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A Strategy for the 2011 Economic
Recovery
.

Joseph S. Tracy, Executive Vice President
Dominican College, Orangeburg, New York
January 28, 2011
These views are my own and do not necessarily represent the views of the Federal Reserve Bank of New York or the Federal Reserve System

Chart 1: Real GDP and the Output Gap
Trillions of US$

Trillions of US$

15.0

15.0

14.5

14.5

14.0

14.0

1.1
Trillion US$

13.5

13.5

13.0

13.0

12.5

12.5

12.0
2005

12.0
2006

2007

2008

2009

2010

Source: Bureau of Economic Analysis and Congressional Budget Office

2011

2012

Chart 2: Real Personal Consumption Expenditures (PCE)
% Change - Year to Year

% Change – Year to Year

9

9

8

8

7

7

6

6

5

5

Real PCE

4

4

3

3

2

2

1

1

0

0

-1

-1

-2

-2

-3
2000

-3
2002

2004

Source: Bureau of Economic Analysis

2006

2008

2010

Chart 3: Auto Sales
% Change - Year to Year

% Change - Year to Year

30

30

20

20

10

10

0

0

-10

-10

-20

-20

-30

-30

-40

-40

-50
1999

-50
2001

Source: Autodata Corporation

2003

2005

2007

2009

Chart 4: Housing Starts and Permits
3-month Moving Average

3-month Moving Average

1800

1800
Starts

1600

1600

1400

1400
Permits

1200

1200

1000

1000

800

800

600

600

400

400

200
1999

200
2001

Source: Census Bureau

2003

2005

2007

2009

Chart 5: Inventory / Sales: Total Business
Ratio

Ratio

1.50

1.50

1.45

1.45

1.40

1.40

1.35

1.35

1.30

1.30

1.25

1.25

1.20
1999

1.20
2001

Source: Census Bureau

2003

2005

2007

2009

Chart 6: Total Unemployment Rate by Age Group
3-month Moving Average

3-month Moving Average

10

18

9
16
8

25-54 Years Old
(Left Axis)

7

14

16-24 Years Old
(Right Axis)

6
12

5
4

10
3
2
2000

55+ Years Old
(Left Axis)

8
2002

Source: Bureau of Labor Statistics

2004

2006

2008

Note: Includes both male and female labor force participants.

Chart 7: Private Non-Farm Payroll Employment
Millions

Millions

116

116

115

115

114

114

113

113

112

112

111

111

110

110

109

109

108

108

107

107

106
2000

106
2002

Source: Bureau of Labor Statistics

2004

2006

2008

2010

Chart 8: Household Net Worth and the Saving Rate
Ratio

Ratio

650

600

Personal Saving
Rate
(right axis)

14

Household Net Worth As a
Percent of Disposable Income
(left axis)

12

10
550

8

6

500

4
450
2

400
1959

0
1971

Source: Federal Reserve Board and BEA

1983

1995

2007

Note: Regression is fitted from 1975Q1 to 1995Q4.

Chart 9: CDS Spreads for Financial Firms
Basis Points

Basis Points

2000

2000

1500

1500

Securities
Firms
1000

1000

500

0
2006
Source: CMA

500

Banks

0
2007

2008

2009

2010

2011

Chart 10: Banks Tightening Terms and Standards for Business
Loans to Large and Mid-Sized Firms
Net Percentage
100

Net Percentage
100

80

80

60

60

40

40

20

Demand

Standards

0

20
0

-20

-20

-40

-40

-60
-80
2000

-60

Spreads

-80
2002

2004

Source: FRB Senior Loan Officer Opinion Survey

2006

2008

2010

Chart 11:

Chart 12: Actual Fed Funds Target
Percent

Percent

6

6

5

5

4

4

Actual
3

3

2

2

1

1

0
2004

0
2005

2006

Source: Federal Reserve Board

2007

2008

2009

2010

2011

2012

Chart 13:

