by Calculated Risk on 1/15/2009 04:49:00 PM

From San Francisco Fed President Janet Yellen: The Outlook for 2009: Economic Turmoil and Policy Responses. A few excerpts:

Economic weakness is evident in every sector of the economy. ... With respect to wealth, the combined impact of falling equity and house prices has been staggering. Household wealth has declined by an estimated $10 trillion. ... Not surprisingly, consumer confidence is at a 30-year low and the personal saving rate is on the rise, as people try to rebuild their wealth and provide a cushion against the possibility of job loss. ...

Business spending is also feeling the crunch, as firms face weak demand for their products, a higher cost of capital, and restricted credit. ...

Nonresidential construction, surprisingly enough, has continued to show some growth up to this point, but this is not likely to last much longer. I’m hearing talk about substantial cutbacks on new projects and planned capital improvements on existing buildings for two all-too-familiar reasons—demand is falling as the economy weakens and financing is hard to get. In particular, the market for commercial mortgage-backed securities, a mainstay for financing large projects, has all but dried up. Banks and other traditional lenders have also become less willing to extend funding.

... Housing starts have plummeted, falling to nearly one-half of their year-ago level, and it is hard to see when they will bottom out, since inventories of unsold new and existing homes remain at high levels relative to sales. Indeed, the possibility of ongoing contraction in this sector is intensified by the economic downturn, the loss in jobs, and the reduced availability of mortgage credit. ...

The ongoing decline in house prices is a source of particular concern not only because of its impact on consumer spending, but also because it contributes importantly to delinquencies and foreclosures ... [S]ome of the earliest and sharpest price declines nationwide occurred in parts of California and other western states, such as Arizona and Nevada. Foreclosure rates in these states are well above their historic highs dating back at least to the late 1970s, and home prices in the largest metro areas are down by as much as 35 to 40 percent from their 2006 peak. Unfortunately, futures contracts for house prices suggest that further declines are likely this year and next.

Many state and local governments have been dragged into the financial mess. The downturns in the housing markets and the economy have bitten into tax collections at the same time that the financial market turmoil has made it harder to issue bonds. These problems are particularly acute in California. ... The latest projection is for a deficit of about $40 billion that will accumulate over the current and next fiscal year. This is a huge shortfall relative to annual revenue of $100 billion, and the actions needed to overcome it are only likely to add to the recession in the state.

... Economic growth in the rest of the world, particularly in Europe and Japan, has weakened sharply for a number of reasons, including spillovers from the U.S. recession and from the financial meltdown that now has spread globally. ... [I]t now looks likely that the data will show worldwide recession in late 2008 and early 2009, with a more severe and long-lasting contraction in many industrial countries.
emphasis added

Global recession. House prices declining "this year and next". "Substantial cutbacks" in non-residential investment. And on and on ... these Fed speeches are grim and depressing.