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Six Charts That Tell the Story of the Unfathomably Bleak Economy the Fed Faced in 2009

• By Josh Zumbrun

AFP/Getty Images

With hindsight, we know that the economy reached a turning point in mid-2009: It stopped shrinking and began growing again. But the expansion would be slow and disappointing and would leave millions unemployed for years.
As Federal Reserve policy makers battled the financial and economic crisis in 2009, it was far from obvious when the downturn would end. Details of their internal discussions that year were revealed Wednesday when the central bank released transcripts of the meetings its policy meetings after their customary five-year lag.
Here’s a look at the data, in six charts, that illustrate the economic conditions the policy-making Federal Open Market Committee confronted in 2009. All the charts end in December 2009.
(1) The Market

By the start of 2009 it was clear that the stock market was in the midst of a full-fledged panic.
Despite the Fed’s historic decision to cut its benchmark short-term interest rate, the federal funds rate, to nearly zero in December 2008, stocks continued to plunge at the beginning of 2009. By early March, the Standard & Poor’s 500 index had lost more than half its value since late 2007. In mid-March, the mood of the market had changed, and Fed officials were quick to seize on the momentum. On March 15, 2009, then-Fed Chairman Ben Bernanke went on CBS’s “60 Minutes” and declared that he was beginning to see signs of “green shoots” in the economy.
“As those green shoots begin to appear in different markets– and as some confidence begins to come back– that will begin the positive dynamic that brings our economy back,” Mr. Bernanke said. It turned out that the market had reached a bottom six days earlier. On March 18, 2009, the FOMC sought to ensure those lows would never again be tested. That day, the Fed announced it would expand its bond-buying program, known to many as quantitative easing, to include a total of $1.75 trillion in mortgage bond and Treasury debt purchases.

(2) The Housing Bust

By 2009 it was also clear that the U.S. was in the midst of an unprecedented housing crisis. The gains in sales, construction and prices of homes in the mid-2000s were clearly unsustainable. The U.S. housing bubble had burst and sales, prices and home construction (a key driver of economic activity) were all in free-fall.

The rapid plunge of 2008 slowed in 2009, but it was clear housing was in for a very long road to recovery. By the end of 2009, home prices were 28% lower than in January 2006, existing home sales were 34% lower, new home sales were 70% lower, and new housing construction starts were off by 74%. The housing figures above have been revised since 2009, but only modestly. It was clear in real time that housing was in complete collapse.

(3) Industrial production and retail sales

The National Bureau of Economic Research, which serves as the semi-official arbiter of U.S. business cycles, declared in December 2008 that the recession had begun a year earlier. The NBER takes its time calling turning points in the economy, waiting until the turn is clear in the data. It wasn’t until September of 2010 that the NBER felt comfortable declaring the recession had ended in June of 2009.
The NBER looks at GDP and jobs, but also industrial production and retail sales, when it determines economic turning points. A look at this data through 2009 shows how unclear the recovery was. Retail sales and industrial production both showed some signs of improvement, but had clearly taken a big hit over the course of the recession. It’s no wonder that Warren Buffett famously said in March 2009 that the economy had “fallen off a cliff.”
These data, too, have been revised since 2009. The turning point for industrial production was clear in the initial reports. It’s hard to say today, even with the benefit of revisions, when retail sales decisively turned upward. It was even less clear in 2009.

(4) Jobs, Jobs, Jobs

By early 2009, the economy was hemorrhaging more than half a million jobs every single month. The period would ultimately be the most severe period of job loss since the Great Depression.
The economy looked horrible at the time, but later revisions would reveal that it was even worse than it appeared. For January 2009, for example, the Labor Department initially reported job losses of 598,000. A terrifying figure. That number was eventually revised to job loss of 796,000. Even worse. As part of the department’s standard process, initial reports are subsequently revised as some establishments report their tallies late. The numbers are eventually reconciled with tax records and other surveys to ensure their accuracy.

