Economic Outlook: Knife’s Edge

Presented to: Greater San Antonio Chamber of Commerce San Antonio, September 27, 2011 Executive Vice President & Director of Research

Harvey Rosenblum

The views expressed are those of the speaker and should not necessarily be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.

Overview

 On the one edge, growth;

on the other, contraction

 Preferable to “Anaerobic Nightmare”

and “Lehman Moment” of 2008–2009

Gauging Our Concern: Nothing in the Green

Many Fed Districts Still Feel Like They Are in Recession
Index, December 2007=100
102

Dallas
100

98

96

94

Minneapolis Boston New York Philadelphia Kansas City Richmond Cleveland St. Louis Chicago San Francisco Atlanta
Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11

92

90 Dec-07

Even in Texas, Not All Metros Show Rapid Growth
Index, August 2008=100
103 102 101 100 99 98 97 96 95 94 2008 2009 2010 2011

El Paso Austin San Antonio Houston Texas Ft. Worth Dallas

Federal Reserve District Map

Many Fed Districts Still Feel Like They Are in Recession
Index, each district employment peak=100
100 99 98 97 96 95 94 93 92 91 90 Peak=t t + 6 mo.

Dallas Boston New York Minneapolis Philadelphia Kansas City Richmond U.S. St. Louis Cleveland Chicago San Francisco Atlanta

t+12

t+18

t+24

t+30

t+36

t+42

t+48

t+54

Recovery? What Recovery?

Essentially no growth over the past 3 years!

Loss of Labor Market Momentum
Monthly change, thousands
400 200 0 -200 -400 -600 -800 -1000 '08
3-year average: -139k Private nonfarm payrolls August
0 total 17k private

Knife’s Edge

Anaerobic Nightmare
'09 '10 '11

Regional Perspective on the Transmission of Monetary Policy

Texas outperforms
- Healthier banking system - No boom and bust housing cycle - Strong exports

“Breaking Out of Recession: Gauging Texas’ Response to Fed Stimulus” by David Luttrell and Harvey Rosenblum

3 out of 4 channels of monetary policy worked well

Global Manufacturing Slowdown
Manufacturing surveys around the globe are soft
Diffusion Index, 50+=Increasing
65 60 55 50 45 40 35 30 '07 '08 '09 '10 '11 U.S. ISM Manufacturing Euro-zone PMI China ISM

Also, UK: 49 and Japan: 51.9

Confidence Crisis
3-month Moving Avg.
140 125 110 95 80 65 50 35 20 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 Conference Board Consumer Confidence 85 75 65 55 45

3-month Moving Avg.
U. of Michigan Consumer Sentiment 105 95

• August reading of Consumer Sentiment collapsed to the lowest level since 1980,

worse than the recession low!

• Conference Board’s Consumer Confidence saw sharpest drop since Lehman (Oct. 08)!

Lending Improves from a Weak Level
 SLOOS:
– continued improvement in lending conditions, standards eased,

demand improved, willingness to lend remains relatively high

– still very soft demand and tighter standards for mortgage lending

 In July, consumer credit rose $12B, the largest monthly increase

since April 2008 and the tenth consecutive monthly increase

 C&I lending has continued to expand; 9 month trend

Lending Improves from a Weak Level
SA, $ Trillions
1.63 1.58 1.53 1.48 1.43 1.38 1.33 1.28 1.23 1.18 Jan-08

C&I Credit Outstanding
1.30 1.28 1.26 1.24 1.22 1.20 1.18 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11

May-08

Sep-08

Jan-09 May-09

Sep-09

Jan-10 May-10

Sep-10

Jan-11

May-11

Sep-11

Evolution of Inflation
• Multiple bubbles burst:

Deflation, deleveraging and depression

Unless there is an aggressive and rapid monetary response (i.e., 2008)
• Going forward: avoiding the danger of • But bubbles bursting again in 2011

deflation, credible risk of rising inflation

Modest Price Pressures, For Now
Percent, yr/yr 6 5 4 3 2 1 0 -1 -2 -3
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
Core CPI 2.0 Trimmed Mean PCE 1.6 Headline CPI 3.8

FOMC Statement 9/21/11 Key Points
 Growth and labor market conditions remain weak  Significant downside risks to the economic outlook  Further monetary accommodation to support a stronger

recovery within the context of price stability
o Reduce long-term Treasury rates

o Reinvest agency debt principal payments in more MBS

 Voting against the action were Fisher, Kocherlakota, and

Plosser, who did not support additional policy accommodation at this time.

Takeaways
 Economic growth has slowed, maybe stalled  We’re on the edge
Recovery Casey’s law: If something can go right, it should! Recession Murphy’s law: If something can go wrong, it will!

Additional Takeaways
 Recession/ recovery not the right framework?  Second Great Contraction a more realistic

thought process

 Texas has outperformed other regions. WHY? o Healthier, better capitalized banks o Internationally competitive firms Key lesson: Ignore lobbying by TBTF banks for

lower capital requirements