January 4, 2010
Markets & the Economy / Economic Outlook
KEY THEMES IN THE ECONOMIC OUTLOOK
THE US ECONOMY
Annualized qtrly. % change, unless noted otherwise
2009
Q3
Q4
2010
Q4/Q4
2.2
4.5
4.4
Final sales
1.5
2.2
Consumers
2.8
2.4
Inv. change ($b ar) -$139.2 -$67.0
3.5
2.9
$45.4¹
(repeating from the last week…)
The boost to real GDP growth associated with this
year’s (ARRA of 2009) fiscal stimulus initiative likely is
greater than initially estimated, because the funds
dispersed are moving out faster than initially estimated.
The initial estimates of the economic impact assumed
that 45% of funds designated for spending would be
dispersed in 2009. Based on that and other
assumptions about tax benefits, the fiscal stimulus was
predicted to boost 2009 Q1, Q2, Q3, and Q4 quarterly
GDP growth rates by 0.5, 2.2, 4.3, and 5.0 percentage
points respectively.
As it has turned out so far, 62% of funds designated for
spending projects have been dispersed. Based on the
actual funds spent so far, the quarterly boost to this
year’s growth rates now is estimated to be 0.5, 4.0, 7.9,
and 7.8 percentage points, respectively.
The initial calculation that the fiscal stimulus initiative
would boost 2009 real GDP growth by three percentage
points on a Q4-to-Q4 basis now appears more likely to
have boosted 2009 growth by five percentage points.
Actual real GDP is likely to end up about flat compared
with the fourth quarter of 2008, implying that the
economy would have contracted sharply again in 2009
had the fiscal stimulus not been implemented.
Real GDP
Nonfarm payrolls
-2.6
Monthly change (’000) -199
-0.8
-32
1.1
138
Unemployment (% qtr end) 9.8
10.1
9.5
Chain PCE prices (% oya²) -0.6
Food (% oya²)
-1.4
Energy (% oya²)
-22.6
Core (% oya²)
1.2
2.2
-1.8
22.6
1.4
-1.1
0.9
-22.5
1.3
-1.3
1.5
2.9
1.8
-0.5
1.6
WTI petroleum ($ / barrel) 69.5
79.4
71
CPI (% oya²)
Core (% oya²)
___________________________________________________________________________
¹ Inventory change in the final quarter of the year
² Change from 12 months earlier
Note: bold figures are estimates or forecasts
THE FED AND THE MARKETS
Percent
Current Jan 27 Mar 16
Federal funds rate target
0-¼% 0-¼% 0-¼%
Federal funds futures contracts n.a. 0.16 0.19
3-month Libor
0.25 0.28 0.28
Spread over 3-month OIS 0.09 0.13 0.13
3-month OIS
0.16 0.13 0.13
10-year Treasury yield
3.84 3.65 3.75
Note: dates are 2nd day of FOMC policy meetings
JPMorgan Chase Bank, New York
James E. Glassman
1-212-270-0778
jglassman@jpmorgan.com
1
January 4, 2010
Markets & the Economy / Economic Outlook
HERE COMES THE SPRING, WITH THE ECONOMY’S DAYS NOW GROWING LONGER
The economy began to grow this summer, with help coming from a number of sectors and GDP
appears likely to have accelerated as the fourth quarter wraps up. Real GDP is expected to expand
about 4½% over the four quarters of 2010 (this translates into a 3 ¾% expansion when measured as
the 2010 annual average versus the 2009 average, the old fashioned method of measuring growth
rates). Because real GDP grew at a 2.5% subpar pace in 2007, contracting 1.9% in 2008, and
essentially flat in 2009, the level of real GDP plausibly is 8-9 percent below potential real GDP—that
is, the output gap may 8-9%--assuming that the economy’s growth potential is about 3% annually.
The 5½ percentage point surge in the unemployment rate since the 2007 low is a more severe than
would be expected (referring to Okun’s Law), given the real GDP performance, but swings in
unemployment tend to be more pronounced than the average cyclical relationship between growth
and unemployment.
Recovery takes hold
US real GDP (annualized percent change)
8
8
7
7
6
6
4.4
5
3.8
4
3.7
3.1
2.9
3
5
4
2.7
2.4
2.5
2.4
1.9
2
3
2
0.4
1
Forecast of
quarter-toquarter real
GDP growth
1
-0.2
0
Quarter-toquarter
actual real
GDP growth
0
-1
-1
-1.9
-2
-2
-3
-3
-4
-4
-5
-5
-6
-6
Annual
growth of
real GDP
(Q4 to Q4)
-7
-7
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Change in
real GDP
from four
quarters
earlier
Source: US Department of Commerce
2
January 4, 2010
Markets & the Economy / Economic Outlook
At least three developments appear to be contributing to the beginning of a new economic recovery.
