National Outlook

Highlights

• The national and global economies have been sinking deeper and deeper into recession, and current momentum is decidedly downward. The U.S., Canada, Japan, United Kingdom and Euro zone all have been in rapid retreat since late last year, and the “emerging” economies are increasingly involved in the broadening downswing. China and India still are posting positive growth, although the rates of advance have slowed considerably.
  
  
• The U.S. “officially” entered recession in December 2007, and the economy has been deteriorating rapidly since then. Real GDP contracted at a 3.8% annual rate in the final quarter of 2008, according to the “advance” estimate by the government. This was the weakest performance since 1982, and a substantial downward revision to fourth-quarter growth is in the cards. The first quarter of this year also will be quite weak, with negative GDP growth around 5.0%.
  
  
• The U.S. labor market is in free-fall. Payroll employment has been falling systematically since the start of recession, and the rate of decline has been accelerating since last fall. The net loss for January was nearly 600 thousand, the worst in 24 years, and the losses now are very broad-based by economic sectors and geographic areas. The national unemployment rate was 7.6% in January, up by 2.8 percentage points since the start of the recession. Broader measures of labor underutilization show even more substantial deterioration of labor market conditions, particularly in the last few months.
  
  
• Commodity prices have fallen dramatically from record highs posted around mid-2008. The most striking declines have been in the oil market, although prices for key agricultural goods and industrial metals also have staged major retreats. These developments, along with the sinking global economy, have relieved upward pressures on broad inflation measures and have ushered in an era of disinflation — in both top-line and core terms. Indeed, the threat of destructive deflation now is looming on the horizon, both nationally and globally.


• On February 18, the Federal Reserve released both short-term and longer-term projections of GDP growth, the unemployment rate and PCE inflation made by FOMC members at the January 27-28 meeting. The projections for 2009 are quite downbeat and the projected recovery is hardly robust. We now expect the Fed to hold the federal funds rate around zero through the end of 2010.
  
  
• Financial market conditions still are quite challenging here and abroad, despite aggressive efforts by the Federal Reserve, the Treasury, the Congress, the White House and foreign governments to improve the functioning of national and global credit markets. Some success has been achieved in interbank and short-term securities markets, and quality spreads have narrowed to some degree in certain components of bond and mortgage securities markets. But fear and distrust still permeate private securities markets, generally, and we’re far from any semblance of normalcy in those markets.
  
  
• Lending conditions at commercial banks were reasonably accommodative during the first year of the global credit crisis that began in August 2007, but bank lending policies and standards have tightened considerably since last spring and the volume of bank loans has flattened in the process. The Fed’s quarterly surveys of bank lending officers show a systematic, cumulative process of tightening for virtually all loan types through the end of 2008, including mortgage loans and loans to builders and developers for land acquisition, land development and construction. NAHB surveys reveal a progressive tightening of lending terms and standards for both outstanding credit and new AD&C loans.
  
  
• The housing downswing has accelerated since late last year as the economy has shifted down, financial market conditions have deteriorated further and mortgage foreclosures have continued to climb. The demand for homes (for owner occupancy) has weakened badly, the hangover of vacant housing units has climbed to record highs, house prices have fallen substantially in more and more places, and builders have reduced the pace of new housing production to record lows. Furthermore, NAHB surveys of builders point toward further declines in sales and starts during the months ahead.
  
  
• The dire situations in the economy, the financial markets and the housing sector cry out for strenuous efforts by policymakers to staunch the flow of blood and help bring the patients back to health. A fair number of measures were implemented last year on the legislative, regulatory and monetary policy fronts, including the $700 billion Troubled Asset Relief Plan (TARP), but the downdrafts in economic and financial market conditions obviously overwhelmed those efforts--leaving quite an inheritance for incoming President Obama.
  
  
• The new President has talked in terms of a three-legged stool that must be assembled if the U.S. economy is to avoid a deep and protracted recession that could degenerate into a deflationary depression. The three legs are fiscal stimulus, financial stability and mortgage foreclosure relief, and maximum complementary support from the Federal Reserve will be needed if ultimate success is to be achieved. Indeed, similar efforts by other major countries will be needed to break the back of the deepening global recession.
  
  
• President Obama’s stool is now being assembled, and the Fed is pledging all the support our central bank can muster. The fiscal stimulus leg now stands as a $787 billion package of spending increases and tax cuts, dubbed the American Recovery and Reinvestment Act that’s focused fairly heavily on 2009-2010. The second leg now consists of a broad outline of a Financial Stability Plan unveiled on February 10 by Treasury Secretary Geithner. The third leg, the Homeowner Affordability and Stability Plan, was unveiled on February 18 by President Obama.

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