(5) Compounding Errors

Over the course of the recession, the errors in the data got worse and worse. It was not until January 2010 that revisions revealed how badly the Labor Department had been overestimating the total number of jobs in the economy. Economists at the Fed and elsewhere did not realize how far off the estimates had been.
For December 2009, the Labor Department initially estimated the economy had 130.9 million jobs. That was eventually recognized as an overestimate of 1.2 million. The figure was later revised to 129.7 million. The initial payrolls figures are never exactly right, but they are especially prone to misses during economic turning points.

(6) Plunging Inflation

The recession of 2008 and 2009 created whiplash in the inflation figures. In the summer of 2008, a spike in oil prices helped push key gauges of annual inflation above 4% and 5%. This caused Fed officials in 2008 to overestimate the risks of inflation and underestimate the risk of economic collapse. But by 2009, a global collapse in oil prices had sent prices into a tailspin.
The consumer price index and the Fed’s preferred gauge–the personal consumption expenditures price index–both plunged into negative territory by 2009. Making matters worse, high unemployment and lower commodities prices were putting downward pressure on measures of so-called core inflation that exclude food and energy prices. The risk of a deflationary spiral looked all too real in 2009.
The CPI does not undergo revisions – so these lines show precisely what Fed officials were seeing in real time. The PCE price index has modest revisions after the initial report.
It was not until the very end of the year that measures of headline inflation began to pick up. In hindsight, we know that Fed policy makers would spend much of the next five years struggling with inflation that was too low, not too high. But by the end of 2009, with price measures recovering, it may have appeared the economy had escaped the grip of deflation once and for all.

Fed’s Evans Sees Early 2016 as Timeframe for Rate Increase

By Mark Peters and Michael S. Derby

LAKE FOREST, Ill.—Federal Reserve Bank of Chicago President Charles Evans said Wednesday the Federal Reserve should hold off until early 2016 to raise interest rates, saying that acting before inflation comes more into line with the central bank’s target could hurt its credibility.
The central banker, whose remarks came to reporters after a speech here, said he is going into this month’s meeting of the rate-setting Federal Open Market Committee, where he holds a vote this year, with an open mind. But he added that current data isn’t showing the uplift in inflation needed to convince him a rate increase this year is appropriate.
“June is a little bit early I would guess in the sense that there is not that many more months of data where we can see this kind of improvement,” Mr. Evans said. “Given the down draft to headline inflation from energy and commodity prices, it would be remarkable if core PCE [personal consumption expenditures] started reverting back to levels that I thought were more in line with that type of confidence.”
Mr. Evans said the Fed won’t get to its 2% price target until sometime in 2018, which would indicate the central bank could raise rates at some point in the first half of 2016. His opposition to a rate increase could put him in a dissenting role on the FOMC.
As for the central bank’s guidance, Mr. Evans said he doesn’t have strong views on the use of the word patient. Fed officials have said they would be “patient” before starting to raise rates, meaning no rate increase is likely at their next two policy meetings.
Mr. Evans said that he wants the central bank’s guidance to remain sufficiently conditional, adding that raising rates too early while inflation remains below the Fed’s target could hurt the credibility of the bank.
Mr. Evans described the economy as doing better and showing momentum even as unemployment still remains too high. But he said that alone shouldn’t result in a rate increase because inflation remains low, having fallen short of the central bank’s 2% price target for nearly three years.
The Federal Reserve has been moving toward a rate increase as unemployment falls and the economy shows signs of further strength. Federal Reserve Chairwoman Janet Yellen last week laid the groundwork for an interest-rate increase later this year and other central bankers have since echoed her message. The central bank has held its benchmark rate near zero for more than six years in an effort to boost the economy.
Mr. Evans said it remains unclear why inflation remains so low as the economy shows strength. “Around the whole world inflation is very low, and that’s a bit of a puzzle. We have got a better economy now, and you would expect inflation to start rising,” Mr. Evans said.
He added that inflation in the U.S. could become decoupled from other countries.

