U.S. and Regional Economic Conditions and Outlook

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1 U.S. and Regional Economic Conditions and Outlook CFA Society of Nebraska Omaha, NE January 14, 215 Kelly D. Edmiston Federal Reserve Bank of Kansas City

2 Outline Structure and Role of the Federal Reserve Economic Output and Forecast Employment Residential Real Estate The Student Loan Crisis (time permitting) January 14, 215 K. Edmiston, FRBKC 2

3 U.S. and Regional Economic Conditions and Outlook STRUCTURE AND ROLES OF THE FEDERAL RESERVE SYSTEM January 14, 215 K. Edmiston, FRBKC 3

4 Federal Reserve System Structure January 14, 215 K. Edmiston, Source: FRBKC Board of Governors of the Federal Reserve System 4

5 12 Federal Reserve Districts January 14, 215 K. Edmiston, FRBKC 5

6 Tenth Federal Reserve District January 14, 215 K. Edmiston, FRBKC 6

7 Objectives of the Fed Monetary Policy (dual mandate) Facilitate the Payments System Cash Operations Check Clearing Electronic Payments Ensure the Safety and Soundness of the U.S. Banking System Bank Regulation Examination January 14, 215 K. Edmiston, FRBKC 7

8 Monetary Policy Federal Open Market Committee Governors (7) + 5 Bank Presidents (NY Fed and 4 others on rotating basis) meets 8 times per year Policy Levers set target federal funds rate set discount rate reserve requirements rarely (but recently), other extraordinary efforts January 14, 215 K. Edmiston, FRBKC 8

9 U.S. and Regional Economic Conditions and Outlook ECONOMIC OVERVIEW AND FORECAST January 14, 215 K. Edmiston, FRBKC 9

10 Annual Growth in Real GDP January 14, 215 Source: U.S. Bureau of Economic Analysis / Haver Analytics K. Edmiston, FRBKC 1

11 Contributions to Percentage Change in Real GDP Percentage Points IV I II III Total GDP Consumer Spending (68.5%) Residential Investment (3.1%) Business Investment (12.2%) Net Exports (-3.%) Government Spending (18.7%) Inventories (.4%) -2.5 January 14, 215 Source: Bureau of Economic Analysis; Haver Analytics

12 U.S. Historical GDP and Forecast Percentage Change GDP Inflation Forecast Historical FOMC Central Tendency LR -4 January 14, 215 K. Edmiston, FRBKC 12

13 25 $trillions (inflation-adjusted GDP and Potential GDP 25 Potential GDP Actual Projected 2 GDP Source: Congressional Budget Office January 14, 215 K. Edmiston, FRBKC 13

14 12. Personal Income Growth Index: 27 Q1 = 1 (SAAR, Inflation-Adjusted) Actual Growth Growth at Historical Average Rate Consumer Spending Q1/27 Q3/27 Q1/28 Q3/28 Q1/29 Q3/29 Q1/21 Q3/21 Q1/211 Q3/211 Q1/212 Q3/212 Q1/213 Q3/213 Q1/214 Q3/214 Source: BEA; Haver Analytics January 14, 215 K. Edmiston, FRBKC 14 6.

15 Savings as a Share of Disposable Income 1% Percent 1% 9% Savings Rate Poly. (Savings Rate) 9% 8% 8% 7% 7% 6% 6% 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% % Q1-27 Q3-27 Q1-28 Q3-28 Q1-29 Q3-29 Q1-21 Q3-21 Q1-211 Q3-211 Q1-212 Q3-212 Q1-213 Q3-213 Q1-214 Q3-214 % Source: BEA; Haver Analytics January 14, 215 K. Edmiston, FRBKC 15

16 Average Debt per Consumer (3 rd Quarter, 214) $2, Four-quarter moving average $2, $16, Total Consumer Debt (excludes first mortgage) NE U.S. $16, $12, $12, $8, Revolving Debt U.S. $8, NE $4, $4, $ $ Source: Federal Reserve Bank of New York Consumer Credit Panel / Equifax Notes: Excludes first mortgage. A first mortgage represents the primary note on the home and typically is not used to purchase consumer goods. January 14,

17 U.S. and Regional Economic Conditions and Outlook EMPLOYMENT AND UNEMPLOYMENT January 14, 215 K. Edmiston, FRBKC 17

18 Historical Recessions % Change from Peak Employment Months -7. Source: U.S. Bureau of Labor Statistics; Haver Analytics January 14, 215 K. Edmiston, FRBKC 18

19 Employment Growth in the U.S. and Nebraska Level Change, Month to Month Nebraska 1YR:.6% Dec 7: 2.2% United States 1YR: 2.% Dec 7: 1.% , -1 Feb-8 May-8 Aug-8 Nov-8 Feb-9 May-9 Aug-9 Nov-9 Feb-1 May-1 Aug-1 Nov-1 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 January 14, 215 K. Edmiston, FRBKC Source: BLS; Haver Analytics 19

20 Unemployment and Labor Force Participation Rates 72. Percent of Working Age Population Percent of Labor Force U.S. Unemployment Rate (right axis) Nebraska Unemployment Rate (right axis) U.S. Labor Force Participation Rate (left axis) Source: U.S. Bureau of Labor Statistics: Haver Analytics January 14, 215 K. Edmiston, FRBKC 2

21 Jobs Deficit 16, thousands 16, 155, Employment Required to Keep Unemployment Rate at Dec 27 Level 155, 15, 145, 2.3 Million.5 Million 15, 145, 14, 135, Employment 14, 135, 13, 13, 125, 125, 12, Source: Federal Reserve Bank of Kansas City Updated through March, , January 14, 215 K. Edmiston, FRBKC 21

