Slow and Low: The Economic and Financial Outlook

Southern Legislative Conference 7th Annual Meeting Slow and Low: The Economic and Financial Outlook July, William R. Emmons Federal Reserve Bank of St. Louis William.R.Emmons@stls.frb.org These comments do not necessarily represent the views of the Federal Reserve Bank of St. Louis or the Federal Reserve System.

Slow and Low: The Economic and Financial Outlook The national economic outlook for Modest growth with downside risks Tame inflation Historically low interest rates The SLC region Strengths: Relatively fast population growth, low costs especially housing Biggest economic challenge: Education Long-term economic and financial outlook Slow growth and low inflation Low interest rates and asset returns Fiscal pressures building: Federal and some states

Slow and Unsteady: Economic Recovery Moves Into Its 8 th Year Growth Rate of Real Gross Domestic Product (GDP) change from year ago Trend Growth Rate of Real GDP Five-year annualized percent change Year-over-year GDP growth - -year annualized growth rate - - - Periods of recession indicated by vertical shaded areas. - - - 9 9 Source: Bureau of Economic Analysis /Haver Analytics - - - Quarterly data through Q.

The New Normal: Fed Consensus Predicts - Growth Forever Note: St. Louis Fed President James Bullard did not submit a long-run projection. Source: Federal Reserve Predictions as of June

Employment Is Growing... Growth Rate of Nonfarm Payroll Employment change from year ago - - - Employment - - - Periods of recession indicated by vertical shaded areas. - - - - 9 9 Source: Bureau of Labor Statistics /Haver Analytics Quarterly data through Q.

... Faster Than Potential Workforce Growth Rate of Nonfarm Payroll Employment change from year ago Growth Rate of Prime-Age Population, Ages - Years Old Five-year annualized percent change - - - Employment Prime-age population, - - - - Periods of recession indicated by vertical shaded areas. - - 9 9 Source: Haver Analytics - - Quarterly data through Q.

Unemployment Rate Unlikely to Fall Much Further Extended Unemployment: Incl. Discouraged + Invol. Part-Time, + Headline Unemployment Rate: Actively Searching, + Years Old College-Grad Unemployment: Actively Searching, + Years Old 8 8 Extended unemployment 8 Headline unemployment 8 Periods of recession indicated by vertical shaded areas. College unemployment 9 9 Source: Bureau of Labor Statistics /Haver Analytics Quarterly data through Q. 7

Inflation Is Below Fed Target of % Inflation Rate: PCE Chain-Price Index change from year ago Fed s inflation target Periods of recession indicated by vertical shaded areas. - - 9 9 Source: Bureau of Economic Analysis /Haver Analytics - - Monthly data through May 8

Inflation Trend Is Weak Inflation Rate: PCE Chain-Price Index -year annualized percent change Fed s inflation target Periods of recession indicated by vertical shaded areas. - - 9 9 Source: Bureau of Economic Analysis /Haver Analytics - - Monthly data through May 9

Inflation Trend Is Weak Inflation Rate: PCE Chain-Price Index -year annualized percent change Fed s inflation target Periods of recession indicated by vertical shaded areas. - - 9 9 Source: Bureau of Economic Analysis /Haver Analytics - - Monthly data through May

Inflation Trend Is Weak Inflation Rate: PCE Chain-Price Index -year annualized percent change Fed s inflation target Periods of recession indicated by vertical shaded areas. - - 9 9 Source: Bureau of Economic Analysis /Haver Analytics - - Monthly data through May

What If We re Hit With a Deflationary Shock Like Brexit or a Recession? Inflation Rate: PCE Chain-Price Index -year annualized percent change Fed s inflation target Periods of recession indicated by vertical shaded areas. - - 9 9 Source: Bureau of Economic Analysis /Haver Analytics - - Monthly data through May

Why Is Inflation Falling? Globalization, Technology and Competition Smoothed (-yr annualized) PCE Inflation Rate for Services Smoothed (-yr annualized) PCE Inflation Rate for Nondurable Goods Smoothed (-yr annualized) PCE Inflation Rate for Durable Goods Services Fed s inflation target Nondurable goods - Durable goods - Periods of recession indicated by vertical shaded areas. - - 9 9 Source: Bureau of Economic Analysis /Haver Analytics - - Monthly data through May

Rebounding Housing Costs Are Masking Falling Inflation In Other Items Smoothed CPI Inflation Rate: All Items Ex Shelter (Rented or Owned) -year annualized percent change Smoothed CPI Inflation Rate: Shelter (Rented or Owned) -year annualized percent change Cost of shelter (rented or owned) Fed s CPI inflation target Periods of recession indicated by vertical shaded areas. - - 9 9 Source: Bureau of Labor Statistics /Haver Analytics Inflation excluding cost of shelter (rented or owned) - - Monthly data through May

