Economic Outlook. Cathy E. Minehan President and CEO Federal Reserve Bank of Boston. Presented to Regional and Community Bankers June 7, 2005

Transcription

1 Economic Outlook Cathy E. Minehan President and CEO Federal Reserve Bank of Boston Presented to Regional and Community Bankers June 7, 5

2 Overview of the US Economy Over the near-term, the expansion appears to be on a solid footing Risks on the downside: Will businesses and consumers stay the course? Is there a housing bubble? Inflation risks: The effect of oil and other input price increases are likely to moderate. New England continues to grow along with the nation In the longer run, national savings needs to increase.

3 Much of the recent Soft Patch was revised away Percent Annualized Change 5 Real GDP- Before Revision Real GDP After Revision Consensus Forecast of Real GDP 3 1 :Q :Q3 :Q 5:Q1 5:Q 5:Q3 5:Q 6:Q1 Source: Bureau of Economic Analysis. Consensus Forecast. Looking forward, businesses and consumers will be the key to the continued expansion 3

4 Firms demand for capital equipment rebounded in April after two months of weak numbers, 5:Q1 value 59 Mfrs' Shipments: Nondefense Capital Goods ex Aircraft (SA, Mil.$) 58 May- Jul- Sep- Nov- Jan-5 Mar-5 May-5 Source: Census Bureau. 11 but the expansion of profits and the buildup of cash should support investment in the future Investment as a Percentage of Cash Flow 6 196:Q1 1965:Q3 1971:Q1 1976:Q3 198:Q1 1987:Q3 196:Q 1968:Q 1973:Q 1979:Q 198:Q 199:Q Source: Bureau of Economic Analysis. Plant and Equipment Investment 1993:Q1 1998:Q3 1995:Q 1:Q :Q1

5 Increasing housing wealth has helped propel the consumer Percent Change, Year-Over-Year Housing and Consumption Growth Contribution of Housing to Consumption Personal Consumption Expenditures Percent C hange, Year-O ver-year Source: OFHEO, Bureau of Economic Analysis and author's calcuations driven, in part, by rising housing prices 1 13 House Price Index, United States (Q1-8=1) :Q 1:Q 1:Q :Q :Q 3:Q 1:Q1 1:Q3 :Q1 :Q3 3:Q1 3:Q3 So u rce : O ffice o f F ed e ral H o u sin g E n te rp rise O ve rsigh t. 3:Q A nnual G row th R ate for the Past Q uarters :Q1 :Q :Q3 :Q 5:Q1 5

6 Source: Census Bureau. Rising real estate prices have decreased affordability, but low interest rates and strong employment growth have left overall affordability high Composite Housing Affordability Index (Median Inc=Qualifying Inc=1) 6 198:Q1 1983:Q1 1986:Q1 1989:Q1 199:Q1 1995:Q1 1998:Q1 1981:Q3 198:Q3 1987:Q3 199:Q3 1993:Q3 1996:Q3 1999:Q3 Which explains the continued strength in the housing market Thousands of Units 1:Q1 :Q3 :Q1 5 N ew Pvt H ousing U nits A uthorized by Building Permits- April 5 Value: Housing Starts: 1 unit- Aril 5 Value: 16 5 New Pvt Housing Units Authorized by Building Permit (SAAR, Thous.Units) Housing Starts: 1 Unit (SAAR, Thous.Units) 1989:Q1 199:Q 199:Q3 199:Q 1996:Q1 1997:Q 1999:Q3 1:Q 3:Q1 :Q 6

7 Improving employment and wage and salary growth should drive consumption Average Monthly Change, Total Nonfarm Payroll Percent Annualized Change, Real W ages and Salary Income 1 Private employment growth (thous.) Total Nonfarm Payroll- Average Monthly Change 5:Q through May Real wage and salary growth All Employees: Total Nonfarm (SA, Thous) Growth in Real Wage and Salary Income 1999:Q1 1999:Q :Q3 1:Q :Q1 :Q 3:Q3 :Q 5:Q1-1 Source: Bureau of Labor Statistics. Bureau of Economic Analysis. 7

8 Inflation risks have risen along with oil prices Percent Change, Year-O ver-year CPI-U: All Items (SA, 198-8=1) CPI-U: All Items Less Food and Energy (SA, 198-8=1) :Q1 1:Q 1:Q3 1:Q :Q1 :Q :Q3 :Q 3:Q1 3:Q 3:Q3 3:Q :Q1 :Q :Q3 :Q 5:Q1 Source: Bureau of Labor Statistics. 8

9 Yet oil price increases have not had a lasting effect on survey expectations of inflation. Percent 7 Spot O il Price, Percent Change Year-O ver-year 15 6 Expected Annual Inflation Rate during next 5 to 1 years: Median (%) Spot Oil Price: West Texas Intermediate [Prior'8=Posted Price] ($/Barrel) SPF: CPI Inflation Rate Over the Next 1 Years: Median (%) :Q1 1986:Q1 1988:Q3 1991:Q1 1993:Q3 1996:Q1 1998:Q3 1:Q1 3:Q3 1983:Q3 1987:Q 1989:Q 199:Q 199:Q 1997:Q 1999:Q :Q :Q Source: Survey of Consum ers (U niversity of M ichigan). SPF: FRB Philadelphia. W all Street Journal. 9-1

