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Assessing the Strength of the U.S. Economic Recovery
James BullardPresident and CEOFederal Reserve Bank of St. Louis
Washington University in St. LouisOlin Business SchoolSt. Louis, MO6 May 2010
Any opinions expressed here are my own and do not necessarily reflect those of the Federal Open Market Committee participants.
This Talk
State of the U.S. economyThe rest of the worldMonetary policyRisks to the outlookFinancial regulatory reform
State of the U.S. Economy
Continued signs of recovery
-8
-6
-4
-2
0
2
4
6
8
2007 2008 2009 2010 2011
Real Gross Domestic ProductActual and forecasted, percent change from previous quarter at annual rate
Real GDP GrowthApr-2010 BC ForecastApr-2010 MA Forecast
Percent
Source: Bureau of Economic Analysis, Macroeconomic Advisers, Blue Chip Economic Indicators.
GDP expected to reach 2008:Q2 peak before year-end
98
99
100
101
102
103
104
2007 2008 2009 2010
2007:Q1 = 100
Real Gross Domestic Product and MA Forecast (As of May 5, 2010)
Source: Bureau of Economic Analysis, Macroeconomic Advisers.
Composition of real output
65
70
75
80
85
90
95
100
105
Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10
2007Q1 = 100
Components of Real Gross Domestic Product
Nondurables plus services
Durables
Investment
Source: Bureau of Economic Analysis.
Home prices are increasing but remain low
1
1.2
1.4
1.6
1.8
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
2001Q1=1
S&P Case Schiller House Prices and Nominal GDP
Nominal GDP
U.S. National S&P Case-Schiller Price Index
Source: Bureau of Economic Analysis, S&P, Fiserv, and MacroMarkets LLC.
Manufacturing has rebounded
25
30
35
40
45
50
55
60
-4
-3
-2
-1
0
1
2
2007 2008 2009 2010
Industrial Production and the ISM Manufacturing Index
Industrial Production (Left Axis)ISM Manufacturing (Right Axis)
Percent Change from Previous Index
Source: Federal Reserve Board/Institute of Supply Management.
Labor market conditions are slowly improving
-1000
-800
-600
-400
-200
0
200
400
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10
Nonfarm Payroll Employment GrowthChange from previous month.
Thousands
162 thousand jobs gained in March
Source: Bureau of Economic Analysis, S&P, Fiserv, and MacroMarkets LLC.
Unemployment remains high
4
5
6
7
8
9
10
11
12
200
250
300
350
400
450
500
550
600
650
700
2005 2006 2007 2008 2009 2010
Unemployment and Initial Claims
ThousandsPercent
Initial Claims for Unemployment Insurance, 4-wk moving average (Left Axis)
Unemployment Rate, SA (Right Axis)
Source: Bureau of Labor Statistics/Department of Labor.
Jan.-Mar. 9.7%
The Rest of the World
Japan3.8, 5.2, 2.9
Australia1.9, 4.7, 2.5
China9.6, 10.8, 8.4EU
0.2, 0.3, 1.9
South Africa3.2, 4.3, 4.4
Global growth
Latin America6.5, 4.8, 4.3
Canada5.0, 5.0, 4.0
U.S.5.6, 3.2, 4.0
India-2.2, 12.0, 9.0
Real GDP growth, SAAR, Percent, 2009:Q4, 2010:Q1, and 2010:Q2Source: Barclays Capital Global Economic Weekly.
Russia15.0, 9.4, 7.0
U.K.1.8, 1.3, 2.6
U.S. leads major partners in productivity
93
95
97
99
101
103
105
107
2007:1 2007:2 2007:3 2007:4 2008:1 2008:2 2008:3 2008:4 2009:1 2009:2 2009:3 2009:4
Index, 2007:Q1 = 100
Output per Employed Person
United States
Canada
JapanU.K.
Euro Area
Source: Board of Governors.
But the U.S. shed a larger percentage of the workforce
94
95
96
97
98
99
100
101
102
103
2007:1 2007:2 2007:3 2007:4 2008:1 2008:2 2008:3 2008:4 2009:1 2009:2 2009:3 2009:4 2010:1
Index, 2007:Q1 = 100
Employment
United States
Canada
Japan
U.K.Euro Area
Source: Board of Governors.
