Regional President Speech

Economic Update Eric S. Rosengren President & CEO Federal Reserve Bank of Boston 2011 Massachusetts Investor Conference December 2, 2011 EMBARGOED UNTIL FRIDAY, DECEMBER 2, 2011 AT 1:30 P.M. U.S. EASTERN TIME OR UPON DELIVERY www.bostonfed.org Figure 1 U.S. Regional Home Price Declines: S&P/Case-Shiller Metro Area Indexes March 2006 - September 2011 Index Level March 2006 = 100 110 110 110 110 110 Boston Chicago Denver NewYork LasVegas 100 100 100 100 100 90 90 90 90 90 80 80 80 80 80 70 70 70 70 70 60 60 60 60 60 50 50 50 50 50 40 40 40 40 40 30 30 30 30 30 Mar-06 Oct-08 May-11 Mar-06 Oct-08 May-11 Mar-06 Oct-08 May-11 Mar-06 Oct-08 May-11 Mar-06 Oct-08 May-11 110 110 110 110 110 LosAngeles Miami Phoenix SanDiego SanFrancisco 100 100 100 100 100 90 90 90 90 90 80 80 80 80 80 70 70 70 70 70 60 60 60 60 60 50 50 50 50 50 40 40 40 40 40 30 30 30 30 30 Mar-06 Oct-08 May-11 Mar-06 Oct-08 May-11 Mar-06 Oct-08 May-11 Mar-06 Oct-08 May-11 Mar-06 Oct-08 May-11 Source: S&P/Case-Shiller / Haver Analytics 2 Figure 2 Growth in Real GDP Components: Current and Three Previous Recoveries Percent Change over First Nine Quarters of Recovery 35 Current Recovery 30 Average of Three Previous Recoveries 25 20 15 10 5 0 -5 Consumption Business Fixed Residential Fixed Government Exports Investment Investment Source: BEA, NBER / Haver Analytics 3 Figure 3 Residential Investment Share of GDP Growth: Current and Three Previous Recoveries Percent 30 25 20 Current Recovery 15 10 5 0 -5 First 4 Quarters of Recovery -10 Next 5 Quarters of Recovery -15 1982:Q4-1985:Q1 1991:Q1-1993:Q2 2001:Q4-2004:Q1 2009:Q2-2011:Q3 Average of Three Recovery Period Recovery Period Recovery Period Current Recovery Previous Recoveries Source: BEA, NBER / Haver Analytics 4 Figure 4 Composition of Household Net Worth: Selected Components 2009 Percent Own Home 60 Rental and Other Real Estate Stocks and Mutual Funds 50 IRA and Keogh Accounts 401(K) and Thrift Accounts 40 Financial Institution Accounts 30 20 10 0 White Hispanic Black Asian Source: Pew Research Center Tabulations of the Census Bureau’s Survey of Income and Program Participation Data 5 Figure 5 Erosion of Home Equity of Households by Race and Ethnicity 2005 - 2009 Median HomeEquityof Households Declinein Median Home Equity from 2005 - 2009 White White Hispanic Hispanic Black 2005 Black 2009 Asian Asian 0 60,000 120,000 180,000 240,000 -60 -40 -20 0 2009 Dollars Percent Source: Pew Research Center Tabulations of the Census Bureau’s Survey of Income and Program Participation Data 6 Figure 6 Employment Growth: Current and Three Previous Recoveries Percent Change Over First Nine Quarters of Recovery 8 Total Employment Employment in Private Industries Construction Employment 6 4 2 0 -2 -4 -6 Current Recovery -8 Average of Three Previous Recoveries -10 Total Employment Employment in Private Industries Construction Employment Source: BLS, NBER / Haver Analytics 7 Figure 7 Homeowner and Rental Vacancy Rates 1980:Q1 - 2011:Q3 Percent 3.5 1 3.0 1 2.5 Homeowner Vacancy Rate 2.0 1 1.5 0 1.0 0 0.5 0.0 0 1980:Q1 1984:Q1 1988:Q1 1992:Q1 1996:Q1 2000:Q1 2004:Q1 2008:Q1 Percent 12.0 1 Rental Vacancy Rate 1 10.0 1 8.0 0 6.0 0 4.0 0 1980:Q1 1984:Q1 1988:Q1 1992:Q1 1996:Q1 2000:Q1 2004:Q1 2008:Q1 Recession Source: Census Bureau, NBER / Haver Analytics 8 Housing has been a Major Impediment to Stronger Growth  Problems in housing have greatly complicated the U.S. recovery  Residential investment has been unusually weak relative to previous recoveries  Consumption, business formation, and employment have also been affected by problems in the housing sector 9 Housing Prices and Monetary Policy  Falling prices discourage home purchases and many borrowers are unable to refinance  This has impacted the ability of monetary policy to have its usual effect on an important interest-sensitive sector  Monetary policy accommodation would have a greater impact if households were able to respond to the lower rates 10 Figure 8 U.S. Unemployment Rate for Population Age 25 and Older by Educational Attainment January 1992 - November 2011 Percent 18 1 This 16 Less than High School Diploma High School Diploma, No College 14 Some College or Associate's Degree 1 Bachelor's Degree or Higher 12 1 10 8 0 6 4 0 2 0 0 Jan-1992 Jan-1995 Jan-1998 Jan-2001 Jan-2004 Jan-2007 Jan-2010 Recession th