Economic Indicators 

Overview 

The economy has seen a slow and unsteady recovery throughout 2010, as it tries to emerge from the deepest recession in the United States since the 1930s. Yet the recovery is not showing tangible results and, as a result, consumer confidence remains near all-time lows. According to the Semiannual Monetary Policy Report to Congress from the Chairman of the U.S. Federal Reserve, any moderate recovery is mainly attributed to the stimulus and fiscal policies that were instituted beginning in the middle of 2009, modest rises in demand from households and business and the slow but unsteady expansion of real consumer spending. In addition, investment in equipment and software has shown an increase, reflecting capital outlays that were deferred throughout the downturn but reflect the need felt by businesses to replace aging equipment. 

Despite humble gains, there are still challenges ahead. As the Federal Reserve points out, the slow recovery in the labor market continues to be an omnipresent drag on household spending, and a significant amount of time and investment is needed to restore the 8.5 million job losses over the past two years. Domestic and global financial conditions represent another challenge plaguing the recovery. Despite some improvements, markets are concerned about sovereign debt, presented by the Greek crisis, Portugals downgraded credit rating and the ability of a number of other euro-area countries to manage their substantial budget deficits. The broad withdrawal from risk-taking in global financial markets associated with the crisis in Europe further lowers stock prices and widens risk spreads in the U.S. We are a global economy more 
than ever before, in every sense of the term, with the successes and trials of each country affecting all others. Domestically, outstanding bank loans continue to contract, and lending standards remain tight. Banks are writing-down problem credits and a large volume of troubled loans to counteract the effect on their books. In addition, according to the Beige Book published by the Federal Reserve Board on July 28, 2010, regional discrepancies exist with different regions feeling varying levels of recovery, and Chicago experiencing a slower rate of consumer and business spending. 

Based on the speed of the recovery, the Federal Open Market Committee (FOMC) and the Congressional Budget Office (CBO) remain conservative for the economic outlook of the next few years. The CBO projects that the federal budget will end 2010 showing a deficit of $1.3 trillion, only slightly smaller than the 2009. Total debt is projected to reach $8.8 trillion by the end of 2010, the highest level since 1952. The FOMC expects Gross Domestic Product (GDP) growth to be in the range of 3.5 percent to 4.5 percent in 2011, inflation to remain around one percent at the end of 2010, and, looking ahead, the unemployment rate to decline to seven percent by the end of 2012. As we forecast for 2010 and beyond, many experts worry that the U.S. will experience a double-dip recession. Federal officials are more optimistic and continue work to pull the country into sustainable recovery. 

Gross Domestic Product (GDP) 
Source: Bureau of Economic Analysis 

***Two line graphs are presented here to show the trend of National and Chicago GDP growth rates.***

According to the United States Bureau of Economic Analysis, Gross Domestic Product (GDP) has experienced a negative growth rate since the first quarter of 2008, and reached its lowest level in that timeframe of -6.4 percent in the first quarter of 2009. Although it increased steadily after the second quarter of 2009, the growth rate 
of first quarter of 2010 was a relative decrease of 3.7 percent. GDP during the second quarter of 2010 saw a further, relative decrease to a rate of 2.4 percent. 

The deceleration in real GDP growth in the second quarter of 2010 primarily reflected acceleration in imports and a deceleration in private inventory investment. These were partly offset by an upturn in residential fixed investment, acceleration in non-residential fixed investment, an upturn in state and local government spending and acceleration in federal government spending. 

The annual real GDP growth in the Chicago metropolitan area remains slow. After reaching a peak of 6.37 percent in 2006, the annual rate lowered to 4.59 percent in 2007 and plummeted to 1.96 percent in 2008. 

Federal Funds Rate 
Source: Federal Reserve Board 

***A graph is inserted here to show the change of Federal Funds Rate from 2006 to July 2010. ***

The Federal Funds Rate is the interest rate at which banks lend balances at the Federal Reserve to other depository institutions, usually overnight. As a means of promoting investment during the current recession, the Federal Funds Rate was lowered significantly to encourage banks to lend money, as well as to aid consumers and corporations with investment, all with a goal of boosting the economic recovery. Since November 2008, the rate has remained between 0.0 and 0.4 percent, the lowest level since the 1950s. At the end of July 2010, the rate remained around 0.18 percent. 

