FED VIEW |

The consensus view of 47 private sector national economists expressed in the previous Thredgold posting is roughly supported by the latest official forecast of the Federal Reserve. It is equally “dismal,” a term used recently by Fed Chair Ben Bernanke.

The Fed’s forecast for the American economy has also been downgraded sharply in recent months. While the Fed expects modest economic growth to return later this year, it won’t be enough to offset decline during the first half.

“If we can take strong and aggressive action, including the Fed’s actions to try to improve credit markets, I think we can break the back of this thing and that we will begin to see improvement in 2009,” noted Bernanke in a speech on February 19. “If we fail to take adequate actions, the situation would continue to deteriorate.”

Fed Forecast

The table notes the official Fed forecasts (say that three times quickly). The number ranges exclude the three highest and three lowest forecasts of the 16 sitting monetary policy makers (The Wall Street Journal).

Employment Pain

The unemployment rate is now expected to approach 8.8% later this year. While the forecast does see some decline in the jobless rate during 2010 and 2011, the rate is not expected to return to a more acceptable 5.0% level until 2012 at the earliest. By comparison, the U.S. unemployment rate, currently 7.6%, averaged 5.8% during 2008 and 4.6% during both 2006 and 2007.

The Fed’s forecast for inflation suggests it will remain under control, with a longer-term outlook ranging from 1.5% to 2.0%. Many economists would agree with this view, although there is a wide disparity between those forecasters who expect to see sharply higher inflation pressures in coming years versus those who see the most likely scenario being a Japanese-style deflation after 2010.

Solid Growth

Like the view of private sector economists, the Fed has delayed its growth expectations, not dismissed them. The Fed’s 2.5%-3.3% real growth expectation for 2010 would return the U.S. to more traditional growth norms.

The 3.8%-5.0% growth expectation for 2011 would be closer to economic boom conditions, likely driven by the impact of current massive fiscal policy pursuits (think Obama’s $787 billion stimulus program) and the Fed’s monetary stimulus, with the current 0.00%-0.25% federal funds rate the lowest ever. The issue of pent-up demand by millions of consumers also likely drives the Fed’s optimistic growth projections, once we (finally) get through 2009…

…didn’t we say that about 2008?

Lowest Since 1955

As noted before, the sharp decline in U.S. inflation pressures—tied to the plunge in oil and other commodity prices of the past eight months—gives the Fed “cover” or support for its aggressive monetary actions. The Consumer Price Index (CPI) over the most recent 12-month period was unchanged, the best performance in 53 years.

The CPI rose 0.3% in January. The increase was the first monthly rise in six months. The rise was actually comforting to those who fear that deflation, or falling prices, will be the Fed’s major challenge in coming years.

Featured in the 25 February 2009 issue of Jeff Thredgold’s Tea Leaf newsletter.

*Artwork from franckie under Creative Commons license at Flickr.com.

U.S. ECONOMIC OUTLOOK |

THE AMERICAN ECONOMY…the recession continues
Domestic and global financial sector paranoia has contributed to major weakness within the U.S. economy. Enormous investment and lending losses have sharply curtailed the availability of credit.

Such financial sector weakness has led to creative and extremely costly government proposals to stabilize financial markets. These factors, combined with prior excesses in new home construction and existing home price appreciation, led to the current period of serious recession, which officially began in December 2007.

BUDGET DEFICITS
…off the charts
The combination of serious U.S. recession, enormous war spending, one financial stabilization program after another, and Congressional economic stimulus spending could see the fiscal year (FY) 2009 deficit, which began on October 1, 2008, easily exceed $1 trillion. The budget deficit for FY 2008 was $455 billion, also a record. Note, however, that much of the Government’s investment into major financial institutions will be returned to taxpayers in coming years as financial markets (hopefully) return to some level of normalcy.

UNEMPLOYMENT
…to move higher
The nation’s jobless rate reached 6.7% in November, a 15-year high. It could reach, and possibly exceed, 7.5% to 8.5% during 2009. By comparison, the jobless rate averaged 4.6% in both 2006 and 2007.

U.S. employment has declined for 11 consecutive months, with nearly two million fewer jobs today than a year ago. However, longer-term labor shortages, especially for skilled workers, will remain center stage for years to come.

INFLATION
…to move lower
The sharp decline in oil and other commodity prices of recent months, should it continue or simply stabilize, will help unwind much of the inflation pressures that pushed inflation (the CPI) to a 16-year high of 4.1% in 2007. Most forecasters expect a 2008 CPI rise of roughly 2.0%, with a slightly smaller increase expected in 2009. Note that there are as many concerns about deflation during the next few years as about inflation.

THE FEDERAL RESERVE
…just plain aggressive
The Fed has been a major player in numerous financial stabilization programs announced during the past 16 months. The sharp decline in inflation pressures provides the Fed “cover” to aggressively use its balance sheet to improve financial flows. Its critical federal funds rate was recently at a 50-year low of 1.00%, with the prospect of going still lower.

Solid evidence of U.S. financial stabilization and a resumption of modest economic growth in 2009’s second half—the current view of most economists—will lead financial markets to expect a minimal reversal of Fed policy late in the year or early in 2010.

GASOLINE PRICES
…like cutting taxes
Need a bit of “good” economic news? The plunge in gasoline prices from a high of roughly $4.25 per gallon in early July to around $1.50-$1.80 now is the equivalent of a $250 billion tax cut for American consumers. One concern is that prices could go too low … and put prior initiatives regarding developing alternative sources of energy on the “back burner.”

