007
2008

Source: Blue Chip Economic Indicators, June 2009; Bureau of Economic Analysis.

Okun’s Law
6
Post-benchmarking
Pre-benchmarking

GDP growth

5
4
3
2
1

Unemployment

0
-1

-1

A historical pattern, referred to as Okun’s law,
posits that there is an inverse relationship between
changes in the unemployment rate and GDP
growth, with year-over-year GDP growth moving
twice as fast as the change in the unemployment
rate. Prior to the BEA benchmarking in July, fears
that this relationship was losing strength through
this recession had been aired. Assuming a constant
natural rate of unemployment, the year-over-year
percentage point change in the unemployment rate
was plotted against year-over-year GDP growth
rates from both pre- and post-benchmarking data.
So far this relationship appears to be holding true.

-2
-3
-4
Notes: GDP growth is the year over year change in GDP in a given quarter.
Unemployment is the change in unemployment rate over a 6% NAIRU.
Data goes back through 2000:Q1.
Sources: Bureau of Labor Statistics, Bureau of Economic Analysis.

Federal Reserve Bank of Cleveland, Economic Trends | October 2009

Economic Activity

The Eﬀects of “Cash for Clunkers” on the Auto Industry
10.06.09
by Kyle Fee

Auto Sales, Monthly Growth (Units)
Percent
40

Total auto sales
Passenger car sales
Lightweight truck sales
Medium and heavy truck tales

30
20
10
0
-10
-20
-30
2007

2008

2009

Source: Bureau of Economic Analysis.

Retail Sales, Monthly Growth (dollars)
Percent
12
10
8
6
4
2
0
-2
-4
-6
-8

Retail sales
Auto sales

Without “Cash for Clunkers” ($2.8 billion)

2007

2008

2009

Source: Census Bureau, Department of Transportation.

Auto Sales, Year-Over-Year Growth (Units)
Percent
30

Total auto sales
Passenger car sales
Lightweight truck sales
Medium and heavy truck tales

20
10
0
-10
-20

As of October 1, the “Cash for Clunkers” program
has processed 670,557 reimbursements totaling
$2.8 billion dollars. The program has received rave
reviews in the media for its short-term success, but
the open question is whether short-term successes
facilitate long-term growth. Will the program jump
start the restructured auto industry or will it result
in mere transitory demand shifts, “stealing” from
future consumption?
There is no doubt that the “Cash for Clunkers”
program—known oﬃcially as the Car Allowance
Rebate System (CARS)—provided a much-needed
shot in the arm for the ailing auto industry. From
July to August, total auto sales increased 25.4 percent. Passenger car sales grew 29.7 percent, lightweight truck sales 20.2 percent. As expected with a
program that was intended to improve fuel eﬃciency, sales of medium and heavy truck decreased 5.6
percent. In dollar terms, auto sales increased 10.6
percent—for comparison, total retail sales increased
3.0 percent over the same period. Note though,
that removing the government contribution of
$2.8 billion drops the increase in auto sales to 5.7
percent and total retail sales to 1.9 percent.
Thanks to the “Cash for Clunkers” program, auto
sales have increased markedly relative to this same
time last year—total sales are up 3.6 percent, and
passenger car sales are up 17.4 percent. On the
other hand, lightweight truck sales remained negative (−9.6 percent), as did and medium and heavy
truck sales (−33.5 percent). In dollar terms, auto
sales and total retail sales decreased year over year,
1.0 percent and 6.0 percent, respectively. Removing
the $2.8 billion government contribution from the
calculations knocks down auto sales to −5.3 percent
and total retail sales to 6.9 percent, year-over-year.

-30
-40
-50
2007

2008

2009

Another beneﬁt of the CARS program can be seen
in the continued decline in domestic auto inventories. In August, inventories decreased 16.3 percent
to 708,700 units, a new record low even in the age

Source: Bureau of Economic Analysis.

Federal Reserve Bank of Cleveland, Economic Trends | October 2009

Retail Sales, Year-over-Year-Growth (dollars) of lean inventories. August also saw auto and light
Percent
10
Retail sales
Auto sales

5
0
-5
-10
-15
-20
-25

The inventory-to-sales ratio is one measure to keep
an eye on as automakers rebuild inventory levels. The ratio hit an all-time high of 4.6 in January 2009, after a year of falling sales and elevated
inventories as the consumer pulled back. Auto
production shutdowns over the spring and summer have helped bring the ratio down amid weak
sales. The “Cash for Clunkers” program accelerated
the decline in inventories, causing the ratio to slide
from 2.4 in July to 1.6 in August.

