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Statement for the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association Alan B. Krueger Assistant Secretary for Economic Policy & Chief Economist

(Archived Content)



A year ago at this time, the unemployment rate was rising sharply, the housing market downturn was entering its fourth year, credit markets were severely impaired and we had just learned that the economy had contracted at the fastest pace in 30 years. Recent reports highlight how much progress has been made in the past year toward restoring economic health.   A range of policies – the Recovery Act, the Financial Stability Plan, and several housing market programs – have been instrumental in pushing the economy into recovery.  Even with the recent improvement, however, the economy is operating well below capacity, and there is significant room for additional progress.   Private sector job growth has resumed, but the unemployment rate remains stubbornly high.   The housing market is showing signs of stabilization, but activity in that sector remains uneven.   The Federal budget deficit has swelled to a post-war high – a consequence of past policies, the recession and the government's efforts to counteract its negative impacts on American households and businesses.   Despite these challenges, the consensus of economists is that the economy will continue to grow and we will add jobs going forward.  

According the advance estimate, real GDP grew for a third straight quarter in 2010Q1, rising by 3.2 percent at an annual rate, following a gain of 2.2 percent in 2009Q3 and 5.6 percent in 2009Q4.   Consumer spending, which accounts for more than two-thirds of GDP, accelerated to its fastest pace in three years.   Business purchases of equipment and software rose rapidly for a second straight quarter.   Private inventories rose for the first time in two years, as firms began to rebuild depleted stocks, a sign that business confidence about the durability of the recovery is rising.   The change in private inventories contributed 1.6 percentage points to first-quarter real GDP growth.   Exports continued to rise but imports increased faster as domestic demand strengthened.   The net export deficit widened as a result, shaving 0.6 percentage point off the first-quarter growth rate after adding 0.3 percentage point in the previous quarter.   Some components of real GDP continued to slide.   Business outlays for structures fell for the seventh consecutive quarter and residential homebuilding activity fell after two quarters of growth, trimming another 0.3 percentage point off the first-quarter gain in real GDP.   States and localities continued to reduce their spending, cutting about ½ percentage point from GDP growth in the first quarter, consistent with other evidence that they are also cutting employment.

The decline in residential homebuilding activity in the first quarter GDP figures highlights that the housing sector has yet to begin a solid recovery.   The decline in Q1 homebuilding activity was due in part to a slowdown in home sales following a surge last fall related to the anticipated November 30 expiration of the tax credit for first-time home buyers.   In February, resales of existing homes dipped to an 8-month low and sales of new homes fell to their lowest level on record.   Those declines were more than reversed in March, however, as the April 30 extended expiration date of the tax credit approached, but sales for the entire first quarter were still below their fourth-quarter level.   Another increase is expected for April, but sales may retreat temporarily once the credit has expired.

The performance of other housing indicators has been similarly uneven, although most suggest that the sector is stabilizing and may be emerging from its multi-year slump.   Housing starts and building permits have generally stabilized and they moved higher in the first quarter, although both permits and starts remain about 70 percent below their peak levels reached in mid 2005 and early 2006, respectively.   The inventory of homes on the market has fallen a great deal but remains high relative to sales.   The number of unsold new single-family homes stood at a 39-year low in March but was equivalent to a 6.7-month supply relative to sales.   There was an 8-month supply of existing homes available for sale at the end of March.   Both inventory-sales measures are well above historical norms.  

The excess supply of homes on the market has depressed homes prices, although prices are no longer falling sharply.   Indeed, the S&P/Case-Shiller composite home price index rose 0.6 percent in February compared to a year earlier – the first year-over-year gain since December 2006.   The Federal Housing Finance Agency purchase-only index fell more than 3 percent over the year ended in February, but that was only half the almost 7 percent decline recorded the previous year.   The large and growing number of homes in foreclosure is a factor in the excess supply:  In the fourth quarter, a record 4.6 percent of all mortgage loans outstanding were in foreclosure and more than 9 percent of mortgages were seriously delinquent (including loans at least 90 days past due and loans already in foreclosure).   Housing market futures point to flat housing prices through 2010.

