Economic Review 2011 – 3rd Quarter

Quarterly Economic Review as of September 30, 2011

In his September 8, 2011, speech to the Economic Club of Minnesota, Ben Bernanke, Chairman of the United States Federal Reserve, noted that recently revised economic data shows the 2008-2009 recession was deeper and the subsequent recovery is weaker than previously thought. Chairman Bernanke cited several potential sources of unusually weak household spending: the persistently high level of employment, deleveraging as consumer pay down debt and save more, and the transitory effects of the supply-chain disruptions caused by the Japanese earthquake and tsunami in March 2011 and an increase in commodity prices in the first half of the year. He did however note the contrasting strength of the business sector: a 15 percent increase in manufacturing production, expansion of business investment in equipment and software, and healthy corporate balance sheets.

The U.S. Bureau of Economic Analysis (BEA) estimates that real gross domestic product (GDP) increased at an annual rate of 1.3 percent in the second quarter of 2011. Quarterly GDP data1 for the preceding ten years is shown in the following figure.

The Federal Open Market Committee of the Federal Reserve meets periodically to assess current economic conditions and determine appropriate financial policies to fulfill its dual mandate of fostering maximum employment and price stability. At its September 20-21, 2011, meeting the Committee kept the target federal funds rate at zero to 0.25 percent and cited various factors for maintaining monetary policy that is very loose by historical standards, including slow economic growth, a depressed housing sector, and continuing weakness in overall labor market conditions. At the end of the second quarter, the Committee completed its second round of quantitative easing, having purchased $600 billion of longer-term Treasury securities to lower interest rates. The Committee announced its intention to purchase $600 million of longer-term Treasury bonds and sell a corresponding amount of shorter-term Treasury bonds by June 2012. The Committee also expects that low rates of resource utilization and a subdued medium-term inflation outlook will warrant keeping the federal funds rate at its current level until mid-2013. Ten years of historical interest rate data2 for the Federal Funds Rate, 10-Year U.S. Treasury bonds, and Moody’s Corporate Baa-rated bonds are shown in the following figure.

The unemployment rate in the United States as of August 2011 was 9.1 percent on a seasonally adjusted basis,3 which places severe strain on the economy as consumers are unable or unwilling to spend. The Congressional Budget Office’s (CBO) August 2011 report stated that, “the economic recovery will continue, but real GDP will stay below the economy’s potential until 2017.”4 The CBO estimates that real GDP will grow 2.3 percent in 2011 and 2.7 percent in 2012, down from CBO estimates in January 2011 of 3.1 percent and 2.8 percent, respectively. The CBO cited expected strong growth in business investment, gains in net exports, and the beginning of a recovery in new-home construction as factors facilitating GDP growth. In June, the Federal Reserve lowered its projected 2011 GDP growth to a range of 2.7 percent to 2.9 percent from anticipated growth of 3.1 percent to 3.3 percent as of April.

Although GDP growth rates are expected to increase as the economy recovers from the severe recession that began in December 2007, the implementation of contractionary fiscal policies at the state level in response to budget deficits, and at the federal level beginning in 2013 as a result of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 will place downward pressure on the economy. Inflation, as measured by the Core Consumer Price Index, which excludes the effects of food and oil, is forecast by the CBO to be 1.7 percent in 2011, eventually increasing to an average of 2.2 percent per year in the 2017 to 2021 period.

1Source: U.S. Bureau of Economic Analysis. GDP percent change based on chained 2005 dollars.
2Federal Reserve Statistical Release H.15 (519) Selected Interest Rates.
3U.S. Bureau of Labor Statistics.
4U.S. Congressional Budget Office. “The Budget and Economic Outlook: An Update.” August 2011.