A Long Spell of Uncertainity

We find ourselves in a period of sustained economic uncertainty. Today, like 6 months ago, the U.S. economy is on the brink of a recession. Weakness in lending activity, coupled with weakness in the housing sector and related manufacturing industries has stymied economic growth since late 2007. At times, recession seems imminent. But, the official measures, such as quarterly gross domestic product, do not clearly signal that the economy is contracting. Further, prices are rising rapidly for food and energy. That is the uncertainty. Will 2008 be remembered as a recession year, or as a period of disappointing but slow growth? And, will 2008 be known as the year when inflation reignited in America. In some sense, the answer does not matter. The United States and its citizens already are experiencing some of the consequences of recession, and of higher inflation. Job counts are declining and unemployment is rising. Many face the prospect of losing their homes. Prices including food and energy are rising 2% faster than in most recent years. But, of course, the answer matters quite a lot. If the U.S. economy falls into recession, or if a recession has already begun, job losses will accelerate and unemployment will rise sharply. The real estate and financial markets may spiral down faster. There is also a risk that prices increases will accelerate if inflation in food and energy spreads into wage inflation impacting a broad spectrum of sectors. Our view is that the economy will avoid both a significant recession and rapid inflation. Strong exports will encourage growth, and consumers and the financial sector will slowly work their way through their current difficulties. Inflation largely will be contained to the food and energy sectors. But, the scenario is far from rosy. We expect weak economic growth through 2008 and early 2009, and elevated inflation rates through 2010. In particular, we expected annual growth in real GDP of 1.1% in 2008, 1.7% in 2009. GDP growth rates only returns to trend growth of 2.8% in 2010. Inflation will hit 4.0% in 2008, and will be well above 2% in subsequent years, at 2.6% in 2009, and 2.7% in 2010. A significant slowdown will be avoided because the weak dollar will encourage strong exports, and because consumer spending will expand modestly despite a weak employment situation and high energy prices. Consumer confidence has declined rapidly but consumer spending should stay steady thanks to lower interest rates, and in the very short-term, federal government rebate checks. Current high energy prices also are expected to stabilize, and therefore, will not cause even further strain on consumer spending for other goods and services. This relatively positive scenario naturally assumes that the U.S. economy will avoid other major dislocations. The economy may fall into a significant recession if there are other major disruptions in the financial system that limit access to capital. Inflation may spike further if oil prices rise or additional weather causes further increases in food prices

A Long Spell of Uncertainty

We find ourselves in a period of sustained economic uncertainty. Today, like 6 months ago, the U.S. economy is on the brink of a recession. Weakness in lending activity, coupled with weakness in the housing sector and related manufacturing industries has stymied economic growth since late 2007. At times, recession seems imminent. But, the official measures, such as quarterly gross domestic product, do not clearly signal that the economy is contracting. Further, prices are rising rapidly for food and energy. That is the uncertainty. Will 2008 be remembered as a recession year, or as a period of disappointing but slow growth? And, will 2008 be known as the year when inflation reignited in America. I

Finishing the euchromatic sequence of the human genome

The sequence of the human genome encodes the genetic instructions for human physiology, as well as rich information about human evolution. In 2001, the International Human Genome Sequencing Consortium reported a draft sequence of the euchromatic portion of the human genome. Since then, the international collaboration has worked to convert this draft into a genome sequence with high accuracy and nearly complete coverage. Here, we report the result of this finishing process. The current genome sequence (Build 35) contains 2.85 billion nucleotides interrupted by only 341 gaps. It covers ∼99% of the euchromatic genome and is accurate to an error rate of ∼1 event per 100,000 bases. Many of the remaining euchromatic gaps are associated with segmental duplications and will require focused work with new methods. The near-complete sequence, the first for a vertebrate, greatly improves the precision of biological analyses of the human genome including studies of gene number, birth and death. Notably, the human enome seems to encode only 20,000-25,000 protein-coding genes. The genome sequence reported here should serve as a firm foundation for biomedical research in the decades ahead

Tracing the impact of the ECB's asset purchase programme on the yield curve

We trace the impact of the ECB's asset purchase programme (APP) on the sovereign yield curve. Exploiting granular information on sectoral asset holdings and ECB asset purchases, we construct a novel measure of the "free-float of duration risk" borne by price-sensitive investors. We include this supply variable in an arbitrage-free term structure model in which central bank purchases reduce the free-float of duration risk and hence compress term premia of yields. We estimate the stock of current and expected future APP holdings to reduce the 10y term premium by 95 bps. This reduction is persistent, with a half-life of five years. The expected length of the reinvestment period after APP net purchases is found to have a significant impact on term premia

