Emerging Trends in the Regional Economy Alison Felix Economist & Branch Executive Federal Reserve Bank of Kansas City Denver Branch The views expressed are those of the presenter and do not necessarily reflect the positions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.
Overview of the Federal Reserve System Primary Functions Monetary Policy: promote maximum employment, price stability and moderate long-term interest rates Financial Services: bank for banks; bank for the federal government Banking Supervision and Regulation: ensure safety and soundness of banks and ensure that banks provide fair and equitable services to consumers. Structure Board of Governors Consists of seven members who are appointed by the President and confirmed by the Senate to serve 14-year terms. Federal Reserve Banks There are 12 Regional Reserve Banks, each serving a unique district. These are semiindependent by design. Federal Open Market Committee (FOMC) Comprised of the 7 members of the Board of Governors and the 12 Reserve Bank Presidents (only 5 presidents are voting members on a rotating basis). Charged with conducting monetary policy to promote economic growth and price stability. 2
Regional Federal Reserve Banks and Branch Locations 3
The Denver Branch of the Federal Reserve Bank of Kansas City Functions Regional research and policy support covering the economies of Colorado, New Mexico and Wyoming Economic, financial education, and community development outreach Examinations of Colorado, Wyoming and northern New Mexico financial institutions Cash processing and distribution Money Museum Around 150 employees 4
Despite weak growth in the first quarter, the U.S. economy bounced back in the second quarter and is expected to continue to expand at a moderate pace. REAL U.S. GROSS DOMESTIC PRODUCT Percent Change from Previous Quarter at Seasonally Adjusted Annualized Rates 6% 5% 4% 3% 2% 1% 1.1% 3.0% 3.8% 4.6% 4.3% 2.1% 0.6% 3.9% 2.3% High Low 2.6% 2.4% 2.0% 2.2% 2.0% 0% -1% -2% -0.9% '13Q2 '13Q3 '13Q4 '14Q1 '14Q2 '14Q3 '14Q4 '15Q1 '15Q2 2015 2016 2017 FOMC Central Tendency Projections* Source: Bureau of Economic Analysis and Federal Open Market Committee (FOMC)/Haver Analytics *Note: Projections as of September FOMC meeting 5
Inflation remains below the FOMC s two percent target, weighed down by declining energy prices. PERSONAL CONSUMPTION EXPENDITURE PRICE INDEX (PCEPI) Percent Change Year-over-Year 6% 4% 2% Headline Inflation FOMC s Target Inflation Rate 0% Core Inflation -2% Aug '05 Aug '07 Aug '09 Aug '11 Aug '13 Aug '15 Source: Bureau of Economic Analytics 6
Measures of unemployment and under-employment have declined steadily over the past five years. UNITED STATES UNEMPLOYMENT RATES Seasonally Adjusted 18% 16% 16.7% U-6 14% 12% 10% 8% 8.3% 11.1% 9.6% U-5 10.0% 6% 4% 5.5% 4.6% U-3 6.2% 5.1% 2% 2007 2008 2009 2010 2011 2012 2013 2014 Aug Sep 2015 Source: Bureau of Labor Statistics 7
Unemployment rates have trended down in Colorado, New Mexico and Wyoming, but remain elevated in some areas. UNEMPLOYMENT RATES August 2015, Seasonally Adjusted Unemployment Rate U-3* U-5** U-6** United States 5.1% 6.2% 10.0% Colorado 4.2% 4.9% 8.8% New Mexico 6.7% 8.5% 12.4% Wyoming 4.0% 4.8% 7.7% *U-3 values are as of August, 2015 for individual states and September, 2015 for the United States. **U-5 and U-6 values are 12-month moving averages as of Q2 2015 for individual states and are for September, 2015 for the United States. Less than 4% 4 to 5% 5 to 6% 6 to 7% Greater than 7% Source: Bureau of Labor Statistics and Haver Analytics 8