Without “Cash for Clunkers” ($2.8 billion)

-30
2007

2008

truck production continue increases oﬀ of historic
lows seen in June. Sharp inventory declines point
to further increases in auto production, as automakers will need to rebuild inventories. However,
automakers face the diﬃcult task of determining
the optimal production schedule to obtain the best
mix and level of inventory in the face of uncertain
consumer demand.

2009

Source: Census Bureau, Department of Transportation.

Domestic Auto Inventories
Millions of units (SAAR)
2.5
2.0
1.5
1.0
0.5
0.0
1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007
Note: SAAR is the seasonally adjusted annual rate.
Source: Bureau of Economic Analysis.

Industrial Production, Autos and Light Trucks
Millions of units (SAAR)
14
12
10
8
6

It would be naïve to expect the level of auto sales
to continue at rates seen in August, which makes
managing the inventory rebuild that much trickier.
Even with the “Cash for Clunkers” program, auto
sales accounted for only 20.5 percent of total retail
sales, breaking the 20 percent mark for the ﬁrst
time since May 2008. Moreover, auto sales as a percentage of total retail sales are well oﬀ of the 20002007 average of 25.2 percent.
In the end, the CARS program subsidized total
auto sales, decreased inventories, and increased
production, providing temporary relief to an ailing
and restructuring domestic auto industry. However,
the risk going forward is that long-term health of
the automakers relies on a debt-burdened consumer, who may pull back on auto sales in the near
term because of a government-enacted policy that
basically “stole” from future demand. Under these
circumstances, automakers must be careful when
ramping up production in the fourth quarter to
avoid building up inventories in the face of declining sales.

4
2
0
1977

1981

1985

1989

1993

1997

2001

2005

2009

Note: SAAR is the seasonally adjusted annual rate.
Source: Federal Reserve Board.

Federal Reserve Bank of Cleveland, Economic Trends | October 2009

Auto Sales as a Percentage of Total Retail Sales
Percent
32
30
28
26
24
22
20
18
16
14
1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007
Source: Census Bureau.

Domestic Auto Inventory-to-Sales Ratio (units)
Ratio
5.0
4.0
3.0
2.0
1.0
0.0
1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007
Source: Bureau of Economic Analysis.

Federal Reserve Bank of Cleveland, Economic Trends | October 2009

International Markets

With the Dollar Depreciating, Can Inﬂation Be Far Behind?
09.29.09
by Owen F. Humpage and Caroline Herrell

Exchange Rate Measures

Many people believe that a falling dollar in the
foreign-exchange market portends future inﬂation,
and they do so for a very good reason: a monetary
impulse is very likely to cause the dollar to ﬂy south
well before consumer prices take oﬀ. Unfortunately
for forecasting buﬀs, other factors besides monetary
spurts aﬀect dollar exchange rates, and these things
muddy the ability of exchange-rate changes to forecast future inﬂation patterns. All and all, exchange
rates do contain useful information for predicting
inﬂation, but forecasting inﬂation simply with an
exchange rate is a little like eating dinner with only
a knife.

Index
150
Major

125

Broad

100
75
50
25
1975

1980

1985

1990

1995

2000

2005

Sources: Federal Reserve Board and Haver Analytics.

The dollar has lost a lot of ground in the past few
years, heightening concerns among some people
about future inﬂation. Relative to the currencies
of the other major developed countries, the dollar has depreciated 40 percent since its peak in
February 2002. If we toss the currencies of the key
developing countries into the mix, the pattern in
only slightly better. The dollar has depreciated 23
percent since early 2002 by this broader measure.
Although the dollar reversed course through much
of last year, it once again seems to be on a downward trajectory.

Inflation Measures
12-month percent change
15
CPI
10
CPI less food and energy
5

-5
1973

Federal Reserve Bank of Cleveland
Median CPI

1978

1983

1988

1993

1998

2003

2008

Sources: Bureau of Labor Statistics, Federal Reserve Bank of Cleveland,
Haver Analytics.

