The Outlook for the U.S. Economy: Sunny Skies But Developing Storm Clouds? The Financial Executives Networking Group Des Peres, MO

Transcription

1 The Outlook for the U.S. Economy: Sunny Skies But Developing Storm Clouds? The Financial Executives Networking Group Des Peres, MO Kevin L. Kliesen Business Economist and Research Officer March 28,

2 Disclaimer The views I will express today are my own and do not necessarily reflect the positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System. 2

3 DATA HEAVEN RESIDES HERE! 3

4 The Big Picture We re into the 8 th year of expansion... The average expansion lasts about 5 years. Real GDP growth during this expansion has averaged about 2.25% per year. Historically, growth has averaged about 3% per year. There are many reasons for weaker growth: Deleveraging, tighter access to credit, reregulation, higher taxes, demographics, and less innovation. Inflation has been below the FOMC s 2% target for most of the past five years. 4

5 Forecasting Basics Joke of the Day! Economic forecasting is an imprecise exercise. Forecasters have a lot of hurdles to overcome: Imperfect data and models, assumptions about economic policy, unexpected developments (shocks) can t be accounted for. So, we assume to a large degree that the past is prologue, but recognize that households, firms, and governments can change their behavior. Incentives matter! Bottom line: Look at long-run trends and then attempt to assess where the economy is currently relative to trend. 5

6 So Many Questions! Is 2.25% economic growth still the norm? Or, will tax reform boost the economy s short- and long-term prospects? How should we think about the increase in the budget deficit due from tax cuts and increased spending? How will the new international trading framework affect the U.S. and world economies? Is inflation temporarily low? If so, what does that imply for the economy and monetary policy? 6

7 The Future Ain t What it Used to Be? Per Capita Real GDP, 1984 to Present Billions of $ ,000 60,000 The Labor Force Participation Rate and the Employment-to-Population Ratio, 1984 to Present Percent ,000 50, Participation Rate 45,000 40,000 35,000 30,000 25, SOURCE: U.S. Bureau of Economic Analysis Data through 2017:Q Employ/Pop Source: Bureau of Labor Statistics. Data through February

8 The Future Ain t What it Used to Be? Growth of Labor Productivity, 1948 to 2017 Percent change, annual data (2.8%) (1.5%) (2.6%) (1.2%) NOTE: Labor productivity is output per hour in the nonfarm business sector. Data for 2017 are for the first three quarters of

9 The Future Ain t What it Used to Be? The Fed's Preferred Inflation Measure Percent change from a year earlier 4.0 Long-Term Inflation Expectations (Inflation expectations based on TIPS) Inflation Expectations 2.0 FOMC Inflation Target (2%) FOMC Inflation Target (2%) 0.0 Jan.2010 Jul.2011 Jan.2013 Jul.2014 Jan.2016 Jul.2017 NOTE: Inflation calculated from the personal consumption expenditures price index. Last observation is February Source is the Bureau of Economic Analysis. 0.0 Jan.2010 Jul.2011 Jan.2013 Jul.2014 Jan.2016 Jul.2017 NOTE: Inflation calculated from the personal consumption expenditures price index. Inflation expectations are 5-year, 5-year forward break-even inflation rates. 9

10 A New Normal for Inflation? Some economists are beginning to wonder if 2% inflation is attainable in light of fundamental changes in the economy. For example, the fracking revolution in the United States seems to have permanently lowered the price of crude oil ( shale band ). Others wonder whether the Amazon effect has exerted similar effects on retail prices. Regardless, most people have confidence that the Fed will keep inflation under control. 10

11 Current Economic Developments 11

12 Current Economic Conditions Solid labor market conditions and low inflation. Consumer optimism supports spending on autos and other bigticket items. Global growth looks pretty strong even Europe is experiencing strong growth! Financial market volatility! Melt-up... Melt-down... Healthy forward momentum in the second half of 2017 bodes well for 2018 and Businesses are optimistic. 12

13 Two Key Barometers Looking Good Total Economy ISM Index, 50+ = Expansion (Feb) 35 Jan.2005 Jul.2007 Jan.2010 Jul.2012 Jan.2015 Jul.2017 Source: Author's calculations based on data published by Institute for Supply Management and the Bureau of Economic Analysis. Index of Leading Economic Indicators 2004= Jan.2005 Jul.2007 Jan.2010 Jul.2012 Jan.2015 Jul.2017 Last actual observation is February

14 Current Economic Conditions WHAT BUSINESSES ARE SAYING Sales nationally and internationally are strong in Q1. We are increasing our CapEx spend by 30% to 40% over [the] previous year. (Chemical Products) We have heard reports of additional business due to the recent reduction of tax rates. (Machinery) More than 40% of U.S. companies say they plan to boost wages and 38% will increase hiring in 2018 because of recent tax reform. (Duke CFO Survey, March 7, 2018) Business Roundtable CEO Economic Outlook Index Reaches Highest Level in Survey s 15-Year History. (BR Press Release, March 13, 2018) 14

15 Forecasters: Expect More CapEx What Are Forecasters Predicting for Real Business Capital Expenditures (Fixed Investment)? Percent changes at annual rates Actuals :Q1 2015:Q4 2016:Q3 2017:Q2 2018:Q1 2018:Q4 SOURCE: Survey of Professional Forecasters, Aug and Feb Feb Forecasts Aug Forecasts 15