Fed’s Evans Says Low Inflation Is A Bit of a Puzzle from WSJ

ByMark Peters andMichael S. Derby

LAKE FOREST, Ill.–Federal Reserve Bank of Chicago President Charles Evans said Wednesday that low inflation remains a bit of a puzzle as the economy shows momentum.
Mr. Evans, whose remarks came during a question-and-answer session here, described the economy as doing better and showing momentum. But he said that isn’t enough to merit a rate increase until 2016 because of low inflation, which has fallen short of the central bank’s 2% price target for nearly three years.
The central banker said low inflation isn’t just an issue here, but one that is being seen around the world. He added that U.S. inflation could become decoupled from other nations.
Mr. Evans, who is a voting member of the monetary policy-setting Federal Open Market Committee, believes the Fed won’t get to that 2% price target until sometime in 2018, which would indicate the central bank could raise rates at some point in the first half of 2016.
The Federal Reserve has been moving toward an interest-rate increase as unemployment falls and the economy shows signs of further strength. Federal Reserve Chairwoman Janet Yellen last week laid the groundwork for an interest-rate increase later this year and other central bankers have since echoed her message. The central bank has held its benchmark rate near zero for more than six years in an effort to boost the economy.
Mr. Evans described proposals to audit the Fed as misguided, saying the central bank is transparent.

Fed’s George Wants Rate Increases by Middle of the Year from WSJ

• ByMichael S. Derby and Amy Stroth

Federal Reserve Bank of Kansas City President Esther George wants to see the U.S. central bank start raising short-term interest rates at some point over the summer, worrying that if Fed doesn’t get moving soon future rate increases may have to be more aggressive.
“I continue to support liftoff towards the middle of this year due to improvement in the labor market, expectations of firmer inflation, and the balance of risks over the medium and longer run,” Ms. George said in a speech in Kansas City, Mo.
“Waiting until economic conditions are nearly back to normal before raising rates may put policy behind the curve and require rates to rise rapidly in the future,” she said. The official noted that when the Fed does begin raising rates, it won’t be on “autopilot” and that subsequent decisions will be determined by the economy’s performance. She also said it is unclear right now where the Fed may ultimately push interest rates.
Ms. George spoke as central bankers actively debate the timing of when to raise the short-term interest rate target from its current level near zero, where it has been since the end of 2008. Most central bankers say they support boosting rates this year in light of decent growth and solid gains in the job market. Giving pause to the press for higher rates has been pervasive weakness in inflation: the Fed has fallen short of its 2% inflation target for nearly three years, and price pressures are weakening, not getting stronger.
A number of officials have said the door to rate increases will open with the June meeting, although few have said they would like to see the Fed act at any given meeting. St. Louis Fed President James Bullard warned in an interview last week that if rate increases haven’t started by the end of the third quarter, the Fed may have waited too long.
Meanwhile, Chicago Fed President Charles Evans said in a speech earlier Wednesday the very weak inflation environment indicates the Fed should hold off on raising interest rates until next year.
Ms. George currently doesn’t have a vote on the policy-setting Federal Open Market Committee. She has long advocated in favor of raising interest rates, worrying that keeping rates very low risked a breakout in inflation and bubbles in financial markets.
Ms. George emphasized that modest rate increases would still leave the economy with a lot of central bank support. Boosting rates would be a “removal of accommodation,” not a “tightening” of monetary policy, she said.
Ms. George was largely upbeat about the state of the economy and doesn’t share some of her colleagues’ anxiety about inflation. Ms. George said there are signs that wage gains are heating up, while the collapse in oil prices is the main reason headline price indexes are so weak.
“While inflation is somewhat below the Fed’s 2% goal, I am not overly concerned with this shortfall. Instead, I see current and forecasted inflation as generally consistent with price stability,” she said.
Meanwhile, “momentum in the labor market will likely continue going forward,” Ms George said. “The U.S. economy is expanding at an above-trend growth rate, which I expect to continue through the end of the year,” she said, adding the strong dollar and foreign weakness could create some headwinds.