Federal Reserve Bank of Cleveland, Economic Trends | October 2009

The connection between an exchange rate and
inﬂation is neither simple nor straightforward,
because the relationship depends on how each
respond to money impulses. Inﬂation, after all, is a
drop in the purchasing power of money that results
when a central bank creates more money than the
public wants to hold. As the public subsequently
unloads the unwanted money for goods and services, all prices, including wages, eventually rise. If
the public also exchanges the unwanted money for
foreign goods and services, the dollar will depreciate in the foreign-exchange market. While inﬂation
eventually leads to a rise in all prices, it does not do
so evenly. Some prices respond to monetary impulses faster than others. Many prices are set under
contracts or by custom and adjust only at discrete
17

intervals. Exchange rates, however, adjust continuously. Moreover, foreign-exchange traders are
highly eﬃcient processors of information. If they
believe that monetary policy will produce inﬂation
down the road, they are very likely to build that
expectation into their exchange-rate quotes today.
For these reasons, if the Federal Reserve creates too
much money, the dollar is very likely to depreciate
well in advance of any rise in the consumer price
index or any other price measure.

Do Exchange-Rate Movements Predict
Changes in the Inﬂation Rate?
Inﬂation measure
CPI

Core

Median

Yes

Exchange rate
Broad
lags include

Major
lags include

Sources: Haver Analytics, Board of Governors of the Federal Reserve System,
U.S. Department of Commerce, Federal Reserve Bank of Cleveland.

Do Changes in the Inﬂation Rate Predict
Exchange-Rate Movements?
Inﬂation measure
CPI

Core

Median

Yes

Exchange rate
Broad
lags include

Major
lags include

Sources: Haver Analytics, Board of Governors of the Federal Reserve System,
U.S. Department of Commerce, Federal Reserve Bank of Cleveland.

Federal Reserve Bank of Cleveland, Economic Trends | October 2009

Unfortunately, exchange rates also respond to other
things besides domestic monetary impulses. Foreign inﬂation rates are just such a factor. Strictly
speaking, exchange-rate changes reﬂect international inﬂation diﬀerentials, not the absolute level of
inﬂation in a speciﬁc country. If the United States
maintains a 3 percent inﬂation rate year in and year
out but the rest of the world consistently maintains
1 percent inﬂation rate, the dollar will tend to depreciate by 2 percent per year. If then both the U.S.
and world inﬂation rates rise by 1 percentage point,
the dollar will continue to depreciate by 2 percent
per year, and this depreciation does not forecast a
change in the U.S. inﬂation rate. Exchange rates
can also change for reasons that don’t have anything
to do with inﬂation. If China, Brazil, or Europe
look like better investment sites than the United
State, funds will ﬂow away from the United States
and to these places, and the dollar will depreciate
against their currencies.
When push comes to shove, this is an empirical issue, so we investigated whether percentage changes
in the Board of Governors’ Broad and Major
currency indexes contain useful information for
predicting changes in future inﬂation rates. The results were mixed. We did ﬁnd pretty clear evidence
that changes in these exchange-rate indexes are
useful for predicting changes in inﬂation as measured by the Federal Reserve Bank of Cleveland’s
median CPI. We also found that the signal was not
confused because the eﬀect also ran in the opposite
direction: inﬂation changes induced movements
in the exchange rates. The median CPI attempts to
oﬀer a cleaner measure inﬂation trends than other
price indexes by abstracting as much as possible
from the inﬂuence of individual price changes, such
as jumps in petroleum prices.
18

We also found evidence that movements in these
exchange-rate indexes predicted changes in inﬂation as measured by the headline CPI, but you
need 12-months’ worth of data before you get any
information. These same exchange-rate movements,
however, are not useful for predicting changes in
inﬂation after you strip out food and energy prices
to get the core CPI. In addition, the results show
that changes in the inﬂation rate, as measured by
either the headline CPI or the core CPI, help predict changes in our two exchange-rate indexes over
short intervals.
In an empirical sense then, exchange-rate changes
do contain some information about future changes
in inﬂation rates, but the results are not robust
across alternative measures of inﬂation. Because of
this lack of robustness and for the reasons outlined
above, no one should “bet the ranch” on exchangerate-based prediction of inﬂation. Most economists
look at a whole slew of data—from GDP gaps to
commodity price trends—before forming opinions
about inﬂation trends. Exchange rates should be in
the mix and used with caution.