Federal Reserve Balance Sheet: Assets
Billions of Dollars
2500

Billions of Dollars
2500

2000

2000

1500

1500

1000

1000

500

500

0
2007
U.S. Treasuries
Repos
Maiden Lane Portfolio
Federal Agency

2008

2009
Other Assets
Other Loans
Special Credit Programs
MBS

Source: Federal Reserve Board

2010

0
2011

Other Supplying Reserve Funds
TAF
Swaps

Chart 14: Inventory / Sales: Total Business
Ratio

Ratio

1.50

1.50

1.45

1.45

1.40

1.40

1.35

1.35

Inventory/Sales

1.30

1.30

1.25

1.25

1.20
1999

1.20
2001

Source: Census Bureau

2003

2005

2007

2009

2011

Chart 15: Industrial Production
% Change - 6 months AR

% Change - 6 months AR

20

20
Durables

10

10

0

0
Non-Durables

-10

-10

-20

-20

-30

-30

-40
1999

-40
2001

Source: Federal Reserve Board

2003

2005

2007

2009

2011

Chart 16: Real Exports
(Series Set to 1.0 at NBER Peak)
Ratio

Ratio

1.20

1.20
1990 Cycle

1.15

1.15

1.10

1.10
1973 Cycle

1.05

1.05

1.00

1.00
Current Cycle

0.95

0.95

0.90

0.90
1981 Cycle

2001 Cycle

0.85

0.85
-2

0

2

4

6

Quarters Since NBER Peak
Source: Bureau of Economic Analysis

8

10

12

Chart 17: Productivity, Compensation and Unit Labor Costs
Nonfarm Business Sector
% Change - Year to Year

% Change - Year to Year

9

9
Productivity
Compensation Per
Hour

6

6

3

3

0

0

-3

-3
Unit Labor Costs

-6
2000

-6
2002

Source: Bureau of Labor Statistics

2004

2006

2008

2010

Chart 18: Private Employment and Hours Worked
% Change – 3-month Annual Rate

% Change – 3-month Annual Rate

8

8

6

6

Aggregate Hours

4

4

2

2

0

0
Employment

-2

-2

-4

-4

-6

-6

-8

-8

-10

-10

-12
2004

-12
2005

2006

Source: Bureau of Labor Statistics

2007

2008

2009

2010

2011

Note: Both series are private industries only.

Chart 19: Unemployment and Labor Force Participation Rates
Percent

Percent

11

67.6

10

67.2

Participation Rate
(Right Axis)

9

66.8
66.4

8
66.0
7
65.6
6
65.2
5

64.8

Unemployment Rate
(Left Axis)

4

3
1999

64.4
64.0

2001

2003

Source: Bureau of Labor Statistics

2005

2007

2009

2011

Chart 20: Real PCE, Disposable Income and Personal Saving
Rate
% Change - Year to Year

Percent

9

9
Personal
Saving Rate
(right axis)

8
7
6

Real PCE
(left axis)

5

Real Disposable
Income
(left axis)

8
7
6
5

4

4

3

3

2

2

1

1

0

0

-1

-1

-2

-2

-3
2000

-3
2002

2004

Source: Bureau of Economic Analysis

2006

2008

2010

Chart 21: Case-Shiller Home Price Index
Composite 20-SA
% Change
24

16

% Change
3
Year to Year
(Left Axis)

2

8

1

0

0

-8

-1

Period to Period
(Right Axis)

-16

-2

-24
2002

-3
2003

2004

2005

2006

2007

2008

2009

2010

2011
Note: Monthly Data

Source: S&P, Fiserv, and MacroMarkets LLC

Chart 22: Banks Tightening Terms and Standards for
Business Loans to Large and Mid-Sized Firms
Net Percentage
100

Net Percentage
100

80

80

60

60

40

40

20

Demand

Standards

0

20
0

-20

-20

-40

-40

-60
-80
2000

-60

Spreads

-80
2002

2004

Source: FRB Senior Loan Officer Opinion Survey

2006

2008

2010

Chart 23: C&I Loans: All Commercial Banks
% Change – 13-week AR

% Change – 13-week AR

40

40

30

30

20

20

10

10

0

0

-10

-10

-20

-20

-30
2001

2002

2003

2004

Source: Federal Reserve Board

2005

2006

2007

2008

2009

2010

2011

-30
2012

Chart 24: Post-Recession Growth Rates
1973-1975 Cycle: 1975Q1 Trough

% Change – AR

% Change – AR

10

10

8

8

6

6

4

4

2

2

0

0
1975Q2

1975Q3

1975Q4

1976Q1

1976Q2

1976Q3

1976Q4

2001 Cycle: 2001Q4 Trough

% Change – AR

1977Q1
% Change – AR

10

10

8

8

6

6

4

4

2

2

0

0
2002Q1

2002Q2

2002Q3

2002Q4

2003Q1

2003Q2

2003Q3

2003Q4

Chart 25: Sovereign Spreads
Percentage Points

Percentage Points

1000

1000

900

Greece

900

800

800

700

700

Ireland
600

600

500

500

Portugal
400

400

300

300

200

200

Spain
100
0
2007
Source: Bloomberg

100
0
2008

2009

2010

2011

Note: Yield spread is the difference between the local 10-year
sovereign bond yield and the 10-year German Bund.