The housing downturn, financial market crisis, and job losses were major setbacks for U.S. households.  On net, household wealth fell by about $17 trillion, or 26 percent, from its peak of $66 trillion in the second quarter of 2007 through the middle of 2009, as home values tumbled and equity markets plunged.   Recently, however, consumer finances have shown signs of improvement.   Rising stock prices and stabilizing home prices have helped lift household net worth by nearly $6 trillion since the first quarter of 2009 to a little over $54 trillion in the fourth quarter.   By the end of 2009, household wealth as a share of disposable income had risen to 490 percent from a low of 451 percent at the start of the year, boosted by increases in stock prices and stabilizing house prices.   The ratio is back above its 1955 to 1995 average of 472 percent.   Household debt has fallen steadily for nearly two years, as households have pared back their use of consumer credit and taken on less mortgage debt.   Debt as a share of disposable income has declined from a record high of 131 percent in the first quarter of 2008 to 123 percent in the fourth quarter of 2009.   

Labor market conditions have started to improve but significant slack remains.   Nonfarm payrolls are growing again, with 54,000 workers per month added to payrolls on average in the first quarter.   Private sector payrolls have grown for three consecutive months.   Just a year earlier, payroll employment was falling by an average of 753,000 per month.   The 162,000 job gain recorded in March was the largest in three years.   Nevertheless, the March level of employment was 8.2 million lower than at the start of the recession in December 2007.  The unemployment rate has eased from the 2-year high of 10.1 percent posted in October, but at 9.7 percent it is still almost double its pre-recession level.   The number of unemployed workers stood at 15 million in March.  Roughly 44 percent of the unemployed have been out of work for 27 weeks or more – a new record.  

The high level of unemployment, along with the low level of capacity utilization, continues to restrain underlying inflation pressures. Headline consumer prices rose 2.3 percent over the twelve months ended in March, compared with a 0.4 percent decline during the year-earlier period.   The acceleration in the headline inflation measure mostly reflected rising oil prices.   The benchmark price for crude oil – the one-month futures price for West Texas Intermediate crude – averaged $81 per barrel in March, up more than $33 from a year ago.   Excluding the volatile energy and food components, core consumer inflation was a moderate 1.1 percent during the twelve months ended in March down from 1.8 percent a year ago.  

Conditions in financial and credit markets continue to improve.   Interest rate spreads have declined substantially over the past year, with many returning to pre-crisis levels. Bond issuance has picked up considerably, and home mortgage rates remain near historically low levels, though bank lending has yet to pick up.   The interest rate on a 30-year conventional fixed-rate mortgage has been hovering around the 5 percent mark since last summer, providing support to housing markets. Financial market volatility has returned to pre-crisis norms, and equity markets are up more than 10 percent over the past six months, which is helping to rebuild consumer wealth and support spending and job growth.

The deep recession has contributed to the steep run-up in the Federal budget deficit, which reached $1.4 trillion (10 percent of GDP) in FY2009 and, in the FY2011 Budget is projected to widen to $1.6 trillion (10.6 percent of GDP) in FY2010.   The economic recovery will help to bring down the budget deficit, which is expected to fall to 5.1 percent of GDP in FY2012.   Actions proposed in the FY2011 budget will trim the deficit further to 3.9 percent of GDP in FY2015.   Even with these improvements, the deficit will still be unacceptably high and generate a rising debt-to-GDP ratio.  To help put federal finances back on a sustainable path, the President has created a bipartisan Fiscal Commission to identify policies to reduce the deficit to about 3 percent of GDP by 2015--which is projected to stabilize the debt-to-GDP ratio at a manageable level--and to propose reforms to meaningfully improve the long-run fiscal outlook.   The Commission on Fiscal Responsibility had its first meeting on April 27 and is slated to issue its recommendations by the end of the year.

Economic conditions continue to improve, but challenges remain, including the high unemployment rate and large government budget deficits.   Nevertheless, the outlook for the economy is positive.   The Administration and many private forecasters see real GDP rising 3 percent this year, with faster growth in 2011.   The employment situation is expected to improve further as economic activity strengthens, although the unemployment rate normally declines slowly.  Improvement in the economy will also lead to smaller near-term government budget deficits, but significant policy changes will be required to move the budget to a fiscal sustainable path in the medium to long run.