Economic Outlook Symposium: Summary of 2008 Results and Forecasts for 2009

By Strauss, William A.; Engel, Emily A. | Chicago Fed Letter, February 2009 | Go to article overview

Economic Outlook Symposium: Summary of 2008 Results and Forecasts for 2009


Strauss, William A., Engel, Emily A., Chicago Fed Letter


According to participants in the Chicago Fed's annual Economic Outlook Symposium, the nation's economic growth in 2009 is forecasted to be very weak, with inflation moving lower and the unemployment rate higher. The housing sector is predicted to remain weak, and light vehicle sales are expected to decline further.

The Federal Reserve Bank of Chicago held its twenty-second annual Economic Outlook Symposium on December 5, 2008. More than 90 economists and analysts from business, academia, and government attended the conference. This Chicago Fed Letter reviews the forecasts from the previous Economic Outlook Symposium for 2008 and then analyzes the forecasts for 2009 (see figure 1) and summarizes the presentations from the most recent symposium.1

The economy had to deal with several economic headwinds during 2008. The housing sector continued to be a substantial drag through- out the year, and credit conditions were ever tightening, Also, energy prices surged through the first half of the year. Despite these factors, the economy post- ed a 2.2% gain in the first half of 2008, compared with the first half of 2007. Activity fell slightly in the third quarter, with a decline of 0.5% (seasonally adjusted annual rate, or SAAR) from the second quarter.

The dramatic decline in lending activity that began in September 2008 brought an already elevated risk to the economic outlook to a tipping point. For example, borrowing costs from the risky high-yield corporate bond market rose from around 8% in the middle of 2007 to 11.5% at the end of August 2008. By the end of September, the interest rate rose to nearly 14%; then it moved up to nearly 19% by the end of October; and then it increased to more than 21% at the end of November. It took more than a year for this rate to rise 350 basis points by the end of August 2008, but the credit crisis in September caused the rate to increase an additional 1,000 basis points in just three months.

Prior to September 2008, it was a challenge to find parts of the real economy that were being materially affected by the turmoil in the financial markets. The dichotomy between the performance of Wall Street firms and Main Street firms was often mentioned. However, because of the crisis in September, nonfinancial firms and individuals began to experience reductions of available credit. As an illustration, the economy began sheddingjobs in January 2008, but for the first eight months of the year, losses averaged 81,900 jobs per month. During the last four months of 2008, job losses averaged 483,500 jobs per month. With job losses, consumer spending began to retrench, falling 3.8% in the third quarter of 2008. For the first three quarters of 2008, light vehicle sales (car and light truck sales) averaged 14.1 million units (SAAR) - 12.8% below the comparable year-earlier period. However, in the fourth quarter of 2008, sales fell to 10.3 million units (SAAR)- 36.0% below the final quarter of 2007.

It was not all bad economic news during 2008; international trade contributed quite a bit to the economy in 2008. While real gross domestic product (GDP) averaged 1.1 % growth for the first three quarters of 2008, net exports contributed 1.6% to this growth. In other words, outside of trade, the economy would have recorded a 0.5% decline. In addition, oil prices, which peaked at $147 per barrel in July, fell to below $50 per barrel by the end of 2008.

Finally putting an end to a discussion that occurred quite often during the year, on December 1, 2008, the National Bureau of Economic Research's Business Cycle Dating Committee determined that economic activity had peaked in December 2007 and that the economy had begun a recession in January 2008.

Performance versus forecasts

At the 2007 Economic Outlook Symposium, participants had expected the economy to expand at a 2.5% rate in 2008. Using the consensus forecast for fourth quarter 2008 real GDP growth from the most recent Economic Outlook Symposium, real GDP is estimated to have risen by a very tepid 0. …

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