16 Construction Outlook Appears to be Improving Dodge Momentum Index for Commercial Construction Year 2000 = SOURCE: Dodge Data & Analytics Data through February 2018 National Home Builders Housing Market Index Index, All Good = Average, Jan.2010 Jul.2011 Jan.2013 Jul.2014 Jan.2016 Jul.2017 Source: NAHB Last actual observation is Feb

17 Housing Markets in the Midwest Appear in Good Condition 17

18 U.S. Job Growth has Outpaced St. Louis Job Growth of Late The St. Louis MSA and U.S. Payroll Employment Growth Rates Percent change from 12 months earlier St. Louis Source: Bureau of Labor Statistics/ Haver Analytics; data through February 2018 U.S. 18

19 St. Louis Unemployment Rate is Lower than the Nation s Rate St. Louis MSA and United States Unemployment Rates Percent of civilian labor force St. Louis United States Source: Bureau of Labor Statistics/ Haver Analytics. Data through Jan./Feb

20 U.S. Unemployment Rates are Low, Regardless of How Measured The U-3 (Official) and U-6 Unemployment Rates and ther Long-Run Median Unemployment Rates Percent (Dotted Lines are Long-Run Medians) U U Source: Bureau of Labor Statistics. Data through February

21 Where are Job Openings the Most and Least Plentiful by Industry? Change in Job Openings Over the Past Year Percent change, Jan to Jan Construction 57.2% Trade, Transportation & Utilities 33.4% Leisure & Hospitality 20.8% Government 18.4% Manufacturing 17.0% Professional Business Services 17.2% Education & Health Care Services 2.6% SOURCE: Bureau of Labor Statistics Number of Unemployed Persons for Each Job Opening Ratio of unemployed to total job openings Last actual observation is January

22 Wage Growth is Picking Up According to Small Businesses Percent of Small Businesses Raising Labor Compensation Over the Past Three Months Last actual observation is February

23 U.S. Wage Growth has Picked Up and Inflation Remains Below 2%. The Atlanta Fed Wage Growth Tracker and Headline Inflation Percent change from a year earlier Wages Inflation -2.0 Jan.2005 Jan.2007 Jan.2009 Jan.2011 Jan.2013 Jan.2015 Jan.2017 A widening gap is good because it signals improving purchasing power of households (inflation-adjusted wages). Last actual observation is Jan./Feb

24 Are Households Too Optimistic? Consumer Confidence Index Jan.2000 Jan.2003 Jan.2006 Jan.2009 Jan.2012 Jan.2015 Jan.2018 NOTE: Avg. of Michigan and Conference Board surveys. Last monthly observation is Feb Personal Saving Rate Percent of disposable personal income SOURCE: BEA Last actual observation is January

25 Are Households Too Optimistic? Yes, if you factor in future taxes. Federal Budget Surplus and Deficit (-), 1960 to 2028 (P) Billions of dollars ,200 Actual CBO Projection (June 2017) 2017 OMB Proj (Feb. 2018) -1, SOURCE: FRB St. Louis, Haver Analytics, CBO, OMB. Federal Debt-to-GDP, 1940 to 2047 (P) Percent of GDP Actual CBO Projection Mar SOURCE: FRB St. Louis, Haver Analytics, CBO, OMB. 25

26 Financial Market Stress and Volatility Increases Modestly The St. Louis Fed's Financial Stress Index Weekly data The CBOE Equity Market Volatility Index (VIX) Weekly data Long-run average, Jan 2006 Jan 2008 Jan 2010 Jan 2012 Jan 2014 Jan 2016 Jan 2018 Last observation: Week of Mar. 16, Jan 2006 Jan 2008 Jan 2010 Jan 2012 Jan 2014 Jan 2016 Jan 2018 Last observation: Week of Mar. 23, St. Louis Fed Financial Stress Index Equity Market Volatility Index (VIX) 26

27 St. Louis MSA Growth Tends to Trail U.S. Real GDP Growth U.S. St. Louis MSA Avg., Avg.,

28 The FOMC: We re Bullish on the U.S. Economy! The Actual and Projected Federal Funds Target Rate Percent Fed Funds Rate FOMC SEP, Mar Information received since the Federal Open Market Committee met in January indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong in recent months, and the unemployment rate has stayed low. [FOMC Statement, March 21, 2018] 28

29 Why You Should be Optimistic... Cuts in marginal tax rates, coupled with increases in household wealth, should keep consumer spending and housing construction growing at healthy rates. Tax law changes will encourage firms to boost capital spending, hiring, and repatriate foreign profits. All else equal, these developments will tend to raise productivity, real wages, and economic growth. Unless inflation ramps up, the FOMC will be patient in withdrawing monetary stimulus. 29

30 And Why You Might Worry. Some of the latest data suggest first-quarter real GDP growth could be weaker than initially expected. Fiscal stimulus could produce faster-than-expected real GDP growth (a good thing!). But this could raise inflation expectations. Larger-than-expected budget deficits could also cause a spike in inflation expectations and thus interest rates. International trade disruptions could roil markets, raise business uncertainty, and lead to lower growth. 30

31 Kliesen s Forecast Projected averages, 2018 to 2020: Real GDP growth: 2.5% to 3.0% Unemployment rate: 3.75% to 4.25% Headline inflation: 2% (some upside risk) Punchline: Policy changes will boost economic growth. Inflation fears have crept into the market, so the Fed will need to remain vigilant. 31

32 QUESTIONS? 32