Federal Reserve Bank of Cleveland, Economic Trends | October 2009

Regional Activity

Pittsburgh’s Labor Market Performance over the Recession
09.23.09
by Kyle Fee
For two days, the leaders of the world’s 20 largest
economies will meet to discuss potential reforms
to the global economic system. Where will this
international meeting take place, you ask? London?
New York? Tokyo? All wrong. None other than the
Fourth District’s own Pittsburgh, Pennsylvania.
While not the center of the global ﬁnance universe,
Pittsburgh’s recent history provides its own story of
economic reform. The economic metamorphosis
from steel town to a health and high-tech services
center is remarkable but nowhere are its successes
more apparent than in the performance of Pittsburgh’s labor market over the “Great Recession.”

Unemployment Rate
Percent
12
10
Nation
8
Cleveland
6

Pittsburgh

4
2
0
1990

Columbus

Cincinnati

1995

2000

2005

Note: Forth District cities are seasonally adjusted using X-11.
Source: Bureau of Labor Statistics.

Payroll Employment
Index, December 2007 =100
104
102
Pittsburgh
100
Columbus
98
Cincinnati

Nation

Unlike most of the Fourth District, Pittsburgh’s
local labor market has held up relatively well over
this recession. Over the past 10 years, Pittsburgh’s
unemployment rate has closely tracked the nation’s
rate, although since December 2007, they have begun to diverge. Pittsburgh’s unemployment rate has
increased only 2.8 percent, while the national rate
has increased 4.5 percent. Other large metropolitan areas in the Fourth District have experienced
unemployment rate increases ranging from 3.1
percent to 4.7 percent. Pittsburgh’s unemployment
rate (7.5 percent) as of July 2009 is well below the
nation’s (9.4 percent) and other large Fourth District metropolitan statistical areas (MSAs).

Cleveland
92
12/07

6/08

12/08

6/09

12/09

Note: Forth District cities are seasonally adjusted using X-11.
Source: Bureau of Labor Statistics

Declines in payroll employment over this downturn
have been severe across all locations, with losses
ranging from −2.1 percent (Columbus, Ohio) to
−6.8 percent (Cleveland, Ohio). Pittsburgh’s payroll
employment declined 2.6 percent, much less than
the nation’s loss of 5.0 percent employment over
the recession.
Similar to other Fourth District MSAs, the main
driver for Pittsburgh’s employment losses has been
the manufacturing sector, accounting for 40 percent of payroll declines. The professional, business,
ﬁnancial services and information sectors are large
loss leaders in Cleveland (36.9), Columbus (34.0)

Federal Reserve Bank of Cleveland, Economic Trends | October 2009

and the nation (32.5) while in Pittsburgh these sectors account for smaller proportion of losses (28.3).
Similar comparisons can be made for the natural
resources, mining, and construction sectors in Pittsburgh as well.

Components of Employment Growth,
Since December 2007
Percent
4
2

Natural resources,
mining & construction

Government & other services
Professional, business &
Leisure, hospitality,
financial services & information
education & health services

Manufacturing
Trade,
transportation &
utilities

Going into the downturn, Pittsburgh’s allocation of
labor proved favorable. The once-industrial behemoth allocated only 8.7 percent of its workforce to
the manufacturing sector in 2007. As discussed in
“Employment Loss in Ohio’s Manufacturing Industry,” manufacturing employment declines have
accelerated during this downturn, adversely aﬀecting local labor markets signiﬁcantly. On the other
hand, Pittsburgh has 19.7 percent of its workforce
in the education and health services sector, which
has been one of the few sectors to produce jobs
during the current downturn. The concentration in
the complementary ﬁelds of education and medicine not only enabled Pittsburgh to withstand some
the ill eﬀects of the business cycle but also provide a
solid foundation for future growth.

0
-2
-4
-6
-8

-4.9
Cincinnati

-6.8

-2.1

Cleveland

Columbus

-2.6

-5.0

Pittsburgh

Nation

Note: Seasonally adjusted using X-11.
Source: Bureau of Labor Statistics.

Do Changes in the Inﬂation Rate Predict Exchange-Rate
Movements?
Percent of employment
Cincinnati, OH

Cleveland, OH

Columbus, OH

Pittsburgh, PA

U.S.

Natural resources,
mining and
construction

4.8

3.8

4.0

5.4

6.1

Manufacturing

11.6

13.3

8.1

8.7

10.1

Trade, transportation and utilities

20.4

18.5

20.3

19.6

19.4

Information

1.5

1.7

2.0

1.9

2.2

Financial activities

6.3

6.7

7.7

5.9

6.0

Professional and
business services

15.0

13.4

15.9

13.6

13.0

Education and
health services

13.5

16.3

11.8

19.7

13.3

Leisure and
hospitality

10.2

8.7

9.5

9.4

9.8

Other services

4.1

3.9

4.6

4.0

Government

12.7

13.3

16.7

11.0

16.1

Source: Bureau of Labor Statistics.

