The Economic Outlook for 2008

Thank you very much, BJ. It's a pleasure to be with you again to discuss the economic outlook.1 I'll begin this morning by discussing current 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. Clearly, the severity of the housing market downturn, along with the attendant financial market fallout, has been the dominant macro-economic development of the past year. 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 this year 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 has the pace of sales, and they are currently depressing home prices and new construction.