The US Economic Outlook (with a Fed twist)

Transcription

1 The US Economic Outlook (with a Fed twist) Presentation prepared for the Economic Outlook Conference 2011 January 13, 2011

2 Chapter 1: Why the FOMC went with QE2, an interpretive dance by David Altig, who offers these words without speaking for the Federal Reserve Bank of Atlanta, the Federal Reserve System, or anyone else. 2

3 Alice Cooper Labor Markets 3

4 Jobs growth continues to disappoint, however, and private payrolls expanded by only 113 thousand workers in December. 400 Change in Private Nonfarm Payroll Employment December 2010, thousands Not enough to seriously dent the unemployment rate Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Source: U.S. Bureau of Labor Statistics 4

5 Economists have not materially changed their outlook for unemployment, which continues to project joblessness persistently high over the forecast horizon. Blue Chip Unemployment Rate Forecast Quarterly Average Actual Jan 10 Median Forecast top ten bottom ten 0 Q1-07 Q3-07 Q1-08 Q3-08 Q1-09 Q3-09 Q1-10 Q3-10 Q1-11 Q3-11 Source: BLS, Blue Chip panel of economists, January 10,

6 CPI inflation trending lower 5% Consumer Price Index percent change year-over-year Disinflation 4% 3% 2% 1% 0% Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Core Median Trimmed Mean through October Source: Bureau of Labor Statistics, FRB Cleveland

7 7 Nearly 72% of the prices in the consumer price index rose by 1-1/2 percent or less in November Falling prices: Lodging away from home, footwear, piped gas and electricity, processed fruits and vegetables, used cars and trucks, men s and boys apparel, new vehicles, household furnishings and operations, car and truck rental, communication, tobacco and smoking products, fresh fruit and vegetables, dairy and related products. Prices rising from 0% to 1-1/2% : Motor vehicle fees, motor vehicle maintenance and repair, alcoholic beverages, recreation, leased cars and trucks, owner s equivalent rent of residences (in all regions), medical care services, food away from home, other food at home, personal care services

8 Private-sector inflation forecasts revised lower 3 CPI Inflation Projections: Survey of Professional Forecasters quarterly Deflation scare yr ahead 1-yr ahead

9 Implied longer-term TIPS inflation expectations drifted lower over the summer yr/5-yr Forward Breakeven Inflation Rates percent Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Source: Barclays 9

10 Probability of deflation over the next 5 years from TIPS market increased over the summer Probability that reference CPI on April 15, 2015 is below its April 15, 2010 level percent Probability calculated with TIPS pricing model May-10 Jun-10 Jul-10 Aug-10 Source: FRB Atlanta calculations

11 Chapter 2: Wherein I assert the policy actually worked. 11

12 Interest rates have increased since November, but fell after to the signal of more easing to come Jun Jun Jun Jun Jun Jun Jun Jun Jul Jul Jul Jul Jul Jul Jul Aug Aug Aug Aug Aug Aug Aug Sep Sep Sep Sep Sep Sep Sep Oct Oct Oct Oct Oct Oct Oct Nov Nov Nov Nov Nov Nov Dec Dec Dec Dec Dec Dec Dec Dec Jan Jan Chairman Bernanke speaks 5-Year Treasury Yield Asset purchases announced FOMC invokes reinvestment policy Dec. FOMC meeting 0 Source: Barclays 12

13 Inflation expectations recovered since asset purchases were first mentioned in August November FOMC September FOMC Jackson Hole Speech 13

14 Probability of deflation over the next 5 years from TIPS market has moderated Probability that reference CPI on April 15, 2015 is below its April 15, 2010 level percent 35 September FOMC Probability calculated with TIPS pricing model 15 November FOMC May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Source: FRB Atlanta calculations

15 Chapter 3: Looking ahead, with optimism. 15

16 After slowing rapidly in the summer, the economy appears to be strengthening again. 7 Real GDP Growth quarterly, annualized % change 5 3 Q4 2010(e) 2.8% The summer slide -5-7 Mar.2008 Sep.2008 Mar.2009 Sep.2009 Mar.2010 Sep.2010 Source: U.S. Bureau of Economic Analysis and Macroeconomic Adviser s tracking report.

17 The consensus outlook for real GDP growth in 2011 has been revised sharply higher over the past two months, largely on the much improved outlook for consumer spending. 3.5 Consensus 2011 real growth forecast (%) Real GDP Real PCE May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Source: BlueChip forecast, Jan. 10, 2011 Date of forecast 17

18 Chapter 4: Wherein the economist in me takes over and I feel compelled to say something negative on the other hand. 18

19 19 Three headwinds 1. Uncertainty still abounds. 2. The consumer upside has its limits. 3. Credit markets continue to mend.

20 20 Three risks 1. Housing prices continue to tumble. 2. European financial market woes are not contained. 3. Inflationary pressures from rising commodity prices, for example become pervasive.

21 Source: BlueChip forecast, Jan. 10, Private economists have shifted the balance of risks for both growth and inflation to the upside. Is U.S. real GDP growth in 2011 MORE LIKELY to exceed or fall short of current consensus expectations? More likely to exceed More likely to fall short 93.2% 6.8% Is U.S. consumer price inflation in 2011 MORE LIKELY to exceed or fall short of current consensus expectations? More likely to exceed More likely to fall short 73.9% 26.1%

22 US Economic Outlook (with a Fed twist)