U.S. & Missouri Economic Outlook Missouri Government Finance Officers Association Jason Brown Economist 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 The Fed consists of three main entities: Board of Governors: federal agency located in D.C., 7 governors appointed by U.S. President, confirmed by Senate Federal Reserve Banks: 12 total; semi-independent by design Federal Open Market Committee: 19 members Fed s primary responsibilities fall within four general areas: Lender of last resort provide liquidity in times of crisis Monetary policy promote full employment and low inflation Bank regulation help ensure safety and soundness of member banks Financial services bank for banks, bank for U.S. government 2
Federal Reserve Districts and Office Locations 3
U.S. Economic Update 4
The U.S. economy is expected to continue to grow at a moderate pace. REAL GROSS DOMESTIC PRODUCT (GDP) Annualized Percent Change from Previous Period 6% 6% 5% 4% 4.9% 3.7% 4.1% High Low 5% 4% 3% 2.8% 2.5% 3.2% 2.3% 3.2% 3.4% 3.2% 2.8% 3.0% 2.5% 3% 2% 2.2% 2% 1% 1.2% 1.1% 1% 0% 0.1% Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2013 2014 2015 2016 2011 2012 2013 FOMC Central Tendency Projections 0% Source: Bureau of Economic Analysis & Federal Open Market Committee (FOMC)/Haver Analytics. *December 2013 Projections. 5
Consumer spending has been the primary driver of economic growth over the past year. CONTRIBUTIONS TO REAL GDP Percent Change at Seasonally Adjusted Annualized Rates 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% Real GDP 3.2% Personal Consumption Expenditures Gross Private Domestic Investment Govt. Consumption & Investment Net Exports '08Q4 '09Q4 '10Q4 '11Q4 '12Q4 '13Q4 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% Source: Bureau of Economic Analysis/Haver Analytics. 6
Consumers are continuing to pay down debt after a run-up during the Great Recession. Revolving Debt Auto Debt $9,000 Real Dollars, Seasonally Adjusted $9,000 $5,000 Real Dollars, Seasonally Adjusted $5,000 $8,000 $7,000 United States $8,000 $7,000 $4,500 $4,000 United States $4,500 $4,000 $6,000 $6,000 $3,500 $3,500 $5,000 $4,000 Missouri $5,000 $4,000 $3,000 $2,500 Missouri $3,000 $2,500 $3,000 $3,000 $2,000 $2,000 $2,000 $2,000 $1,500 $1,500 $1,000 $1,000 Sep-99 Sep-01 Sep-03 Sep-05 Sep-07 Sep-09 Sep-11 Sep-13 $1,000 $1,000 Sep-99 Sep-01 Sep-03 Sep-05 Sep-07 Sep-09 Sep-11 Sep-13 Source: Federal Reserve Bank of New York Consumer Credit Panel 7
Unemployment rates remain elevated and are expected to gradually decline in coming years. UNEMPLOYMENT RATES Seasonally Adjusted 10% 9% 9.4% 9.6% United States 10% 9% 8% 7% 6% 5% 4.8% 4.6% 4% Missouri 6.7% 5.9% 7.1% 7.0% 6.6% 6.3% 6.1% 5.8% 5.8% 5.3% 8% 7% 6% 5% 4% 3% 3% 2% 2006 2007 2008 2009 2010 2011 2012 Nov Dec 2013 2014 2015 2016 FOMC Central 2013 Tendency Projections* 2% Source: Bureau of Labor Statistics & Federal Reserve Board/Haver Analytics. *December 2013 Projections. 8
Labor force participation rates have continued a steady decline, but recently leveled off in Missouri. LABOR FORCE PARTICIPATION Percent 70 69 68 67 66 Missouri 70 69 68 67 66 65 64 63 United States 65 64 63 62 62 Dec '03 Dec '05 Dec '07 Dec '09 Dec '11 Dec '13 Source: Bureau of Labor Statistics /Haver Analytics. 9
Inflation remains below the FOMC s 2 percent target. PERSONAL CONSUMPTION EXPENDITURE PRICE INDEX (PCEPI) Percent Change Year-over-Year 6% 6% 4% Headline Inflation 4% 2% 2% 0% Core Inflation 0% -2% -2% Nov. '03 Nov. '05 Nov. '07 Nov. '09 Nov. '11 Nov. '13 Source: Bureau of Economic Analysis/Haver Analytics. 10
