THE US ECONOMIC OUTLOOK

Transcription

1 THE US ECONOMIC OUTLOOK US economy has been growing strongly but will slow (perhaps sharply). Martin Neil Baily with Jacob Funk Kirkegaard and Katharina Plück Institute for International Economics September 14, 2005 Revised September 16, 2005

2 Growth Prospects Growth had been expected to accelerate in the second half of Katrina will cut growth in this period to around 3.5 percent. Katrina effects will dissipate or reverse by But Fed tightening, weakness in housing, plus high energy prices, will slow growth to around 2.5 percent in

3 Katrina Effects on the Economy Louisiana and Mississippi produce about 2 percent of US GDP. About an eighth of this could be lost for three months. Employment effects look to be thousand in the short term. Privately insured losses are estimated at about $40 $60 billion. Federal flood insurance will be additional. Congress has approved $60 billion in emergency assistance with outlays occurring in FY2006. Overall, Katrina will reduce GDP growth by about 0.4 percent in the second half of

4 Katrina Effects on Energy High uncertainty: Daniel Yergin suggests Katrina may be the biggest shock ever to oil supply. Phil Verleger foresees gas lines and severe economic impacts. On oil: The biggest immediate problem is refining capacity, not crude. Katrina has knocked out 8 refineries, 10 percent of capacity. About half should be back quickly, the remainder may take several months. However, there has been a fall in gasoline consumption 5 percent high prices are working (EIA estimates). With energy markets already tight, Katrina is likely to mean high gasoline and heating costs persist into the winter $2 3 per gallon of gas and natural gas prices at around $12 mm btu. Over a 5-year or longer horizon, oil prices will fall back to the $30 40 range. 4

5 Oil: In the Past, High Spot Prices Did Not Pull Up Futures Prices; A Different Situation Today. April September 2003 October 2003-July 2004 August -September 2004 $20 October 2004-March 2005 April 2005-May 2005 June 2005-Present Spread Between Nymex Spot and NYMEX 7year Future $15 $10 $5 $0 -$5 Hurricane Katrina Hits -$10 $0 $10 $20 $30 $40 $50 $60 $70 $80 Source: NYMEX NYMEX Spot Price 5

6 Oil: Futures Prices are Very High Indeed Too High in the Long Run WTI Crude Oil Prices and Futures $80 $70 $60 $50 $40 $30 $20 $10 $0 6 7/1/2010 1/1/2011 7/1/2011 7/1/2009 1/1/2010 1/1/2009 WTI Crude Spot WTI Crude Futures 1/1/1999 7/1/1999 1/1/2000 7/1/2000 1/1/2001 7/1/2001 1/1/2002 7/1/2002 1/1/2003 7/1/2003 1/1/2004 7/1/2004 1/1/2005 7/1/2005 1/1/2006 7/1/2006 1/1/2007 7/1/2007 1/1/2008 7/1/2008 Source: NYMEX

7 2004q3 2005q1 Expenditure on Energy as a Share of Total Personal Consumption Expenditure 6 Expenditure on all energy goods and services* Expenditure on gasoline and oil percent 1993q1 1994q3 1994q1 1994q3 1995q1 1995q3 1996q1 1996q3 1997q1 1997q3 1998q1 1998q3 1999q1 1999q3 2000q1 2000q3 2001q1 2001q3 2002q1 2002q3 2003q1 2003q3 2004q1 Source: Bureau of Economic Analysis, NIPA Tables. *Consists of gasoline, fuel oil, and other energy goods and of electricity.

8 Housing: The Impact of Housing Wealth on Consumption Value of households' owner-occupied housing ($ billions) level increas: $ 3.9 trillion percentage increase: 28.3% $13,809.3 $17,713.6 Change in wealth multiplied by 0.05 = $200 billion in additional consumption = 2.3 percent of personal consumption expenditures 1st quarter st quarter 2005 Source: Federal Reserve Board, Flow of Funds, June 2004 and June

9 House Prices Have Risen Sharply Possible Bubble in some Regions 5-year percentage increase in house prices in selected metropolitan statistical areas (MSAs) Santa Barbara-Santa Maria Santa Ana-Anaheim- Irvine, CA Los Angeles-Long Beach-Glendal Fort Lauderdale- Pompano Beach Bakersfield, CA Washington- Arlington-Alexandria Bethesda-Frederick- Gaithersburg Boston-Quincy, MA New York-Wayne- White Plains, NY Charlottesville, VA Philadelphia, PA San Francisco-San Mateo-Redwood Minneapolis-St. Paul- Bloomington Richmond, VA St. Louis, MO-IL percentage change Kansas City, MO-KS Detroit-Livonia- Dearborn, MI San Antonio, TX Rochester, NY Lafayette, IN mean for all 265 MSAs: 45% Source: Office of Federal Housing Enterprise Oversight. mode for all 265 MSAs: 24%

10 Bubble or Not, House Prices will Soften Real housing prices fell after the 1970s boom and after the 1980s boom. Prices today have moved way above trend. House price increases are outpacing income growth. Nominal price declines are likely in some regions. A large drop in overall housing wealth is unlikely. 10

11 Inflation Concerns are Affecting Fed Policy So Far the Inflation Impact of Oil Prices Has Been Moderate Crude Oil Price, index number equal to 100 prior to shock Saudi Light* (1973q4-1979q1) Saudi Light* (1979q2-1983q1) WTI (1999q1-2005q1) US Consumer Price Index, index number equal to 100 prior to shock q4-1979q1 1979q2-1983q1 1999q1-2005q1 Source: Oil Economists Handbook (5 th ed., Vol.1); Datastream; OECD Main Economic Indicators. *Note: Saudi Light Official Government Prices. 11

12 Fed Tightening: Long Rates Have Remained Low but Are Expected to Rise year treasury securities 30-year conventional mortgage Effective federal funds rate Consensus Economics forecasts: percent /1 4/8 4/15 4/22 4/29 5/6 5/13 5/20 5/27 6/3 6/10 6/17 6/24 7/1 7/8 7/15 7/22 Source: Federal Reserve Board; Consensus Economics Inc., Consensus Forecasts. 7/29 8/5 8/12 8/19 8/26 Sept. 05 Nov. 05 Dec. 05 Mar. 06 Jun. 06 Aug

13 If the Fed Keeps Tightening, Long Rates will Rise. Short Rates Affect Demand Independently of Long Rates US Short- and Long-term Interest Rates 1990-August % 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 13 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jul-02 10y Constant Maturity Treasury Bill Effective Fed Funds Rate = Periods of Fed Tigthening Jan-90 Jul-90 Jan-91 Jul-91 Jan-92 Jul-92 Jan-93 Jul-93 Jan-94 Jul-94 Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Source: Federal Reserve

14 Summary and Conclusion Why the US economy will slow down: Energy prices going through the roof Fed tightening and inflation worries Softer housing market Not much help from international trade Why there should not be a recession: Long rates remain low. Fed will ease if growth falters seriously. Inflation effects are moderate so far. Strong momentum with low unemployment Housing collapse unlikely Federal spending on Iraq and hurricane relief 14