The Outlook for the U.S. Economy And Some Longer Term Issues

Transcription

1 The Outlook for the U.S. Economy And Some Longer Term Issues Anthony Murphy Federal Reserve Bank of Dallas GIC Central Banking Conference Madrid, 3 Oct 2016 The views expressed are those of the author, and are not those of the Federal Reserve Bank of Dallas or of the Federal Reserve System. 1

2 General Remarks The Fed is tasked with Conducting monetary policy subject to a dual mandate (price stability and maximum employment), unlike the ECB; Supervising and regulating banks to ensure the safety and soundness of the banking and financial system; Maintaining financial stability and containing systematic risk; Providing financial services and playing a major role in operating the U.S. s payment systems I will talk about the U.S. economic outlook and some longer term aspects of U.S. monetary policy (but not timing issues) I will also discuss the limits of monetary policy 2

3 U.S. Economic Growth Has Been Pretty Modest and Uneven Contributions to Real GDP Growth (PPAR) H1 GDP Growth, % SAAR Personal Consumer Expenditure, PCE Non-Residential Fixed Investment Residential Fixed Investment Inventories Net Exports Government Note: PPAR = percentage points at annual rates, SAAR = seasonally adjusted at annual rates. Source: BEA. 3

4 Many External and Internal and External Shocks Including Low Oil Prices Oil & Gas Related Investment v. Other Non-Residential Investment 2009$B, SAAR 2009$B, SAAR Structures + Equipment + IP 2,000,000 1,800,000 1,600, ,000 Structures & Equipment 1,400, ,000 1,200, , , , ,000 Other Sectors Struct & Equip Mining Sector Struct & Equip 1,000,000 80,000 60, Source: BEA and author s calculations. 4

5 Deleveraging Important Reason Why Recovery from Great Recession So Slow Household Deleveraging Probably Complete Percent H'hold Net Worth / Income H'hold Debt / Income Sources: BEA and Federal Reserve, 5

6 Unemployment Rate Close to NAIRU or Natural Rate U6 Includes Part Time for Economic Reasons and Discouraged Workers Percent, SA "Broad" U6 Unemployment Rate "Headline" U3 Unemployment Rate 9.7% Aug '16 4.9% CBO "NAIRU" or Natural Rate Source: BLS and CBO. 6

7 Labor Force Participation Rate Ticks Up Uncertain Demographic + Cyclical + Residual (Secular Trends) Components ercent, SA Labor Force Participation Rate Employment to Population Rate 62.8% Aug ' % Source: BLS. 7

8 Wage Inflation Slowly Picking Up Need to Look at a Range of Wage Measures 6 Employee Cost Index (Y/Y,%) 6 Ave Hourly Earnings (Y/Y,%) % 2016 Q % Aug Atlanta Fed Wage Tracker (Y/Y,%) 3.3% Aug 2016 Smoothed Median Source: BLS and Atlanta Fed. 8

9 Forecasts of Output and Unemployment Moderate Output Growth and Unemployment Below NAIRU 2016 Q Q Q4/Q Q4/Q Q4/Q Q4/Q4 Real GDP Growth FOMC (21 Sep) Blue Chip (10 Sep) SPF (12 Aug) e 2.2 e 2.2 e 2016 Q Q Q Q Q4 Unemployment Rate FOMC Blue Chip SPF e 4.6 e 4.7 e Sources: Blue Chip Economic Indicators (10 Sep 2016), Survey of Professional Forecasters (SPF, 12 Aug 2016), and Federal Open markets Committee Summary of Economic Projections (FOMC, 21 Sep 2016, median). 9

10 Short-Term Output Forecasts and Outcomes Forecasts Mean Reverting and Over Optimistic Percent, SAAR GDP Growth Rate 2009 M3 Forecast 2010 M3 Forecast 2011 M3 Forecast 2012 M3 Forecast 2013 M3 Forecast 2014 M3 Forecast 2015 M3 Forecast 2016 M3 Forecast Sources: Blue Chip Economic Indicators (March forecasts) and BEA (latest Estimates). 10

11 Percent, SA 11 Unemployment Forecasts and Outcomes Forecasts Too Pessimistic M3 Forecast 2015 M3 Forecast 2014 M3 Forecast 2013 M3 Forecast 2012 M3 Forecast 2011 M3 Forecast 2010 M3 Forecast Sources: Blue Chip Economic Indicators (March forecasts) and BLS. 11

12 Underlying Inflation Close to 2% Target Percent 5 12 Month PCE Inflation 4 3 2% Target Headline (All Items) Trimmed Mean Core (Ex. Food & Energy) Sources: BEA and Dallas Fed. 12

