Emerging Trends in the U.S. and Colorado Economies

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1 Emerging Trends in the U.S. and Colorado Economies Alison Felix Economist and Branch Executive Federal Reserve Bank of Kansas City Denver Branch The views expressed are those of the presenter and do not necessarily reflect the positions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.

2 The Structure of the Federal Reserve System The Federal Reserve System was created by Congress in It is a public-private, decentralized institution consisting of the Board of Governors in Washington, D.C. and 12 regional Reserve Banks. Board of Governors Consists of seven members who are appointed by the President and confirmed by the Senate to serve 14-year terms. There are currently five members of the Board of Governors: Jerome Powell, Michelle Bowman, Lael Brainard, Richard Clarida and Randal Quarles. Regional Federal Reserve Banks There are 12 Regional Reserve Banks, each serving a unique district. These are semiindependent by design. The Reserve Banks are governed by their Board of Directors, and the Directors (excluding Banking Directors) select the President of the Bank. Federal Open Market Committee (FOMC) Comprised of the 7 members of the Board of Governors and the 12 Reserve Bank Presidents (only 5 presidents are voting members on a rotating basis). Charged with conducting monetary policy.

3 Regional Federal Reserve Banks and Branch Locations

4 The Primary Functions of the Federal Reserve System Conduct the Nation s Monetary Policy The Federal Open Market Committee is the group charged with conducting monetary policy within the U.S. The Committee has a statutory mandate from Congress to promote maximum employment, stable prices and moderate long-term interest rates. Provide and Maintain an Effective and Efficient Payments System The Federal Reserve supplies payments services to the public through depository institutions including banks, credit unions and savings and loans. We also serve as a banking and fiscal agent for the United States government. Payment services includes cash processing, processing and clearing checks, transferring funds and issuing, transferring and redeeming U.S. government securities. Supervise and Regulate Banking Operations The Federal Reserve ensures the safety and soundness of banks and ensures that banks provide fair and equitable services to consumers. The Federal Reserve also monitors and promotes the stability of the financial system as a whole.

5 After accelerating last year, U.S. economic growth is expected to slow modestly in the years ahead. REAL U.S. GROSS DOMESTIC PRODUCT Percent Change from Previous Quarter at Seasonally Adjusted Annualized Rates 6% 4% 2% High Low 0% -2% -4% -6% Year-over-Year Percent Change -8% -10% '08Q3 '09Q3 '10Q3 '11Q3 '12Q3 '13Q3 '14Q3 '15Q3 '16Q3 '17Q3 '18Q3 Sources: Bureau of Economic Analysis and Federal Open Market Committee (FOMC)/Haver Analytics *Projections as of December FOMC meeting FOMC Central Tendency Projections*

6 The unemployment rate has declined steadily over the past eight years and has fallen below most estimates of its longer-run level. U. S. UNEMPLOYMENT RATE Seasonally Adjusted 11% 10% 9% 8% 7% 6% 5% 4% Median of FOMC longer-run projection* FOMC Projections* 3% '00 '03 '06 '09 '12 '15 '18 Sources: Bureau of Labor Statistics, National Bureau of Economic Research and Federal Open Market Committee (FOMC)/Haver Analytics *Projections as of December FOMC meeting; median unemployment rate '21

7 Inflation is near the FOMC s two percent target. PERSONAL CONSUMPTION EXPENDITURE PRICE INDEX (PCEPI) Percent Change Year-over-Year 4% 2% Headline Inflation FOMC s Target Inflation Rate FOMC* Projections 0% Core Inflation -2% Sources: Bureau of Economic Analysis and Federal Open Market Committee/Haver Analytics *Projections as of December FOMC meeting; median projections

8 Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. - January 2019 FOMC Statement 6% 5% 4% FOMC MEDIAN PROJECTIONS: DECEMBER, % 2% EFFECTIVE FEDERAL FUNDS RATE 1% 0% Source: Federal Reserve Board/Haver Analytics

9 FEDERAL RESERVE BALANCE SHEET Trillions $5 $4 $3 Short term lending, targeted lending programs, and rescue operations MBS & agency debt $5 $4 $3 $2 $1 Treasury securities and other assets $2 $1 $ $0 Source: Federal Reserve Board, Haver Analytics, and author s calculations.

10 Employment has been increasing in Colorado and the nation for more than eight years, with Colorado gains outpacing the nation. PAYROLL EMPLOYMENT GROWTH Index 100 = December, 2007, Seasonally Adjusted Percent Change Dec. 07 to Present Past Year U.S. (Dec. 18) 8.6% 1.8% Colorado (Dec. 18) 17.5% 2.8% Denver (Dec. 18) 20.6% 2.1% Denver Colorado United States Dec. '07 Oct. '09 Aug. '11 Jun. '13 Apr. '15 Feb. '17 Dec. '18 Source: Bureau of Labor Statistics, Haver Analytics and author s calculations.