22 Alternative Unemployment Rates United States 2 16 Percent U NE Unemployment U-3: 3.6% (Q3) U-6: 7.1% U Percent Nebraska U U.S. Unemployment U-3: 5.6% (Dec) U-6: 11.2% 8 4 U Source: U.S. Bureau of Labor Statistics; Haver Analytics January 14, 215 K. Edmiston, FRBKC 22

23 U.S. and Regional Economic Conditions and Outlook RESIDENTIAL REAL ESTATE January 14, 215 K. Edmiston, FRBKC 23

24 14 Existing Home Sales (through Nov 214) Index: Mar 26 = Kansas City (82.6) U.S. (75.3) Omaha (18.9) Lincoln (97.6) 4 2 Source: Area Realtors Associations January 14, 215 K. Edmiston, FRBKC 24

25 Existing Single-Family Home Activity Demand Headwinds Economy/Financial Security Uncertainty about Market Household Formation Credit Availability Homebuyer Traffic PROPRIETARY DATA REMOVED January 14, 215 K. Edmiston, FRBKC 25

26 14 Months Supply of Homes, Metro Omaha Months Supply (seasonally adjusted) Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 January 14, 215 K. Edmiston, FRBKC Source: Area Realtors Associations 26

27 14 Home Prices Index: 24 Q1 = 1 Index: 24 Q1 = U.S. Kansas City 8 6 Wichita Des Moines Omaha January 14, 215 K. Edmiston, FRBKC Source: FHFA / Haver Analytics 27

28 U.S. and Regional Economic Conditions and Outlook (BRIEF) DISCUSSION OF THE STUDENT LOAN CRISIS Kelly D. Edmiston, Lara Brooks, and Stephen Shepelwich (April 213, revised). Student Loans: Overview and Issues, The Federal Reserve Bank of Kansas City Research Working Papers No. RWP January 14, 215 K. Edmiston, FRBKC 28

29 Outstanding Student Loan Debt $1.2 $1. billions $1.1 $1.2 $1. $.8 $.8 $.6 $.6 $.4 $.4 $.2 $.2 $ $. Source: Federal Reserve Bank of New York January 14, 215 K. Edmiston, FRB KC 29

30 Capacity to Repay / Burden Individual Student Loan Debt Statistics Median $14,5; Average $25,745 25% under $5,824 25% over $31,1 > 3% with debt over $1,.5% over $2, Payments (in repayment): $197 median; < $97 for 25%; >$423 for 25% 4% of borrowers under 3 (1/3 over 4) Sources: Authors calculations using data from the Federal Reserve Bank of New York Consumer Credit Panel; Federal Reserve Bank of New York January 14, 215 K. Edmiston, FRB KC 3

31 Student Loan Delinquency 2% 4-month moving average 2% 17.4% Payment > $ 16% 23% delinquency for those in repayment, determined by eliminating loans with zero or increasing balances that are not past due All 13.6% 16% 12% 12% 9.7% 8% 7.9% 8% 4% % 1.9% 1.2% 1.1%.7%.2%.5% Past Due 3-59 days 6-89 days days 12+ days 4% % Sources: Authors calculations using data from the Federal Reserve Bank of New York Consumer Credit Panel January 14, 215 K. Edmiston, FRB KC 31

32 Cohort Default Rates 25% Share of cohort in default 22.4% 21.4% 25% 2% 2% 17.6% 17.2% 17.8% 15% 15.% 15% 1% 11.6% 1.7% 1.4% 9.6% 8.8% 8.8% 9.1% 1.% 1% 6.9% 6.7% 7.% 5.6% 5.9% 5.4% 5.2% 4.5% 5.1% 4.6% 5.2% 5% 5% % Source: U.S. Department of Education, Office of Federal Student Aid Latest release: September 28, 212 % January 14, 215 K. Edmiston, FRB KC 32

33 Issues Driving Delinquency Recession and Recovery Most over-due balances for those over 3 Unemployment (real rate?), esp. for young Underemployment Slower wage and salary growth, esp. for young AP: 5% of young unemployed/underemployed Noncompletion Better prospects for completers (buying an asset; lifetime income) Especially high for for-profit (28% completion for-profit, 56% public, 65% private not-for-profit) No credit consideration Poor borrower information January 14, 214 K. Edmiston, FRB KC 33

34 Fiscal Impact Accrual-based budgeting NPV (incl disbursements, subsidies, payments) Federal Credit Reform Act (FCRA, 199) method Federal Government Costs using FCRA FY211: -$47.3b FY212: -$34.3b (est.) FY 213: -$32.2b (proposed) Updates vs. fair-value January 14, 215 K. Edmiston, FRB KC 34

35 Fiscal Impact Accrual-based budgeting (cont) Fair-value estimates CBO: 11 percent of disbursements Implies $13.3b (+$3b consolidation) Indirect Greater income tax revenues; lower costs Interest deductions Outlook Not expected to see much higher default rates Could see continued rapid increases in borrowing Reform options January 14, 215 K. Edmiston, FRB KC 35

36 Contact Information: Kelly D. Edmiston Senior Economist Community Development 1 Memorial Drive Kansas City, MO (816) Kelly.edmiston@kc.frb.org January 14, 215 K. Edmiston, FRBKC 36

Economic Conditions and Outlook for the U.S. and Greater Kansas City Area

Economic Conditions and Outlook for the U.S. and Greater Kansas City Area Mid-America Planned Giving Council Kansas City, MO January 9, 215 Kelly D. Edmiston Federal Reserve Bank of Kansas City Economic