Source: BLS, Census Bureau, NBER / Haver Analytics 11 Figure 9 Changes in Unemployment Rate by Educational Attainment Unemployment Rate Business Cycle Peak Current Peak-to-Current Educational Attainment December 2007 November 2011 Percent Change Less than High School Diploma 7.7% 13.2% + 71% High School Diploma, No College 4.7% 8.8% +87% Some College or Associate’s Degree 3.8% 7.6% +100% Bachelor’s Degree or Higher 2.1% 4.4% +110% Note: Figures are for population age 25 and older Source: Census Bureau, BLS / Haver Analytics 12 Figure 10 Employment Cost Index for Civilian Workers 1983:Q1 - 2011:Q3 Percent Change from Year Earlier 7 1 6 1 5 1 4 3 0 2 0 1 0 0 1983:Q1 1986:Q1 1989:Q1 1992:Q1 1995:Q1 1998:Q1 2001:Q1 2004:Q1 2007:Q1 2010:Q1 Recession Source: BLS, NBER / Haver Analytics 13 Figure 11 Employment Cost Index for Civilian Workers by Occupational Group 2007:Q1 - 2011:Q3 Percent Change from Year Earlier 5 Management and Professional Sales and Office 4 Natural Resources, Construction and Maintenance Production, Transportation and Material Moving Service Occupations 3 2 1 0 2007:Q1 2008:Q1 2009:Q1 2010:Q1 2011:Q1 Source: BLS / Haver Analytics 14 Figure 12 Employment Cost Index for Civilian Workers by Occupational Group 2009:Q2 - 2011:Q3 Percent Change 6 Nine Quarters of Current Recovery (2009:Q2 - 2011:Q3) 4 2 0 Total Management and Sales and Office Natural Resources, Production, Service Professional Construction and Transportation and Occupations Maintenance Material Moving Source: BLS / Haver Analytics 15 Figure 13 Bank Size Relative to Country Size: Assets of Largest Bank as a Share of GDP as of Year End 2010 Percent 300 Switzerland 250 Netherlands 200 Denmark Sweden Belgium 150 United Spain Kingdom France 100 Germany Italy 50 United States 0 Note: Includes the U.S. and all European countries with a bank ranked in the top 50 worldwide as of year end 2010 Source: Global Finance, IMF 16 Figure 14 Sovereign Credit Default Swap Spreads as of November 28, 2011 Basis Points 600 Italy 500 Spain Belgium 400 300 France 200 Denmark Netherlands United United Germany Sweden Switzerland Kingdom States 100 0 Note: CDS spread is five-year mid-price spread Note: Includes the U.S. and all European countries with a bank ranked in the top 50 worldwide as of year end 2010 Source: Bloomberg 17 Figure 15 Stock Prices of Largest Banks in Europe and the United States Average Stock Prices: Average Average Percent Change Index Level Dec 29, 2006 = 100 Largest Banks in B a n k A s s e t s Groups of Five Billion Dollars Year End sssssssssss Peak P e a k to 2010 to Dec 31, 2010 D e c 3 0 , 2 0 0 8 N o v 2 8 , 2 0 1 1 ( P o s t 2006) Nov 28, 2011 Nov 28, 2011 Five Largest Banks 2,456 33 30 110 -72 -37 Next Five Largest Banks 2,019 30 22 104 -79 -44 Next Five Largest Banks 1,470 41 30 111 -73 -41 Next Five Largest Banks 1,028 34 22 118 -81 -50 Source: Global Finance, Bloomberg 18 Figure 16 Dollar Funding Pressures January 2, 2007 - December 1, 2011 Basis Points 250 200 150 100 50 0 -50 2-Jan-07 18-Dec-07 2-Dec-08 17-Nov-09 2-Nov-10 18-Oct-11 Note: Basis Spread of Implied Dollar Cash Rate from 3-MonthEuro-Dollar FX Swap over 3-Month Dollar LIBOR Source: British Bankers’ Association, Deutsche Bundesbank, Financial Times / Haver Analytics 19 Recent FOMC Actions  Expect short-term rates low until mid-2013  Downward pressure on longer-term interest rates  Extending the average maturity of our holdings of securities  To support conditions in mortgage markets, reinvest principal payments from holdings of agency debt and mortgage-backed securities in agency mortgage-backed securities 20 Monetary Policy Cannot Fully Offset Problems, but Can Mitigate Some Effects  Reducing unemployment by half a percent means 750,000 jobs  Unemployment at 8.6% and medium term inflation restrained  Goal is to restore economy to full employment and 2% inflation  The sooner the economy improves the more quickly we can normalize interest rates 21

Eric Rosengren (2011, December 1). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20111202_eric_rosengren

@misc{wtfs_regional_speeche_20111202_eric_rosengren,
  author = {Eric Rosengren},
  title = {Regional President Speech},
  year = {2011},
  month = {Dec},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20111202_eric_rosengren},
  note = {Retrieved via When the Fed Speaks corpus}
}