Interest Rates Can t Go Much Lower Can They? -Year Fixed-Rate Mortgage -Year Treasury Note -Month Treasury Bill 8 8 -yr. mortgage Periods of recession indicated by vertical shaded areas. 9 9 Sources: FHLMC, FRB /Haver -yr. Tsy -mo. Tsy Weekly data through July 7,

Brexit Knocked Long-Term Interest- Rate Expectations Even Lower asury Forward Rate: -Mo. Trsy Yield Projected Years in the Future asury Forward Rate: -Mo. Trsy Yield Projected Years in the Future easury Forward Rate: -Mo. Trsy Yield Projected Years in the Future easury Forward Rate: -Mo. Trsy Yield Projected Year in the Future Level of -month Treasury yield projected by current market prices to prevail in: years ():.98% Level of after-inflation - mo. Trsy yield projected by current market prices to prevail in: years ():.% years ():.7% years ():.9% years ():.9% years ():.% year (7):.7% years (8): -.% JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC Source: Federal Reserve Board /Haver Analytics Weekly data through July,

The SLC Region Strengths Relatively fast population growth Low costs, especially housing Biggest economic challenge: Education Home-grown labor force requires stronger primary and secondary schools Can leading states in the SLC region maintain a steady inflow of college-educated workers? Can other states begin to attract a bettereducated workforce? 7

Population in SLC States: Million Millions USA ex SLC SLC states 8 Source: Census Bureau Quarterly data through Q.

SLC States Represent of U.S. Population USA ex SLC SLC states 9 Source: Census Bureau Quarterly data through Q.

SLC Population-Growth Rate of.% Far Exceeds.% Rate in Rest of U.S. SLC states USA ex SLC Five-year annualized growth rates Source: Census Bureau Quarterly data through Q.

Housing Costs in SLC States Are Low Primarily Due to Low Land Prices House values in dollars STATE Land Value Structure Cost VA $,9 $99, FL $9, $8,8 NC $8,9 $8,788 SC $8,98 $8, TN $7,7 $8, GA $,7 $7,88 TX $,9 $7, MO $, $7,8 LA $,9 $7,9 AR $, $, KY $,98 $8, AL $,88 $7, MS $, $, OK $, $,9 WV $,9 $,7 Source: Lincoln Institute of Land Policy

Housing Is Not Just Cheap in SLC States It s Affordable Index values equal in 97 Housing is less affordable Housing is more affordable Sources: Federal Housing Finance Agency, Bureau of Economic Analysis Quarterly data through Q.

Housing Affordability Has Varied Less Recently in SLC States Than Elsewhere Index values equal in 99 Housing is less affordable Housing is more affordable Sources: Federal Housing Finance Agency, Bureau of Economic Analysis Quarterly data through Q.

SLC States Rank Low in High-School Graduation Rates Rank for highschool graduates Share of adults with HS diplomas State Wyoming.9 Minnesota.9 Alaska.9 Iowa.9 New Hampshire.9 Vermont.9 Montana.9 Hawaii 8.9 Utah 9.9 Maine.9 North Dakota.9 South Dakota.9 Nebraska.9 Wisconsin.9 Kansas.9 Washington.9 Colorado 7.89 Rank for highschool graduates Share of adults with HS diplomas State Oregon 8.89 Massachusetts 9.89 Maryland.89 Connecticut.89 Idaho.88 Michigan.88 Pennsylvania.88 Ohio.88 Delaware.87 New Jersey 7.87 Missouri 8.87 Indiana 9.87 Virginia.87 Illinois.8 Oklahoma.8 Florida.8 New York.8 Rank for highschool graduates Share of adults with HS diplomas State Rhode Island.8 North Carolina.8 Arizona 7.8 Georgia 8.8 Nevada 9.8 South Carolina.8 Tennessee.8 New Mexico.8 West Virginia.8 Arkansas.8 Louisiana.8 Alabama.8 Kentucky 7.8 California 8.8 Mississippi 9.8 Texas.8 Source: Dept. of Education

Many SLC States Rank Below Average in -Year-College Graduation Rates Rank for college graduates Share of adults with college degrees State Massachusetts.8 Colorado. Maryland.7 Connecticut. New Jersey. Virginia. Vermont 7. New York 8. New Hampshire 9. Minnesota. Washington. Illinois. Rhode Island. California. Hawaii. Kansas. Oregon 7.9 Source: Dept. of Education Rank for college graduates Share of adults with college degrees State Delaware 8.9 Utah 9.9 Georgia.8 Montana.7 Nebraska.7 Maine.7 Alaska.7 North Carolina.7 Pennsylvania. North Dakota 7. Wisconsin 8. Arizona 9. Texas. Florida. New Mexico. Missouri. Iowa. Rank for college graduates Share of adults with college degrees State South Dakota. Michigan. South Carolina 7. Ohio 8. Idaho 9. Wyoming. Tennessee. Oklahoma. Indiana. Alabama. Nevada. Louisiana. Kentucky 7. Mississippi 8. Arkansas 9.9 West Virginia.7

