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- We are likely to see further sizable job losses and increased unemployment in coming months
- Recent data also suggest that the pace of contraction may be slowing, and they include some tentative signs that final demand, especially demand by households, may be stabilizing. In coming months, households’ spending power will be boosted by the fiscal stimulus program, and we have seen some improvement in consumer sentiment. Nonetheless, a number of factors are likely to continue to weigh on consumer spending, among them the weak labor market and the declines in equity and housing wealth that households have experienced over the past two years. In addition, credit conditions for consumers remain tight.
- The housing market, which has been in decline for three years, has also shown some signs of bottoming
- The available indicators of business investment remain extremely weak.
- Conditions in the commercial real estate sector are poor.
- We continue to expect economic activity to bottom out, then to turn up later this year.
- The supply of mortgage credit is still relatively tight, and mortgage activity remains heavily dependent on the support of government programs or the government-sponsored enterprises.
- Investors seemed to adopt a more positive outlook on the condition of financial institutions after several large banks reported profits in the first quarter, but readings from the credit default swap market and other indicators show that substantial concerns about the banking industry remain.
The section below appears to warn about the impact of rising rates, wider credit spreads, and weaker equities. i.e., the Fed wont be looking to snuff out any rallies. Also, slack to expand even after recovery takes hold, meaning disinflation continues, with ÃƒÂ¢Ã¢â€šÂ¬Ã‹Å“expectationsÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢ being main factor preventing deflation.
- An important caveat is that our forecast assumes continuing gradual repair of the financial system; a relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall.
- Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further. We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly. In particular, businesses are likely to be cautious about hiring, implying that the unemployment rate could remain high for a time, even after economic growth resumes.
- In this environment, we anticipate that inflation will remain low. Indeed, given the sizable margin of slack in resource utilization and diminished cost pressures from oil and other commodities, inflation is likely to move down some over the next year relative to its pace in 2008. However, inflation expectations, as measured by various household and business surveys, appear to have remained relatively stable, which should limit further declines in inflation.