11 The majority of industries in Colorado have added jobs over the past year. CHANGE IN PAYROLL EMPLOYMENT, DECEMBER 2018 Seasonally Adjusted Percent Change Year-over-Year Natural Resources & Mining Professional & Business Services Manufacturing Transportation & Utilities State Government Leisure & Hospitality Health Care & Social Assistance Retail Trade Information Other Services Financial Activities Wholesale Trade Local Government Construction Federal Government Private Educational Services Source: Bureau of Labor Statistics/Haver Analytics -0.1% -0.6% -4.2% 5.2% 3.9% 3.8% 3.6% 3.5% 2.9% 2.6% 2.3% 2.3% 1.1% 1.1% 1.1% 17.5% Colorado United States

12 Unemployment rates are low across most of Colorado. UNEMPLOYMENT RATES November 2018, Seasonally Adjusted Unemployment Rate U-3 U-5* U-6* United States (Dec. 18) 3.9% 4.8% 7.6% Colorado (Dec. 18) 3.5% 3.8% 6.3% Denver (Nov. 18) 3.4% *U-5 and U-6 values are 12-month moving averages as of Q for Colorado and are for December, 2018 for the United States. Less than 2% 2 to 3% 3 to 4% 4 to 5% Greater than 5% Source: Bureau of Labor Statistics/Haver Analytics

13 Wage gains have picked up over the past year but remain moderate. NOMINAL WAGE AND SALARY GROWTH PER EMPLOYEE Year-over-Year Percent Change, Four-Quarter-Moving-Average 11% 11% 8% 5% Q United States 2.9% Colorado 2.6% 8% 5% 2% 2% -1% -1% Q3: '00 Q3: '06 Q3: '12 Q3: '18 Note: Gray bars indicate recession. Source: Bureau of Economic Analysis, Bureau of Labor Statistics and National Bureau of Economic Research /Haver Analytics

14 Labor force participation rates have increased substantially in Colorado over the past three years. LABOR FORCE PARTICIPATION RATES Seasonally Adjusted 80% 75% 70% Colorado 69.2% 65% 60% United States 63.1% 55% Dec. '00 Jun. '05 Dec. '09 Jun. '14 Dec. '18 Note: Gray bars indicate recession. Source: Bureau of Labor Statistics and National Bureau of Economic Research/Haver Analytics

NET MIGRATION Total 2017 Net Migration as a Percentage of 2017 Population Annual Percent

15 Colorado continues to experience net in-migration, but the pace of growth has slowed somewhat over the past couple of years. NET MIGRATION Total 2017 Net Migration as a Percentage of 2017 Population Annual Percent Change 2018 United States 0.3% Colorado 0.9% Denver County (2017) 0.7% Durango More than 2% 1% to 2% 0% to 1% -1% to 0% -2% to -1% Less than -2% Source: Census Bureau

16 Residential construction activity has increased significantly since 2009, but multifamily permitting has started to slow. RESIDENTIAL PERMITS Seasonally Adjusted, Year-to-Date Through October Colorado Denver 50,000 40,000 Multifamily Single Family 32,000 28,000 24,000 Multifamily Single Family 30,000 20,000 16,000 20,000 12,000 10,000 8,000 4, Source: Census Bureau/Haver Analytics

17 Low inventories have led to strong home price appreciation in recent years in Colorado. HOME PRICES Seasonally Adjusted, Index 100 = Q3: Denver Colorado United States '08Q3 '10Q3 '12Q3 '14Q3 '16Q3 '18Q3 Source: Federal Housing Finance Agency/Haver Analytics

18 Vacancy rates are low across the Denver metro area. DENVER COMMERCIAL VACANCY RATES 20% 18% 16% 14% 12% 10% 8% 6% 4% Office Retail Industrial Multi-Family 2% 2007:Q3 2010:Q2 2013:Q1 2015:Q4 2018:Q3 Source: CBRE Econometric Advisors

19 Tourism remains an important sector for the Colorado economy. HOTEL OCCUPANCY RATES Colorado HOTEL ROOM RATES Colorado, 2018 Dollars 90% $190 80% $180 70% 60% 50% 40% 30% 10-Year Avg Year Average Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec 70.7% 65.5% YTD Averages $170 $160 $150 $140 $130 $120 $110 $100 Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec $157.5 $146.4 YTD Averages Source: Colorado Hotel and Lodging Association

20 Overall, the services sector continues to expand at a solid pace, and contacts expect additional gains in the months ahead. NON-MANUFACTURING AND SERVICES ACTIVITY Diffusion Index, Seasonally Adjusted, Month-over-Month Expanding U.S December 2018 Kansas City 55.3 District December Contracting 40 Dec. '14 Dec. '15 Dec. '16 Dec. '17 Dec. '18 Source: Kansas City Federal Reserve Bank, ISM/Haver Analytics

