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M
ONTHLY
O
UTLOOK
 
March 11, 2009
U.S. Overview International Overview
Yes We Can Recover!
We continue to believe the fourth quarter of 2008 and thefirst quarter of 2009 will mark the darkest hours of thisrecession. Output, employment and consumer spendingwill likely remain under pressure for all of this year andpossibly into the early part of next year. The recession willeventually end and we see the bottom occurring in eitherthe fourth quarter of 2009 or first quarter of 2010. The endof the recession, however, will not mark the end of theeconomy’s struggles. The unemployment rate is expectedto rise throughout 2010, peaking at 10 percent or more.Our outlook includes the impact of the recently enactedeconomic stimulus act. Reductions in payroll withholdingwill provide some modest support to personal and after–taxincome in April and May, which will help moderate recentdeclines in consumer spending. Business fixed investmentand commercial construction are expected to be somewhatweaker than our earlier forecast, reflecting the recent sharpdownturn in factory orders and business confidence.Government spending has also been revised slightly higher,particularly during the second half of this year.Slower economic growth around the world is cutting intoexports and we now expect international trade to subtract0.6 percentage points from 2009 economic growth. The largedownward revision to fourth quarter real GDP also loweredthe growth trend, and we now expect real GDP in 2009 willcontract 3.3 percent.
Foreign Central Banks Join Fed in Unorthodox Steps
At recent policy meetings, the Bank of Canada, the Bank ofEngland and the European Central Bank each cut theirrespective policy rates by 50 basis points. Central banks inCanada and Great Britain have cut policy rates about as lowas they can go. However, foreign central banks are not outof ammunition. For example, the Bank of Englandannounced a program of asset purchases, includingpurchases of government bonds, which led to a significantrally in the U.K. government bond market. Lowergovernment bond yields should help to pull private sectorborrowing costs lower as well. The Bank of Canada said thatit will announce a framework for unconventional policymeasures in April. The ECB likely will cut its policy ratefurther, and it too could eventually embark upon a course ofunconventional easing.On a trade-weighted basis, the U.S. dollar has risen about 20percent against other major currencies since last July. In ourview, the dollar’s rally has further to run because signs ofeconomic stabilization should appear in the United Statesbefore they do in most other major economies. However, asforeign economies stop contracting later this year and earlynext year, most foreign currencies should stabilize as well.The currencies of many developing countries shouldeventually stabilize and begin to strengthen as shell-shockedinvestors become less risk averse and become attracted to thehigh returns that emerging markets currently offer.
Real GDP
Bars = Compound Annual Growth Rate Line = Yr/Yr Percent Change-8.0%-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%200020022004200620082010-8.0%-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%GDPR - CAGR: Q4 @ -6.2%GDPR - Yr/Yr Percent Change: Q4 @ -0.8%Forecast
 
Trade Weighted Dollar
Major Curency Index, 1973 = 1006570758085909510010511011520002002200420062008201065707580859095100105110115Trade Weighted Dollar: Q4 @ 79.4Forecast
 
 
 
U.S. Outlook Economics Group
2
But Road to Recovery is Long and Arduous
Real GDP is expected to decline at a 7.2 percent annualrate during the first quarter, which we expect will be thelargest quarterly drop during this recession. Economicactivity in the first quarter is clearly in freefall, withemployment plummeting, factory orders plunging andconsumer spending largely on hold. Exports are alsonotably weak, reflecting slumping economic conditions in Japan and many of Asia’s emerging economies.With the economy in freefall it is hard to find many signsof encouragement. Even the federal government’s effortsto support the economy are somewhat suspect becausethey do not include as much spending for infrastructure asmany would like and is a bit heavier on income transfers.While the $787 billion stimulus package is far fromperfect, we believe it would be a huge mistake to thinkthat it will not provide any relief to the economy.The most immediate relief from the stimulus package willbe the reduction in tax withholding schedules, which willput a few extra dollars into take-home pay beginning inApril. While the extra dollars are relatively small amountson an individual basis, they will help support spending ata time when employment and income are plummeting.Some of the additional aid to state and local governmentsshould begin to pay dividends during the second half ofthe year. Yet once again, the extra dollars will not lead toa dramatic turnaround in state and local governmentspending. Still, state and local government spending willbe stronger than it would have been without the stimulus.The Treasury and Federal Reserve are also providingsome relief by providing liquidity to parts of the financialmarket. Unfortunately, only Treasuries and high gradepaper are being bought, but it is still providing somerelief. Home mortgages are available at attractive interestrates for buyers with good credit histories and who canafford to make a down payment.Consumer spending will also see some benefit from Fedand Treasury actions, but not enough to turn spendingpositive in the near term. Financing for motor vehicles anddealer floor plans should loosen up a bit this spring andcar sales should be
 
modestly higher.
 
One growing problemis that many credit card issuers are slashing credit lines orcanceling cards for people with weaker credit histories orwho live in areas where home prices are falling.Even with these challenges, we believe the bulk of thedecline in consumer spending is behind us. Our forecasthas consumer outlays essentially flat during the secondand third quarters. The stability follows three consecutivequarterly drops, however, leaving outlays well-belowtheir year ago level. There have been few positive signs onthe consumer front. January’s bounce in retail sales wasmerely a statistical artifact, reflecting the sharp plunge inspending during previous months. Retailers, car dealersand eateries are closing across the country with a record150,000 shops expected to close their doors this year.Business fixed investment did not turn down as early asconsumer spending did but investment outlays are clearlyin full retreat today. Outlays for equipment and softwareplummeted at a 28.8 percent annual rate during the fourthquarter and are expected to drop at a double-digit pace inevery quarter of 2009. Businesses are striving to bringcapacity back in line with sales. So far, cutbacks have notbeen deep enough, as inventory-to-sales ratios haveincreased and productivity has declined.While we see the recession ending, our forecast is notoptimistic. Our outlook is at the lower end of the range offorecasts in the latest Blue Chip Economic Forecast.Moreover, we see a more sluggish recovery than theconsensus and have the unemployment rate rising higher.
Real Personal Consumption Expenditures
Bars = Compound Annual Growth Rate Line = Yr/Yr Percent Change-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%200020022004200620082010-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%PCE - CAGR: Q4 @ -4.3%PCE - Yr/Yr Percent Change: Q4 @ -1.5%Forecast
 
Manufacturing Inventory to Sales Ratio
1.11.21.31.41.51.61.79293949596979899000102030405060708091.11.21.31.41.51.61.7Manufacturing: Jan @ 1.46
 
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