The financial panic in the fall of 2008 that appeared to trigger last winter’s impulsive US and global
economic collapses has rapidly subsided. Libor spreads are back to normal and in the credit markets,
the JPMorgan high yield spread index is tumbling from almost 2,000 basis points (20 percentage
points above Treasury yields) to 700 basis points by the end of last week, indicating that credit
markets are reopening even to the weakest links.
Second, businesses and consumers have made needed adjustments to set the stage for a new
expansion. In the housing market, inflated house prices that have done so much damage to some
financial institutions and the economy are history. House prices are back to the most affordable
levels on record, taken as an average. This explains why real estate conditions are beginning to
stabilize and slowly turn more favorable. At the same time, businesses have pared capital spending
The inventory dynamic, stealth as it is, will lift production through the winter
US demand (real final sales) and output (real GDP) (chained 2005 dollars)
13,600
13,500
13,400
13,300
13,200
13,100
13,000
12,900
12,800
12,700
12,600
12,500
12,400
12,300
12,200
12,100
12,000
When GDP is in the green zone, businesses are building inventories
Final sales
GDP
When GDP is in the red zone, businesses are liquidating inventories
2004
2005
2006
2007
2008
2009
13,600
13,500
13,400
13,300
13,200
13,100
13,000
12,900
12,800
12,700
12,600
12,500
12,400
12,300
12,200
12,100
12,000
2010
Source: US Department of Commerce
3
January 4, 2010
Markets & the Economy / Economic Outlook
The US and Europe are the main engines of growth … others remain dependent on developing economies
Real GDP growth in selected regions (percentage change from four quarters earlier)
10
9
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
-10
Emerging economies in Asia, Eastern
Europe and Latin America (orange)
EU-11 (black)
US (blue-gray)
Japan (red)
Global (blue-shaded region)
10
9
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
-10
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Note: forecasts for all economies other than the US are from JPMorgan’s Global Economic Research team; aggregates are weighted growth rates
based on the level of GDP in 2000 converted to US dollars, based on PPP values.
Sources: US Department of Commerce; JPMorgan Co.; JPMorgan Chase & Co.
back sharply, in some categories to levels that are not even replacing depreciation facilities. And
inventory levels have been chopped to bare-minimum levels. Prices have fallen in some areas in
response to weakened aggregate demand and that is an important and needed cure.
Finally, fiscal and monetary policies are very supportive. Fiscal stimulus is boosting real GDP growth
by 1-3 percentage points this year and into the first half of next year. The Fed’s interest rate policy
has helped to revive risk appetites. And its balance sheet expansion has supported the flow of credit.
The global economy is likely to grow 4-5% pace in 2010. Developing economies grew at a brisk pace
in Q2, in part, because their natural growth is considerably higher than that of the developed
economies. Developed economies stabilized this spring and now seem to be expanding too.
4
January 4, 2010
Markets & the Economy / Economic Outlook
Monetary and fiscal policies are appropriately accommodative around the world, with central bank
rates well below long-term rates and fiscal stimulus initiatives adopted by many. These policies are
expected to remain stimulative for some time. This is a key assumption underpinning the widely-held
private-sector forecasts of above-trend growth for a while and it no doubt lies behind the forecasts of
the Federal Reserve staff and FOMC members that call for a period of above-trend growth.
A normalization of risk appetites is shrinking credit spreads and re-opening credit markets. This is
most visible in the drop in the differential between debt costs for noninvestment grade borrowers
compared with the US government; the JPMorgan high yield index has narrowed to around 700 basis
points from nearly 2,000 basis points last winter. Stock market gains since March 9 have recovered
half of the losses from the October 9, 2007 record high to the March 9, 2009 low. The recovery in
equity values by itself is sufficient to raise the level of consumer spending by roughly $200 billion
annually, if seen as permanent, or by enough to raise the level of real GDP by roughly 1½ percent.
It takes a lot of (above-trend) growth to get back to full employment …
US real GDP and hypothetical potential real GDP (chained 2005 dollars)
16,000
16,000
15,000
14,000
Estimated potential level of
real GDP (GDP level when
unemployment is 5%
15,000
14,000
13,000
13,000
12,000
12,000
11,000
11,000
10,000
10,000
9,000
9,000
8,000
8,000
7,000
7,000
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Sources: Macroeconomic Advisers; JPMorgan Chase & Co.
