The Economic Outlook: Downshift Karen Dynan Harvard University and Peterson Institute for International Economics Spring 2019 Global Economic Prospects Meeting Washington, DC April 2, 2019
The global outlook: lower growth in 2019 Real GDP Growth (Y/Y) 2018 2019 2020 Global Output Growth (PPP weights) 3.7 3.4 3.6 US: heading back to trend 2.9 2.2 1.8 Euro Area: near-term soft patch 1.8 1.2 1.4 Japan: growth holding up 0.8 1.0 0.8 UK: will depend on Brexit outcome 1.4 1.4 1.3 China: credit-driven slowdown this year 6.6 6.1 6.1 India: brisk growth 7.2 7.3 7.7 Russia: sanctions a drag 2.3 1.5 1.8 Brazil: recovery still slow 1.1 1.3 1.7 Source: Consensus Forecasts for 2018, PIIE for 2019-2020. Annual-average-over-annual-average growth rates. 1
Behind the global forecast Some special factors (e.g. bottlenecks for German automakers) are weighing on growth, but the slowing of growth is largely a return to trend amid: Financial conditions that are tighter on net than in 2018 despite some easing in recent months Waning fiscal stimulus in the United States Since the October 2018 GEP, a downward revision to growth, especially in 2019, on weaker-than-expected incoming data for Europe, China, Brazil, and the United States 2
The US contour is shaped by fiscal effects Effects on Q4/Q4 Growth of 2017 Tax Legislation and 2018 Spending Legislation Percentage Points 0.8 0.6 0.4 0.2 0.0-0.2-0.4 2018 2019 2020 2021 Note: Average of estimates based on CEA (2009) multipliers and CBO multipliers as reported in CEA (2014). Source: Congressional Budget Office (2017; 2018); Joint Committee on Taxation (2017); Council of Economic Advisers (2009, 2014); Jason Furman's calculations. 3
US growth falls to trend, unemployment bottoms out, and inflation rises modestly Percent Change 3.5 3.0 2.5 2.0 1.5 1.0 0.5 Real GDP Growth (Q4/Q4) Actual Forecast Potential Output Growth Unemployment PCE Price Inflation (Q4/Q4) Rate (Q4) Headline Core 2016 4.8 1.6 1.8 2017 4.1 1.8 1.6 2018 3.8 1.9 1.9 2019 3.7 2.0 2.0 2020 3.8 2.2 2.2 Note: Values in shaded cells are forecasts. Source: Bureau of Economic Analysis; Bureau of Labor Statistics; Haver Analytics; author's calculations. 0.0 2015 2016 2017 2018 2019 2020 Source: Bureau of Economic Analysis; Haver Analytics; author's calculations. 4
What to make of the sharp deceleration in US real GDP in recent quarters? US GDP Growth in Recent Quarters Percent Change from Prior Quarter 5.0 4.5 Actual Forecast 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2017:Q4 2018:Q1 2018:Q2 2018:Q3 2018:Q4 2019:Q1 Source: Bureau of Economic Analysis; Haver Analytics; author's calculations. The slowing toward the end of 2018 is consistent with estimates that fiscal effects on growth peaked mid-year 2019:Q1 not really so weak as the government shutdown and residual seasonality are holding back growth by ½ to ¾ percentage point 5
Soft recent readings on consumption but strong household fundamentals Billions of Dollars 340 335 330 325 320 315 Core Retail Sales and Food Services 2008:Q4 2013:Q4 2018:Q4 Personal saving rate 6.1 6.3 6.8 Wealth to income ratio 5.3 6.4 6.6 Debt service ratio 12.8 10.1 9.9 Credit card delinquency rate 10.2 9.5 7.8 Note: 90+ day delinquency rate for credit cards. Source: Bureau of Economic Analysis; Board of Governors of the Federal Reserve System; Federal Reserve Bank of New York, Consumer Credit Panel; Equifax; Haver Analytics. 310 Jan 17 Jul 17 Jan 18 Jul 18 Jan 19 Note: Core retail sales excludes building materials and supplies, auto sales and sales at auto dealers, and sales at gas stations. Source: Census Bureau; author's calculations. 6
With indicators of household confidence holding up, it s most likely just a breather Millions of Units, Annual Rate 18.5 Light Vehicle Sales 18.0 17.5 17.0 16.5 16.0 15.5 15.0 14.5 14.0 13.5 2013 2014 2015 2016 2017 2018 2019 Source: Bureau of Economic Analysis; Haver Analytics. University of Michigan Consumer Sentiment Index (1966:Q1=100) 120 110 100 90 80 70 60 2013 2014 2015 2016 2017 2018 2019 Source: University of Michigan; Haver Analytics. 7