“Employment Loss in Ohio’s Manufacturing Industry”
http://www.clevelandfed.org/research/trends/2009/0409/02regact.
cfm

Federal Reserve Bank of Cleveland, Economic Trends | October 2009

Regional Activity

Fourth District Employment Conditions
10.01.09
by Kyle Fee

Unemployment Rate
Percent
11
10
9
8
7

Fourth District
United States

6
5
4
3
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
a. Seasonally adjusted using the Census Bureau’s X-11 procedure.
Shaded bars represent recessions. Some data reflect revised inputs,
reestimation, and new statewide controls. For more information, see
http://www.bls.gov/lau/launews1.htm.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

County Unemployment Rates
U.S. unemployment rate = 9.7%

7.0% - 9.3%
9.4% - 10.3%
10.4% - 12.2%
12.3% - 13.2%
13.3% - 14.7%
14.8% - 21.2%
Note: Data are seasonally adjusted using the Census Bureau’s X-11 procedure.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

Federal Reserve Bank of Cleveland, Economic Trends | October 2009

The District’s unemployment rate increased 0.1
percentage point to 10.2 percent for the month of
August. The decrease in the unemployment rate
is attributed to increases in the number of people
unemployed (0.6 percent), decreases in the number
of people employed (−0.1 percent), and decreases
in the labor force (−0.5 percent). The District’s rate
was higher than the national rate in August (0.5
percentage point), as it has been since early 2004.
Since the recession began, the nation’s monthly unemployment rate has averaged 0.7 percentage point
lower than the Fourth District’s unemployment
rate. Since this time last year, the Fourth District
and the national unemployment rates have each
increased 3.5 percentage points.
There are signiﬁcant diﬀerences in unemployment
rates across counties in the Fourth District. Of the
169 counties that make up the District, 33 had an
unemployment rate below the national rate in August and 136 counties had a higher rate. There were
121 District counties reporting double-digit unemployment rates. 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 7.0 percent
(Allegheny County, Pennsylvania) to 21.2 percent
(Magoﬃn County, Kentucky), with the median
county unemployment rate at 12.1 percent. Counties in Fourth District Pennsylvania generally populate the lower half of the distribution, while the few
Fourth District counties in West Virginia moved to
the middle of the distribution. Fourth District Kentucky and Ohio counties continue to dominate the
22

County Unemployment Rates
Percent
24
22
20

Ohio
Kentucky
Pennsylvania
West Virginia

18
16

upper half of the distribution. These county-level
patterns are reﬂected in statewide unemployment
rates, as Ohio and Kentucky have unemployment
rates of 10.8 percent and 11.1 percent, respectively,
compared to Pennsylvania’s 8.6 percent and West
Virginia’s 9.0 percent.

Median unemployment rate = 12.1%

14
12
10
8
6
4

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 | October 2009

Banking and Financial Institutions

The Availability and Proﬁtability of Credit Cards
10.05.09
by Kent Cherny and O. Emre Ergungor

Credit Card Interest Rates

Credit cards serve a dual purpose in our economy.
First, they are a means of payment in lieu of cash
or checks. Used in this way, credit cards simplify
people’s day-to-day transactions and cash management needs. At the same time, credit cards are often
used by individuals and small businesses for shortor medium-term unsecured borrowing. Individuals may use the revolving balance of a credit card
to ﬁnance large purchases ahead of their income.
Small businesses may rely on credit cards for their
working capital needs.

Percentage spread over one-year Treasury notee
14
13
12
11
10
9
All credit card accounts
8
7
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Federal Reserve Board.

Credit Card Profitability
Percentage rate
12
11
10
9
8
7
6
5
4
3
2
1
0
1/06

Excess spread rate (revenue less
charge-offs and financing costs)

Charge-off rate

7/06

1/07

7/07

1/08

7/08

1/09

7/09

Because they are not secured by marketable assets
and have uncertain repayment periods, credit cards
often carry substantially higher interest rates than
secured debt like mortgages and auto loans. The
rates can also serve as a barometer for the broader
risk proﬁle of consumers as well as the availability
of credit to them. Interest rates for credit card holders have increased over the past two years.
Rates must compensate credit card issuers for
the charge-oﬀs they take on uncollectable balances, which is why they are a gauge of credit risk.
Charge-oﬀs can be particularly problematic during
recessionary times, and the current recession is no
exception. Charge-oﬀ rates have crept steadily upward since the recession began in late 2007. More
recently, charge-oﬀs dropped a bit and rates rose,
which led to a slight rebound in credit card issuers’ excess spread (a measure of proﬁtability) of 2
percentage points in July.