5
January 4, 2010
Markets & the Economy / Economic Outlook
… and that applies to the hiring pace as well
US nonfarm payrolls (monthly change in thousands)
500
500
400
Average monthly change over the past 12 months 400
300
300
200
200
100
100
0
0
-100
-100
-200
-200
-300
-300
-400
Change from the previous month
-400
-500
-500
-600
-600
-700
-700
2000
2005
2010
2015
Source: US Department of Labor
Even as the evidence of a long-awaited economic rebound accumulates, the case for low Fed rates
remains strong, for at least three reasons. First, even though prospects of an economic rebound are
good, ongoing labor market data have been indicating, and new National Income statistics now
confirm, that the US economy fell into a deeper hole than at any time since the 1930s. For example,
since the 2008 Q2 peak in real GDP, national output has plunged 3.8%. That is larger than the 2.7%
drop in real GDP from the top to the bottom back in 1981-82. And those statistics don’t tell the whole
story, because the economy’s underlying growth potential is higher today than it was in 1980s. That
is why the rise in unemployment has been larger in this recession than in 1981. The unemployment
rate has increased 5.8 percentage points, from the 4.4% low in the spring of 2007 to 10.2% currently.
By 1982, the unemployment rate had risen 3.6 percentage points, to 10.8% at the peak from the
7.2% low.
When the economy is recovering from a steep tumble, it can grow rapidly—faster than its potential
6
January 4, 2010
Markets & the Economy / Economic Outlook
The Fed’s “maximum employment” goal, it may take a decade to achieve
US unemployment rate (percent of the civilian labor force)
12
12
11
11
The Fed's view about the near-term and
sustainable (Nairu) unemployment level¹
10
10
9
9
8
8
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
¹ Central tendency forecasts of the Federal Reserve’s FOMC members.
Sources: NBER recession bars; US Department of Labor
growth rate—without boosting inflation. In fact, a period of above-trend growth will be needed for
quite some time in order to return the economy to full employment. That is, by the way, why the
FOMC reasonably forecasts that the economy will grow at a 4-5% rate in 2011.
The magnitude of the cyclical damage that has resulted from the recession is best characterized by
the unemployment rate and the gap between the current level of unemployment and the desired level
suggests why the central bank will be patient. With unemployment in the neighborhood of 10%, it
stands twice as high as the level of unemployment that Federal Reserve policy makers consider to
be noninflationary or desirable (the bars in the figure on the previous page). The “long run” forecasts
can be viewed as the FOMC’s assumption about the meaning of “maximum employment”, a key goal
of the central bank that is coded in the Federal Reserve Act. As the figure implies, restoring the US
economy to full employment could require a number of years of above-trend growth. This considera7
January 4, 2010
Markets & the Economy / Economic Outlook
tion alone suggests that the Federal Reserve’s interest rates will remain near the current 0% level
until there is convincing evidence that the economy is well on its way to recovery.
Second, inflation is benign. In fact, for the first time in memory, inflation is below the range the central
bank considers optimal for the longer run. And with the economy likely to be well below its long-run
potential level for a while, inflation is more likely to fall than to rise in coming years. The Federal
Reserve and most central banks have embraced a long-run goal for inflation that is around 2%.
Finally, fiscal policy will become a drag in 2011 as this year’s fiscal initiative winds down and the
Bush Administration’s tax cuts expire at the end of 2010. By 2011, the economy should be recovering
fast enough on its own to overcome the coming fiscal drag. But there will be considerable uncertainty
about that and the Fed may need to remain more accommodative than it would otherwise to ease the
transition away from fiscal support.
Inflation is “below optimal levels for the longer run” … the Fed’s own words
US consumer price indexes (percent change from 12 months earlier)
12
12
The FOMC's forecast
10
10
for PCE chain price
inflation and long-run
goal ¹
8
8
Chain PCE
price index
6
6
4
4
2
2
0
0
Core chain PCE price index
-2
1960
-2
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
¹Range of views of FOMC members.
