The U.S. Economic Outlook

Transcription

1 The U.S. Economic Outlook Gering/Scottsbluff Economic Forum August 23, 216 George A. Kahn Vice President and Economist The views expressed are those of the author and do not necessarily reflect the opinions of the Federal Reserve Bank of Kansas City or the Federal Reserve System

2 Outlook Themes The economy will likely grow somewhat faster than its longer-run trend in Q3. Economic growth has been supported largely by consumer spending. Manufacturing activity has rebounded, but business investment remains weak. Brexit has increased uncertainty about the outlook, but so far, the effects on the U.S. economy appear modest. Labor markets are near full employment, and inflation is expected to rise toward 2 percent. 1

3 After a soft first half, real GDP is expected to strengthen in H2. % % Q3 tracking estimate Real GDP q/q (saar) Real GDP y/y Sources: Bureau of Economic Analysis, NBER, Haver Analytics 2

4 Consumer spending supported real GDP growth in Q2. % 3. % GDP Consumption Business Fixed Investment Residential Investment Government Inventory Investment Net Exports -1. Sources: BEA, Haver Analytics 3

5 Payroll employment rebounded in June and July... chg, thousands (sa) chg, thousands (sa) Jan 28-Jan 29-Jan 21-Jan 211-Jan 212-Jan 213-Jan 214-Jan 21-Jan 216-Jan Total nonfarm payrolls (1-month average) Total nonfarm payrolls (3-month average) -8 Sources: Bureau of Labor Statistics, NBER, Haver Analytics 4

6 and the labor force participation rate edged up. %, sa %, sa Jan 1997-Jan 2-Jan 23-Jan 26-Jan 29-Jan 212-Jan 21-Jan Labor force participation rate Trend: Age-specific LFPR at 2 levels, with demographic change Sources: Bureau of Labor Statistics, KCFRB, NBER, Haver Analytics

7 The unemployment rate has stabilized near the FOMC s estimate of its longer-run value. %, sa %, sa Median of FOMC longer-run projections (June 216) FOMC projections (June 216) Unemployment rate Source: BEA, Federal Reserve Board, Haver Analytics 6

8 Labor costs are rising at a moderate pace. y/y % chg y/y % chg Mar 29-Mar 211-Mar 213-Mar 21-Mar Employment Cost Index: wages and salaries of private sector works (ex incentive paid occupations) Average hourly earnings of all employees Sources: Bureau of Labor Statistics, NBER, Haver Analytics 7

9 Index, Q1-66= Consumers remain confident about current and expected conditions. 2-Jan 27-Jan 29-Jan 211-Jan 213-Jan 21-Jan University of Michigan: Current Economic Conditions (left) University of Michigan: Consumer Expectations (right) Index, Q1-66= Source: University of Michigan, NBER, Haver Analytics 8

10 Consumer spending is holding up and supporting overall growth. y/y % chg y/y % chg Real consumer spending on services Real consumer spending on goods -8. Sources: US Census, NBER, Haver Analytics 9

11 Both manufacturing and nonmanufacturing activity are expanding Index, > = increasing (sa) 7 Index, > = increasing (sa) ISM manufacturing ISM nonmanufacturing 3 Source: Census Bureau, Haver Analytics 1

12 but capital spending remains soft. $ Bn, 3mma, sa $ Bn, 3mma, sa Manufacturers' new orders (nondefense, excluding aircraft) Manufacturers' shipments (nondefense, excluding aircraft) Source: Census Bureau, Haver Analytics

13 Brexit caused a spike in market volatility. Index Brexit 1/1/16 2/1/16 3/1/16 4/1/16 /1/16 6/1/16 7/1/16 8/1/16 Market Volatility Index (VIX) Sources: Wall Street Journal, CBOE, Haver Analytics Index

14 Stock prices fell after Brexit, but have since recovered. Index, 6/23/16=1 Index, 6/23/16= Brexit 8 /1/16 /16/16 /31/16 6/1/16 6/3/16 7/1/16 7/3/16 8/14/16 S&P FTSE 2 DAX S&P DAX FTSE 2 Sources: Financial Times, Wall Street Journal, Haver Analytics

15 Long-term interest rates have declined 1 yr gov't bond yield % % 2.1 U.S U.K. Brexit Germany Japan /1/16 1/31/16 3/1/16 3/31/16 4/3/16 /3/16 6/29/16 7/29/16 U.S. U.K. Japan Germany -.4 Sources: Federal Reserve Board, Reuters, Haver Analytics 14

16 and the dollar has appreciated. Index $/ 96 Brexit USD appreciation /1/14 11/1/14 3/1/1 7/1/1 11/1/1 3/1/16 7/1/16 Nominal Trade-Weighted Exch Value of US$ vs Major Currencies (L) US$/Pound (R) Sources: Federal Reserve Board, Haver Analytics 1

17 U.S. exports to the U.K. are a small fraction of U.S. GDP Sources: IMF, World Bank % % Exports to the U.K. as a share of each country s GDP

18 Economic policy uncertainty has risen. Index (Mean=1) 8 Index (Mean=1) Lehman Debt Ceiling Crisis (211) Debt Ceiling Crisis (213) Brexit /1/8 1/1/1 1/1/12 1/1/14 1/1/16 Economic Policy Uncertainty Index 3 Day Moving Avg Sources: Stanford University, University of Chicago, Haver Analytics 17

19 Inflation is expected to rise toward the FOMC s objective. y/y % chg FOMC projections (June 216) y/y % chg Core PCE inflation Headline PCE inflation Source: BEA, Federal Reserve Board, and Haver Analytics 18

20 Federal funds futures markets are pricing in roughly even odds of another policy move by the end of the year. % %....4 June 13, 216 (before Brexit) August 18, 216 (current) June 27, 216 (post Brexit) Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17.3 Source: Chicago Board of Trade, Haver Analytics 19

21 The median FOMC projection suggests two additional moves this year. % % FOMC projections (June 216) Federal funds target rate Federal Reserve Discount Rate Source: Federal Reserve Board, Haver Analytics 2

22 The Federal Reserve s balance sheet has stabilized near $4. trillion. Tn $ Tn $ Assets Short term lending, targeted lending programs, and rescue operations Other Treasury securities and other assets Reserves Currency MBS & agency debt - Liabilities Source: Federal Reserve Board, Haver Analytics

23 Summary The U.S. economy remains on track with labor markets at or near full employment and inflation rising toward the FOMC s 2% objective. Consumer spending is supporting overall growth, but investment spending remains weak. Brexit has added to global economic uncertainty, but the effects on the U.S. economy are modest. Monetary policy remains accommodative. 22

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