The U.S. Economic Outlook Bob Murphy Boston College

Transcription

1 The U.S. Economic Outlook Bob Murphy Boston College Remarks Prepared for the Institute of Real Estate Management January 19, 2006

2 Summary: The Economic Recovery Matures Economy grows at potential rate Inflation remains contained Federal Reserve ends its tightening cycle Long-term interest rates rise only slightly Job growth matches labor force growth IREM Outlook 1

3 Economic Growth Temporary slowdown in last quarter of 2005 Growth returns to potential range of 3.0 to 3.5 percent But composition of growth will change Consumer spending slows and business investment spending takes up the slack IREM Outlook 2

4 Real GDP Growth (quarterly percent change at annual rate) Note: 2005 Q4 is an estimate

5 Consumer Spending Slows Rising mortgage rates Slowdown in real estate price appreciation Lingering impact from higher energy prices Contraction in home-equity loans and consumer credit during 4th quarter 2005 (first time since early 1990s) IREM Outlook 4

6 Capital Spending Ramps Up Lots of cash on hand: corporate profits at a historically high share of national income Overinvestment of 1990s has been worked off and is now aging rapidly Stock market values are generally more in line with fundamentals Energy prices have come off of earlier highs and appear stable for now IREM Outlook 5

7 Contribution of Investment to GDP Growth (percentage points)

8 Inflation Remains Contained Higher inflation in 2005 reflected the increase in energy prices Core inflation has remained stable at about 2 percent Continued competition from abroad limits ability of U.S. firms to raise prices Federal Reserve will remain vigilant under Chairman Bernanke IREM Outlook 7

9 Consumer Price Inflation

10 Federal Reserve Reaches Neutral Neutral federal funds rate of about 2.5 percent after inflation Core inflation running at about 2.0 percent Implies federal funds rate of about 4.5 percent Greenspan increases rate to 4.5 percent (from current rate of 4.25 percent) as he exits Bernanke will want one more increase to establish his credentials---so 4.75 by spring IREM Outlook 9

11 Term Structure Conundrum? Remarkably little increase in long-term rates, given increase in short-term rates Yield curve has flattened Signaling recession? Or reflecting confidence in Fed policy and voracious appetite abroad for U.S. Treasury bonds? IREM Outlook 10

12 Short and Long-Term Interest Rates

13 Bond and Mortgage Rates

14 Real Estate: A Tale of Two Markets Nationally, housing costs as a share of pretax family income increased from 17 percent in 1998 to 22 percent late last year, but remain below the high of 30 percent reached in early 1980s Suggests concern of bubble in real estate market is unwarranted, at least for the United States as a whole IREM Outlook 13

15 Real Estate: A Tale of Two Markets Coastal markets have become significantly less affordable over past 5 years, though still only about where they were in early 1980s--but mortgage rates were around 15% in those days! Heartland markets have become more affordable both recently and compared to 25 years ago Expect some continued slowing in real estate though not a collapse IREM Outlook 14

16 IREM Outlook 15

17 Employment Growth has Lagged Average job growth of just over 150K per month in fourth year of economic expansion Average was 325K per month in fourth year of the 1990s expansion Nearly 2 million jobs added over the past year compared with almost 4 million in same period of 1990s expansion IREM Outlook 16

18 Productivity is the Reason for Sluggish Employment Growth Productivity growth has been robust, keeping the lid on price pressures But the downside is slower gains in employment Look for employment to grow just sufficiently to match expanding labor force Unemployment rate thus will remain stable IREM Outlook 17

19 Productivity Growth (Non-farm Sector)

20 Unemployment and Labor Force Participation

21 Risks to the Outlook Trade deficit leads to plummeting dollar Consumers rein in their spending by more than expected Energy prices surge once again As first baby boomers hit 60, projected long-term budget deficit spooks financial markets IREM Outlook 20

22 US Trade Balance (billions of dollars)

23 Personal Saving Rate

24 Federal Deficit (CBO Intermediate Projection)

25 Federal Debt (CBO Intermediate Projection)

26 Forecast for 2006 GDP Growth of about 3.5 to 4.0 percent Inflation drifts below 3.0 percent, heading toward underlying core rate of 2.0 percent 10-Year Bond Interest Rate hovers around 5.0 percent Unemployment Rate remains around 5.0 percent IREM Outlook 25