10 As most forecasters anticipate moderation in inflation Percent Annualized Change Consensus Forecast of CPI :Q 5:Q3 5:Q 6:Q1 6:Q 6:Q3 6:Q Source: Consensus Forecast. 1

11 And most measures of labor costs have yet to accelerate. Percent Change, Year-Over-Year Employment Cost Index: Compensation: Civilian Workers (SA, Jun-89=1) Nonfarm Business Sector: Compensation Per Hour (SA, 199=1) Average Hourly Earnings: Total Private Industries (SA, $/Hour) :Q1 1998:Q1 1999:Q1 :Q1 1:Q1 :Q1 3:Q1 :Q1 5:Q1 Source: Bureau of Labor Statistics. 11

12 New England Economy Business Cycle Update New England s economic growth caught up with the nation s in. Job counts remain below peak in the two largest New England states, Massachusetts and Connecticut. Indicators for early 5 signal continued expansion. and their homes appreciate more moderately than those in certain other regions of the country. 1

13 After a slow pickup, the New England economy grew at the same rate as the nation in. 8 Total Real Personal Income, Percent Change From Year Earlier United States New England Source: Bureau of Economic Analysis. 13

14 The regional job count remains below its pre-recession peak. Employment Index, Each Area's Pre-Recession Peak = RI ME US VT CT NH Shortfalls from Peak (numbers of jobs) NE: 17,7.97 MA: 17,.96 NE CT: 31,.95 MA.9.93 Jan- Aug- Mar-1 Oct-1 May- Dec- Jul-3 Feb- Sep- Apr-5 Source: Bureau of Labor Statistics. 1

15 The New England economy is continuing to grow; job gains strengthened in April. Number of Net New Payroll Jobs, Quarterly (Thousands) 1 Number of Net New Payroll Jobs, Quarterly (Thousands) 6 5 5:Q to date (April) - 5:Q to date (April) Q1- Q1-1 Q1- Q1-3 Q1- Q Q1- Q1-1 Q1- Q1-3 Q1- Q1-5 United States New England Source: Bureau of Labor Statistics. 15

16 Most forward-looking regional economic indicators continue to look positive. Initial C laim s for U nem ploym ent Insurance, Index, 1995=1 1.8 Indexes of New England UI Claims and Onlibe Job Recruitment. Monster Employment Index, October 3 - September = Monster Employment, Right Axis 15 1 Intial Claim s, Left Axis Jan-98 Jun-98 Nov-98 Sep-99 Apr-99 Feb- Jul- Dec- May-1 Mar- Jan-3 Oct-1 Aug- Nov-3 Jun-3 Sep- Apr- Feb-5 Source: U.S. Bureau of Labor Statistics and Federal Reserve Bank of Boston; Monster W orldwide. 16

17 New England homeowners continue to see their properties increase in value, but several other regions are now experiencing greater rates of home price appreciation. 5 Conventional Mortgage Home Price Index, Percent Change From Year Earlier Percent Change, 3 Q Q New England United States New England 1.6 Mid Atlantic 13.5 E. N. Central W.N. Central 5.6 S. Atlantic.3 1 E.S. Central 6. 5 W.S.Central Mountain Q1-98 Q1-99 Q1- Q1-1 Q1- Q1-3 Q1- Note: Shaded area indicates range of values among the nine U.S. Census divisions. Source: Freddie Mac. Pacific

18 National savings has deteriorated Federal Deficit as a % of GDP Corporate Profits as a % of GDP 6 Longer-run Concerns Federal Deficit as a % of GDP Corporate Profits as a % of GDP Savings Rate Which requires that we import savings from abroad Savings Rate Current Account Balance a % of GDP = N et cap ital in flo w s fro m abroad :Q1 196:Q3 1969:Q1 1973:Q3 1978:Q1 198:Q3 1987:Q1 1991:Q3 1996:Q1 :Q3 196:Q 1966:Q 1971:Q 1975:Q 198:Q 198:Q 1989:Q 1993:Q 1998:Q :Q 18 Source: Federal Surplus/Deficit as a % of GDP (FY): Office of Management and Budget. Personal Savings as a % of Disposable Personal Income, Balance on Current Account as a % of GDP (SAAR): Bureau of Economic Analysis. Corporate Profits as % of GDP: Bureau of Economic Analysis.

19 And our indebtedness relative to the rest of the world limits how long this can Billions of Dollars continue U.S. International Investment : Assets - Liabilities U.S. International Investment Relative to GDP U.S.: International Investment Position: Assets (Bil.US$)- Liabilities (Bil.US$) (U.S.: International Investment Position: Assets (Bil.US$)- Liabilities (Bil.US$))/ Nominal GDP -.3 Source: International Monetary Fund/ Haver Analytics. 19

20 Investment/Savings Imbalances How to re-balance? Depreciating currency, which could result in rising interest rates and financial market instability Increased government or private savings Problems with those solutions: We may not like it in the short run Increased govt. savings means less stimulus Weakens recovery in short run Does not yield 1-for-1 decline in trade deficit The rest of the world might not like it Depreciating currency makes their goods more expensive If we save more (spend less), the engine of world growth slows down so do they Economic logic says deficits can t grow indefinitely.