Economic Review 2012 – 1st Quarter

Quarterly Economic Review
As of March 31, 2012

In his February 29, 2012, speech to the Financial Services Committee of the U.S. House of Representatives, Ben Bernanke, Chairman of the United States Federal Reserve, noted that, “the recovery of the U.S. economy continues, but the pace of expansion has been uneven and modest by historical standards.” Private sector payrolls increased by an average of 165,000 per month from the middle of 2011 through the beginning of 2012, yet layoffs by state and local governments have continued as the public sector deals with budget deficits. Although the unemployment rate has declined appreciably from approximately 9.0 percent during much of 2011 to 8.3 percent as of January 2012, the job market remains elevated, long-term unemployment is still near record levels, and the number of persons working part time for economic reasons is very high.

The U.S. Bureau of Economic Analysis (BEA) estimates that real gross domestic product (GDP) increased at an annual rate of 3.0 percent in the fourth 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 March 13, 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. The Committee is in the process of extending the average duration of the Treasury bonds and other securities held on its balance sheet. By June 2012 the Committee expects to conclude these purchases of $400 billion in longer-term securities and corresponding sales of shorter-term securities to further reduce long-term interest rates. 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 through late 2014. 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 March 2012 was 8.2 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) January 2012 report stated that, “the pace of economic expansion will remain quite modest over the next two years because of the lingering effects of the financial crisis and the recession as well as the path of federal fiscal policy under current law.”4 The CBO bases its projections on current law, which provides for the expiration of various stimulus measures at the end of 2012. Absent congressional intervention, previously enacted tax cuts will be reversed, improving the government’s fiscal position but applying downward pressure to te economic recovery.

The CBO estimates that real GDP will grow 2.0 percent in 2012 and 1.1 percent in 2013, with growth averaging 4.1 percent from 2014-2017. GDP is expected to remain below the economy’s potential until 2018. In January, the Federal Reserve lowered its projected 2012 GDP growth to a range of 2.2 percent to 2.7 percent from anticipated growth of 2.5 percent to 2.9 percent as of November 2011. The Federal Reserve now projects 2013 GDP growth will be between 2.8 percent and 3.2 percent, down from it’s November projection of 3.0 percent to 3.5 percent.5 Inflation, as measured by the Core Consumer Price Index, which excludes the effects of food and oil, is forecast by the CBO to be 1.2 percent in 2012, eventually increasing to an average of 2.0 percent per year in the 2018 to 2012 period.6

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: Fiscal Years 2012-2022.” January 2012.
5“Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, January 2012.”
6U.S. Congressional Budget Office. “The Budget and Economic Outlook: Fiscal Years 2012-2022.” January 2012.