Growing for nearly a decade. 114 months and counting, through December Will become longest Post-War expansion if it lasts through July

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114 months and counting, through December Will become longest Post-War expansion if it lasts through

1 Economic Update Closing in on Expansion Record Byron Gangnes Professor of Economics Senior Research Fellow, UHERO University of Hawaii at Manoa VLI February 219 Hawaii Island Growing for nearly a decade 114 months and counting, through December Will become longest Post-War expansion if it lasts through July Millions Non-farm Payroll Jobs Dec-218

2 Tax cuts and optimism boosting growth US economic growth accelerated last year A kick from tax cuts Healthy jobs and confidence Some slowing is expected as fiscal stimulus wanes Growth of US Real Gross Domestic Product 18Q4 est. 215 III 216 III 217 III 218 III Fourth quarter 218 estimate from Survey of Professional Forecasters, 11/13/18. Unemployment near half-century low Steady job creation has reduced unemployment Likely below sustainable full employment levels Most of the labor market damage from the Great Recession is now healed US Unemployment Rate (SA) Dec % in Dec 218

3 Below 4%, but still adding jobs Thousands Change in payroll jobs Ave since Dec-218 Income gains have accelerated 4 Growth in nominal wage and salary income Q1 28 Q3 211 Q1 213 Q3 216 Q1 218 Q3

4 Spending picked up last year Retail sales growth near 6% 3-4% after inflation Part of that is higher spending on gas Holiday sales rose 5% according to MasterCard Strongest in 6 years Auto sales have been flat for two years 8% 6% 4% 2% % Quarterly Retail Sales Growth Other than gas 21 Q1 211 Q1 212 Q1 213 Q1 214 Q1 215 Q1 216 Q1 217 Q1 218 Q1 218 Q3 Consumers remain very confident University of Michigan Consumer Sentiment Forward-looking indicators suggest ongoing consumer strength Supporting factors Job security Wage gains Tax cuts Home appreciation Jan-219 Shutdown damage?

5 Global expansion may have peaked China slowing Weakness in exportdependent economies like East Asia, Germany Index Leading Indicators - OECD + 5 MNEs Sep-218 US exports to some markets are slowing US Export Growth World China Germany Nov-217 Jan-218 Mar-218 May-218 Jul-218 Sep-218

6 Manufacturing has slipped from recent highs >5 = Expansion 7 ISM US Purchasing Managers Index for Manufacturing Dec-218 Is housing expansion done? Thousands* 3, Housing Starts and Homebuilder confidence Index 1 2,25 NAHB Confidence 75 1, * Seasonally adjusted annual rate Housing Starts Dec

7 Effects of stimulus will ebb Fiscal stimulus last year Tax Cuts and Jobs Act 218 Budget Act Both buoyed spending in 218 Effects will start to wane this year of GDP Contribution to Growth from 217 Tax Cuts and Jobs Act and 218 Budget Act Source: CBO and National Taxpayers Union Outlook: US will converge to EU pace Growth of Real Gross Domestic Product 4 EU-15 United States Japan Source: UHERO and United Nations Project LINK

8 China trends lower, Brazil recovers 1 Growth of Real Gross Domestic Product China India Brazil Source: UHERO and United Nations Project LINK Is the next recession coming? Only a few signs are flashing red Stock prices and long-term bond yields have fallen Lower commodity prices reflect global softening Other indicators remain positive Consumer spending and productivity are up So are corporate profits Investment remains healthy in many countries $/bbl Oil Price, West Texas Intermediate May-217 Jul-217 Sep-217 Nov-217 Jan-218 Mar-218 May-218 Jul-218 Sep-218 Nov-218 Jan-219

9 Where are the biggest risks? Candidates? Government shutdown Trade war Fed actions Equity market correction or bear Rising corporate debt Federal shutdown The federal shutdown imposed a short-run hit Some spending was just shifted to later time Might the effects be more persistent? Effect of hit to confidence? Will we see another one? Change in Annualized GDP Growth rate Direct effect of federal shutdown 218Q4 Macro Adv. CBO CEA 219Q1 219Q2? My calculations based on Macroeconomic Advisers, January 4, 219; Congressional Budget Office, January 219; Council of Economic Advisors, January 15, 219.