A Long Spell of Uncertainity

We find ourselves in a period of sustained economic uncertainty. Today, like 6 months ago, the U.S. economy is on the brink of a recession. Weakness in lending activity, coupled with weakness in the housing sector and related manufacturing industries has stymied economic growth since late 2007. At times, recession seems imminent. But, the official measures, such as quarterly gross domestic product, do not clearly signal that the economy is contracting. Further, prices are rising rapidly for food and energy. That is the uncertainty. Will 2008 be remembered as a recession year, or as a period of disappointing but slow growth? And, will 2008 be known as the year when inflation reignited in America. In some sense, the answer does not matter. The United States and its citizens already are experiencing some of the consequences of recession, and of higher inflation. Job counts are declining and unemployment is rising. Many face the prospect of losing their homes. Prices including food and energy are rising 2% faster than in most recent years. But, of course, the answer matters quite a lot. If the U.S. economy falls into recession, or if a recession has already begun, job losses will accelerate and unemployment will rise sharply. The real estate and financial markets may spiral down faster. There is also a risk that prices increases will accelerate if inflation in food and energy spreads into wage inflation impacting a broad spectrum of sectors. Our view is that the economy will avoid both a significant recession and rapid inflation. Strong exports will encourage growth, and consumers and the financial sector will slowly work their way through their current difficulties. Inflation largely will be contained to the food and energy sectors. But, the scenario is far from rosy. We expect weak economic growth through 2008 and early 2009, and elevated inflation rates through 2010. In particular, we expected annual growth in real GDP of 1.1% in 2008, 1.7% in 2009. GDP growth rates only returns to trend growth of 2.8% in 2010. Inflation will hit 4.0% in 2008, and will be well above 2% in subsequent years, at 2.6% in 2009, and 2.7% in 2010. A significant slowdown will be avoided because the weak dollar will encourage strong exports, and because consumer spending will expand modestly despite a weak employment situation and high energy prices. Consumer confidence has declined rapidly but consumer spending should stay steady thanks to lower interest rates, and in the very short-term, federal government rebate checks. Current high energy prices also are expected to stabilize, and therefore, will not cause even further strain on consumer spending for other goods and services. This relatively positive scenario naturally assumes that the U.S. economy will avoid other major dislocations. The economy may fall into a significant recession if there are other major disruptions in the financial system that limit access to capital. Inflation may spike further if oil prices rise or additional weather causes further increases in food prices

A Soft Landing and a Long Layover

The U.S. economy achieved a soft landing in 2006. This was a desirable outcome. The economy needed a break from its rapid, and potentially inflationary, growth in 2004 and 2005, before taking off again. But, that new flight has been delayed. The aggregate economy has remained mired in slow growth in the first half of 2007. Pockets of the economy, such as the labor market, have been strong, but a weak housing sector has limited overall growth. Further, signs point to one or two more quarters of weaker growth, before the economy is able to take off again. This outcome is disappointing, and has been difficult for many individuals and businesses in the construction industry, and related sectors. There was a 25% decline in the number of building permits nationwide between June 2006 and June 2007, a nearly 20% decline in housing starts. This decline had a ripple effect not only in construction but in related industries such as real estate, and segments of manufacturing and finance. Many workers, however, have been unaffected by the decline. The overall labor market in fact has been quite strong. Total employment increased by 1.4% nationwide between June 2006 and June 2007, and the unemployment rate currently sits at 4.5%. This pattern of solid employment growth despite weak growth in gross domestic product is typical of the later stages of the businesses cycle. In many ways, it is the mirror image of the “jobless recovery” that occurred in 2002 and 2003 when the national economy pulled out of the 2001 recession. At that time, firms squeezed productivity out of the economy, expanding output rapidly without increasing employment. Expenses were cut and employees worked long hours. By now, many of these opportunities have been exhausted and firms must expand employment to increase output. Thus, there is solid employment and earnings growth even when economic growth is tepid. Nationwide, 1.2% job growth is expected for 2007. But, job growth will need to accelerate as the economy returns to trend growth in 2008 and 2009. Job growth of 1.4% is expected for 2008 and 1.7% for 2009%. Growth in real (inflationadjusted) gross domestic product will reach only 1.9% in 2007 before rising to 2.8% in 2008 and 3.1% in 2009. We see only a small chance of a recession in the next four quarters. Given expectations that the economy will return to trend growth next year, the Federal Reserve will have little incentive to lower interest rates. But, there also will be no need to increase rates as inflationary pressures recede. The consumer price index was up 2.5% in the first half of 2007 versus 3.8% in the first half of 2006. Inflation rates should stabilize at this level. For all of 2007, we expect inflation of 2.3%. Inflation is expected at 2.5% in both 2008 and 2009. Gasoline prices are expected to remain steady over the next few years. To be sure, prices will continue to fluctuate seasonally, spiking in the summer and declining in the spring and fall. But, a permanent decline is not expected. Unfortunately, we are currently experiencing the “new normal” price for gasoline in the summer. Commodity prices in general are expected to stay strong. In many ways this will benefit states such as Nebraska where commodity production is an important part of the economy

