PRESS RELEASE

April 22, 2009

UPDATED 2009 ANNUAL NATIONAL ECONOMIC FORECAST

(All forecasted changes are relative to calendar year 2008)

Real GDP (-2.9%)

U.S. annual economic growth is projected to decline in 2009 for the first time since 1991.   The current recession, which began in December, 2007, is expected in 2009 to evolve into the longest lasting economic downturn since 1933 and the most severe decrease in annual output since the post war economic adjustment of 1946.  

The 2009 national forecast is really a story about continued economic adjustment to the credit crisis created by declining house values. We expect relatively dramatic household budget rebalancing throughout 2009 as households react to declining wealth, tighter credit conditions and the prospect of continuing job losses.  Despite the record level retained earnings of non-financial corporations in 2008, credit availability problems and consequent high risk premiums for investment grade corporate bond rates are expected to play havoc with business investment decisions and result in a decline in 2009 capital spending as cash flush businesses focus more on solvency than investment spending.  Exports have been a bright spot in the economy through the third quarter of 2008, however, credit and income problems, especially in Europe and Japan, are expected to reduce both the value and volume of U.S. exports in 2009.  

The proposed 2009-2010 federal government economic rescue plan of roughly $800 billion is expected to be phased-in with increments of about $250 billion in 2009 and $350 billion in 2010. However, there will be a significant lag between the time the proposed spending bill is passed and its economic effect. The 2009 impact of the spending is likely to be concentrated in the latter half of the year. Further, a significant part of the spending intended to aid state government is expected to offset some of the prospective cuts in state government spending rather than add incremental purchasing power and a portion of the payroll tax credits to households is likely to be used to repair household balance sheets.

Given the virtual collapse in 2008 of roughly 40 percent of the volume of the nation's annual credit market, problems in these markets are likely to continue through 2009 and beyond.  The Federal Reserve has attempted to jury rig at least a portion of the lending power of the vanished securities market, most recently through its new TALF and mortgage security purchases, and the Treasury has tried to recapitalize lending institutions in order to repair and expand the leverage base of banks.  However, the restoration of private sector credit market is likely to extend over a number of years.   

Consumer Price Index-U (-1.1%)

Assuming average 2009 oil prices, based on the U.S. Department of energy forecast of $54.40 per barrel in 2008, the CPI is expected to decline slightly from its 2008 level.  The decline is expected to be heavily concentrated in the first two quarters of 2009.  The lagged affect of lower 2008 energy prices on the CPI, especially the steep decline in the fourth quarter of 2008 is likely to continue to work its way through the economy's relative price structure until the end of the second quarter of 2009.   Given the anticipated and significant decline in economy-wide demand, the rate of CPI decline would be larger if not for an anticipated increase in food prices. 

Three-Month Treasury Bill Rate (Year Avg.  .2%)

The Federal Reserve Board is expected to find itself in a particularly difficult position in 2009.  The prospect of price deflation creates a pressing need to insure liquidity in the face of a decline in economy-wide demand and credit market problems.  Low short term interest rates carry with them their own problems especially for money market mutual funds, however, the Fed has little choice but to maintain rock bottom short term rates in its attempt to avoid deflationary conditions.

Prime Rate (Year Avg. 3.25%)

As with other short-term rates, the prime rate will follow the course of the bill rate as risk premium spreads return to more normal levels.

Ten-Year Treasury Bond Rate (Year Avg. 3.0%)

The long Treasury bond rate has experienced a significant decline over the past year and has reached historic 50 year lows.  The decline has been primarily the result of a "flight to safety" as risk premiums for private securities increased due to the considerable increase in uncertainty in the bond market; uncertainty that resulted from mortgage defaults and increased expectations of recession in 2009.  First half rates are likely to linger around a range of 2.1 to 2.4 percent with the current rate of anticipated deflation.   This market bears close watching by investors as it will quickly appear oversold at any hint of inflation.  In the second half rates are expected to rise above 3 percent, and may increase significantly, as the expected rate of economic growth increases.   

30-Year Conventional Mortgage Rate (Year Avg. 4.9%)

Long-term mortgage rates will follow and be affected by many of the same market factors as those influencing the ten-year T-Bond rate.  However, the conventional mortgage rate over the first half of 2009 should reach 50 year lows of around 4.4 to 4.7 percent as the Federal Reserve provides a significant increase in demand to the market with a projected $500 billion purchase of Fannie Mae and Freddie Mac mortgage securities and continues with its quantitative easing of credit through credit facility purchases of mortgage backed securities.  The final quarter is likely to see rates move higher as economic expansion resumes and the threat of price deflation wanes.