10 The trade war How much it hurts will depend on actions and reactions Chg in GDP United States Chg in GDP China Tariffs in baseline Add cars, trucks, and parts with retaliation Add market reaction Add China (25 percent on $267 billion) with retaliation Add confidence effect Source: International Monetary Fund, World Economic Outlook, October 218. Fed signals a halt in interest rate hikes for now Fed had signaled two more rate hikes this year But last week said they will be patient about future hikes Cited global economic and financial developments and muted inflation pressures. Chairman Powell: My colleagues and I have one overarching goal: To sustain the economic expansion Federal Funds Rate ?

11 Inflation has moved to Fed s comfort zone PCE Deflator (Core) Yield curve close to inverting 4 CPI (Core) 27 Q1 28 Q1 29 Q1 21 Q1 211 Q1 212 Q1 213 Q1 214 Q1 215 Q1 216 Q1 217 Q1 218 Q1 218 Q3 Yields on Treasury Securities of Different Maturities "Target" Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 1 Yr 2 Yr 3 Yr 1/3/17 1/2/18 12/31/18

12 Equity market adjustment After a Trump bump in 217, US markets moved sideways for much of 218 Recently flirting with Bear Market Overseas markets have fared worse Does this signal economic trouble to come? 3,1 2,9 2,7 2,5 2,3 2,1 1,9 1,7 1,5 S&P 5 Stock Price Index Jan-214 Jul-214 Jan-215 Aug-215 Feb-216 Aug-216 Mar-217 Sep-217 Mar-218 Oct-218 Feb-219 Equity markets predict lots of recessions Index Jan-1972 Sep-1974 Real equity prices May-1977 Jan-198 Sep-1982 May-1985 Jan-1988 Sep-199 May-1993 Jan-1996 Sep-1998 May-21 Jan-24 Sep-26 May-29 Jan-212 Sep-214 May-217 Dec-218 Wilshire 5 total market index relative to personal income; Dec. 31, 218 uses Gangnes estimate of Dec 218 personal income. Dec. 31, 218

13 Corporate debt levels look risky 15% 13% 11% 9% Household and corporate debt burdens Household debt service share Corp debt to GDP 8% 7% 6% 5% 4% 7% 199 Q Q Q Q4 23 Q1 26 Q2 29 Q3 212 Q4 216 Q1 218Q2 3% Or something we don t expect Recessions often come from unanticipated shocks or policy errors Brexit? Politics? Geopolitics???

14 Two recession probability models 1% 75% 5% 25% % Jan-1985 Jul-1986 Jan-1988 Jul-1989 Jan-1991 Jul-1992 Jan-1994 Jul-1995 Jan-1997 Jul-1998 Jan-2 Jul-21 Jan-23 Jul-24 FRBNY Piger Jan-26 Jul-27 Jan-29 Jul-21 Jan-212 Jul-213 Jan-215 Jul-216 Jan-218 Jul-219 Two recession probability models + 1 1% 75% 5% 25% % Jan-1985 Jul-1986 Jan-1988 Jul-1989 Jan-1991 Jul-1992 Jan-1994 Jul-1995 Jan-1997 Jul-1998 Jan-2 Jul-21 Jan-23 Jul-24 FRBNY Piger Jan-26 Jul-27 Jan-29 Jul-21 Jan-212 Jul-213 Jan-215 Jul-216 Jan-218 Google searches Jul-219

peak At full employment little room exists for upside surprises

15 Not over yet Odds look good for continued, but slower growth Tax cut effects will wane And global business cycle may be past its peak At full employment little room exists for upside surprises That focuses us on downside risks Never count this expansion out

Nonfarm Payroll Employment

Nonfarm Payroll Employment PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS, FEDERAL RESERVE BANK OF BOSTON Current Economic Developments - June 10, 2004 Data released since your last Directors' meeting show the economy continues to