Update on US economic outlook

Update on the U.S.
- Preliminary Q3 real GDP growth in the U.S. (revised down to -0.5% from the initial -0.3%) displayed a downward revision to personal consumption from the original -3.1% down to -3.7%.
-The U.S. housing starts plunging, Inventories remain at record highs; Home prices (S&P Case-Shiller C-10) are down 23% from the peak and the pace of decline accelerating every month
-Sudden spike in job losses and filing for jobless claims in November.
-Monthly job losses (a lagging indicator) are expected to hit the 300,000-350,000 range in 4Q08 and early-2009, taking the unemployment rate to 8.5-9% by late-2009/early 2010
-Manufacturing sector is facing tight credit conditions and slowing domestic and export demand
- Auto sector is also in a perfect storm amid slumping vehicle sales and tight credit conditions
- Recent readings of both the PPI and the CPI are showing the beginning of deflation
In a sentence: Slow economic recovery, massive erosion of consumer wealth and demand and double-digit decline in industrial activity

Actions to combat:
- President-elect Barack Obama unveiled a first rate economic team (Larry Summers, Tim Geithner and Christina Romer) to address this most severe financial and economic crisis.
- Consumer confidence got a boost from falling oil prices and new leadership in the U.S. government
- Federal Reserve announced direct purchases of $600bn in conforming MBS and agency bonds ($500bn and $100bn, respectively.)
- Simultaneously, the Federal Reserve is setting up a new $200bn Term Asset-Backed Securities Loan Facility (TALF) for investors of consumer loan-backed securities
- Government provided a $306bn rescue package for Citigroup

Next Steps:
- Significant fiscal stimulus expected over next 4-5 quarters to prevent significant growth contraction and deflation.
- Spending on infrastructure and green technology as endorsed by Obama can provide some stimulus during prolonged growth slowdown
- Democrats are also pushing for unemployment benefits and food stamps which are well-targeted and have the largest bang-for-the-buck.
- Obama has prioritized a large fiscal package as soon as he comes into office in Jan 2009