Report on Economic and Financial Developments

Transcription

1 Report on Economic and Financial Developments Loretta J. Mester Executive Vice President and Director of Research June 1, 1 *The views expressed here are those of the author and do not necessarily reflect those of the Federal Reserve Bank of Philadelphia or of the Federal Reserve System. Executive summary Economic growth has slowed over the past two months in both the nation and the district Near-term growth forecasts have been revised down about ½ percentage point Downside risks to the forecast have risen European sovereign debt & banking system problems U.S. fiscal situation looming at year-end Slower global growth FOMC will implement Operation Twist through yearend and said it is prepared to take further action 1

2 The FOMC continues to expect moderate growth, a gradual decline in the unemployment rate, and inflation to move toward its longer-run goal of % Central tendency of Fed Governors and Presidents April 1 Forecasts Survey of Professional Forecasters 1 Q Survey Real GDP Growth* 1.9 to. %. to. %. %.7 %* Unemployment Rate in Q PCE Inflation (Q/Q growth). to. % 7. to. % 7.9% NA 1. to 1.7 % 1. to. %.1 %. % *Q/Q growth for Fed forecasts and 1 SPF; annual growth for 13 SPF The FOMC revised down their forecasts for Real GDP growth, Q/Q Evolution of 1 FOMC projections and median SPF forecast Date of FOMC projection Jan 1 Apr 1 Jun 1 Sources: FOMC Minutes and Press Conference, and Philadelphia Fed Survey of Professional Forecasters (SPF). Note, survey dates for SPF are: Feb, May, Aug, Nov. Projections for 1 -

3 The FOMC continues to expect growth to strengthen in Real GDP growth, Q/Q Evolution of 1 FOMC projections and median SPF forecast Date of FOMC projection Jan 1 Apr 1 Jun 1 Sources: FOMC Minutes and Press Conference, and Philadelphia Fed Survey of Professional Forecasters (SPF). Note, survey dates for SPF are: Feb, May, Aug, Nov. Projections for 13 - Growth decelerated to around percent in the first quarter and is running at about the same pace in the second quarter Real GDP Growth, SAAR 11 H.% 11 H1.% 1.9% Quarterly data: Last point plotted is 1Q1 3

4 Economic activity was stronger at the start of the year Philadelphia Fed Current Economic Activity Indexes, annualized growth over the three months ending in February 1 > % 3% to % % to 3%.% to % -.% to.% -% to -.% -3% to -% <-3% than it is now. But activity in most states is still increasing. Philadelphia Fed Current Economic Activity Indexes, annualized growth over the three months ending in May 1 > % 3% to % % to 3%.% to % -.% to.% -% to -.% -3% to -% <-3%

5 Employment growth has weakened since the start of the year. In May, payrolls rose by only 9 thousand jobs. Monthly job gains have averaged 1 thousand this year compared with 13 thousand last year. Thousands of jobs Monthly change in nonfarm payrolls Last month plotted is May 1 Average monthly gains for each year are indicated by the grey lines Employment in our three states decelerated over the past three months Annualized 3-month payroll job growth, as of May 1 Job growth ann. 3-month as of May US:.9% 3-state:.3% PA:.% NJ: 1.% DE: 3.% < 3%.9% to % 1.9% to 1%.9% to %.1% to 1% 1.1% to % > % 1. Pittsburgh,. Erie, 3. Johnstown,. Altoona,. State College,. Williamsport, 7. Harrisburg-Carlisle,. York-Hanover, 9. Lebanon, 1. Lancaster, 11. Reading, 1. Scranton-Wilkes-Barre, 13. Allentown-Bethlehem-Easton, 1. Newark-Union, 1. Bergen-Passaic-Hudson, 1. Trenton-Ewing, 17. Edison, 1. Philadelphia, 19. Camden,. Wilmington, 1. Dover,. Vineland-Millville-Bridgeton, 3. Atlantic City,. Ocean City

