Economic and Housing Outlook 1. William Strauss, Senior Economist and Economic Advisor Federal Reserve Bank of Chicago. Economic and Housing Outlook

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1 Economic and Housing Outlook Builder Chicago, IL May, William Strauss Senior Economist and Economic Advisor The Great Recession ended in June, but the economy expanded by just.% over the past year Real gross domestic product Quarterly change(saar) ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' The Chicago Fed National Activity Index -month average is near zero The liabilities side of the Fed s balance sheet shows large amount of excess reserves. Chicago Fed National Activity Index Liabilities of the Federal Reserve Billions of dollars,... Three month average... Monthly. '''''''''''''''''''''',,,, Deposits of Depository Institutions Treasury Balance Currency in Circulation The personal savings rate has recently moved lower Existing home prices fell by over % Personal savings as a of disposable personal income ' ' ' ' ' ' ' ' ' ' Median sales price existing single family home month smoothed $, $, $, $, $, $, $, $, $, ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' Economic and Housing Outlook

2 The stock market has improved since March, but remains well below previous levels GDP is forecast to grow near trend in and slightly above trend in S&P stock index Index: =,,,, ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' Real gross domestic product Blue Chip GDP Forecast Actual Forecast Quarterly change(saar)... Q ' ' ' ' ' ' ' ' ' ' ' ' ' The recovery has been led by the consumer and business sectors The forecast path of the current recovery is relatively muted compared with past deep recession recovery cycles Contributions to real GDP growth during the current recovery age points (annual rate)... GDP Consumption Business Fixed Investment. Residential Investment. Change in Inventories.. Government Net Exports Business cycle recovery path index business cycle trough = average annualized growth:.% average annualized growth:.% average annualized growth:.% Blue Chip forecast recovery path quarters before trough quarters after trough Employment fell by over. million jobs between December and February, but began to rise and has added. million jobs over the past months Total employment Monthly change (saar) '''''''''''''''''''''' After peaking in October, the unemployment rate has fallen by. age points Unemployment rate '''''''''''''''''''''' Economic and Housing Outlook

3 Okun s Law: for every age point that GDP growth deviates from its trend leads to a half age change in the unemployment rate in the opposite direction The unemployment rate is forecast to edge lower Changes in Real GDP and the unemployment rate since Change in unemployment rate Q/Q,,age points Unemployment rate Blue Chip Forecast Q Change in Real GDP Q/Q, age points ' ' ' ' ' ' ' ' ' ' ' ' ' Inflation has risen Personal consumption expenditure chain price index change from a year earlier ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' In large part due to the movement of oil prices. However, adjusted for inflation, current oil prices are below the levels that existed thirty years ago Real West Texas Intermediate oil price dollars per barrel. dollars ' ' ' ' ' ' ' ' Natural gas prices remain low Expenditures on energy are below the historical average Real natural gas price dollars per mmbtu ( dollars) ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' Energy goods and services expenditures as a share of total consumption s s s s s s ' ' ' ' ' ' ' ' ' ' Economic and Housing Outlook

4 Removing the volatile food and energy components from the PCE, core inflation remains contained Inflation is anticipated to rise. this year and next year Personal consumption expenditure less food and energy change from a year earlier chain price index ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' Consumer price index Quarterly change (saar) Q Blue Chip CPI Forecast Actual Forecast... ' ' ' ' ' ' ' ' ' ' ' ' ' Industrial output in manufacturing fell quite sharply during the recession, but has risen strongly over the past thirty-three months, averaging.% and has recovered.% of the loss during the recession Industrial production is forecast to rise at a solid pace Industrial production manufacturing Total industrial production Quarterly change (saar) Monthly change (saar) Q Blue Chip IP Forecast Actual Forecast... ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' Housing starts have been improving Existing home sales have been improving Housing starts month smoothed,,,,,, ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' Existing single family home sales,,,,,,,,, ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' Economic and Housing Outlook

5 However, new home sales has yet to improve The supply of new single family homes has fallen from very high levels New single family home sales,,,, ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' Months supply of new single family homes months '''''''''''''''''''''' Home prices appear to be stabilizing In the fourth quarter, home prices fell by. from a year earlier Median sales price existing single family home month smoothed change from a year earlier '''''''''''''''''''''' According to RealtyTrac, in every housing units in the country received a foreclosure filing in March March Foreclosure Rate Heat Map Mortgage rates continue to move lower Mortgage rate year fixed '''''''''''''''''''''' Economic and Housing Outlook

6 Housing affordability improved dramatically Yet, consumer attitudes towards buying a home remain very low Composite housing affordability index index= when median family income qualifies for an % mortgage on a median priced existing single family home '''''''''''''''''''''' Consumer attitudes plan to buy a home in next six months of respondents ' ' ' ' ' ' Home ownership rates have been moving lower Rent has risen Homeownership rate ' ' ' ' ' ' ' ' ' CPI Rent on primary residence change from a year earlier '''''''''''''''''''''' Why do you build homes? You build homes for people There is a very close relationship between household formation and housing starts, but housing starts tend to be above household formation New households and housing starts Housing starts (average),, per year, New households (average),, per year housing starts,,, new households ' ' ' ' ' ' ' ' ' ' Economic and Housing Outlook

7 The amount of excess housing units compared with trend has disappeared Since, household formation growth has averaged one Housing starts,, +,, units Household formation,, -,, units,, units -,, units -,, units ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' Household formation remains below its long-run average Looking at the relationship between housing starts and household formation shows a large excess amount of inventory on the market, although it has begun to fall New Households,,,, units -,, units -, units +,, units New households and net housing starts, net housing starts,, units -,, units,,, units new households,,,, -,, units ' ' ' ' ' ' ' ' ' ' +,, units -, units ' ' ' ' ' ' ' ' ' ' The forecast calls for a very gradual recovery in housing Credit spreads between Corporate High Yield securities and Corporate Aaa securities have been edging lower Housing starts,,,, Blue Chip Housing Starts Forecast () Actual Forecast ' ' ' ' ' ' Credit spreads between Corporate High Yield and Corporate Aaa Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Economic and Housing Outlook

8 Monetary policy has been very aggressive, keeping the Fed Funds near zero since December The Federal Funds Rate is anticipated to remain very low over the forecast horizon Fed Funds rate '''''''''''''''''''''' Target Federal Funds Rate FOMC ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' The asset side of the Fed s balance sheet has expanded in size and in composition The Fed s expansion of the monetary base has allowed the money supply to continue rising, compared with what took place during the s Assets of the Federal Reserve Billions of dollars, Term Asset Backed Securities Loan Facility, Maiden Lane II & III, AIG Support Central Bank Swaps, Commercial Paper Facility, Maiden Lane Term Auction Credit Securities Held Outright Monetary expansion index: Jan = monetary base M ' ' ' ' CPI Monetary expansion current period index: Jan = monetary base M CPI ' ' ' ' ' Summary The outlook is for the U.S. economy to expand at a pace below trend this year and slightly above trend in Employment is expected to rise moderately with the unemployment rate edging lower Slackness in the economy will lead to a relatively contained inflation rate Housing appears to have bottomed Vehicle sales are anticipated to rise at a good pace Growth in manufacturing output should be solid Economic and Housing Outlook