Employment is increasing at a moderate pace in Colorado, but has declined in New Mexico and Wyoming since the first quarter. 120 115 110 105 100 PAYROLL EMPLOYMENT GROWTH Index 100 = September 2005, Seasonally Adjusted Percent Change Past 10 Years Past Year Peak to Current U.S. (Sept. 15) 5.8% 2.0% 2.9% CO (Aug. 15) 13.1% 1.9% 6.8% NM (Aug. 15) 1.6% 0.3% -2.9% WY (Aug. 15) 10.2% 0.1% -2.2% Colorado Wyoming United States New Mexico 95 Sep. '05 Sep. '07 Sep. '09 Sep. '11 Sep. '13 Sep. '15 Source: Bureau of Labor Statistics 9
Job gains have been broad-based across industries in the U.S. and Colorado over the past year. U.S. AND COLORADO PAYROLL EMPLOYMENT, AUGUST 2015 Seasonally Adjusted Percent Change Year-over-Year Construction Health Care & Social Assistance Leisure & Hospitality State Government Local Government Financial Activities Private Educational Services Federal Government Manufacturing Retail Trade Transportation & Utilities Natural Resources & Mining Wholesale Trade Professional & Business Services Other Services Information -0.9% -1.2% -1.3% -4.5% 6.4% 5.4% 4.5% 3.1% 2.3% 2.2% 2.1% 1.9% 1.5% 1.2% 0.8% 0.3% Top Performing Industries Colorado United States Worst Performing Industries Source: Bureau of Labor Statistics 10
New Mexico has struggled to recover from the recent recession, and employment declined in more than half of industries over the past year. NEW MEXICO PAYROLL EMPLOYMENT, AUGUST 2015 Seasonally Adjusted Leisure & Hospitality Education & Health Services Professional & Business Services Financial Activities Federal Government Retail Trade Transportation & Utilities State Government Manufacturing Wholesale Trade Information Other Services Local Government Natural Resources & Mining Construction Percent Change Year-over-Year -5.2% -0.2% -0.4% -0.9% -1.7% -2.1% -2.6% -3.6% 0.9% 0.3% 0.1% 0.0% 3.7% 2.7% 2.3% Top Performing Industries Worst Performing Industries Source: Bureau of Labor Statistics 11
Declines in the energy sector are weighing on employment growth in Wyoming. WYOMING PAYROLL EMPLOYMENT, AUGUST 2015 Seasonally Adjusted Percent Change Year-over-Year Private Educational Services Financial Activities Leisure & Hospitality Health Care & Social Assistance Information State Government Professional & Business Services Manufacturing Local Government Retail Trade Wholesale Trade Transportation & Utilities Federal Government Construction Other Services Natural Resources & Mining -15.4% -0.4% -2.1% 10.0% 7.1% 5.1% 3.3% 2.7% 2.6% 1.1% 1.0% 0.6% 0.3% 0.0% 0.0% 0.0% Top Performing Industries Worst Performing Industries Source: Bureau of Labor Statistics 12
Migration has varied across Colorado, New Mexico and Wyoming. NET MIGRATION Total 2014 Net Migration as a Percentage of 2014 Population Annual Percent Change 2014 United States 0.3% Colorado 1.0% New Mexico -0.6% Wyoming -0.4% More than 2% 1% to 2% 0% to 1% -1% to 0% -2% to -1% Less than -2% Source: Census Bureau 13
Residential construction activity has picked up over the last several years, but remains below pre-recession levels. VALUE OF RESIDENTIAL CONSTRUCTION Index 100 = July 2005, Seasonally Adjusted Three-Month Moving Average 160 140 120 100 80 60 40 20 United States Colorado Wyoming New Mexico 0 Jul '05 Jul '07 Jul '09 Jul '11 Jul '13 Jul '15 Source: McGraw Hill/F.W. Dodge 14
The recovery in residential construction activity has been driven by strong gains in multifamily building at the national level. MONTHLY HOUSING PERMITS Thousand of Permits, Seasonally Adjusted 250 5 200 United States Colorado 4 150 100 MULTI-FAMILY 3 2 50 0 SINGLE FAMILY Aug. 05 Aug. 07 Aug. 09 Aug. 11 Aug. 13 Aug. 15 1.5 1.2 New Mexico 0.9 0.6 0.3 0.0 Aug. '05 Aug. '07 Aug. '09 Aug. '11 Aug. '13 Aug. '15 1 0 Aug. 05 Aug. 07 Aug. 09 Aug. 11 Aug. 13 Aug. 15 1.5 Wyoming 1.2 0.9 0.6 0.3 0.0 Aug. '05 Aug. '07 Aug. '09 Aug. '11 Aug. '13 Aug. '15 Source: Census Bureau/Haver Analytics 15