Source: NBER recession bars; US Department of Labor
8
January 4, 2010
Markets & the Economy / Economic Outlook
Appendix I. Highlights of the economic outlook
Percent change over the four quarters of the year, unless noted otherwise
2009
2010
2011
2012
Real GDP
-0.2
4.4
2.4
3.7
Unemployment (percent in final quarter of the year)
10.1
9.5
8.7
9.2
1.2
-1.0
-0.4
0.2
JPMorgan Chase & Co. forecast
Chain PCE prices
Food
-1.0
0.9
-0.5
0.0
Energy
-1.3
-20.2
0.0
0.0
Core chain PCE prices
1.6
1.3
1.0
0.5
$79
$71
$67
$65
Real GDP
-0.4 to -0.1
2.5 to 3.5
3.4 to 4.5
3.5 to 4.8
Unemployment (% in Q4 of year)
9.9 to 10.1
9.3 to 9.7
8.2 to 8.6
6.8 to 7.5
1.1 to 1.2
1.3 to 1.6
1.0 to 1.9
1.2 to 1.9
1.4 to 1.5
1.0 to 1.5
1.0 to 1.6
1.0 to 1.7
Growth raised and
expected to surpass
potential growth over H2
Grow faster
than potential growth
Still faster than 2010
Petroleum, WTI ($/barrel at year end)
Federal Reserve central tendency forecasts
FOMC (FOMC, November 3-4, 2009)
Chain PCE prices
Core chain PCE
Board staff (FOMC, November 3-4, 2009)
Real GDP
Unemployment rate
Raised its forecast for unemployment a little over the forecast horizon from
the previous forecast that called for 8% by the end of 2011
Chain PCE inflation
Run a little above core inflation through 2010
Core chain PCE inflation
Near core rate
Slow somewhat further over 2010 and 2011
Highlights of the interest rate outlook
Percent
2010
FOMC Meetings:
Jan 26-27
Mar 16
Apr 27-28
Jun 22-23
Aug 10
Sep 21
Nov 2-3
Federal funds rate
0-¼%
0-¼%
0-¼%
0-¼%
0-¼%
0-¼%
0-¼%
Fed funds futures contracts
0.16
0.21
0.28
0.45
0.57
0.69
0.99
3-month Libor
0.30
0.30
0.30
0.30
0.30
0.30
0.30
10-year Treasury note yield
3.65
3.65
3.65
3.75
3.75
3.75
3.75
9
January 4, 2010
Markets & the Economy / Economic Outlook
Appendix II. Details of the economic and market outlook
Percent change over the four quarters of the year, unless noted otherwise
2007
2008
2009
2010
2011
2012
--- % change over the four quarters ---
08Q4
09Q1
09Q2
09Q3
09Q4
10Q1
10Q2
10Q3
10Q4
--- % change from the previous quarter ---
Economic growth
Domestic output (real GDP)
Final demand for US-made output (final sales)
Consumer spending
Real disposable personal income
Household saving rate (% of income at period end)
Home building
Construction of business structures
Business equipment and software spending
Government spending
Net exports ($ billion at an annual rate at year end)
Imports
Exports
Memo:
Current account deficit ($ billions at period end)
Current account deficit (% of GDP at period end)
Ch. in Private Inventories ($ billions annualized)*
Annualized percent change*
Vehicle output contribution to GDP growth (pct. pts.)
Residential construction contribution to GDP growth (pct. pts.)
Memo: nominal GDP
2.5
-1.9
-0.2
4.4
2.4
3.7
-5.4
-6.4
-0.7
2.2
4.5
3.5
4.0
5.0
5.0
2.7
2.0
1.0
1.5
-20.5
18.9
3.2
2.5
-564
0.9
10.2
-1.4
-1.8
0.3
3.8
-21.0
3.2
-10.7
3.1
-551
-6.8
-3.4
0.0
1.2
2.9
5.5
-11.3
-24.1
-10.5
2.2
-476
-7.1
-2.1
3.5
2.8
5.6
8.0
22.5
1.4
6.8
3.9
-479
7.5
6.7
2.5
2.6
1.3
6.9
9.0
4.0
6.2
1.9
-453
6.0
4.0
3.3
3.7
2.1
5.6
3.0
4.0
6.7
2.6
-504
5.5
4.0
-4.7
-3.1
3.4
3.8
-23.2
-7.2
-25.9
1.2
-471
-16.7
-19.5
-4.1
0.6
0.2
3.7
-38.2
-43.6
-36.4
-2.6
-387
-36.4
-29.9
0.7
-0.9
6.2
5.4
-23.2
-17.3
-4.9
6.7
-330
-14.7
-4.1
1.5
2.8
-1.4
4.5
18.9
-18.4
1.5
2.6
-357
21.3
17.8
2.2
2.4
6.7
5.5
10.0
-13.0
4.5
2.3
-358
13.0
16.0
2.4
2.3
4.4
6.0
20.0
-5.0
3.4
3.2
-370
9.0
8.0
3.0
2.6
6.0
6.8
25.0
3.0
4.6
2.7
-382
9.0
8.0
4.4
2.6
5.8
7.5
25.0
4.0
11.9
6.2
-387
6.0
6.0
4.2
3.8
6.0
8.0
20.0
4.0
7.5
3.3
-397
