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Thursday, October 30, 2008

Fed's Yellen: "Economy Contracting Significantly"

by Calculated Risk on 10/30/2008 03:57:00 PM

From San Francisco Fed President Dr. Janet Yellen: The Mortgage Meltdown, Financial Markets, and the Economy. Excerpt on the economic outlook:

[R]ecent data on the economy have been deeply worrisome. Data released this morning reveal that the economy contracted slightly in the third quarter. For the fourth quarter, it appears likely that the economy is contracting significantly. Mainly for this reason, inflationary risks have diminished greatly.
...
For consumers, the credit crunch is one of several negative factors accounting for the decline in spending in recent months. Consumer credit is costlier and harder to get: loan rates are up, loan terms are tougher, and increasing numbers of borrowers are being turned away entirely. This explains, in part, the exceptional weakness we have seen in auto sales. In addition, of course, employment has now declined for nine months in a row, and personal income, in inflation-adjusted terms, is virtually unchanged since April. Furthermore, household wealth is substantially lower as house prices have continued to fall and the stock market has declined sharply.

Business spending, too, is feeling the crunch in the form of a higher cost of capital and restricted access to credit. ... Some of our business contacts report that bank lines of credit are more difficult to negotiate, and many indicate that they have become cautious in managing liquidity, in committing to capital spending projects that can be deferred, and even in extending credit to customers and other
counterparties. Nonresidential construction also is headed lower largely because of the financial crisis; the market for commercial mortgage-backed securities, a mainstay for financing large projects, has all but dried up.
...
Until recently, weakness in domestic final demand was offset by a major boost from exporting goods and services to our trading partners. Unfortunately, economic growth in the rest of the world has slowed noticeably. ... As a result, exports will not provide as much of an impetus to growth as they did earlier in the year.
emphasis
added
"It appears likely that the economy is contracting significantly". Strong words from a Fed president. Q4 is going to be ugly.