6 Employment growth in our three states is lower than in the nation. So far this year, job growth in NJ has offset weakness in PA and DE. Annualized year-to-date payroll job growth, as of May 1 Job growth ann. yr-to-date as of May US: 1.% 3-state:.% PA:.% NJ:.1% DE:.1% < 3%.9% to % 1.9% to 1%.9% to %.1% to 1% 1.1% to % > % 1. Pittsburgh,. Erie, 3. Johnstown,. Altoona,. State College,. Williamsport, 7. Harrisburg-Carlisle,. York-Hanover, 9. Lebanon, 1. Lancaster, 11. Reading, 1. Scranton-Wilkes-Barre, 13. Allentown-Bethlehem-Easton, 1. Newark-Union, 1. Bergen-Passaic-Hudson, 1. Trenton-Ewing, 17. Edison, 1. Philadelphia, 19. Camden,. Wilmington, 1. Dover,. Vineland-Millville-Bridgeton, 3. Atlantic City,. Ocean City Recent modest job growth has retarded progress on recovering lost jobs % of jobs lost from employment peak to employment trough and % of lost jobs regained since employment trough 7.% 7.%.3% 3 1.9% % of lost jobs regained.% % of jobs lost.% 7.%.9% US PA NJ DE Incorporates May 1 data

7 Unemployment rates are down since last August, but we have seen little movement over the past three months Civilian unemployment rate US:. (May) PA: 7. (May) NJ: 9. (May) DE:. (May) Three States:.1 (May) NJ US PA DE Monthly data: Last point plotted is May 1 Regional manufacturing activity slowed in May and June Diffusion Index 7 Business Outlook Survey: General Activity Index Future General Activity Index Index represents percentage of respondents reporting an increase minus percentage reporting a decrease. Monthly data: Last point plotted is June 1 7

8 At the national level, manufacturing activity has shown more strength than suggested by the regional surveys. Auto production remains strong. Index, 7= Motor Vehicle Assemblies (right scale) Manufacturing Output Industrial Production SAAR, Mill. Units Monthly data: Last point plotted is May 1 Oil prices are down sharply since peaking in March. They are down about $1 a barrel since the start of the year. Gasoline prices have fallen nearly a gallon over the past three months. $ per barrel oil 1 1 Spot Prices West Texas Intermediate $ per gallon for gasoline. Brent Retail Gasoline Weekly data: Last point plotted is June 1, 1 for WTI and June, 1 for Retail Gasoline and Brent. 1.

9 As oil prices have fallen, inflation has moderated toward its longer-run goal of percent. Total PCE Inflation and Core PCE Inflation 1-month % change % 1.% Monthly data: Last month plotted is April 1 Personal income growth has slowed in recent months consistent with slower employment growth Year-over-year growth in personal income and real disposable income (3-month moving average) Jan 7 Jul 7 Jan Jul Jan 9 Jul 9 Jan 1 Jul 1 Jan 11 Jul 11 Jan 1 Monthly data: Last point plotted is April 1 9

10 1 Despite slower income growth, retail sales continue to grow at a moderate pace May Apr - Year over year growth in Year over year growth retail sales, excluding autos, in nominal retail sales - gas stations, and building materials stores Monthly data: Last point plotted is May 1 for retail sales and April 1 for sales excl. autos, gas, and building materials 1 1 Household net worth is beginning to recover after the sharp contraction in Change in household net worth Trillions of $ $9 $ $3 $ age change, year to year -$3 -$ -$9 - - $ Change Source: FRB Flow of Funds, annual data for ; quarterly data for 1Q1 1 Q1 -$1 -$1 1

11 House prices appear to have stabilized and may even be starting to rise 1 1 FHFA Purchase-Only House Price Index Year-over-year percentage change CoreLogic Excluding Distressed Sales Case-Shiller House Price Index Composite Monthly data: Last point plotted is March 1 for Case-Shiller and FHFA and April 1 for CoreLogic There are signs that housing is starting to recover, with sales and starts moving up, albeit from very low levels Thousands of units Existing single family home sales Thousands of units Privately owned housing units started New single family home sales Monthly data: Last point plotted is April 1 11

12 1 Uncertainty surrounding the European sovereign debt and banking problems continues to cloud the global outlook Spread of 1-year government bond over 1-year German government bond Greece (right scale) 1 3 Portugal Ireland Italy Spain France 1/3/11 //11 7//11 1//11 1/1/1 /1/1 1 Daily: Last point plotted is June 19, 1 Stock prices have been volatile on concerns about the European sovereign debt and banking situation. Year-to-date, the S&P is still up over percent, on net. NASDAQ & S&P 3 3 NASDAQ Dow Jones Dow Jones Industrials S&P Jan 1 Jun 1 1 Dec 1 7 May Nov 11 7 Apr 1 9 Daily data: Last point plotted is June, 1 1