Source: Standard & Poor’s.

Liquidity in the market for credit card debt—and
in the overall bank credit market more generally—
also factors into the availability and cost of unsecured credit. Last fall, both the market for shortterm bank funds, gauged by the LIBOR rate, and
the market for securitized credit card receivables
seized up, meaning banks could only fund new
credit card debt at high interest rates. In many
cases, ﬁnancial institutions chose to severely restrict
the amount of new credit extended in order to con
Federal Reserve Bank of Cleveland, Economic Trends | October 2009

Credit Card ABS Issuance and Spreads
Spread over LIBOR, in percentage points

Billions

16
ABS spread

8
7

ABS issuance
10

3
2

2
0
2006

0
-1
2007

2008

2009

Sources: Bloomberg, Bear Stearns.

Consumer Indebtedness
Percentage of disposable personal income
6.8
6.7
6.6
6.5
6.4
6.3
6.2

serve capital. For the ﬁve months between September 2008 and March 2009, no asset-backed securities (ABS) secured by credit card receivables were
issued, and spreads on existing securities spiked
from around 1 percent to nearly 8 percent.

Consumer debt payments

6.1
6.0
5.9
5.8
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Federal Reserve Board

In order to restore the ﬂow of new credit, the Federal Reserve included credit cards in the securities
that were eligible for its Term Asset-Backed Securities Loan Facility (TALF). So far this year, $23.8
billion—or 60 percent—of the $40 billion in credit
card ABS debt issued has been submitted to the
TALF for ﬁnancing. The liquidity improvements
have brought down credit card funding costs for
issuers and helped temper the contraction in newly
extended credit.
Current demand for credit cards is subject to potentially countervailing forces. On the one hand,
individuals are saving more, and may be looking
to cut their debt loads by funding purchases with
cash rather than credit. One measure of consumer
indebtedness, t he consumer ﬁnancial obligations
ratio, which is the ratio of consumer debt payments
to disposable personal income , was 5.82 percent
last quarter, down from levels around 6.60 percent
in 2003-2005. At the same time, unemployment
continues to rise, and many people are remaining
unemployed longer, which could lead people to
draw on their credit card lines (if they haven’t been
reduced or terminated) to meet monthly expenses.
The total amount of outstanding credit card debt
held at commercial banks has fallen 9.1 percent
since its peak in December 2008. This contraction
may, in part, be a response to demand ﬂuctuations,
but it could also be the result of supply-side considerations, namely the funding issues and credit quality degradation previously alluded to. Nearly half of
all unsecured revolving credit is held in securitized
pools, suggesting that policy eﬀorts to stabilize the
ABS market can have signiﬁcant eﬀects on the overall supply of credit card debt.
One other factor that may be aﬀecting the supply
of credit card debt now and in the long run is Congress’s recent passage of the Credit Card Accountability Responsibility and Disclosure Act of 2009.
Among many other things, the Act places new
restrictions on the supply of credit card lines to indi

Federal Reserve Bank of Cleveland, Economic Trends | October 2009

Credit Card Financing Sources
Billions of dollars of revolving unsecured credit
1,100
1,000
900

Thrifts
Nonbanks

Credit unions

800
700
600

Securitized pools

500
400

Finance companies

300
200
100

Commercial banks

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Federal Reserve Board G.19 release.

viduals under 21 years of age, and prohibits certain
interest rate variability practices previously used by
issuers. Insofar as these latter changes limit fees or
high-frequency risk repricing, extending credit to
certain borrowers may become unproﬁtable, which
would cause supply to contract accordingly.
Credit card funding costs are improving after policy
intervention into the ABS market, but concerns
about credit risk, as well as supply and demand factors, will potentially alter the volume and pricing of
credit cards in the near term. Perhaps these market
and legislative changes will lead to renewed interest in credit alternatives such as unsecured personal
loans, which are often subject to a more rigorous
underwriting process than most credit cards.

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Federal Reserve Bank of Cleveland, Economic Trends | October 2009

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