U.S. Oil Prices per Barrel 
Source: Energy Information Administration

***Two line graphs are presented here, one showing the trend of U.S. Crude Oil Price from 1997 to 2010, the other showing the price change in 2010.***

After having stayed stable for a decade, the price of crude oil has experienced dramatic fluctuations since 2008. It reached a record high price of $134.44 per barrel in July 2008, when it began decreasing. In December 2008, the price had dipped to $31.84 per barrel, $100.00 less than the level five months prior. The price has since 
increased steadily, with only a few notable fluctuations. 

In January through July 2010, the price per barrel remained in the range of $70.00 to $80.00, with a decline from late January to mid-February and slow growth in March. It reached the highest price in this time period ($81.64) in mid-April, dropping to $75.01 in May. The price has not exceeded $75.00 per barrel afterwards. 

Consumer Price Index (CPI) 
Source: Bureau of Labor Statistics

***A chart is inserted here to compare the national CPI and the CPI of Chicago Metropolitan Area from 2001 to 2009. ***

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. It is a major measure for adjusting payments to consumers when the intent is to allow them to purchase, at todays prices, a market basket of goods 
and services equivalent to one that they could purchase in an earlier period. 

The CPI in 2009 shows a negative percentage (-0.4 percent) nationwide and (-1.2 percent) in the Chicago metropolitan area. The 2009 CPI was due to poor economic conditions. 

***A chart is inserted here to show the changes of national CPI and the CPI of Chicago Metropolitan Area from February 2009 to May 2010. ***

Taking a closer look at the national and Chicago region rates during the period from February 2009 through May 2010, one finds the monthly CPI fluctuating between -0.5 percent and near one percent. Chicago CPI corresponds with the national CPI for most months during this period. In December 2009, the national CPI decreased by 0.18 percent from the previous month, while the CPI of Chicago area decreased by 0.48 percent, reaching its lowest level since January 2009. 

Producer Price Index (PPI) 
Source: Bureau of Labor Statistics

***A graph is inserted here to show the changes of the PPI of seven commodities from 2001 to 2009. The selected commodities are:  inished goods, gasoline, metals and metal products, industrial commodities less fuels, lumber, iron and steel and transportation equipment. ***

Similar to CPI, Producer Price Index (PPI) is another inflationary indicator, measuring average changes in prices received by domestic producers for their output. Seven commodities are selected: finished goods, gasoline, metals and metal products, industrial commodities less fuels, lumber, iron and steel and transportation equipment. 

While the PPI for lumber had declined steadily since 2004, all other commodities observed fluctuations at different degrees until 2008, when PPI for all commodities, excluding transportation equipment, dropped significantly due to the economic recession. 

***A graph is inserted here to show the changes of the PPI of seven commodities from January 2009 to June 2010. ***

From January 2009 to June 2010, the PPI of gasoline experienced vast fluctuations, while other commodities stayed within the range between -5.0 percent and positive 5.0 percent. This fact reflects the U.S. crude oil price changes discussed earlier. 

Non-Farm Payroll 
Source: Bureau of Labor Statistics 

***Two graphs are inserted here to show both national and Chicago non-farm payroll from 2006 to March 2010. The first graph shows the total number of employment, and the second shows the percentage change of non-farm payroll from previous year. ***

The non-farm employment in the Chicago metropolitan area is consistent with the trend of national employment. After a slight increase in 2007, non-farm jobs in Chicago began decreasing, and between March 2009 and March 2010, Chicagos employment decreased by 113,200 jobs. Accordingly, the percentage change of non-farm payroll year-overyear has been negative since 2008, showing the decline of non-farm job opportunities. 

However, the absolute values of percentage change rates of 2010 decreased by 2.79 percent and 2.13 percent nationwide and for the Chicago region, respectively. This 
showed that the elimination of nonfarm employment occurred at a slower rate compared to 2009 and that fewer layoffs occurred in early 2010. 