6.0
5.0
-661
-4.6
-620
-4.3
-454
-3.1
-469
-3.1
-500
-3.2
-526
-3.3
-620
-4.3
-418
-2.9
-392
-2.8
-432
-3.0
-454
-3.1
-460
-3.1
-464
-3.2
-463
-3.1
-469
-3.1
-113.9 -160.2 -139.2
-6.7
-9.6
-8.6
10.3
1.2
0.6
1.3
-37.1
0.4
-29.7
-0.5
31.4
3.7
92.0
2.9
-37.4
-2.1
-67.0
-4.5
-31.6
-2.3
1.0
-0.2
20.5
1.1
47.5
2.8
-0.10
-0.70
5.34
-0.80
-0.58
0.07
0.14
-1.26
1.28
-0.04
0.44
4.44
0.01
-1.56
2.18
-0.02
2.21
3.59
-1.28
-0.70
-5.40
-1.53
-2.99
-4.60
0.20
-1.11
-0.80
1.46
-0.28
2.60
0.44
1.00
8.36
-0.02
2.00
3.65
-0.03
3.00
1.79
-0.05
4.00
5.18
-0.05
5.00
7.23
1.4
1.6
-2.5
-2.1
-1.0
-0.8
4.5
3.7
3.5
2.8
2.8
3.6
-5.5
-4.9
-8.6
-6.4
-2.3
-0.9
3.0
2.3
4.4
2.2
3.8
2.7
4.2
3.2
5.0
4.4
5.1
4.3
0.90
0.26
0.61
1.81
2.04
-1.65
-1.15
-1.09
-6.72
-8.74
-3.48
-3.61
-3.21
-4.95
-4.45
1.19
1.70
1.18
3.78
3.92
1.96
2.08
1.94
3.59
3.66
1.22
1.38
1.21
3.59
3.66
-3.68
-3.44
-2.88
-12.98
-18.41
-5.95 -4.52
-5.62 -2.76
-4.82 -4.64
-19.01 -10.36
-21.74 -8.11
-2.59
-3.02
-2.56
6.14
8.90
-0.77
-3.02
-0.76
5.92
6.44
-0.16
0.51
-0.16
4.33
4.70
0.93
1.40
0.92
3.59
3.66
1.76
2.21
1.74
3.59
3.66
2.24
2.70
2.22
3.59
3.66
4.8
78.6
6.9
70.9
10.1
68.6
9.5
73.4
8.7
77.2
9.2
80.1
6.9
70.9
9.6
67.2
10.1
68.6
10.2
70.0
10.1
71.2
9.9
72.3
9.5
73.4
Domestic demand
Gross demand for all output (Gross Domestic Purchasers)
Final demand for all output (Final Sales to Domestic Purchasers)
Employment and production
Nonfarm payrolls (establishment survey)
Employment (Household Survey)
Nonfarm payroll equivalent (Household Survey)
Industrial production
Manufacturing production
Economic slack
Unemployment rate (percent of labor force at period end)
Factory capacity use (% of capacity at period end)
8.1
66.7
9.3
65.5
Inflation
GDP chain price index
Core GDP chain price index
2.7
2.8
1.9
1.7
1.5
0.7
0.1
1.1
-0.2
0.3
-0.2
-0.6
0.1
-0.8
1.9
0.5
0.0
0.8
0.4
0.5
3.9
1.0
0.1
0.5
-2.2
0.8
0.2
1.0
2.2
2.0
3.6
4.7
19.7
2.5
1.7
6.8
-9.1
2.0
1.3
-1.7
3.7
1.4
-1.1
0.9
-21.5
1.3
-0.7
-0.8
0.0
0.8
0.0
-0.3
0.0
0.3
-5.0
4.7
-64.0
0.8
-1.5
-1.1
-36.7
1.1
1.4
-3.6
-2.0
2.0
2.6
-2.1
40.5
1.2
2.7
0.1
32.8
1.2
-0.8
-0.3
-13.0
1.0
-4.2
-0.7
-42.9
1.1
-0.6
-1.4
-14.0
1.2
1.3
6.3
-10.9
1.8
4.0
2.3
1.5
2.0
1.5
1.7
-0.4
1.5
-0.2
1.0
0.3
0.5
-8.3
0.6
-2.4
1.5
1.3
2.4
3.6
1.5
3.6
1.5
0.0
1.1
-3.3
1.3
-0.2
1.5
1.7
2.0
S&P 500 after-tax operating profits
Percent of GDI
-30.8
1.66
-100.6
-0.01
1.82
4.4
2.28
2.2
2.3
3.6
2.4
-100.6
-0.01
-39.2
1.10
-18.9
1.51
-1.6
1.72
0.0
1.82
3.6
1.85
4.1
2.03
4.7
2.16
4.4
2.28
Pre-tax GDP profits (from current production)
Percent of GDI
After-tax GDP profits (from current production)
Percent of GDI
-5.7
10.53
-5.3
7.51
-25.1
7.91
-15.8
6.34
29.1
10.10
23.1
7.72
28.1
12.39
28.1
9.47
8.4
13.15
8.4
10.04
5.0
13.33
5.0
10.18
-25.1
7.91
-15.8
6.34
-19.0
8.45
-19.7
6.52
-12.6
8.77
-15.3
6.58
-6.6
9.65
-9.7
7.37
29.1
10.10
23.1
7.72
35.8
11.08
34.4
8.46
38.4
11.66
40.9
8.91
32.1
12.18
32.1
9.30
28.1
12.39
28.1
9.47
-162
-1.2
-455
-3.1
-1416
-10.0
-1100
-7.6
-637
-4.1
-412
-2.5
PCE chain price index
PCE food chain price index
PCE energy chain price index
Core PCE chain price index
CPI
Core CPI
Corporate Profits
0.0
Federal budget balance
Billions
Percent of GDP
10
January 4, 2010
Markets & the Economy / Economic Outlook
Appendix II. Details of the economic and market outlook, continued
Percent at end of period shown
2007
2008
2009
2010
2011
2012
08Q4
09Q1
09Q2
09Q3
09Q4
--- % change from the previous quarter ---
--- % change over the four quarters ---
----------Last Day of Period Shown ----------
Financial markets
Federal funds rate target