THE GLOBAL ECONOMY
…more slowing expected
Five years of powerful global economic performance gave way to major slowing during 2008. A global recession during 2009 is likely.

As in the U.S., global financial markets and major financial market players have been decimated by a loss of confidence…the most crucial component of the lending and investing process. If you don’t have confidence in the firms you lend money to, you simply don’t do it…just ask Bear Stearns and Lehman Brothers, now deceased.

Better news? Recent declines in energy, commodity, and many food costs have been good news for hundreds of millions of the global poor.

Asian economies are dealing with their own exposure to global financial market distress and slowing global exports, with various nations enacting their own stimulus packages. China’s recently announced $586 billion stimulus program comes to mind. A series of Chinese interest rate cuts have also taken place as this nation faces economic growth that may soon be half its prior blistering pace.

Japan’s economy continues to struggle to regain its 1980s economic magic. Today? Japan is again in recession. As before, the Japanese fear the rising Asian clout of the Chinese.

I have no doubt that European business leaders and politicians were laughing at the U.S. earlier in 2008 for the enormous financial mess we got ourselves into. The laughter ceased when the Europeans soon realized their challenges might surpass our own.

Europe is now dealing with its own recession, with limited prospects for emergence anytime soon. The weakness in home prices in many European nations exceeds that in the U.S., as many communities saw home prices skyrocket earlier in this decade. More interest rate cuts are coming from the European Central Bank.

Russia’s critics have had a field day in response to its aggression into Georgia. The Russians have experienced some of the global community’s most volatile stock market performance, in part tied to the collapse of energy prices.

Oil wealth continues to accumulate across the Persian Gulf. However, many investors are losing sleep because of massive commercial development commitments that were predicated upon oil remaining north of $100 per barrel … whoops.

Major South American nations struggle with much lower energy and commodity prices than their respective budgets assumed. Other nations in the region struggle with high taxes, enormous business red tape, and highly anxious credit markets.

Canada is facing its own likely recession as its major export market—the U.S.—struggles with recession. Growth in Mexico is modest, but must improve to provide greater opportunities for its citizens.

THE BOTTOM LINE?
U.S. economic recession will hopefully give way to modest growth by mid-year 2009. We also expect: a much larger budget deficit … rising unemployment … declining inflation pressures … record low short-term interest rates … stable energy prices … and a very weak global economy.

Jeff Thredgold is an economic consultant to Zions Bank

Featured in the Winter 2009 Issue of Zions Bank’s Insight newsletter within the January/February 2009 issue of the Community magazine.

*Artwork from luccawithcheese under Creative Commons license at Flickr.com.

THE WAY I SEE IT |

As the nation’s credit crisis has continued to make headlines, the United States Department of Treasury has continued to develop new tools to engender confidence and strengthen liquidity in the financial system. A major new element of the government’s response is the Capital Purchase Plan, an element of the Emergency Economic Stabilization Act recently passed by Congress, by which up to $250 billion is being invested in healthy banks that form the backbone of our economy. This new capital is being provided in the form of senior preferred stock, with a coupon rate of 5 percent for the first five years, after which the rate increases to 9 percent. Warrants to purchase common stock at current prices, in an amount equal to 15 percent of the total investment, are also provided to the government. The structure of the program virtually ensures that these taxpayer funds will not constitute a “bailout,” but rather an investment that will be fully repaid by the many banks receiving this investment.

Zions Bancorporation has received a $1.4 billion allocation of this capital, providing us with an exceptionally strong capital base during a period that is shaping up to be one of the most challenging in the nation’s economic history. When combined with the nearly $300 million in new capital we raised in the third quarter, these new funds will raise our Tier 1 Capital Ratio to approximately 10.9 percent—more than 80 percent greater than the regulatory “well-capitalized” threshold.

Our participation in the Capital Purchase Plan will ensure that our balance sheet remains very strong relative to our peers, and will enable us to continue to effectively serve our customers. We expect to use the capital to support our ability to provide credit in the communities we serve. Our ability to leverage this capital and further expand our loan production will depend as well on continuing to build our deposit base and prudently underwriting and pricing credit risk. But this is a very important step forward by the government in enabling the banking industry to begin unthawing the frozen plumbing of the nation’s credit markets.

When combined with the increase through the end of 2009 in FDIC deposit insurance coverage to $250,000—with unlimited insurance coverage on noninterest bearing demand deposit accounts—the Capital Purchase Plan provides us with tremendous resources to help serve customers and increase their confidence in our banks, and in the financial system.

Harris H. Simmons is chairman, president and chief executive officer of Zions Bancorporation.

Originally published in November 2008 Zions Bancorporation News Volume 2 issue 9.

FEATURED IN SNL FINANCIAL, THE WALL STREET JOURNAL, AND BARRONS |

George Feiger, CEO of Contango Capital Advisors, has shared some of his insight regarding current market conditions recently in the media.  Please see the following articles with Katie Borden at SNL Financial, David Gaffen at the Wall Street Journal, and Tom Sullivan at Barrons:

December 4, 2008
CEO George Feiger tells SNL Financial that now is a good time to hunt for bargains among financial stocks, “if you have a strong stomach.”

November 20, 2008
CEO George Feiger talks to the Wall Street Journal’s Marketbeat about the credit markets.

November 3, 2008
CEO George Feiger featured in Barron’s article: “Assets are likely to become even cheaper over the next three months.”

*Artwork created by City On Fire at Flickr.com.