National Unemployment Rate 
Source: Bureau of Labor Statistics 

***A graph in inserted here to show both the national and Chicago unemployment rate from 2000 to 2009. ***

Prior to 2009, the national unemployment rate stayed in the range between four percent and six percent. The rate has been climbing since the beginning of 2009, peaking at 10.1 percent in October 2009. The rate slightly declined in the first four months of 2010, but remained near ten percent. Current unemployment rates are at their 
highest level in the past decade. The unemployment rate of the Chicago region reflects the national trend. 

TED Spread 
Source: Bloomberg

***A chart is inserted here to show the change of TED Spread from 2008 to 2010. ***

The TED spread is an indicator of perceived credit risk in the general economy, calculated by the difference between the interest rates on London Interbank Offered Rate (LIBOR), short-term U.S. government debt (T-bills), and denominated in basis points (bps). The widening of the TED spread indicates withdrawn liquidity, more risk of default perceived by investors and a downturn in the U.S. stock market. Historically, the TED spread remained within the range between 10.0 and 50.0 bps until 2007. It reached a peak of 463.6171 bps in October 2008 during the collapse of the financial market, and gradually dropped throughout 2009. In 2010, the TED spread approached its historical range, stabilizing around 50.0 bps in the beginning of the year and lowering to 30.00 bps as the year progressed. This change shows 
the gradually restored confidence in the financial market. 

10-year U.S. Treasury Yield 
Source: Federal Reserve Board 

***A chart is inserted here to show the percentage change of 10-year U.S. Treasury Yield from 2007 to August 2010. ***

The ten-year Treasury note is the most frequently-quoted security when discussing the performance of the U.S. government bond market, and is used to convey the market's perspective on longer-term, macroeconomic expectations. After reaching 55.1 percent in June 2007, its highest level in the past three years, the treasury yield has been decreasing. There were a few fluctuations and it dropped sharply to 2.42 percent in December 2008. The yield had been increasing throughout the first half year of 2009, reflecting investors concern over the U.S. budget deficit. Staying close to four percent from June 2009 to April 2010, the yield fell in May 2010 to 3.42 percent, and has not moved significantly through August 2010. The percentage has remained steady in 2010 due to the increase of investment in U.S. government debt spurred by the European economic crisis. 

Ten-Year Swap Rate 
Source: Federal Reserve Board 

***A chart is inserted here to show the percentage change of 10-year swap rate from 2007 to August 2010. ***

The ten-year swap rate is the rate paid by a fixed-rate payer on an interest swap, with maturity of ten years. After ten months in the range of five percent to six percent, the rate decreased to 4.89 percent in November 2007. It stayed below five percent for the next 11 months until another plummet, to 2.7 percent, in December 2008. The rate gradually climbed up to four percent and fluctuated around that point for much of 2009. The increase indicated the market's growing risks due to the credit crisis, resulting in an increasing demand to pay fixed rates. In 2010, the rate slightly lowered to three percent, showing the increase in swap trading, which coincided with growing optimism about the eurozone crisis. 

Ten-Year Swap Spread 
Source: Federal Reserve Board 

***A chart is inserted here to show the percentage change of 10-year swap spread from 2007 to August 2010. ***

The ten-year swap spread is the gap between the rate to exchange floating for fixed interest payments and Treasury yield for ten years, the two indicators dicussed above. By taking into account the investments that contain credit risk as well as the ones that are often viewed as risk-free, swap spread indicates investors 
expectation of the market. 

After fluctuating between 0.5 percent, or 50.0 basis points (bps) and 75.0 bps, the spread began dropping, reaching 14.0 bps in January 2009. It further narrowed to one bps in March 2010, the lowest since 1988, according to data collected by Bloomberg. The spread turned negative for the first time in April 2010, indicating the Treasury 
yield was higher than the swap rate, which is typically greater because of the credit risks it contains. This negative spread was mainly due to the increase in the treasury yield, suggesting an increased concern about sovereign debt, presented by the U.S. budget deficit, the Greek crisis, and Portugals downgraded credit rating. 

The swap spread again turned negative in the end of July 2010 and was fluctuating around zero bps in August 2010. In contrast to the conditions in March, this turn was triggered by a flood of corporate debt issuances from banks. 