San Antonio Business and Economics Society October 27, The U.S. Economic Outlook: Soft Patch, Sink Hole, or Springboard?

Transcription

1 San Antonio Business and Economics Society October 27, 2004 The U.S. Economic Outlook: Soft Patch, Sink Hole, or Springboard? Kevin L. Kliesen Economist, Federal Reserve Bank of St. Louis Not an official Document

2 Outline of Talk Current Conditions (are we past the soft patch?) The Consensus Forecast Risks to the Consensus Forecast

3 Current Conditions Economic conditions firm in the third quarter, following the second-quarter soft patch Economic activity hit a soft patch in late spring after having grown briskly in the second half of 2003 and the first part of That softness in activity no doubt is related, in large measure, to this year's steep increase in energy prices. Chairman Greenspan, Congressional Testimony, September 18, 2004

4 Tracking Forecast: 2004/Q3 Real GDP Growth Percent Baseline Baseline Baseline Baseline 3 Current Qtr Forecast Current Qtr Forecast Current Qtr Forecast /29/2004 7/2/2004 7/13/2004 7/15/2004 7/28/2004 8/3/2004 8/12/2004 8/17/2004 8/25/2004 9/1/2004 9/8/2004 9/14/2004 9/21/ /1/ /4/ /14/ /15/ /25/2004 Source: Macroeconomic Advisers

5 Current Conditions Economic conditions firm in the third quarter, following the second-quarter soft patch Payroll employment growth weakened in 2004:Q3, but hours growth accelerated at fastest rate in more than 7 years

6 Payroll Employment During the Current & Average Business Cycle Percentage Difference from Peak Value Average Business Cycle Quarters After Peak NOTE: Average excludes the 1980 peak; post-ww II period. Current Business Cycle

7 Real GDP Growth and the Hours Growth Gap Real GDP Percent change, four quarters earlier Hours Hours Gap Real GDP Growth NOTE: Hours gap is the four-quarter growth of nonfarm hours less the four-quarter growth of aggregate nonfarm employment.

8 Current Conditions Economic conditions firm in the third quarter, following the second-quarter soft patch Payroll employment growth remains relatively weak, but hours growth accelerates Monetary policy remains accommodative; FOMC moving in a measured pace toward neutrality Oil prices move past $50/bbl, but inflation expectations remain stable

9 Financial Market Inflation Expectations Percent 4 Weekly Data Year 30-Year NOTE: Yield spreads between nominal and inflation-indexed U.S. Treasury securities.

10 Consensus Forecast Key assumptions

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13 Consensus Forecast Key assumptions Continued strong structural productivity growth boosts real incomes, spending, and holds down growth of unit labor costs and prices

14 Four- and 40-Quarter Growth Rates of Nonfarm Labor Productivity Percent Qtr 40-Qtr

15 Consensus Forecast Key assumptions Continued strong structural productivity growth boosts real incomes, spending, and holds down growth of unit labor costs and prices Robust profits, low cost of capital keeps business capital spending growing briskly Weaker foreign growth in 2005

16 U.S. & Foreign Economic Growth Rates Percent Change (F) 2005 (F) U.S.A. Canada Mexico Japan Euroland SOURCE: Blue Chip Economic Indicators (October 10, 2004)

17 Forecasts for 2004 and 2005

18 Forecasts of Major GDP Components Consumer Spending :Q2 2004:Q4 2005:Q2 2005:Q Fixed Investment :Q2 2004:Q4 2005:Q2 2005:Q4 Business Residential Govt. Spending Net Exports :Q2 2004:Q4 2005:Q2 2005:Q4 2004:Q2 2004:Q4 2005:Q2 2005:Q4 Source: Macroeconomic Advisers

19 Risks to the Forecast Oil prices continue to rise, weakening consumer spending and heightening business uncertainty

20 Cumulative 12-Month Percent Changes in Real WTI Prices During Oil Shock Episodes (Zero Otherwise) Percent n = 26 n = 21 n = n = n = 15 n =

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22 Percent change, annualized 5.00 Effects of $50/Bbl Oil on Real GDP Growth (Hamilton's methodology) :Q3 2004:Q4 2005:Q1 2005:Q2 2005:Q3 2005:Q4 Real GDP Growth (Baseline) Real GDP Growth (Adjusted for Change in Oil Prices) NOTE: Calculations based on methodology formulated by Hamilton (2003). Assumes spot price of WTI averages $50 per barrel from 2004:Q4 through 2005:Q4.

23 Increased Energy Efficiency: Partial Offset to Higher Prices SOURCE: U.S. Energy Information Administration

24 Simulating the Effects of Higher Oil Prices Using a Structural Forecasting Model SOURCE: Macroeconomic Advisers (October 2004)

25 Risks to the Forecast Oil prices continue to rise, weakening consumer spending and heightening business uncertainty Low real interest rates cause demand growth to increase faster than expected inflationary effects from tighter labor and product markets offset Output gap not as large as consensus forecast suggests; in actuality monetary policy too accommodative

26 Percent 12 Hypothetical Neutral Federal Funds Target Rates Gap Neutral, 1% Inflation Target Actual Fed Funds Target Rate Neutral, 2% Inflation Target NOTE: Hypothetical fed funds target rate is the sum of the 40-quarter annualized growth rates of labor productivity and labor force growth, plus an assumed inflation target of either 1 or 2 percent.

27 Year-to-date Core PCE inflation rates and the FOMC s inflation projection for 2004 made in July 2004 Percent 3 2 FOMC Central Tendency (1.75 to 2.0%) 1 Core inflation, Jan. Aug Jan Mar May Jul Sep Nov 2004

28 Questions?