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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