13 London FTSE& German DAX Stock prices abroad have fallen on concerns about global recession and the European situation. In recent days, prices have risen on rumors of coordinated central bank intervention. German DAX Jan 1 May 1 3 Aug 1 3 Dec 1 19 Apr 11 1 Aug 11 7 Dec 11 Apr 1 Daily data: Last point plotted is June, 1 London FTSE Japan Nikkei Hong Kong Hang Seng Hong Kong Hang Seng & Japan Nikkei The value of the dollar is rising on safe-haven flows Index, March 1973 = 1 9 Trade-weighted value of $ against major currencies and Euros per $ Euros/US $ Weekly data: Last point plotted is June 7,

14 Interest rates are very low across the maturity spectrum. Longer-term interest rates have fallen as investors seek the safe haven of U.S. Treasury securities. For three and a half years, the Fed has kept the fed funds rate at essentially zero year mortgage rate year Treasury bond yield 1. Fed funds effective rate. Jan 7 Jul 7 Jan Jul Jan 9 Jul 9 Jan 1 Jul 1 Jan 11 July 11 Jan 1 Weekly data: Last point plotted is June 1, 1 U.S. banks on-balance-sheet exposure to the peripheral countries in Europe is relatively small Billions $ Exposure of US Banks to Europe Billions $ Dec, Dec 1, Dec 11 (Left scale) (Right scale) Greece Portugal Italy Ireland Spain Germany France UK Source: BIS Consolidated Banking Statistics (June 1 Report) 1

15 Market participants had priced in more accommodative policy given the weaker-than-expected economic data and worries about developments in Europe 1. 3-day federal funds futures rates.7 April, 1 Jan 19, 1 June, 1. June 1, 1.. Jan 1 Jul 1 Jan 13 Jul 13 Jan 1 Jul 1 Jan 1 Trillions $ 3. Assets Liabilities -3. The Fed holds nearly $1 trillion in agency mortgage-backed securities and agency debt. Operation twist lengthened the portfolio s maturity. Treasury Supplementary Financing Program Other assets Loans Other Liabilities Agency securities Treasury securities Federal Reserve notes in circulation Reserve Balances Jan-7 Nov-7 Sep- Jul-9 May-1 Mar-11 Jan-1 Trillions $ Weekly data: Last point plotted is June 1, 1 1

16 The FOMC announced it will implement another round of operation twist through the end of this year Operation twist 1 announced last September and completed at end of June Purchased long-term Treasuries and sold short-term Treasuries Bought $ billion of Treasuries with remaining maturities of to 3 years Sold $ billion of Treasuries with remaining maturities of 3 years or less. Operation twist announce this week to be completed by year-end Buy $7 billion of Treasuries with remaining maturities of to 3 years Sell an equal amount with maturities of 3 years or less Same pace of transactions as currently doing Fed will hold no short-term Treasuries once completed 1

17 Appendix: Additional Charts FOMC participants assumptions about the appropriate policy paths underlying their economic projections have not changed much. [In June, two new Fed governors participated.] Number of Participants 9 January projections April projections June projections Appropriate Timing of Policy Firming: Liftoff from the Zero Bound Source: FOMC Minutes and Press Conference 17

18 Private sector payroll growth has slowed in recent months Thousands of jobs Monthly change in private nonfarm payrolls Last month plotted is May 1. Average monthly gains for each year are indicated by the grey lines. Recent months readings on payrolls have been revised down Thousands of jobs Change in nonfarm payrolls Feb 1 Mar 1 Apr 1 May 1 1st estimate nd estimate 3rd estimate 1

19 Private sector job growth in the U.S. is slowing a tad compared with the 1991 jobless recovery. And this recession was much sharper. Cumulative % change in private nonfarm payrolls since recession trough 1 U.S. private payroll employment 9 Avg of recoveries, Last point plotted for 9 recovery is May 1 Trough Mar 1991 Nov 1 Jun 9 Months Since Recovery Began Unlike prior recessions, government jobs are being cut Cumulative % change in government nonfarm payrolls since recession trough 1 U.S. government payroll employment Census workers => +1K in May 1 Avg of recoveries, Last point plotted for 9 recovery is May 1 Trough Mar 1991 Nov 1 Jun 9 Months Since Recovery Began 19

