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Tuesday, October 14, 2008

Fed's Yellen: "U.S. economy appears to be in a recession"

by Calculated Risk on 10/14/2008 11:31:00 PM

From San Francisco Fed President Janet Yellen: The Financial System and the Economy. Here are Dr. Yellen's comments on the economy:

The recent flow of economic data suggests that the economy was weaker than expected in the third quarter, probably showing essentially no growth at all. Growth in the fourth quarter appears to be weaker yet, with an outright contraction quite likely. Indeed, the U.S. economy appears to be in a recession.
By now, virtually every major sector of the economy has been hit by the financial shock. I’ll start with consumer spending, where the news has not been good. Employment has now declined for nine months in a row, and personal income, in inflation-adjusted terms, is virtually unchanged since April. Household wealth is substantially lower as house prices have continued to slide and the stock market has declined sharply. On top of this, 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. Even before the extraordinary deterioration in financial market conditions over the past few weeks, the evidence was accumulating that consumer spending had weakened. In real terms, consumer spending was flat or contracted in recent months.
Business spending, too, is feeling the crunch, as firms face weak final demand for their products, a higher cost of capital, and restricted credit. ... We’ve even begun to see some signs of a slowdown for the previously very strong IT industry across the country and in the Bay Area in particular. ... A tech slowdown could intensify with the fall-off in consumer spending, and the weakening in business spending could come into play since the financial industry is a heavy user of both IT equipment and software.
Nonresidential construction is another sector that has been affected by the financial crisis, in part because the market for commercial mortgage-backed securities, a mainstay for financing large projects, has all but dried up. ... With financing unavailable, I’m hearing talk about substantial cutbacks on new projects and planned capital improvements on existing buildings.
Until recently, we have received a major boost from exporting goods and services to our trading partners. Unfortunately, the news on foreign demand has also turned weaker. Economic growth in the rest of the world, particularly in Europe and Japan, has slowed for a number of reasons, including spillovers from the U.S. slowdown, and most importantly, the financial meltdown that now has intensified substantially in Europe and elsewhere. ... As a result, exports will not provide as much of an impetus to growth as they did earlier in the year.
emphasis added
That is pretty much a clean sweep. All sectors are now slowing or in recession (except possibly government spending).