Monetary Policy
Near-Zero Policy Rates in the G-7
0
1
2
3
4
5
6
2007 2008 2009 2010
Percent
U.S.
Euro Area
Canada
Japan
U.K
Federal Reserve balance sheet
0
500
1,000
1,500
2,000
2,500
3,000
Jan-2007 Jul-2007 Jan-2008 Jul-2008 Jan-2009 Jul-2009 Jan-2010
Short-Term Lending to Financial Firms and Markets
Rescue Operations
Operations Focused on Longer-Term Credit Conditions
Traditional Portfolio
Traditional Portfolio and Long-Term Assets
Billions $
Source: Board of Governors.
-3
-2
-1
0
1
2
3
4
5
6
2003 2004 2005 2006 2007 2008 2009 2010
Percent
Headline CPI Inflation
Core CPI Inflation
Inflation remains low
Source: Bureau of Labor Statistics.
Headline CPI Inflation and Core CPI Inflation(Year-over-year percent change. Monthly data. Last observation: March 2010.)
Risks to the Outlook
Sovereign Credit ProtectionFive-Year CDS ratesBasis Points
Source: Bloomberg.
U.S. State Debt Burdens
Source: The State of California Debt Affordability Report October 2009.
Debt Ratios of the 10 Most Populous States Ranked by Ratio of Debt to Personal IncomeState Moody’s / S&P/ Fitch Debt to Personal Income Debt per CapitaTexas Aa1/AA+/AA+ 1.4% $520Michigan Aa3/AA-/A+ 2.2% $766Pennsylvania Aa2/AA/AA 2.5% $950Ohio Aa2/AA+/AA 2.8% $962Florida Aa1/AAA/AA+ 2.9% $1,115Georgia Aaa/AAA/AAA 3.0% $984California Baa1/A/BBB 4.4% $1,805Illinois A1/AA-/A 4.6% $1,877New York Aa3/AA/AA- 6.3% $2,921New Jersey Aa3/AA/AA- 7.3% $3,621
Financial Regulatory Reform
Bank supervision
The Fed should continue to supervise state member banks and bank holding companies of all sizes. Understanding the entire financial landscape helps the Fed
make sound monetary policy decisions. It is important that the Fed remain connected with Main Street
America, and not become biased toward the very large, mostly New York-based institutions.
Fed structure
The Federal Reserve has three parts. Washington: Board of Governors. New York: One bank in the nation’s financial capital. Main Street: Eleven banks in the rest of the nation.
The regional structure was designed to keep some power out of New York and Washington.It allows for input on key policy questions from around the U.S.This system has been very successful.
Fed governanceThe Board of Governors members are appointed by the President and confirmed by the Senate.The Board of Governors has oversight authority for the Fed.This includes budget authority.It also includes authority over key appointments in the Fed. This means Presidents, First Vice-Presidents, as well as the Chair and
Vice-Chair of the Board of Directors at each Bank.
There is considerable accountability in the Roosevelt-era re-design of the Federal Reserve.
Auditing monetary policyMonetary policy is vigorously debated everyday, both inside and outside the Fed.The Fed is extensively audited—our rough estimate is about 425,000 hours annually: Internal audit function. Board of Governors oversight. External auditor (Deloitte).
Each hour of audit time requires staff time for compliance.In addition, the Fed is subject to auditing by the GAO, the investigative arm of Congress.Additional audits are welcome, so long as they do not constitute political meddling.
Federal Reserve independenceAllowing short-term politics to mix too closely with monetary policy leads to poor economic outcomes.This has occurred frequently in the developing world over the past 50 years.In the U.S., erosion of Fed independence could result in a 1970s-style period of volatility.The consequences for the U.S. and the global economy would be large.No one would be served well by this outcome.
Federal Reserve Bank of St. Louisstlouisfed.org
Federal Reserve Economic Data (FRED)research.stlouisfed.org/fred2/
James Bullardresearch.stlouisfed.org/econ/bullard/