Many SLC States Rank Below Average in Advanced-Degree Rates Rank for advanced degrees Share of adults with advanced degrees State Massachusetts. Maryland. Connecticut. Virginia. New York. Vermont. New Jersey 7.9 Colorado 8.7 Illinois 9.7 Rhode Island.7 Delaware. New Hampshire. Washington. California.7 Oregon. New Mexico. Minnesota 7. Source: Dept. of Education Rank for advanced degrees Share of adults with advanced degrees State Kansas 8. Pennsylvania 9. Hawaii.99 Georgia.99 Maine.9 Missouri.9 Michigan.9 Arizona.9 Utah.9 Alaska 7.9 Florida 8.9 Nebraska 9.88 North Carolina.88 Ohio.88 Kentucky.8 Texas.8 Wisconsin.8 Rank for advanced degrees Share of adults with advanced degrees State South Carolina.8 Montana.8 Indiana 7.8 Wyoming 8.79 Tennessee 9.79 Alabama.77 Nevada.7 Idaho.7 Iowa.7 Oklahoma.7 South Dakota.7 Mississippi.7 Louisiana 7.9 North Dakota 8.7 West Virginia 8.7 Arkansas.

SLC-Region High-School Graduation Rates Are Low... Rank MO SLC TX 7 Source: Dept. of Education

... But Several SLC States Attract Many College Graduates Rank VA GA NC TX FL MO SLC 8 Source: Dept. of Education

SLC Advanced-Degree Rate Slightly Better Still Rank VA GA MO FL NC TX, KY SLC 9 Source: Dept. of Education

The Long-Term Economic and Financial Outlook What to expect in the years ahead Slow growth and low inflation Low interest rates and asset returns Growing fiscal pressures at Federal level and in some states

Growth Slowdown From % to % Appears Permanent CBO Forecast of Real-GDP Growth Rate Average annualized percent over previous years History Forecast 7 7 8 8 9 9 Source: Congressional Budget Office /Haver Annual Analytics data through ; forecasts -

Why the Growth Slowdown? Slow growth of the labor force Weak productivity growth Lingering recession effects Deleveraging Tighter credit conditions, including tougher regulation Low labor-force participation rate Scarring effects

The Long Period of Expensive U.S. Stocks Continues Expected Real U.S. Stock Return: E/P Ratio Using CAPE (-year moving average) cted Real Aaa Bond Return: Aaa Yield Minus Trailing GDP Deflator... (-year moving average) Stocks 8 Negative equity risk premium 8 Bonds - - - Sources: Haver Analytics Sources: S&P, BLS, Federal Reserve Board 7 8 9 - Monthly through April

Expected Real U.S. Stock and Bond Returns Are Low Expected Real U.S. Stock Return: E/P Ratio Using CAPE (-month moving average) xpected Real Aaa Bond Return: Aaa Yield Minus Trailing CPI Inflation (-month moving average) 8 8 Negative equity risk premium Stocks Bonds 8 8 9 9 Sources: Haver Analytics Sources: S&P, BLS, Federal Reserve Board Monthly through June

Very Low Guaranteed Real Returns Signal Pessimistic Growth Expectations Expected Real U.S. Stock Return: E/P Ratio Using CAPE (-month moving average) aranteed Long-Term Real Return: -Year Trsy Inflation-Indexed Yield (-month moving average) 7 7 Stocks Treasury inflationindexed yield Sources: Haver Analytics Sources: S&P, BLS, Federal Reserve Board Monthly through June

Federal-Government Budgets Likely to Create Ever-Larger Deficits Federal-Government Outlays as % of GDP: CBO 'Best Guess' Federal-Government Revenues as % of GDP: CBO 'Best Guess' Outlays Budget deficit Revenues Source: Source: Congressional Congressional Budget Office Budget Office /Haver Analytics June forecast

Result: Federal Debt Will Explode As of GDP Federal Debt Held by the Public as of GDP: CBO 'Best Guess' Federal debt held by the public 7 Source: Source: Congressional Congressional Budget Office Budget Office /Haver Analytics June forecast

Long-Term Fiscal Situation in Most SLC States Looks Manageable Debt, unfunded pension and unfunded retiree healthcare costs as percent of state personal income, SLC states in descending order Kentucky North Carolina Mississippi Arkansas Louisiana Texas South Carolina Missouri Alabama Oklahoma W. Virginia Florida Georgia Tennessee Virginia 8 Source: Pew May

In Sum: The Outlook is For Slow Growth, Low Interest Rates and Financial Returns The U.S. economy is growing at about a - percent pace, down from percent before the Great Recession. Downside risks are from overseas adjustments and diminishing slack at home. The SLC region has good growth potential but needs to improve primary and secondary education for the st -century economy. Interest rates and returns on financial assets are likely to remain historically low. 9