3-month Libor
Spread of 3-month Libor over 3-month OIS
4.25
4.70
0.08
0.13
1.43
0.08
0.13
0.28
0.64
0.13
0.30
0.13
0.13
0.63
0.13
1.25
1.63
0.13
0.13
1.43
1.21
0.13
1.19
0.97
0.13
0.60
0.38
0.00
0.29
0.12
0.13
0.28
0.13
2-year note
5-year note
10-year note
3.05
3.45
4.04
0.76
1.55
2.25
0.88
2.35
3.50
0.78
2.45
3.75
1.52
2.45
3.75
2.31
3.02
4.00
0.76
1.55
2.25
0.81
1.67
2.71
1.11
2.54
3.53
0.95
2.31
3.31
0.88
2.35
3.50
3.55
4.65
3.36
4.37
1.46
2.49
1.38
2.88
1.54
3.75
5.10
4.78
5.32
4.94
5.25
Interest rate swaps
2-year
10-year
30-year conventional mortgage rate (FHLMC)
$/euro
Yen/$
Wilshire 5000 (index of all publicly traded shares)
S&P 500
Annual percent change
After-tax reported earnings per share
After-tax operating earnings per share
Memo: write-downs in dollars per share
Price-earnings ratio
6.17
1.45
110
14,820
1,527
7.6
66.2
82.5
16.4
18.50
5.10
1.32
119
9,087
903
-40.8
14.9
49.5
34.6
18.24
5.25
1.25
117
12,000
1,193
32.1
43.2
56.3
13.1
21.20
6.83
1.25
115
15,102
1,575
32.1
35.3
76.2
40.9
20.67
6.83
1.25
110
16,252
2,080
32.1
38.8
78.7
39.9
26.43
7.26
1.25
110
17,012
2,747
32.1
42.7
81.0
38.3
33.91
11
January 4, 2010
Markets & the Economy / Economic Outlook
Appendix III. The evolution of economic forecasts
The evolution of economic views this year. The tables below illustrate the recent evolution of the Federal Open Market
Committee, the Congressional Budget Office, the Administration, and two surveys of private forecasters. Growth forecasts
have changed little since the beginning of the year but unemployment forecasts have climbed significantly. Most of these
forecasts have reflected a belief, now materializing, that the economy would stabilize by mid-year and then begin to grow
during the second half of the year. With respect to unemployment, however, it was widely believed early this year that
unemployment would peak around 8%. At present, however, most expect the unemployment rate to peak near 10%. As a
result, the economy begins a new recovery from a position that is deeper in the hole than earlier believed.
The growth rebound plays out as advertised … but unemployment is worse
Real GDP (percentage change from four quarters earlier)
Forecast source
When published
2009
2010
2011
2012
Memo: Unemployment rate
Peak unemployment rate:
(% )
When
(2010 Q4)
SIFMA¹
Blue Chip Consensus
Federal Reserve (FOMC)
Blue Chip Consensus
Blue Chip Consensus
Blue Chip Consensus
CEA (Administration)
Congressional Budget Office
Blue Chip Consensus
Federal Reserve (FOMC)
Blue Chip Consensus
SIFMA¹
Blue Chip Consensus
Federal Reserve (FOMC)
Congressional Budget Office
CEA (Administration)
Blue Chip Consensus
Federal Reserve (FOMC)
December
December
-0.3
-0.5
3.2
2.9
10
9.9
November 3-4
-0.4 to -0.1
2.5 to 3.5
November
October
September
August (Mid-Session Review)
August
August
-0.3
-0.4
-0.6
-1.5
-1
-1.1
2.9
2.8
2.7
2.9
2.8
2.7
June 23-24
-1.5 to -1.0
2.1 to 3.3
9.8 to 10.1
July
June
June
-1.1
-1.4
-1.4
2.7
2.9
1.9
9.9
9.9
9.7
April 28-29
-2.0 to -1.3
2 to 3
March
March
February
-1.5
0.3
-1.9
4.1
3.5
2.1
January 27-28
-1.3 to -0.5
2.5 to 3.3
3.4 to 4.5
4.3
3.8
3.5 to 4.8
10.1
10.3 2010 Q1
9.9 to 10.1
9.9
9.6
9.5
10.0
9.9
9.7
10.1
10.1
10.0
9.7
10.2
10.1
2010 Q1
2010 Q1
2010 Q1
2009 Q4
2010 Q1
2009 Q4
9.9
9.9
9.7
9.2 to 9.6
4.1
9.0
7.9
9.0
7.9
8.5 to 8.8
Memo: CBO's range of estimates of ARRA 2009's fiscal stimulus
Low estimate
High estimate
--- percentage points --1.4
2.8
1.1
3.3
¹ Consensus of economists at financial firms belonging to the Securities Industry and Financial Markets Association .