US Inflation Undershoots FED target of 2% - from WSJ

A key gauge of U.S. consumer prices sank in January due partly to cheaper oil, undershooting the Federal Reserve’s goal of 2% annual inflation for the 33rd consecutive month. But a gauge of underlying price pressures remained resilient headed into 2015.
The price index for personal consumption expenditures, which is the central bank’s preferred inflation gauge, rose 0.2% in January from a year earlier. That followed annual growth of 0.8% in December, 1.2% in November and 1.4% in October, the Commerce Department said Monday.
It was the lowest reading for headline inflation since October 2009, when prices rose just 0.1% from a year earlier following seven months of year-over-year price declines as the 2007-09 recession ended.
Excluding the often-volatile categories of food and energy, consumer prices rose 1.3% in January from the prior year. That was unchanged from annual growth of 1.3% in December though down from readings of 1.4% in November and 1.5% in October.
Overall prices fell 0.5% in January from the prior month, and core prices rose 0.1% from December. Economists surveyed by The Wall Street Journal had expected a 0.1% increase for prices excluding food and energy.
Fed Chairwoman Janet Yellen last week told lawmakers that “recent softness” in inflation largely reflects the plunge in oil prices since mid-2014. Prices for energy goods and services tumbled 10.4% in January from the prior month and were down 21.2% from a year earlier, according to Monday’s report.
Ms. Yellen acknowledged slower growth in nonenergy prices as well, which she said partly reflects “declines in the prices of many imported items” and “perhaps also some pass-through of lower energy costs into core consumer prices.”
The Fed is on track to raise short-term interest rates, which have been pinned near zero since December 2008, later this year. It must weigh continued improvement in the labor market against sluggish inflation, which has undershot the central bank’s 2% target since the spring of 2012.
Ms. Yellen last week said the Fed will raise rates when it is “reasonably confident that inflation will move back over the medium term toward our 2% objective.”
Another closely watched gauge of U.S. inflation, the Labor Department’s consumer-price index, fell into negative annual territory in January. The index declined 0.1% from a year earlier, largely due to falling prices for gasoline, the agency said last week. Prices excluding food and energy rose 1.6% in January from a year earlier.

Wall Street Journal Blogs - International Report from Macro Horizons

WRAP: Europe seems well on the road to recovery. Services in most of the major economies are posting solid growth and retail sales are booming, thanks not least to long dormant German consumers. That Germany is a driver shouldn’t be a surprise. Inflation is low, unemployment is at multi-decade lows, wage settlements are rising, finance is fantastically cheap. Could this be the beginning of a German boom?

Global investors’ concerns now have to some extent shifted to Asia, where we got an improvement in China’s services purchasing managers’ index and slightly-higher-than-expected Australian GDP readout – both welcome, but not quite enough to set aside nagging worries of a protracted regional slowdown. There, the cycle of regional central banks easing monetary conditions is set to continue, with India surprisingly joining the fray Wednesday with a rate cut even though its economy is showing signs of recovery. (AM, MC)

EUROPE: February services purchasing managers’ indexes.

–EUROZONE was 53.7 against 53.9 forecast and 52.7 in January.

–FRANCE was 53.4 against 53.4 forecast and from 49.4 in January.

–GERMANY was 54.7 against 55.5 forecast and from 54.0 in January.

–ITALY was 50.0 against 51.3 forecast and from 51.2 in January.

–SPAIN was 56.2 from 56.7 in January.

–U.K. was 56.7 against 57.4 forecast and from 57.2 in January.

European services sentiment was generally positive in February, albeit not quite as bullish as some had anticipated, according to the latest purchasing managers’ indexes. Sentiment will have been underpinned by falling oil prices and the European Central Bank’s decision to launch quantitative easing. But with oil prices having found a floor, the former boost is likely to slow while it’s still an open question how much QE will actually boost credit flow. (AM)

EUROZONE: January retail sales rose 1.1% on the month against 0.2% expected and 3.7% on the year.

The eurozone is booming. Right? Retail sales in the single-currency region surged in January, led by strong German sales numbers. So what’s behind it? Certainly, some of the strength derives from falling oil prices. The eurozone is a substantial net importer of energy, so dropping prices acts as a windfall to these economies, giving consumers more spending power. And the European Central Bank’s decision to launch quantitative easing will have supported sentiment. But, undoubtedly, Switzerland’s decision to unpeg itself from the single currency also kicked sales higher in the single-currency region.  (AM)