13 Consumer and Professional Long Run Inflation Expectations Fairly Well Anchored Consumers' Expected Inflation 5 to 10 Years Ahead % Forecasters' Expected CPI Inflation 10 Years Ahead 2.2% Years Ahead 2.1% Sources: U. Michigan / Reuters Survey of Consumers and SPF. 13

14 Market and Professional Inflation Expectations Differ Percent Survey Based (Blue Chip & SPF) Market Based (CL Fed) Sep 2014 Sep 2015 Sep Months Sources: Aruoba (2016), Philly and Cleveland Feds. 14

15 2016 Q3 Forecasts of Inflation Reverting to Target 2016 Q Q4/Q Q4/Q Q4/Q Q4/Q4 CPI Inflation Blue Chip (10 Sep) SPF (12 Aug) PCE Inflation FOMC (21 Sep) SPF Core PCE Inflation FOMC SPF Sources: Blue Chip Economic Indicators (10 Sep 2016), Survey of Professional Forecasters (SPF, 12 Aug 2016), and Federal Open markets Committee Summary of Economic Projections (FOMC, 21 Sep 2016, median). 15

16 Monetary Policy U.S. is closer to normalizing monetary policy: o The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress towards its objectives FOMC Statement, 21 Sept 2016 o Near term risks to the economic outlook appear roughly balanced By contrast, the ECB is unlikely to reduce monetary accommodation any time soon The underlying problems of the EZ remain o It is not close to being an optimal currency union o There is no fiscal union, and adjustments costs are very unevenly distributed among member states o Supply side reforms have been slow 16

17 Longer Term Economic Issues in U.S. Lower output growth and productivity growth in the long term? o Lower growth rate lower r* (natural rate of interest) near zero lower bound (ZLB) more likely to be hit in a recession Combination of changing demographics, less capital deepening and lower total factor productivity etc. At micro level, lower TFP reflected in: o Widening gaps between most and least productive firms o Fewer start-ups and less reallocation of production among firms Aging demographics and the level of government debt Limited role for monetary policy (or short-term fiscal policy) in addressing these issues Some role for macro-prudential policies, but there are trade-offs Sensible supply sides policies needed (Congress not FOMC) 17

18 Slow Growth in GDP and Hours Since 2006 Demographics Important Memo: GDP Hours Population Labor force participation Employment rate Hours per person Note: Average annualized Q4/Q4 percentage change. Sources: BEA, BLS and Fischer (2016).Δ 18

19 Decline in Productivity Growth in Business Sector TFP Badly Measured Etc., But Slowed Before the Great Recession Output Labor input Labor productivity Labor composition Capital deepening Total factor productivity TFP Note: Average annualized Q4/Q4 percentage change. TFP figures are adjusted for utilization. Sources: BEA, BLS, Fernard (2014) and Fischer (2016). 19

20 Laubach & Williams Estimates of Natural Rate of Interest r* Percent 4 At Lower End of Range of Estimates of r* x Time Varying Long-Run Growth Rate (g*) 1 0 Natural Rate of Interest (r*) r* = 1.36 g* + z 0.2% -1-2 Other Unspecified Factors (z) Source: Laubach and Williams (2003, updated 2016). 20

21 Estimates of Long-Run GDP Growth Year Blue Chip SPF CBO FOMC % 3.0% 2.9% % 3.3% 2.6% % 2.6% 2.2% 2.7% % 2.5% 2.3% 2.5% % 2.6% 2.1% 2.3% % 2.3% 1.9% 2.0% 1.8% Sources: Blue Chip Economic Indicators, Survey of Professional Forecasters (SPF), Congressional Budget Office (CBO) and Federal Open markets Committee (FOMC) Summary of Economic Projections (median). 21

22 Suggested Policies to Promote Productivity Growth Bailey & Montalbano, Brookings, Sept 2016 Greater competition o Simplify regulation o Limit patents too little competition, too much rent seeking o Reduce licensing restrictions barrier to entry o More competition in health care Invest in worker skills Invest in infrastructure Tax reform Greater Federal support for R&D 22

23 U.S. Monetary Policy Many Open Issues Mechanics (and timing) of normalization o Very large balance sheet, the results of QE / LSAPs o At present, maturing Treasuries are rolled over and principal repayments on Agency debt and MBS are reinvested o Awash with reserves, so traditional tools for controlling short term rates supplemented o IOR (interest on reserves) and RRP (reverse repos) important Longer term issues include: o ZLB (near zero lower bound) and the size of the Fed s balance sheet o ZLB and inflation target why not 3% rather than 2%? o Should the range of QE / LSAP assets be extended beyond Treasuries and Agency debt & MBS? 23