² Forecast for the fourth quarter of the year.
Sources: Federal Reserve Board; Blue Chip; CBO; Office of Management and Budget, Council of Economic Advisers; Sifma
12
January 4, 2010
Markets & the Economy / Economic Outlook
Appendix IV. Alternative economic forecasts
2008
2009
2010
2011
2012
Central tendency
November 3-4
June 23-24
April 28-29
January 27-28²
-0.4 to -0.1
-1.5 to -1.0
-2.0 to -1.3
-1.3 to -0.5
2.5 to 3.5
2.1 to 3.3
2.0 to 3.0
2.5 to 3.3
3.4 to 4.5
3.8 to 4.6
3.5 to 4.8
3.8 to 5.0
3.5 to 4.8
2.5 to 2.8
2.5 to 2.7
Range of all FOMC views
November 3-4
June 23-24
April 28-29
January 27-28²
-0.5 to 0.0
-1.6 to -0.6
-2.5 to -0.5
-2.5 to 0.2
2.0 to 4.0
0.8 to 4.0
1.5 to 4.0
1.5 to 4.5
2.5 to 4.6
2.3 to 5.0
2.3 to 5.0
2.3 to 5.5
2.8 to 5.0
2.4 to 3.0
2.4 to 2.8
Central tendency
November 3-4
June 23-24
April 28-29
January 27-28²
9.9 to 10.1
9.8 to 10.1
9.2 to 9.6
8.5 to 8.8
9.3 to 9.7
9.5 to 9.8
9.0 to 9.5
8.0 to 8.3
8.2 to 8.6
8.4 to 8.8
7.7 to 8.5
6.7 to 7.5
6.8 to 7.5
5.0 to 5.2
4.8 to 5.0
4.8 to 5.0
Range of all FOMC views
November 3-4
June 23-24
April 28-29
January 27-28²
9.8 to 10.3
9.7 to 10.5
9.1 to 10.0
8.0 to 9..2
8.6 to 10.2
8.5 to 10.6
8.0 to 9.6
7.0 to 9.2
7.2 to 8.7
6.8 to 9.2
6.5 to 9.0
5.5 to 8.0
6.1 to 7.6
4.8 to 6.3
4.5 to 6.0
4.5 to 5.3
1.1 to 1.2
1.0 to 1.4
0.6 to 0.9
0.3 to 1.0
1.3 to 1.6
1.2 to 1.8
1.0 to 1.6
1.0 to 1.5
1.0 to 1.9
1.1 to 2.0
1.0 to 1.9
0.9 to 1.7
1.2 to 1.9
1.7 to 2.0
1.7 to 2.0
1.7 to 2.0
1.0 to 1.7
1.0 to 1.8
-0.5 to 1.2
-0.5 to 1.5
1.1 to 2.0
0.9 to 2.0
0.7 to 2.0
0.7 to 1.8
0.6 to 2.4
0.5 to 2.5
0.5 to 2.5
0.2 to 2.1
0.2 to 2.3
1.5 to 2.0
1.5 to 2.1
1.5 to 2.0
Central tendency
November 3-4
June 23-24
April 28-29
January 27-28²
1.4 to 1.5
1.3 to 1.6
1.0 to 1.5
0.9 to 1.1
1.0 to 1.5
1.0 to 1.5
0.7 to 1.3
0.8 to 1.5
1.0 to 1.6
0.9 to 1.7
0.8 to 1.6
0.7 to 1.5
1.0 to 1.7
Range of all FOMC views
November 3-4
June 23-24
April 28-29
January 27-28²
1.3 to 1.6
1.2 to 2.0
0.7 to 1.6
0.6 to 1.5
0.9 to 2.0
0.5 to 2.0
0.5 to 2.0
0.4 to 1.7
0.5 to 2.4
0.2 to 2.5
0.2 to 2.5
0.0 to 1.8
0.2 to 2.3
Federal Reserve (FOMC forecasts), Q4-to-Q4 basis
Real GDP
Actual
Unemployment Rate (% on last quarter of the year)
Actual
Chain PCE Prices
Actual
-1.9
6.9
1.7
Central tendency
November 3-4
June 23-24
April 28-29
January 27-28²
Range of all FOMC views
November 3-4
June 23-24
April 28-29
January 27-28²
Core Chain PCE Prices
Actual
Long Run
2.0
13
January 4, 2010
Markets & the Economy / Economic Outlook
Appendix IV. Alternative economic forecasts, continued
2008
Administration (OMB / CEA), Q4-to-Q4 basis
Real GDP
Actual
Mid-sesson Review (July 2009)
2010 budget (February 2009)
Unemployment rate (Q4 level)
Actual
Mid-sesson Review (July 2009)
2010 budget (February 2009)
GDP Price
Actual
