The Economic Outlook for 2008

It's a pleasure to be with you. While the economy is seldom far from many people's minds, I think it's fair to say that economic conditions are garnering a bit more attention than usual right now. Housing markets have deteriorated over the last two years and the resulting losses on mortgage-related securities contributed to financial market turmoil last summer. The associated decline in employment in the construction and financial industries has contributed to a slowdown in aggregate job growth. Moreover, inflation — both overall and excluding food and energy prices — has picked up of late. As you might imagine, these developments have kept us busy at the Federal Reserve. So today, I'd like to spend some time talking about the economy. I'll begin by reviewing current economic conditions, and then go on to discuss the outlook for the coming year. Before we begin though, let me note that the usual disclaimer applies: the views I express are my own and are not necessarily shared by any of my colleagues on the Federal Open Market Committee.1Clearly, economic activity has been softening. At the end of last year, real GDP grew at a meager 0.6 percent annual rate, and most forecasters are not looking for much better growth — if any — in the current quarter. Much of this sluggishness has been due to a severe housing market downturn, along with the attendant financial market fallout. After a 10-year expansion, residential investment peaked in late 2005. Since then, construction and sales have fallen fairly sharply, first in large metropolitan areas that had seen the strongest booms, and then spreading to other markets where housing price increases were less pronounced. Despite the falloff in construction, inventories of unsold homes rose sharply. While inventory levels have actually retreated somewhat in recent months, they have not come down as rapidly as sales, and they are currently a depressing influence on home prices and new construction.