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W
EEKLY
E
CONOMIC
&
 
F
INANCIAL
C
OMMENTARY
 
 June 19, 2009
U.S. Review Global Review
Real Interest Rates and Monetary Base
Real Fed Funds Rate* vs. M2 Money Growth-8%-4%0%4%8%12%16%1990199219941996199820002002200420062008-8%-4%0%4%8%12%16%Real Fed Funds Rate: May @ -1.7%M2 Money Supply Growth: May @ 9.0%*Fed Funds Rate Minus Core CPI
 
U.K. Unemployment Rate
Seasonally Adjusted4.0%4.5%5.0%5.5%6.0%6.5%7.0%7.5%8.0%19971999200120032005200720094.0%4.5%5.0%5.5%6.0%6.5%7.0%7.5%8.0%Unemployment Rate: Apr @ 7.2%
 
Is the U.K. Economy Nearing Bottom?
Real GDP in the United Kingdomdropped at an annualized rate of7.3 percent in the first quarter, thesteepest sequential rate of decline in30 years, and recent monthlyindicators suggest that the economyhas continued to contract, albeit at aslower rate, in the second quarter.For starters, the labor market hascontinued to deteriorate. Thenumber of unemployed workersrose by 39,300 in May, which wasnot quite as bad as expected.However, the unemployment rate,which has shot up rapidly since lastsummer, rose further. Indeed,unemployment is currently at thehighest rate since the late 1990s.The weakness in the labor markethas caused wage growth to slowsharply in recent months. Lastautumn, average earnings(excluding bonuses) were growingat a year-over-year rate of3.6 percent. In April, earnings were
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Recent Special Commentary
Lower Inflation Liberates the Fed
Worries about inflation have clearlygotten ahead of themselves. Whilewe believe inflation is a monetaryphenomenon over the long run, lagsbetween stronger money growthand rising inflation are long andvariable. The Fed still has plenty oftime to drain the liquidity itprovided in the aftermath of thefinancial crisis before a troublesomeinflation takes hold. Bond investorswill likely remain edgy until such aplan materializes, as they should.Bond investors, policymakers, andconsumers are right to be concernedabout the rapid money growth.Money supply growth, both M1 andM2, is up at a 9.5 percent annualrate since November and themonetary base is up at a 53.1percent annual rate over this period,which means money growth wouldbe even stronger if lending actuallypicked up.Of course the whole purpose offlooding the economy with reserveswas to stabilize the financialmarkets, so that lending couldrevive. So the Fed’s task is now todrain the excess liquidity theyprovided just as the economyrevives, without killing off therecovery or enraging Congress.
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DateTitleAuthors
June-18Labor Market Evolution: Realities and RomanticsSilvia, York & WhelanJune-18What Drives Consumer Delinquency Rates?Vitner & IqbalJune-18Personal Income Fell Accross Much of the CountryVitnerJune-11Florida Economic OutlookVitner & Kamaruddin
 
U.S. Forecast
ActualForecastActualForecast200820092005200620072008200920101Q2Q3Q4Q1Q2Q3Q4Q
Real Gross Domestic Product
1
0.92.8-0.5-6.3-5.7-3.42.92.12.92.82.01.1-2.72.1Personal Consumption0.91.2-3.8-4.31.5-1.01.71.93.03.02.80.2-0.71.4Inflation Indicators
2
"Core" PCE Deflator2.22.32.31.91.81.71.21.02.12.32.22.21.40.9Consumer Price Index4.24.35.21.5-0.2-1.3-2.6-0.33.43.22.93.8-1.11.1Industrial Production
1
0.2-4.6-9.0-12.9-19.2-15.52.02.93.32.31.5-2.2-11.41.1Corporate Profits Before Taxes
2
-1.5-8.3-9.2-21.5-18.0-16.0-12.0-8.017.615.2-1.6-10.1-13.85.8Trade Weighted Dollar Index
3
70.371.076.179.482.580.082.685.086.081.573.379.485.085.0Unemployment Rate4.95.46.16.98.19.39.910.35.14.64.65.89.410.6Housing Starts
4
1.061.020.870.660.530.470.510.552.071.811.340.900.510.74Quarter-End Interest RatesFederal Funds Target Rate2.252.002.000.250.250.250.250.254.255.254.250.250.250.5010 Year Note3.453.993.852.252.713.803.803.804.394.714.042.253.804.20
Data As of: June 10, 2009
1
Compound Annual Growth Rate Quarter-over-Quarter
3
Federal Reserve Major Currency Index, 1973=100 - Quarter End
2
Year-over-Year Percentage Change
4
Millions of Units
 
I
NSIDE
 
U.S. Review 2U.S. Outlook 3Global Review 4Global Outlook 5Point of View 6Market Data 7
 
U.S. Review Economics Group
U.S. Review
Unemployment Rate
Seasonally Adjusted2%4%6%8%10%12%606570758085909500052%4%6%8%10%12%Unemployment Rate: May @ 9.4%
 
Core Intermediate PPI
 Year-over-Year Percent Change-6%-4%-2%0%2%4%6%8%10%12%14%85878991939597990103050709-6%-4%-2%0%2%4%6%8%10%12%14%PPI-Intermediate Materials: May @ -5.6%
 