The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. - January 2014 FOMC Statement 7% 6% 5% 4% EFFECTIVE FEDERAL FUNDS RATE 3% 2% 1% 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Federal Reserve Board/Haver Analytics. 11
the Committee will add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $35 billion per month rather than $40 billion per month. - January 2014 FOMC Statement $4 $3 $2 $1 $0 -$1 -$2 -$3 FEDERAL RESERVE BALANCE SHEET Trillions Assets Traditional Portfolio Currency in Circulation Liabilities Foreign Currency Swaps Short-Term Lending Federal Agency & Mortgage-Backed Securities Reserves Other Trillions $4 $3 $2 $1 $0 -$1 -$2 -$3 -$4 -$4 2008 2009 2010 2011 2012 2013 2014 Source: Federal Reserve Board/Haver Analytics. 12
Regional Economic Update 13
Most states experienced positive job growth over the past year. DECEMBER 2013 NONFARM EMPLOYMENT Year-over-Year Percent Change, Seasonally Adjusted 1.3% Over 3% 2 to 3 1 to 2 0 to 1 Below 0 United States 1.6% 14
Job gains continue nationally, but the pace of growth in Missouri is lagging. NONFARM EMPLOYMENT Index 100 = December 2003, Seasonally Adjusted 110 United States Percent Change Past 10 Years Past Year Peak to Current U.S. 5.0% 1.6% -0.9% MO 1.6% 1.3% -3.0% 105 100 Missouri 95 Dec '03 Dec '05 Dec '07 Dec '09 Dec '11 Dec '13 Source: Bureau of Labor Statistics/Haver Analytics. 15
Missouri metropolitan areas have faired better, with the exception of Saint Louis. NONFARM EMPLOYMENT Index 100 = December 2003, Seasonally Adjusted 125 120 Percent Change Past 10 Years Past Year Peak to Current Kansas City 4.5% 0.7% -4.2% St. Joseph 20.8% 2.0% -0.2% Joplin 8.4% 1.5% -0.5% 115 St. Joseph 110 Joplin 105 100 Kansas City 95 Dec '03 Dec '05 Dec '07 Dec '09 Dec '11 Dec '13 Source: Bureau of Labor Statistics/Haver Analytics. 16
Employment growth has been picking up in some sectors in Missouri, but all government sectors are still shrinking. NOVEMBER 2013 PAYROLL EMPLOYMENT Seasonally Adjusted Percent Change Year-over-Year Construction Financial Activities Wholesale Trade Professional and Business Services Educational and Health Services Leisure and Hospitality Other Services Manufacturing Retail Trade Transportation and Utilities Local Government State Government Federal Government Information Natural Resources and Mining Missouri United States -0.1% -2.6% -2.6% -2.9% -4.8% 3.7% 3.3% 3.1% 2.5% 2.5% 1.3% 1.0% 0.9% 0.3% 0.2% Share of Missouri Jobs 4.0% 6.3% 4.5% 12.9% 15.6% 10.4% 4.3% 9.2% 11.3% 3.5% 10.3% 3.6% 2.0% 2.1% 0.1% Source: Bureau of Labor Statistics/Haver Analytics. 17
Higher wage jobs are slowly coming back to Missouri. DECEMBER 2013 MISSOURI PAYROLL EMPLOYMENT Seasonally Adjusted 15 10 Education and Health, 425 Prof. & Business, 350 Thousands of Jobs 5 0 Leisure & Hospitality, 283 Trade, Transp & Util, 513 Financial, 171 Manufacturing, 250 Construction, 109-5 -10 10 12 14 16 18 20 22 24 26 28 30 Average Wage ($ per hour) Source: Bureau of Labor Statistics/Haver Analytics. 18
Residential construction activity has picked up considerably. VALUE OF RESIDENTIAL CONSTRUCTION Index 100 = December 2003, Seasonally Adjusted Three-Month Moving Average 160 140 120 100 Missouri Percent Change Cumulative Year-to-Date* Past Year United States 26.2% Missouri 23.5% 80 60 United States 40 20 Dec. '03 Dec. '05 Dec. '07 Dec. '09 Dec. '11 Dec. '13 Source: McGraw Hill/F.W. Dodge. *Year-to-Date calculation is for December 2013 19