Risk and Recovery

The crisis in the housing and financial sectors has led to a dramatic slowdown in U.S. economic growth. Fourth quarter GDP growth and job growth are expected to be anemic and the economy may fall into recession in 2008. Indeed, several of the dozen members of the Nebraska Business Forecast Council do believe that the U.S. economy will likely slip into recession during 2008. However, the overall consensus of the Council is that the U.S. economy will avoid a recession. Economic growth will be slow in the first three quarters of 2008 before recovering in late 2008 and 2009. The reasons for concern about the economy are well understood. There has been a decline in both new home construction and the sales of existing homes. Housing permits and starts are each down by approximately 25% in 2007. This decline has had a ripple effect not only in construction but in related industries such as real estate, and segments of manufacturing and finance. Rising mortgage delinquencies, particularly for sub-prime mortgages have lead to stress at many financial institutions. This has led some financial institutions to cut back on lending. Recent evidence suggests that weakness in selected industries and these concerns about credit may have slowed consumer spending and lead to a decline in manufacturing activity. Rising oil and gasoline prices also have limited consumer income available to spend on other goods and services. The combined force of all of these factors is what has caused economic growth to slow and raised legitimate concerns that the economy could fall into recession. However, there is also a case to be made for continued economic growth in 2008. First the housing crisis, while significant, is limited to only a portion of the economy. This may explain why total employment has continued to grow through the end of 2007, at least according to preliminary estimates. Secondly, a weak U.S. dollar has lead to a substantial improvement in exports, and an overall improvement in the nation’s trade deficit, which supports growth. The third and final reason is the Federal Reserve Bank has shown a willingness to cut interest rates, or take other actions to improve liquidity. Not everyone has been satisfied with the pace of the Fed’s actions but the institution stands willing to make further cuts in short-term interest rates in 2008. Nationwide in 2007, non-farm job growth is thought to have expanded by 1.2 percent. Job growth is expected to slow to 0.9 percent in 2008 before bouncing back to 1.7 percent growth in 2009 as the economic growth accelerates again. Growth in real (inflation-adjusted) gross domestic product (GDP) is expected to have been 2.5 percent in 2007. The rate of growth will dip in the first half of 2008. Overall real GDP growth is expected to be 2.2 percent in 2008. Growth in real gross domestic product will improve in 2009 as the economy recovers, to 3.1 percent. As noted earlier, there is a significant chance, approaching 40 percent that the economy will fall into recession in 2008. If this occurs, job growth is expected to be negative during 2008. This is not the Council’s expectation but it is a possibility

A Soft Landing, Steady Growth, and Accelerating Farm Income

After years of accelerating growth, the U.S. economy achieved a soft landing in 2006. The rate of economic growth remained positive but slowed sufficiently to reduce inflation pressures and the need for further interest rate increases. At the same time the economy remained strong enough to continue the current expansion which has been in place since late 2001. Such a soft landing is vital because it should allow the economy to continue to expand for years to come, but with moderate inflation. The housing sector played an important role in the U.S. economy’s recent slowdown. Housing prices and con-struction activity have fallen significantly in 2006. The decline is expected to continue into early 2007 before housing prices stabilize and construction activity and employment begin to grow again. Other sectors of the economy (manufacturing, retail, and services) should continue to grow throughout the period. A recovering housing sector in 2007 should lead to a reacceleration of the economy in the second half of the year. Overall, the slow growth seen in late 2006 is expected to continue through early 2007. As a result, growth in real GDP will reach only 2.5% in 2006 and 2007. Real GDP growth will reach 3.0% in 2008 and 3.5% in 2009. The rate of inflation also began to slow in late 2006 due to falling energy prices. Gasoline prices have stabilized at historically higher levels. Stable prices, however, will not fuel inflation in the years to come. Less risk to inflation has allowed the Federal Reserve Bank to end its string of interest rate increases. Employment is expected to expand in all major industry groupings throughout the 2007 to 2009 period. The fastest rate of growth is anticipated in the services sec-tor. Manufacturing employment also is expected to grow. Solid job growth will keep national unemployment rates well below 5 % throughout the period

Manufacturing Rebounds

National economic conditions will continue to favor growth over the next three years, including sustained increases in manufacturing employment. Higher energy prices, particularly for oil, gasoline, and natural gas, will impact the economy, but probably only will moderate economic growth rather than cause a significant slowdown. After rapid growth in 2004 and 2005, growth in real gross domestic product is expected to moderate in 2006-2008, due to higher long-term interest rates as well as higher energy prices. Real gross domestic product will grow 3 percent in 2006 and fall to 2.5 percent growth in later years. The housing market will be another factor weighing on the economy. New housing starts are expected to moderate in 2006 through 2008, falling from record levels in 2005. Growth in gross domestic product will be strong enough to sustain employment growth at a steady 1.5 to 1.7 percent rate, which is in line with recent job growth. The rate of inflation will hit 3.5 percent to 4.0 percent in 2006, but is expected to moderate to around 2.5 percent to 3.0 percent in 2007 and 2008. More rapid inflation, however, remains the main risk to the forecast. Recent energy price increases, which are likely to be sustained, may continue to filter through the economy. This could cause broad-based price increases. There also is a possibility that energy prices could rise even more, causing higher inflation, and further restricting economic growth. The likelihood of such a high inflation scenario will decline, however, if the Federal Reserve continues to raise short-term interest rates and use other monetary policies to reduce inflation. The new Federal Reserve Board head, Ben Bernanke, appears willing to do so