Mid-sesson Review (July 2009)
2010 budget (February 2009)
CPI
Actual
Mid-sesson Review (July 2009)
2010 budget (February 2009)
2009
2010
2011
2012
-1.9
-0.8³
-0.2
-1.5
0.3
2.9
3.5
4.3
4.4
4.6
6.9
10.0
8.1
9.7
7.7
8.0
6.8
6
1.9
2.0³
1.9
1.6
1.0
1.2
1.2
1.4
1.5
1.8
0.5
0.8
1.4
1.6
1.7
1.8
2.1
6.9
1.5
1.5
14
January 4, 2010
Markets & the Economy / Economic Outlook
Appendix IV. Alternative economic forecasts, continued
2008
Congressional Budget Office, Q4-to-Q4 basis
Real GDP
Actual
August 2009
March 2009
January 2009¹
September 2008¹
Unemployment Rate (year average)
Actual
August 2009
March 2009
January 2009¹
September 2008¹
GDP Price Index
Actual
August 2009
March 2009
January 2009¹
September 2008¹
CPI
Actual
August 2009
March 2009
January 2009¹
September 2008¹
Core CPI
Actual
August 2009
March 2009
January 2009¹
September 2008¹
Chain PCE Price Index
Actual
August 2009
March 2009
January 2009¹
September 2008¹
Core Chain PCE Price Index
Actual
August 2009
March 2009
January 2009¹
September 2008¹
2009
2010
2011
2012
-1.0
-1.5
-1.5
1.8
2.8
4.1
3.0
3.8
4.1
4.1
9.3
8.8
8.3
6.2
10.2
9.0
9.0
9.1
7.7
6.6
1.6
1.3
1.1
2.4
0.9
0.8
0.8
3.8
0.5
0.8
0.6
0.6
2.2
1.5
1.3
1.7
1.2
1.1
1.6
1.4
1.5
2.3
1.1
1.0
1.3
1.0
0.8
1.2
0.5
1.4
2.5
1.1
1.0
1.1
0.8
0.9
1.7
0.7
1.2
2.2
0.8
0.8
0.9
0.5
0.7
-1.9
-0.9
-0.4
0.9
6.9
5.8
5.7
5.4
1.9
1.9
2.6
2.5
1.5
1.5
2.5
4.9
2.0
2.0
2.1
2.4
1.7
1.7
1.8
4.0
2.0
1.8
2.1
2.3
15
January 4, 2010
Markets & the Economy / Economic Outlook
Appendix IV. Alternative economic forecasts, continued
2008
Blue Chip, Q4-to-Q4 basis
Real GDP
Actual
December consensus
November consensus
October consensus
September consensus
August consensus
July consensus
June consensus
April consensus
February consensus²
Unemployment
Actual
December consensus
November consensus
October consensus
September consensus
August consensus
July consensus
June consensus
April consensus
February consensus²
CPI
Actual
December consensus
November consensus
October consensus
September consensus
August consensus
July consensus
June consensus
April consensus
February consensus²
2009
2010
2011
2012
-0.5
-0.3
-0.4
-0.6
-0.8
-1.1
-1.4
-1.3
-1.9
2.9
2.9
2.8
2.7
2.8
2.7
2.9
2.7
2.1
3.6
2.9
3.3
2.9
10.2
9.9
10.0
9.9
10.1
9.3
9.1
8.9
8.3
9.9
9.6
9.6
9.5
9.7
9.9
9.7
9.4
8.7
8.1
5.8
7.1
5.5
1.3
1.2
0.9
0.8
0.8
0.7
0.5
-0.8
-0.8
1.8
1.7
1.8
1.8
1.8
1.9
1.9
1.7
1.8
2.1
2.4
2.3
2.5
-1.9
-0.8
-0.8
1.3
6.9
5.8
5.8
1.5
1.5
3.8
3.8
¹ Does not include the estimated impact of the fiscal stimulus (ARRA 2009)
² Probably did not include an estimated impact of the ARRA 2009 fiscal stimulus plan.
³ Established before 2009 NIPA benchmark revisions were released.
16
January 4, 2010
Markets & the Economy / Economic Outlook
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17