(Continued from Page 1)
The Economic Environment will Make the Fed’s Task Difficult
The economic environment the Fed will likely face during thisperiod will not make things easy for policymakers. While we seethe recession ending later this year, unemployment is likely tocontinue rising well into 2010. The last two recessions saw theunemployment rise 15 months and 19 months, respectively, afterthe recession ended. If, as we expect, the recession ends thissummer, and the unemployment rate rises along the lines that itdid following the past two downturns, then the unemploymentwould peak in late 2010 or early 2011. With the unemploymentrate currently at 9.4 percent, the jobless rate will almost certainlytop out in the low double digits and could quite possibly rise abovethe post-depression high of 10.8 percent hit back in 1982.Politics could make the Fed’s job even tougher. Next year willmark a contentious mid-term congressional election and voters arelikely to be antsy, particularly in states with high unemploymentrates. The latest state unemployment figures, which came outtoday, show that 12 states and the District of Columbia alreadyhave unemployment rates above 10 percent, including large states,such as California, Florida, and Michigan. Even if theunemployment rate peaks sooner than it did following the past tworecessions, it will still likely be uncomfortably high come electiontime. Draining liquidity without wrecking the recovery orupsetting Congress would require skills tantamount to pitchingback-to-back no hitters.For all the worries about inflation, the latest inflation figures showlittle reason to be concern. The Consumer Price Index rose just 0.1percent in May, both on an overall basis and after excluding foodand energy prices. Price increases were tame pretty much acrossthe board. One notable exception was gasoline prices, which rose3.1 percent in May. With the economy struggling, rising gasolineprices are having more of a dampening effect on consumerspending than they are on pushing prices higher in relatedindustries. Prices for airfares, for example, declined sharply. Foodprices are also moderating, particularly for fruits and vegetables,which are among items that are most sensitive to higher fuel costs.Looking back further in the production pipeline there is even lessreason to be concerned about inflation in the near term. TheProducer Price Index rose 0.2 percent overall but fell 0.1 percentafter excluding food and energy prices. Price increases were evenbetter behaved further back in the production pipeline, with coreintermediate goods prices falling 0.2 percent in May and tumblingat a 5.6 percent annual rate over the past three months.
Selected Current Data
2
Gross Domestic Product - CAGRQ1 - 2009-5.7%GDP Year-over-YearQ1 - 2009-2.5%Personal ConsumptionQ1 - 20091.5%Business Fixed InvestmentQ1 - 2009-36.9%Consumer Price IndexMay - 2009-1.3%"Core" CPIMay - 20091.8%"Core" PCE DeflatorApril - 20091.9%Industrial ProductionMay - 2009-13.4%UnemploymentMay - 20099.4%Federal Funds Target RateJun - 190.25%
 
CPI vs. Core CPI
 Year-over-Year Percent Change-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%929496980002040608-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%CPI: May @ -1.3%Core CPI: May @ 1.8%
 
 
U.S. Outlook Economics Group
Existing Home Sales • Tuesday
Sales of existing homes were up 2.9 percent in April with increasesin both the single-family and multi-family segments. The NationalAssociation of Realtors (NAR) noted that the portion of sales thatwere related to distressed properties fell back to 45 percent fromthe 50 percent registered in March. Foreclosures are still puttingconsiderable pressure on the market. As such, we expect sales willcontinue to hold within the same narrow range reached since late2008 for the seventh consecutive month. Existing sales shouldincrease slightly to 4.7 million units as potential buyers remainedon the sideline except in the distressed market. While sales maynot have yet reached an absolute bottom, clearly a bottomingprocess is underway.
Previous: 4.68M Wachovia: 4.70MConsensus: 4.82M
Existing Home Resales
Seasonally Adjusted Annual Rate - In Millions4.04.55.05.56.06.57.07.51999200120032005200720094.04.55.05.56.06.57.07.5Existing Home Sales: Apr @ 4.68 Million
 
Durable Goods Orders • Wednesday
For five out of the last seven months, durable goods orders haveposted monthly declines as manufacturers attempt to aligndepleting sales with appropriate production levels. As the recessioncontinues, businesses and consumers are delaying big-ticketpurchases despite April’s jump in new orders to 1.9 percent. Theseries is notably volatile on a month-to-month basis and we do notexpect the gain to stick. Industrial production continued to declinein May, with motor vehicle and parts output accounting for thebulk of the drop. Capacity utilization remains well below the lowsof the past two recessions and the abundance of productioncapacity means pricing power will remain minimal.We expect the downward trend in orders will continue in Maydeclining a significant 3.9 percent. Despite signs of stabilization insome of the regional purchasing managers’ surveys and thenational ISM manufacturing survey, sustained growth in durablegoods orders is a ways off.
Durable Goods New Orders
Series are 3-Month Moving Averages-50%-40%-30%-20%-10%0%10%20%30%939597990103050709-50%-40%-30%-20%-10%0%10%20%30%3-Month Annual Rate: Apr @ -22.2% Year-Over-Year Percent Change: Apr @ -25.3%
 
Previous: 1.9% Wachovia: -3.9%Consensus: -0.8%
Personal Income • Friday
Personal income rose 0.5 percent in April driven primarily by a$45.7 billion increase in personal current transfer receipts with$11.8 billion attributed to stimulus payments. Disposable personalincome rose 1.1 percent on the month, both in real and nominalterms. The Bureau of Economic Analysis noted that without thechanges from the recent stimulus bill, gains would have been just0.7 percent. Nonfarm employment losses seem to be moderating,on average, as the economy shed 500,000 jobs during each of thepast three months. Aggregate hours worked fell at an 8.6 percentannual rate in May and will likely hold down personal income. Weexpect personal income fell 0.1 percent in May and personalspending was flat. The personal saving rate should remainrelatively elevated as consumers continue to exercise caution.
Previous: 0.5% Wachovia: -0.1%Consensus: 0.3%
Personal Income
Both Series are 3-M Moving Averages-10%-5%0%5%10%15%929496980002040608-10%-5%0%5%10%15%Personal Income 3-M Annual Rate: Apr @ -1.1%Personal Income Year-over-Year Percent Change: Apr @ 0.6%
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