The Economic Outlook and Policy Actions
Truck Blue Book Conference
Craig S. HakkioFederal Reserve Bank of Kansas City
April 30, 2009
Overview The recession is long, deep, and global. The financial system remains under significant stress. In response to the crisis, we have seen massive policy
interventions around the world. Cautiously optimistic the worst of the crisis may be over.
Financial market conditions have improved somewhat.
Some signs of a possible bottom. Many economists expect a recovery to begin by year-
end.
The current recession: among the worst in the post-war period
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1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Real GDP GrowthQuarterly Percent Change (annualized)
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The collapse of housing …
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1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009
Single Family Housing StartsThousands
Labor markets have deteriorated
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Unemployment and Nonfarm Payroll Employment
Thousands, average 3-month change Percent
Nonfarm Payrolls(left-axis)
Unemployment Rate(right-axis)
Change since December 2007
Nonfarm Payrolls : - 5.1 MillionUnemployment Rate : + 3.6 ppts
The slowdown is global
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Industrial Production(IMF, April 2009)
WorldAdvanced economiesEmerging economies
Percent Change from Year Ago
Financial stress has diminished, but still remains elevated.
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1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
FRB KC Financial Stress IndexIndex Index
In response, we have seen massive policy interventions
around the world.
The Federal Reserve has responded aggressively.
Federal funds rate target cut from 5 ¼ percent to 0 – ¼ percent.
Established facilities to provide backing to commercial paper and consumer ABS markets.
The Federal Reserve has committed to buying $1.75 trillion of Agency MBS, Agency debt, and Treasury securities.
The Fed’s balance sheet:Change in composition, significant increase in size
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0.8
1.2
1.6
2.0
2.4
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
Federal Reserve Banks' Assets
Provide Liquidty to Key Credit Markets
Rescue Operations
Short-Term Lending to Financial Firms
Purchase of Long-Term Securities
Treasury Portfolio & Misc
$, Trillions
So, how much is $1 trillion?
So, how much is $1 trillion?
$1 million = 11 ½ days = Sunday, April 12, 2009 (Easter).
So, how much is $1 trillion?
$1 million = 11 ½ days = Sunday, April 12, 2009
$1 billion = 32 years = 1977
So, how much is $1 trillion?
$1 million = 11 ½ days = Sunday, April 12, 2009
$1 billion = 32 years = 1977 $1 trillon = 32,000 years = 30,000 BC
(Neanderthals disappeared from Europe)
Central banks around the world have been reducing interest rates
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Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09
Central Bank Policy Rates
China
Euro Zone
Canada
United States
Percent
Governments around the world are also supporting financial markets
The fiscal package is large:$787 billion, with the bulk coming in 2009-2011
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2009 2010 2011 Total
Composition of Stimulus PackageBillions $Total
(right axis)
Billions $
SpendingTax cuts
Fiscal years
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Fiscal policy in the rest of the world is also stimulative
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1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014
General Government Fiscal Balances(IMF, April 2009)
World
Advanced economies
Emerging and developing economies
Percent of GDP
Cautiously optimistic the worst of the crisis may be over
There are tentative signs of a bottom in housing
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2004 2005 2006 2007 2008 2009
New and Existing Home SalesThousands, 3-Month moving average Thousands
New home sales(left axis)
Existing home sales(right axis)
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2004 2005 2006 2007 2008 2009
Inventories of Unsold HomesMonths Months
Existing homes
New homes
Home price deflation may not be getting worse.
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Home Price IndicesPercent Change from Year Ago
Case-Shiller
FHFA
Recently, consumer spending has picked up somewhat
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Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
Monthly Growth of Core Retail SalesPercentPercent, Annualized 3-month moving average
Interest rates have come down where the Fed has intervened
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Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09
30-Year FRM and 10-Year Treasury RatesPercent Percent
30-Year FRM
10-Year Treasury
And while the stock market has picked up, …
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January-09 February-09 March-09 April-09
S&P 500 IndexIndex
… it remains depressed
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1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
S&P 500 IndexIndex
The outlook: Most forecasters expect recovery to start in 2009:H2
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2008 Q2 2009 Q3 2009 Q4 2010 Q4/Q4
Real GDP Growth
ActualBlue Chip Apr Forecasts
Quarterly percent change (annualized)
2008 Q3 2008 Q4 2009 Q1 2009 Q2
What drives the expected recovery?
Federal Reserve policy: Actions to unfreeze financial markets and favorable interest rates support consumer and business spending and housing.
Fiscal policy: Tax cuts and spending increases stimulate aggregate demand.
Turnaround in consumer spending and, in turn, business spending
Housing market bottoms in the second half of the year, due to low mortgage rates, low house prices, and tax credits.
Inventories fall so much that firms eventually ramp up production.
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Unemployment will continue to drift higher before eventually declining
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2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010
Unemployment Rate
ActualBlue Chip April Forecast
Quarterly Average Rate
The IMF expects growth to pick up in 2010
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World Advanced US Euro Area Japan Newly industrialized
Asian economies
Emerging and
developing economies
China India Brazil Mexico
World GDP Growth
2008 2009 2010
Q4/Q4 Percent Change
2008 and 2009:Advanced and newly industrialized Asian economies decline.Emerging and developing economies grow.
2010:All economies (except Japan) grow.
Core inflation will remain low
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2005 2006 2007 2008 2009 2010
Core PCE Inflation Q4/Q4
Actual
Survey of Professional Forecasters
Q4/Q4 percent change
Summary
Current recession is among the sharpest of the post-war period.
Monetary and fiscal policy have responded aggressively.
Most forecasters expect recovery to begin in the second half. Optimistically, we may be seeing tentative signs of a
bottom. However, recovery is likely to be gradual.
Truck Market Outlook
Carl HeikelPresident & CEO
Arrow Truck Sales, Inc.
Slide 1Truck Blue Book – Carl Heikel – April 30, 2009
Slide 2Truck Blue Book – Carl Heikel – April 30, 2009
39,131
25,23924,548
16,000
21,000
24,000
28,000
25,727
10,000
16,000
17,000
18,000
284,008
150,965133,473
110,000
155,000175,000
200,000
31,643
26,842
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
NAFTA Retail Sales Forecast
2006 2008
246,000
184,863
348,866
U.S.
CANADA
MEXICO
NAFTA
216,000
2011Forecast
2010Forecast
2012Forecast
207,847
2009Forecast
136,000
2007
192,000
Slide 3Truck Blue Book – Carl Heikel – April 30, 2009
U.S. Class 8 Retail Sales Volumes2009
7,37
4
6,23
6
8,22
2
7,20
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10,0
00
9,70
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00 11,2
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10,0
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13,2
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0
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4,000
6,000
8,000
10,000
12,000
14,000
16,000
J F M A M J J A S O N D
Monthly Volume
Actual Volume
Forecasted Annual Retail Sales: 110,000
Q1 Actual: 21,832
Q1 Forecast: 19,500
Difference: +2,332
1st Quarter21,832
2nd Quarter23,700
3rd Quarter30,000
4th Quarter34,468
Slide 4Truck Blue Book – Carl Heikel – April 30, 2009
Used Trucks Business• Price deterioration in the last 12 months• Used Trucks prices compared to New Trucks• Retail Sales improving for those able to finance• Wholesale limited by dealer floor planning• Exports to new markets competing with Europeans• Difficulties of the Canadian market• Mexico opened for import - and closed again• The opportunities in the coming months:
– General economic recovery and age of equipment– Price increases new environmental rules - US10 engines