Prospects for a pick-up in home construction depend on how fast Millennials leave nest (best guess is only gradually given low affordability) Total Housing Starts Millions, Seasonally Adjusted Annual Rate 2.5 Percent of Adults Age 25-34 Living with Parents Percent 24 2.0 20 1.5 1.0 0.5 16 12 8 4 Men Women 0.0 1998 2002 2006 2010 2014 2018 Source: Census Bureau; Haver Analytics. 0 1998 2002 2006 2010 2014 2018 Source: Census Bureau. 8
Business investment picked up in 2018 even outside oil and mining, but orders have flattened of late Q4-over-Q4 Percent Change 12 BFI 10 BFI excl. oil and mining 8 6 4 2 0 Business Fixed Investment (BFI) Growth 2017 2018 Note: BFI excluding oil and mining excludes oil and mining equipment and structures and is calculated using a Tornqvist approximation. Source: U.S. Bureau of Economic Analysis; Jason Furman; author's calculations. New Orders: Nondefense Capital Goods excluding Aircraft Dollars, Millions 75,000 70,000 65,000 60,000 55,000 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18 Jan 19 Source: Census Bureau; Haver Analytics. 9
With the dollar likely to remain strong, net exports should continue to be a modest drag Real Broad Trade-Weighted US Dollar Index Index (March 1973 = 100) 105 100 95 90 85 80 2005 2007 2009 2011 2013 2015 2017 2019 Source: Federal Reserve Board of Governors; Haver Analytics. Contributions of Net Exports to Q4/Q4 Real GDP Growth 2017-0.3 2018-0.2 2019-0.2 2020-0.2 Note: Values in shaded cells are forecasts. Source: Bureau of Economic Analysis; Haver Analytics; author's calculations. 10
Expect payroll gains to at last moderate with slowing growth (and not much slack left in participation) 200 Change in Nonfarm Payrolls Thousands, 3-month Trailing Moving Average 400 Percent 85 84 Prime-age Labor Force Participation 0-200 -400-600 Consistent with stable ageadjusted employment rate 83 82 81 80 79-800 2007 2009 2011 2013 2015 2017 2019 Source: Bureau of Labor Statistics; Haver Analytics; author's calculations. 78 2000 2004 2008 2012 2016 Note: Prime-age is ages 25-54. Source: Bureau of Labor Statistics; Haver Analytics. 11
Resulting in a bottoming out of unemployment in coming quarters Percent of Labor Force 12 Unemployment Rate 10 8 6 4 2 0 2007 2009 2011 2013 2015 2017 2019 Note: Dashed segment represents forecasted values. Source: Bureau of Labor Statistics; Haver Analytics; author's calculations. 12
Wages are rising but the still-high profit share level suggests room for wages to do so without pressure on prices 4-quarter Percent Change 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 Labor Compensation Average Hourly Earnings of All Employees: Total Private Atlanta Fed Wage Growth Tracker Employment Cost Index: Compensation, Private Industry 0.0 2005 2007 2009 2011 2013 2015 2017 2019 Source: Bureau of Labor Statistics; Federal Reserve Bank of Atlanta; Haver Analytics; author's calculations. Percent 15 12 9 6 3 After-tax Corporate Profits as a Share of National Income 0 1970 1980 1990 2000 2010 Note: Includes inventory valuation adjustment and capital consumption adjustment. Source: Bureau of Economic Analysis; Haver Analytics; author's calculations. 13
Very modest overshoot of inflation target expected 12-month Percent Change 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0 Consumer Price Inflation Headline PCE Target Core PCE -1.5 2009 2011 2013 2015 2017 2019 Note: Dashed segments represent forecasted values. Source: Bureau of Economic Analysis; Haver Analytics; author's calculations. 14
With just one more increase in the fed funds rate over next two years Percent 7 Effective Federal Funds Rate Percent 7 10-Year Treasury Yield 6 6 Average, 1990 2007 5 4 3 2 1 Average, 1990 2007 FOMC Median Expectation for Long-Run Federal Funds Rate 5 4 3 2 1 0 2012 2014 2016 2018 2020 Note: Dashed segment represents forecasted values. Source: Federal Reserve Board of Governors; Haver Analytics; author's calculations. 0 2012 2014 2016 2018 2020 Note: Dashed segment represents forecasted values. Source: Federal Reserve Board of Governors; Haver Analytics; author's calculations. 15
Shifting downside risks to the outlook Less likely: Inflation rising more sharply than expected resulting in a sharp Fed move toward higher rates More likely: Hard Brexit Trend growth turning out to be weaker than we think now (Relatedly) slower growth leading to more resistance to needed structural reforms and more support for populist policies like protectionism 16