National Outlook

Highlights

• The U.S. economic recession still is deepening. Real GDP growth has been revised down considerably for the final quarter of 2008, now showing a stunning 6.2% annualized rate of decline.
  
  
• Another large decline in real GDP is in the cards for the first quarter of this year (we’re currently estimating -5.5%), due in part to yet another major downshift in the stock market for most of the quarter.
  
  
• The recession increasingly is global in scope and nature, and a rare decline in world real GDP now is a foregone conclusion for 2009. Trade flows are contracting substantially for both developed and emerging economies, and the U.S. now is registering sharp declines in both exports and imports.
  
  
• Our nominal trade deficit has been falling since last July, partly reflecting lower prices of imports (especially energy). However, the trade sector most likely will make a negative contribution to U.S. real GDP growth in the first quarter of this year, as in the fourth quarter of 2008, due partly to the rise in the dollar since mid-2008.
  
  
• Stark evidence of the deepening recession has been piling up rapidly in the labor market. The recession officially began in December 2007 as payroll employment peaked out. Cumulative payroll job losses now stand at 4.4 million (data through February), more than half of that decline has occurred during the past four months, and weekly data on claims for unemployment compensation point to another very large loss in March.
  
  
• The civilian unemployment rate naturally has been rising rapidly in recent months as payroll employment has faltered, hitting 8.1% in February, and broader measures of labor underutilization (including discouraged workers and those working only part time for economic reasons) show even more alarming patterns.
  
  
• The housing sector, which began to weaken more than two years prior to the onset of national recession, still is a major negative for the U.S. economy. The housing production component of GDP (residential fixed investment) suffered a severe setback in the final quarter of 2008 and will post an even weaker performance in the first quarter of this year.
  
  
• Employment in residential construction continues to trail down systematically as housing production continues to weaken, and falling house prices continue to take heavy tolls on household wealth, consumer spending, mortgage credit quality and the national and global financial systems.
  
  
• The national and global financial market crisis has rightfully earned the title of “Great Recession” for the current economic situation. Indeed, daunting problems in the financial systems pose formidable impediments to near-term economic stability and recovery both here and abroad, despite enactment of large fiscal stimulus packages in the U.S. and elsewhere. This reality was emphasized in a recent meeting of the finance ministers of the G-20 countries in England.
  
  
• It’s true that extraordinary efforts by the Federal Reserve and foreign central banks have improved the functioning of interbank markets and some short-term credit markets (particularly commercial paper) since the virtual freeze last fall. But our banking system apparently remains seriously undercapitalized (despite major injections of TARP funds), banks and other major financial institutions are weighed down by “toxic” mortgage assets that are proving very hard to value, and mortgage foreclosure problems still are mounting. Under these conditions, private credit markets still are in serious states of disrepair.
  
  
• U.S. policymakers have been in the forefront of efforts to improve the functioning of national and global financial markets. The Fed became even more aggressive at the March 17-18 FOMC meeting, committing to a federal funds rate close to zero for an “extended period” and announcing a series of measures to reduce longer-term interest rates and stimulate flows of credit to homebuyers, consumers and small businesses through further expansion of the Fed’s balance sheet.

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