Here's an article I ran across (thanks to Didi on the Notes thread) that (IMO) provides an excellent overview of the economy:
FedViews
February 15, 2002
Jack Beebe, Senior Vice President and Director of Research at the Federal Reserve Bank of San Francisco, states his
views on the current economy and the outlook:
The economy lost another 89,000 jobs in January. The manufacturing sector continued to shed jobs at a rapid
clip, but air transportation and retail trade strengthened on a seasonally-adjusted basis following large declines
in October and November. It is likely that we will see further declines in employment over the next few months,
and that job growth will be modest in this cyclical recovery. Severe profit squeezes and efforts to continue
productivity enhancement are likely to dampen job growth for some time.
Manufacturing in the technology sectors has risen slightly from a very low level while the rest of manufacturing
continues to decline, with the exception of the motor vehicle sector. Motor vehicle production rose sharply in
November and December as firms sought to restore inventories drawn down following the sales burst of
October. Much of the rest of the manufacturing sector is languishing due to recessions in the U.S. and abroad,
the strong dollar, and the long-standing pattern of emigration of U.S. manufacturing to lower cost countries.
The index of new orders in manufacturing was a little above 50 in December and January, indicating that more
firms received increasing orders than received decreasing orders. This series gives some evidence that perhaps
the manufacturing sector has reached bottom. The level of manufacturing output remains very low, however.
Capacity utilization in manufacturing stands at 72.7 percent, the lowest figure since 1982.
In January, the Michigan Consumer Sentiment Index indicated that consumers' views of future conditions
continued to improve. The level of consumer sentiment remains quite low, however.
While consumer spending slowed over the past two years from the extremely rapid 5 percent pace of 1998-99,
spending growth has remained strong. Financing incentives on new motor vehicles in the fourth quarter
boosted spending particularly in October and November. Moreover, Christmas season sales exceeded
expectations by a significant margin. Initial data for retail sales in January showed a further decline in dollar
auto sales from very high levels, but the data also showed a surprisingly large increase in non-auto spending.
Not only was non-auto spending high in January but the December data were revised upward as well.
Like consumer spending, home buying has been strong throughout the recession, giving a lift to residential
construction. In our forecast, we expect continued positive growth in real residential construction from now
through the end of next year. In contrast, non-residential construction has dropped off sharply since the
beginning of the recession and we do not expect positive growth in this area until early next year.
Despite tight inventory management throughout the 1990s, this recession saw inventory reductions that
exceeded those of all recessions since the 1950s. We are expecting reductions of considerably smaller
amounts during this quarter and next before inventory growth turns positive again. However, even inventory
reductions of smaller amounts during this quarter and next will boost GDP growth significantly in these two
quarters as production is raised closer to final sales.
Federal government purchases surged in the fourth quarter and we expect equally large increases this quarter
and next. The impetus from government spending, combined with significantly less inventory liquidation, will
boost GDP growth in the near term. We are expecting GDP growth of around 1-3/4 percent this quarter and
2-1/2 percent next quarter. Later in the year, a pickup in the growth of business equipment investment and
consumer spending causes GDP growth to grow at around 4 percent in the forecast. Our forecast is that of a
relatively slow recovery and the 4 percent growth figure next year is only modestly above our assumption of
sustainable trend real GDP growth of around 3-1/4 percent. A faster turnaround in inventories could give us
significantly more growth than forecasted for a quarter or two in the recovery phase. (Inventory swings are
notoriously difficult to predict on a quarterly basis.
Economic growth well below trend since mid-2000 has caused the unemployment rate to rise around 1-3/4
percent thus far. The Department of Labor reported that the drop to 5.6 percent in January was probably a
statistical fluke; we should expect a figure more like 5.8 percent in the February data. The GDP growth rate in
our forecast remains below trend through the third quarter of this year, causing the unemployment rate to rise
to a little over 6 percent in the forecast before declining very modestly next year. Because of earnings
squeezes and cautious hiring, we should expect fairly weak employment growth this year and next.
Slack in the labor market and modest expectations of price inflation will cause labor cost inflation to recede
throughout the forecast. Lower labor cost inflation, slack in product markets, and the pass-through effects of
currently low energy prices and a strong dollar are likely to give us lower core price inflation through next year.
Daily volatility in equity prices has buffeted interest rates to a noticeable extent, but there has been little trend
in yields on intermediate- and long-term high quality debt over the last two months. And while the debt of many
corporations is being downgraded, the average yield on low-grade (non-rated) bonds has declined a bit over
the past few months as investors have become more confident of a pending economic recovery. The risk
premium on low-grade bonds remains high, however, and default rates on such bonds remain well above those
during and following the 1990-91 recession.
Futures prices in the federal funds market indicate that traders are not expecting a change in the federal funds
rate target over the next few months and then are expecting a slow rise in the rate during the second half of
this year, with the funds rate implied by the current forward yield structure rising from its current level of 1-3/4
percent to around 2-1/2 percent by the end of this year.
Several downside risks remain in the outlook. First, there is still the possibility of further serious terrorist actions.
Second, consumer sentiment and spending could sag if households become more cautious in response to
weak job growth throughout this year. Finally, despite declines since 2000, stock prices on average remain very
high relative to reasonable earnings forecasts—and earnings reports are likely to look far weaker than
expected as grandiose accounting methods continue to unravel.
frbsf.org
Corresponding Charts:
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AdvocateDevil |