Home prices are rising at different paces across the nation. FHFA PURCHASE-ONLY HOME PRICE INDEX 2013Q3 Percent Change Year-over-Year, Seasonally Adjusted 5.8% Percent Change Year-over-Year Over 10% 7.5 to 10 5 to 7.5 2.5 to 5 0 to 2.5 Below 0% United States 8.4% Source: Federal Housing Finance Agency/Haver Analytics. 20
Manufacturing activity has recently slowed in the U.S. and 10 th District of the Federal Reserve. MANUFACTURING ACTIVITY Diffusion Index, Seasonally Adjusted, Month-over-Month 65 60 55 Expanding ISM 51.3 January 2013 50 45 40 35 Contracting Kansas City District 52.5 January 2013 30 Jan. '04 Jan. '06 Jan. '08 Jan. '10 Jan. '12 Jan. '14 Source: Institute for Supply Management & Federal Reserve Bank of Kansas City/Haver Analytics. 21
Tenth District manufacturers expectations for future activity have held steady across most categories. TENTH DISTRICT MANUFACTURING EXPECTATIONS Diffusion Index, Seasonally Adjusted, Six months ahead 30 20 '13Q1 '13Q2 '13Q3 '13Q4 10 0 Production Volume of New Orders Number of Employees Capital Expenditures New Orders for Exports Source: Federal Reserve Bank of Kansas City 22
Total trade decreased YTD through the third quarter in Missouri, with declines in Europe, China, Japan, and Canada. MISSOURI EXPORTS BY TRADING PARTNER Billions $16.0 $14.0 $12.0 $10.0 $8.0 Percent Change YTD Q3 2013 Year-over-Year Total Trade -9.3% SHARE All Other -9.6 26.1% Japan -43.2 3.6 Mexico 8.2 14.6 Canada -2.2 32.1 China* -27.7 8.0 Eurozone -11.7 15.6 $6.0 $4.0 $2.0 $0.0 '05 '06 '07 '08 '09 '10 '11 '12 Q3 2013 Top exports by value YTD Q3 2013 Billion $ Transp. Equipment $2.2 Chemical Manufactures $1.7 Food Products $1.1 Machinery $1.0 Source: Census Bureau. Note: Eurozone includes the 27 EU member countries. *Includes Hong Kong, Taiwan & Macau. 23
Crude oil prices remain high, while natural gas prices are low. Price per Barrel SPOT PRICES Price per Thousand Cubic Feet $150 $16 $125 $100 Crude Oil (Left Axis) $14 $12 $10 $75 $8 $50 $6 $4 $25 $2 Natural Gas (Right Axis) $0 $0 Jan. '04 Jan. '06 Jan. '08 Jan. '10 Jan. '12 Jan. '14 Source: Bloomberg. 24
Oil drilling has increased sharply over the past few years, while natural gas drilling has declined as a result of lower prices. ACTIVE DRILLING RIG COUNTS UNITED STATES TENTH DISTRICT 2,000 500 1,600 Crude Oil 400 1,200 300 800 200 400 100 0 Natural Gas '08 '09 '10 '11 '12 '13 0 '08 '09 '10 '11 '12 '13 Source: Baker Hughes. 25
Crop prices have turned lower, with expectations for flat to lower prices. CROP PRICES $/Bushel 18 16 14 12 10 8 6 4 2 Soybeans Wheat Corn Futures Prices 0 Jan-08 Jan-10 Jan-12 Jan-14 Source: Commodity Research Bureau. Futures prices as of 1/31/2014 26
Farmland values continue to rise, but will likely slow with lower farm income. TENTH DISTRICT FARMLAND VALUES Percent change from previous year 40 35 30 25 20 15 10 5 0-5 Nonirrigated Irrigated Ranchland 40 35 30 25 20 15 10 5 0-5 -10-10 Q3 2006 Q3 2007 Q3 2008 Q3 2009 Q3 2010 Q3 2011 Q3 2012 Q3 2013 Source: FRBKC Ag Credit Survey. 27
Breakeven costs for livestock producers remain at or above market prices. LIVESTOCK PRICES AND BREAKEVEN COSTS Dollars per hundredweight 160 140 120 100 80 60 40 20 Hog Breakeven Hog Price Cattle Breakeven Cattle Price 160 140 120 100 80 60 40 20 0 0 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Source: USDA and Iowa State University 28
Summary U.S. economic growth remains moderate. Monetary policy remains accommodative. Missouri is experiencing uneven growth across sectors. Housing and construction are leading the way. Agricultural commodity prices have lowered, suggesting lower farm income in the near term. 29
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