Executive Summary
After more than a year of recession and a decline greater than forty percent in some financial indices, are we making any progress to the upside? To identify progress we first identify where we are now in the economy.1 Second, we address the question of whether we have reached a bottom, and which indicators we can use to gauge the economy’s potential recovery. Finally, how can we measure progress in our policy efforts to address both economic and credit issues and if there are signs of progress at the regional level within the Sixth Federal Reserve District.
Our results suggest that we have made very little progress with the economy remaining in a deep recession. Alternatively, we do see progress in selected credit markets but only where the Federal Reserve appears to be directly involved. Unfortunately, the regional story remains disappointing.
Where are we now?
Our most recent forecast shows a deeper and longer recession than we witnessed in either 1990 or 2001, perhaps similar to our experience in 1973-75. In Figure 1 we illustrate our baseline expectations for real GDP. Real final sales are expected to remain negative throughout 2009. Inventory swings and declines in imports might produce a positive GDP figure before then, but we now believe the recession will last through the third quarter of this year while job losses and rising unemployment will likely carry over into next year. Federal government spending makes a significant positive contribution to our positive fourth quarter estimate for GDP.
Throughout this financial crisis there have been endless comparisons between today’s environment and the 1930s. We feel a more apt comparison is the deep 1973-1975 recession, a period that also dealt with an oil price shock, a housing collapse and a banking crisis (Figure 2). This more recent recession, and not the Great Depression, provides a template for our outlook.