Chart 26: Total and Core CPI
% Change - Year to Year

% Change - Year to Year

6

6

5

5
Total CPI

4

4

3

3

2

2
Core CPI

1

1

0

0

-1

-1

-2

-2

-3
1998

-3
2000

2002

Source: Bureau of Labor Statistics

2004

2006

2008

2010

Chart 27: Case-Shiller Home Price Index
Composite 20-SA
% Change
24

16

% Change
3
Year to Year
(Left Axis)

2

8

1

0

0

-8

-1

Period to Period
(Right Axis)

-16

-2

-24
2002

-3
2003

2004

2005

2006

2007

2008

2009

2010

2011
Note: Monthly Data

Source: S&P, Fiserv, and MacroMarkets LLC

Chart 28: Excess Supply of Housing
Thousands of Units

Thousands of Units

3500

3500

3000

3000

2500

2500

2000

2000
Excess Units: Total

1500

1500

1000

1000
Renter (For Rent)

500

500

0

0
Owner (For Sale)

Held Off Market

-500

-500
1997

1999

2001

Source: Federal Reserve Bank of New York

2003

2005

2007

2009

Note: Shading represents NBER recessions.

Chart 29: Growing Foreclosure Pipeline:
2000000

1800000

1600000

1400000

1200000

1000000

800000

600000

400000

200000

0

Source: OCC & OTS Mortgage Metric Reports

Note: Quarterly Data

Appendix Charts:

Real GDP and the Output Gap
Trillions of US$

Trillions of US$

15.0

15.0

14.5

14.5

14.0

14.0

1.1
Trillion US$

13.5

13.5

13.0

13.0

12.5

12.5

12.0
2005

12.0
2006

2007

2008

2009

2010

Source: Bureau of Economic Analysis and Congressional Budget Office

2011

2012

Nominal Interest Rates
Percent

Percent

4.25

4.25
Flash Crash

4.00

Jackson
Hole

November 2nd
FOMC

4.00

3.75

3.75

10-Year Treasury

3.50

3.50

3.25

3.25

3.00

3.00

2.75

2.75

2.50

2.50

2.25
2.00
Jan-10

Dudley
Speech

Fiscal
Compromise

2.25
2.00

Apr-10

Source: Federal Reserve Board

Jul-10

Oct-10

Jan-11

Apr-11

Real State and Local Government
(Series Set to 1.00 at NBER Peak)
Ratio

Ratio

1.10

1.10
1973-75 Cycle

2001 Cycle

1.05

1.05

1981-82 Cycle

1.00

1.00
1990-91 Cycle
Current Cycle

0.95

0.95
-2

0

2

Source: Bureau of Economic Analysis

4
6
Quarters Since NBER Peak

8

10

12

Real Residential Investment
(Series Set to 1.0 at NBER Peak)
Ratio

Ratio

1.4

1.4
1981 Cycle

1.3

1.3
2001 Cycle

1.2

1.2

1.1

1.1
1990 Cycle

1.0

1.0
1973 Cycle

0.9

0.9

0.8

0.8

0.7

0.7

Current Cycle

0.6

0.6
-2

0

2

4

6

8

10

12

Quarters Since NBER Peak
Source: Bureau of Labor Statistics

Note: Dashed line represents FRBNY forecast.

Real Per Capita Household Net Worth
(Series Set to 1.00 at NBER Peak)
Ratio

Ratio

1.10

1.10
1981-82 Cycle
1990-91 Cycle

1.05

1.05

1.00

1.00

0.95

0.95
2001 Cycle

0.90

0.90
1973-75 Cycle

0.85

0.85
Current Cycle

0.80

0.80

0.75

0.75

0.70

0.70
-2

0

2

4

6

8

Quarters Since NBER Peak
Source: Federal Reserve Board, Bureau of Economic Analysis, Census Bureau

10

12