Wednesday, April 13, 2011

Notes from Presentation on Outlook of Economy 2011 and 2012

William A.  Strauss
Senior Economist and Economic Advisor
Chicago Fed
March 2011


  • In 2010 there has been positive real GDP growth (2.8% latest quarter); though barely above trend rate.
  • He mentions also that 62% of this growth we saw was due to changes in business inventories and not actual goods being sold 
  • Since the 2008 crisis growth has been primarily inventory related but this trend is going to stop

1930’s Financial Crisis
  • The last time a financial crisis was tied to a recession was in 1930. Which is when the Fed did not grow M2 fast enough

Money Supply Issues
  • Capital has been locked up in banks post 2008.
  • Banks refuse to loan out excess reserves
  • Going into 2011 there was a survey to loan officers that showed officers felt tight loaning practices have been easing
  • Saving rate is still about 6% into 2011 (similar rate seen from 2008), which means good for the long term bad for short term growth.

  • The value of housing in the West Coast region is still the worse off in the US with the home values about 50% to 25% lower compared to other regions.  He mentions the negative “wealth effect” this has
  • Surveys show that such a high savings rate will persist since investments in housing and stock markets will not meet investor desired returns/investment goals.
  • Such evidence points to a huge wave of consumption coming back into the economy once it does come back. 

  • Population growth is close to 0%
  • From November to 2010 to January 2011 we’ve seen the biggest drop in unemployment since the 1950’s
  • Expectations for the end of 2012 is 8% unemployment

  • Fed has already made forecast and all policy decisions are done for 2011. The Feds main focus is 2012. (a.k.a  short term risk won’t weigh heavily into policy decisions in 2011 i.e. strong headline inflation numbers)
  • Wage inflation has been benign, the Fed is looking for 2% PCE but it is much lower. Inflation still negligible. 

  • Manufacturing was one of the hardest hit sectors coming off the 2008 crisis when GDP was negative 4%
  • Going into 2011 manufacturing has almost made back all its losses since the crisis and will continue to growth strongly, even though capacity utilization is relatively down
  • Industrial companies like DEER will benefit from this growth
  • Light weight vehicle sales
    • From 1998 to 2007 there were 16 million sales
    • By 2008  It dropped to 9 million
    • Currently at 2011 sales are at 13 million
  • Car industry is becoming more efficient and more profitable currently vs its peak sales years
  • In the 80’s there was an oligopoly in the US markets. The only foreign care in the US was VW. In the 90’s there was a wave of foreign cars mostly produced abroad. In 2011 60% of the foreign cars are made in the US. In 2010 75% of the cards sold were made in the US. 
  • There are now 13 name plate car manufacturers. 
  • Strauss is very bullish on Manufacturing, VW making its return along with Chyrsler, his point is US is still a great place to manufacture goods

More on Housing
  • Housing hasn’t moved anywhere in the past 3 years
  • Mortgage rates low
  • Fed expects Housing Starts to improve in 2011
  • Credit Spreads between High Yield and Corporate credit strong down trend. 

Brief History
  • 2008 there was a brief liquidity trap
  • Great depression
    • Deflation
    • M2 fell greatly
    • Money Base was slow to grow

  • GDP growth will continue to be solid
  • Unemployment is capped at 8% to 2012
  • Inflation expected to maintain at 2%

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