Home prices are rising in most states... FHFA PURCHASE-ONLY HOME PRICE INDEX (2015Q2) Percent Change Year-over-Year, Seasonally Adjusted 2.8% 10.6% 2.5% Over 10% 7.5 to 10 5 to 7.5 2.5 to 5 0 to 2.5 Below 0% United States 5.4% Source: Federal Housing Finance Agency 16
yet prices remain below pre-recession values in many states. FHFA PURCHASE-ONLY HOME PRICE INDEX (2007Q1 2015Q2) Percent Change Peak to Current, Seasonally Adjusted 8.1% 26.7% Over Over 10% 20% 7.5 10 to to 10 20 50 to to 7.5 10 2.5-10 to to 50-20 0 to to 2.5-10 Below 0% -20% -10.1% United States -2.4% Source: Federal Housing Finance Agency 17
Vacancy rates are low across the Denver metro, but commercial vacancies remain elevated in Albuquerque. COMMERCIAL VACANCY RATES 24% Denver 24% Albuquerque 20% Office 20% Office 16% 16% 12% 12% 8% Industrial 8% Industrial 4% 4% Source: Torto-Wheaton Research 18
Tourism activity has picked up in Colorado, New Mexico and Wyoming over the past two years. HOTEL OCCUPANCY RATES 74% 70% Historical Average 2013 2014 2015 66% 62% 58% 54% CO N.M. WY Source: Rocky Mountain Lodging Report 19
Manufacturing activity has slowed in the region due in part to a weak energy sector and a strong dollar. MANUFACTURING ACTIVITY Diffusion Index, Seasonally Adjusted, Month-over-Month 65 Expanding 60 55 50 45 40 35 Contracting U.S. 50.2 September 2015 Kansas City 46.0 District September 2015 30 Sep. '05 Sep. '07 Sep. '09 Sep. '11 Sep. '13 Sep. '15 Source: Institute for Supply Management & Federal Reserve Bank of Kansas City 20
Drilling rigs have fallen sharply in 2015, but oil production has been slow to decline. OIL RIG COUNT Number of Active Drilling Rigs 560 OIL PRODUCTION Million Barrels per Month, SA U.S. States U.S. States 2,400 120 14 2,000 1,600 1,200 800 400 N.M. U.S. CO WY 100 80 60 40 20 0 0 Oct. '08 Apr. '12 Oct. '15 480 400 320 240 160 80 N.M. WY U.S. CO 0 0 Jul. '05 Jul. '10 Jul. '15 12 10 8 6 4 2 Source: Baker Hughes & Department of Energy, Energy Information Administration/Haver Analytics 21
Prior to additional oil price declines in the third quarter, energy firms expected activity to be roughly flat over the next six months. FRBKC ENERGY SURVEY Quarterly Diffusion Indexes 60 40 20 0 Drilling/Business Activity Access to Credit Profits 60 40 20 0 Employment Employee Hours Wages/Benefits -20-20 -40-40 -60-60 -80-80 -100 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q4 2015 (exp) -100 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q4 2015 (exp) Source: FRBKC Energy Survey 22
Breakeven oil prices have fallen as productivity rises and costs decline, but oil prices remain well below the levels needed for a substantial increase in drilling. REPORTED BREAKEVEN OIL PRICES AND WTI EXPECTATIONS $/Barrel $/Barrel 120 120 100 WTI June 2015 price needed for substantial increase in drilling to occur- $73 100 80 Energy Survey avg. breakeven in late Sept. 2014 - $78 80 60 Late Mar. 2015 avg. breakeven - $62 September 29 WTI Futures 60 40 40 Jan. '14 Jun. '14 Nov. '14 Apr. '15 Sep. '15 Feb. '16 Jul. '16 Dec. '16 Sources: Kansas City Federal Reserve Bank s Energy Survey, Energy Information Administration, Reuters 23
U.S. real net farm income is projected to decline sharply in 2015. U.S. REAL NET FARM INCOME Billions, 2009 Dollars 140 120 100 2015 Forecast 80 60 40 20 0 1970 1980 1990 2000 2010 Source: USDA 24
Crop prices remain low, and cattle prices are starting to decline after record profits last year. U.S. CROP PRICES Dollars per Bushel U.S. LIVESTOCK PRICES Dollars per Hundredweight 9 8 7 18 16 14 280 240 Feeder Cattle Live Cattle 280 240 6 12 200 200 5 10 4 8 160 160 3 2 Corn (left scale) Soybeans (right scale) 6 4 120 120 1 2 Sep. '09 Sep. '11 Sep. '13 Sep. '15 80 80 Sep. '09 Sep. '11 Sep. '13 Sep. '15 Sources: The Wall Street Journal, Chicago Board of Trade, and USDA 25
For additional information on the regional economy: http://www.kansascityfed.org/denver