20 Total employment growth in the nation is weaker than in the 1991 recovery Cumulative % change in nonfarm payrolls since recession trough 1 U.S. payroll employment 9 Avg of recoveries, Last point plotted for 9 recovery is May 1 Trough Mar 1991 Nov 1 Jun 9 Months Since Recovery Began Unemployment rates vary across the region, with higher rates in southern New Jersey County Unemployment Rates: April 1 Erie Warren McKean Potter Tioga Bradford Susquehanna Crawford Wayne Forest Wyoming Venango Elk Cameron Sullivan Lackawanna Mercer Clinton Lycoming Pike Clarion Jefferson Luzerne Montour Sussex Monroe Passaic Lawrence Clearfield Centre Union Columbia Warren Bergen Butler Armstrong Northumberland Carbon Morris Snyder Essex Beaver Schuylkill Northampton Indiana Mifflin Union Hudson Lehigh Allegheny Cambria Dauphin Hunterdon Blair Juniata Somerset Perry Lebanon Berks Westmoreland Huntingdon Bucks Middlesex Montgomery Mercer Monmouth Washington Cumberland Bedford Lancaster Chester Fayette Somerset Philadelphia Franklin York Ocean Greene Fulton Delaware Adams Camden Burlington Gloucester New Salem Castle Atlantic Cumberland Cape Less than 7.% Kent May 7.% - 9.% 9.% - 11.% Greater than 11.% Sussex

21 The share of unemployment that is long-term remains high of Unemployed 7 1 weeks or longer weeks or longer Jan.71 Jan.7 Jan. Jan.9 Jan.99 Jan. Monthly data: Last point plotted is May 1 Long-term unemployment remains high. Weeks Job losers as percent of civilian labor force Average weeks unemployed Long-term unemployed as percent of civilian labor force Monthly data: Last point plotted is May 1. Job losers are people unemployed for less than weeks. Long-term unemployed are people unemployed for more than weeks. 1

22 The unemployment rate is higher when we include all marginally attached workers and those working part-time for economic reasons. Both ticked up in May U: Unemployed in U3 plus all marginally attached workers and those working part-time for economic reasons 1.%.% U3 = Official unemployment rate Monthly data: Last point plotted is May 1 Unemployment rates have differed by gender but are now converging 1 1 Male.3%.1% Female Monthly data: Last point plotted is May 1 Source: Bureau of Labor Statistics

23 Unemployment rates differ by race African Americans Hispanics Total Whites 13.% 11.%.% 7.% Monthly data: Last point plotted is May 1 Source: Bureau of Labor Statistics 1 Unemployment rates are significantly lower for those with more education. The only category with a drop in unemployment in May was the bachelor s degree or higher category. Civilian unemployment rate by educational attainment Less than High School Diploma High School Diploma, No College 13.%.1% 7.9% Some College 3.9% Bachelor s degree and higher Monthly data: Last point plotted is May 1 3

24 Unemployment among young people remains particularly high 3 Civilian Unemployment Rates by Age 1-19 Years.% Years - Years 1.9% 7.1%.% Years & Older Monthly data: Last point plotted is May 1 Labor force participation is below the level that would be predicted by cyclical factors and demographics Civilian Labor Force Participation Rate (SA) 7 3 Nonlinear trend Q1 Q1 3Q1 Q1 9Q1 9Q1 9Q1 9Q1 1Q1 Q1 7Q1 1Q1 13Q1 Quarterly data: Last point plotted for participation is 1Q1 Source: Bureau of Labor Statistics. Trend is author s calculation controlling for the unemployment rate, share of working age population over, share of working age population female, time, and time-squared.