21 65 Manufacturing activity has been strong the past two years, but recent surveys suggest the pace of expansion may be slowing. MANUFACTURING ACTIVITY Diffusion Index, Seasonally Adjusted, Month-over-Month Expanding Contracting U.S December 2018 Kansas City 53.0 District December Dec. '08 Dec. '10 Dec. '12 Dec. '14 Dec. '16 Dec. '18 Source: Kansas City Federal Reserve Bank, ISM/Haver Analytics

22 Despite ongoing trade and tariff concerns, exports from Colorado increased last year. COLORADO EXPORTS BY TRADING PARTNER Billions $9.0 $8.0 $7.0 $6.0 $5.0 $4.0 $3.0 $2.0 $1.0 $0.0 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 Sources: WISERTrade and Census Bureau '17'18 YTD October OCTOBER 2018 YEAR-TO-DATE Year-over-Year Percent Change Total Trade 5.4% SHARE* All Other % Japan Mexico Canada China Eurozone *Shares are for 2017

23 After depreciating in 2017, the dollar has appreciated over the past year. FOREIGN EXCHANGE VALUE OF THE DOLLAR Index March 73 = Appreciating US$ Nominal trade-weighted exchange value of US$ vs. major currencies Source: Federal Reserve Board, NBER./Haver Analytics

24 Energy activity rose substantially over the past two years in response to higher oil prices. CRUDE OIL PRODUCTION Millions of Barrels, Monthly, Seasonally Adjusted U.S United States (left) CO Colorado (right) Nov. '08 Nov. '10 Nov. '12 Nov. '14 Nov. '16 Nov. '18 Source: Baker Hughes, Energy Information Administration/Haver Analytics

25 However, employment in Colorado s energy sector remains below previous peak levels. NATURAL RESOURCES AND MINING EMPLOYMENT Seasonally Adjusted, Thousands United States (left) Colorado (right) Jan. '09 Jan. '11 Jan. '13 Jan. '15 Jan. '17 Jan. '19 Source: Bureau of Labor Statistics & Haver Analytics

26 Looking ahead, oil prices have fallen in recent months and are expected to remain near current levels. ENERGY PRICES $/ Barrel $/Million BTU WTI Oil Spot Price (left-axis) $140 $14 Henry Hub Spot Price (right-axis) $120 $12 $100 $80 $60 $40 $20 Futures $0 Jan. '08 Jan. '10 Jan. '12 Jan. '14 Jan. '16 Jan. '18 Jan. '20 $10 $8 $6 $4 $2 $0 Source: Bloomberg Energy Services

27 As oil prices declined, drilling activity fell in the fourth quarter for the first time in almost three years FRBKC ENERGY SURVEY Quarterly Diffusion Indexes Employment Wages/Benefits Employee Hours Source: Federal Reserve Bank of Kansas City Drilling/Business Activity Access to Credit Profits Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q (exp) Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q (exp)

28 Oil prices are expected to remain below the level needed for a substantial increase in drilling over the next two years. ENERGY SURVEY SPECIAL QUESTION Q4:2018 Oil (WTI) $ / barrel $ / mbtu $120 $6 $100 $66 $5 $3.48 $80 $63 $59 $61 $54 $4 $60 $3 Natural Gas (Henry Hub) $3.54 $3.23 $3.06 $3.12 $40 $2 $20 $1 $0 Substantial Increase in Drilling Price Exp. in 6 months Exp. in 1 year Exp. in 2 years Exp. in 5 years $0 Substantial Increase in Drilling Price Exp. in 6 months Exp. in 1 year Exp. in 2 years Exp. in 5 years Notes: Blue bars represent range for survey respondents. Numbers above bars indicate average of the range (the black line in the middle of the blue bars). Source: Kansas City Federal Reserve Bank Energy Survey

29 Slightly more energy contacts expect a decline in capital expenditures in 2019 compared to 2018 levels than expect an increase. ENERGY SURVEY SPECIAL QUESTION Q4: % What are your expectations for your firm s capital spending in 2019 versus 2018? 20% 15% 10% 5% 0% Increase significantly Increase slightly Source: Kansas City Federal Reserve Bank Energy Survey Remain close to 2018 levels Decrease slightly Decrease signifcantly No opinion/don't know

30 Many firms have reduced their 2019 capital spending plans as a result of the recent drop in oil prices. ENERGY SURVEY SPECIAL QUESTION Q4: % 30% 25% 20% 15% 10% 5% Has the recent drop in oil prices caused you to lower expectations for your firm s capital spending in 2019? 0% Yes significantly lower Source: Kansas City Federal Reserve Bank Energy Survey Yes slightly lower No Too soon to make a decision No opinion/don't know

31 The agriculture sector continues to struggle as commodity prices remain low. U.S. REAL NET FARM INCOME Billions, 2017 Dollars * *Forecast for 2018 Source: USDA

32 For additional information on the regional economy:

Emerging Trends in the U.S. and Colorado Economies

Emerging Trends in the U.S. and Colorado Economies Sam Chapman Associate Economist Federal Reserve Bank of Kansas City Denver Branch The views expressed are those of the presenter and do not necessarily