SF FedViews

It is interesting to examine the recession and recovery of the economy through the prism of the stock market—particularly the broad Standard & Poor’s (S&P) 500-stock index, and the narrower S&P Homebuilders Industry and Dow Jones financial institution indexes. The first stage in the economic downturn was a housing bust, which was evident in steep declines in homebuilder stock prices in 2006 and 2007. Next, financial institutions suffered severe losses, and financial institution stocks posted steady price declines throughout 2007 and 2008. Finally, fallout from the housing bust and financial meltdown led to a deep recession, which was accompanied by a […]

The economy has shown more signs that it is on the rebound, with the recovery proceeding at a moderate pace. GDP growth for the fourth quarter of 2009 was revised up to 5.9 percent from 5.7 percent. However, 3.9 percentage points, about two-thirds of that number, was due to inventory investment as firms sharply slowed their rates of inventory liquidation. This is expected to make a much smaller contribution to growth in the future as the inventory cycle ends. Recent monthly readings indicate that final sales are growing moderately. Real consumer spending rose by 0.3 percent in January, up 1.4 percent […]

The economy appears to be in a moderate recovery, but questions remain about the durability of growth and whether it can be sustained by private demand as the impetus from the federal fiscal stimulus fades later this year. While the recession may be over, production, income, sales, and employment are at very low levels. With moderate economic growth, it could take years for the economy to pull out of its deep recessionary hole. Accordingly, the unemployment rate seems likely to remain elevated for several years. The associated economic slack has reduced inflationary pressures. Over the past year, the core PCE price […]

Looking at the outlook from a year ago, our forecasts for economic growth and inflation proved to be reasonably on target, but the unemployment rate rose far more than we had expected. According to currently available data, real GDP growth was close to zero last year, with a sharp contraction in the first half of the year offsetting strong positive growth in the second half. Based on past experience, zero real GDP growth implies an increase in the unemployment rate of between 1 and 1-1/2 percentage points, consistent with our forecast from a year ago. In fact, the unemployment rate rose […]

Incoming data continue to indicate that the economic recovery is taking hold. Deterioration in the labor market is abating. Household spending is expanding at a moderate pace. Tentative signs suggest that the housing sector may have bottomed, and housing construction has begun to grow. Financial market conditions have improved further. The employment report for the month of November was better than expected. Nonfarm payroll employment edged down by just 11,000 jobs, much less than expected, and the employment counts in September and October were revised to show smaller declines than previously reported. The unemployment rate fell 0.2 percentage point to 10.0%, […]

The U.S. economy expanded at a 3.5% annual rate in the third quarter, ending a string of four straight quarters of negative growth. Consumer spending increased at a robust 3.4% annual rate in the third quarter, boosted by the cash-for-clunkers program. Not surprisingly, sales of motor vehicles fell sharply after the program ended. But the decline was somewhat less than expected, suggesting greater underlying strength in demand than previously thought. Residential construction and exports were also areas of strength in the third quarter. Improvements in consumer and foreign demand have helped the manufacturing sector to rebound from the worst recession in […]

Five key questions are often asked about current economic and financial conditions: Has the financial crisis ended? Is the recession over? Will the economy return to full employment and normal conditions anytime soon? Is inflation going to jump too high? Does the Federal Reserve have an “exit strategy” to undo its extraordinary policy actions of the past two years? The answers, respectively, are: Mostly, Almost certainly, No, No, and Yes. The financial crisis has eased. In particular, financial market conditions have improved, with lower liquidity and risk spreads in the interbank lending, commercial paper, and corporate debt markets. Also, although banks […]

On balance, it’s probable that the economy has reached bottom and begun its slow recovery. The course going forward surely won’t be smooth or painless, and clear risks remain. Housing activity has been showing fairly uniform signs of recovery. For example, housing starts and permits have been rising fairly steadily since the beginning of the year. Home sales are also picking up, a factor contributing to the resumption of construction activity. By some measures, home prices have also shown some signs of stabilizing. Given the importance of housing in the balance sheets of both households and banks, stabilization in housing markets […]

Financial markets are improving, and the crisis mode that has characterized the past year is subsiding. The adverse feedback loop, in which losses by banks and other lenders lead to tighter credit availability, which then leads to lower spending by households and businesses, has begun to slow. As such, investors’ appetite for risk is returning, and some of the barriers to credit that have been constraining businesses and households are diminishing. The housing sector, which has been at the center of the economic and financial crisis, also looks to be stabilizing—albeit, at a very depressed level. The pace of house price […]

Over the past several weeks, forward-looking economic indicators such as stock prices, corporate bond spreads, and the Institute for Supply Management (ISM) survey of manufacturers have been giving more positive readings, while lagging economic indicators such as employment and unemployment have continued to reflect the ongoing contraction in the U.S. economy. In the manufacturing sector, output declined further in April, but at a less rapid pace than in previous months. However, the new orders component of the ISM survey of manufacturers, which is a good leading indicator, rose to 51.1 in May, implying that more than half of the survey respondents […]