25 Labor force participation rates differ by race 7 7 Labor Force Participation Rates Hispanics Whites Total African Americans 7.1%.% 3.% 1.3% Monthly data: Last point plotted is May 1 Source: Bureau of Labor Statistics Both male and female participation rates have declined since the recession ended 7 Labor Force Participation Rates Male Total Female Monthly data: Last point plotted is May 1 Source: Bureau of Labor Statistics

26 Teenagers and young adults have seen the sharpest declines in labor force participation 9 Labor Force Participation Rates - yrs old (left scale) yrs old (left scale) 1-19 yrs old (right scale) yrs & older (right scale) Monthly data: Last point plotted is May 1 Source: Bureau of Labor Statistics Total inflation is down from its peak reflecting the drop in oil prices. Total CPI Inflation and Core CPI Inflation 1-month % change % 1.7% Monthly data: Last month plotted is May 1

27 Longer-term inflation expectations appear to be well-anchored. Jan : FOMC releases % inflation target Survey of Professional Forecasters Median 1-Year CPI Inflation Expectations Year Inflation Compensation from Treasury Inflation- Indexed Securities. Jan- Jul- Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-1 Daily data: Last point plotted is June, 1 for inflation compensation and Second Quarter 1 SPF for 1-year CPI inflation expectations Consumer sentiment fell the past two months on uncertainty over the European sovereign debt problems, the global slowdown, and U.S. fiscal problems looming at year-end Sentiment index, Q1 = 1 Confidence index, 19 =1 1 1 Consumer Sentiment Index, University of Michigan Consumer Confidence Index, Conference Board Jan 7 Jul 7 Jan Jul Jan 9 Jul 9 Jan 1 Jul 1 Jan 11 Jul 11 Jan 1 Monthly data: Last point plotted is June 1 for sentiment and May 1 for confidence 7

28 Billions of Dollars $, $, $, $3, $, $1, $ -$1, -$, -$3, -$, -$, -$, The rebound in the stock market contributed to a sizable rise in household wealth in the first quarter Change in households stock and mutual fund holdings Change in households real estate equity Q1 Source: FRB Flow of Funds, annual data for ; quarterly data for 1Q1 Auto production remains strong Millions of Units, Annual Rate 1 1 Auto and light truck sales mil mil 9 Auto and light truck assemblies Monthly data: Last point plotted is May 1

29 Household debt-to-disposable income is falling Debt-to-Disposable Income Quarterly data: Last point plotted is 1 Q1 Households debt-service burdens are falling. This partly reflects low interest rates. Total financial obligations to disposable personal income* Quarterly data: Last point plotted is 11 Q Source: Federal Reserve Board *Includes payments on mortgage debt, consumer debt, auto leases, rental properties, homeowners insurance, and property taxes. 9

30 Inventories of unsold homes are down from their peaks Months supply at current sales pace Months supply of condos and co-ops.9. Months supply of single family homes Source: National Association of Realtors Monthly data: Last point plotted is April 1 House prices are firming in the western part of Pennsylvania and the Marcellus shale area Change in FHFA House Price Index For Metro Areas (as of 1 Q1) Not Reported Less than % % to % % to % % to % % to % % to % Greater than % Pittsburgh, - Erie, 3- Johnstown, - Altoona, - State College, - Williamsport, 7- Harrisburg-Carlisle, - York-Hanover, 9- Lebanon, 1- Lancaster, 11- Reading, 1- Scranton-Wilkes-Barre, 13- Allentown-Bethlehem-Easton, 1- Newark-Union, 1- Bergen-Passaic-Hudson, 1- Trenton-Ewing, 17- Edison, 1- Philadelphia, 19- Camden, - Wilmington, 1- Dover,- Vineland-Millville-Bridgeton, 3- Atlantic City,- Ocean City 3

31 of all mortgages outstanding, 1- residential units Delinquencies continue to move down. Still, one in 13 mortgages is seriously delinquent. Past due at least 3 days Seriously delinquent: Past due at least 9 days or in foreclosure New foreclosures Q1 Q1 7Q1 Q1 9Q1 1Q1 11Q1 1Q1 Quarterly data: Last point plotted is 1Q1 Source: Mortgage Bankers Association, seasonally adjusted European banks are the most exposed to Portugal, Italy, Ireland, Greece, and Spain Banking System Credit Exposures to PIIGS as of 11Q Billions of US $ 1 France Germany Rest of Europe US All Other 1 Greece Spain Italy Portugal Ireland France Source: BIS Consolidated Banking Statistics (June 1 Report) 31

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