Report on Economic and Financial Developments Loretta J. Mester Executive Vice President and Director of Research July, 1 *The views expressed here are those of the author and do not necessarily reflect those of the Federal Reserve Bank of Philadelphia or of the Federal Reserve System. Executive summary Economic growth slowed in the second quarter in both the nation and the district Downside risks include: European sovereign debt & banking system problems U.S. fiscal situation looming at year-end Slower global growth Several central banks have taken further steps to try to boost growth Policy questions: Has the outlook changed enough to warrant further action? If so, what action? 1
Employment growth has weakened since the start of the year. In June, payrolls rose by thousand jobs. Average monthly job gains this year are no higher than last year. Thousands of jobs Monthly change in nonfarm payrolls - - - - -1 7 9 1 11 1 Last month plotted is June 1 Average monthly gains for each year are indicated by the grey lines Quarterly job gains in the second quarter were only 1/3 of what they were in the first quarter Thousands of jobs - - - - -1-1 -1-1 -1 - - - Quarterly change in nonfarm payrolls 9 1 11 1 77 5 Last month plotted is 1 Q Source: Bureau of Labor Statistics
Progress on unemployment has stalled over the past three months. 11 1 9 7 5 Civilian unemployment rate US:. (June) PA: 7.5 (June) NJ: 9. (June) DE:.7 (June) Three States:.3 (June) NJ US PA DE 3 9 93 9 95 9 97 9 99 1 3 5 7 9 1 11 1 Source: Bureau of Labor Statistics and Phila Fed Research Department. Monthly data: Last point plotted is June 1. Personal income growth has stabilized to a modest 3 percent pace over the past three months Year-over-year growth in personal income and real disposable income (3-month moving average) 7 5 3 1-1 - -3 - -5 - Jan 7 Jul 7 Jan Jul Jan 9 Jul 9 Jan 1 Jul 1 Jan 11 Jul 11 Jan 1 Monthly data: Last point plotted is May 1 3
Retail sales growth moderated in June 1 Year-over-year growth in retail sales, excluding autos, gas stations, and building materials stores Year-over-year growth in nominal retail sales Year-over-year growth in real retail sales - - -1 5 7 9 1 11 1 Monthly data: Last point plotted is June 1 Regional manufacturing activity has slowed over the past three months, similar to last summer Business Outlook Survey: General Activity Index Future General Activity Index Diffusion Index 7 5 3 19.3 1-1 -1.3 - -3 - -5 199 1999 1 3 5 7 9 1 11 1 Index represents percentage of respondents reporting an increase minus percentage reporting a decrease. Monthly data: Last point plotted is July 1
At the national level, manufacturing activity rebounded in June, but its pace stepped down in Q compared to Q1 Index, 7=1 15 1 Motor Vehicle Assemblies (right scale) SAAR, Mill. Units 1 15 95 1 9 5 Manufacturing Output Industrial Production 9 3 75 1 3 5 7 9 1 11 1 Monthly data: Last point plotted is June 1 Business investment in equipment and software has also softened 3 Nondefense capital goods excluding aircraft Year-over-year percentage change, SA Orders 1-1 - Shipments -3-9 99 1 3 5 7 9 1 11 1 Monthly data: Last point plotted is May 1 5
Oil prices have firmed over the past month, but are down about $1 a barrel since the start of the year. Gasoline prices remain under $3.5 a gallon. $ per barrel oil 15 1 Spot Prices West Texas Intermediate $ per gallon for gasoline. Brent 5. 9. 3. 3 Retail Gasoline. 7 9 1 11 1 Weekly data: Last point plotted is July 13, 1. 1. As oil prices have fallen, inflation has moderated to slightly under the FOMC s longer-run goal of percent 5. Total PCE Inflation and Core PCE Inflation 1-month % change. 3.. 1. 1.% 1.5%. -1. -. 1 3 5 7 9 1 11 1 Monthly data: Last month plotted is May 1
There are signs that housing is starting to recover, with sales and starts moving up, albeit from very low levels Thousands of units 5 5 Existing single family home sales Thousands of units 5 55 175 15 15 1 75 5 Privately owned housing units started New single family home sales 5 5 35 3 5 5 5 7 9 1 11 1 Monthly data: Last point plotted is June 1 for starts and existing home sales and May 1 for new home sales 15 15 1 5 FHFA Purchase-Only House Price Index House prices appear to have stabilized and may even be starting to rise Year-over-year percentage change -5-1 -15 CoreLogic Excluding Distressed Sales Case-Shiller House Price Index Composite - 9 93 9 95 9 97 9 99 1 3 5 7 9 1 11 1 Monthly data: Last point plotted is April 1 for Case-Shiller and FHFA and May 1 for CoreLogic 7
Uncertainty surrounding the European sovereign debt and banking problems continues to cloud the global outlook, but European countries have taken some positive steps 1 Spread of 1-year government bond over 1-year German government bond Greece (right scale) 5 1 Portugal Ireland Italy Spain France 1/3/11 //11 7/5/11 1//11 1//1 //1 7/5/1 3 1 Daily: Last point plotted is July 17, 1 NASDAQ & S&P 5 3 Stock prices continue to be volatile on concerns about Europe and the global growth slowdown. The S&P5 is little changed, on net, over the past month, but is up over percent, on net, year-to-date. 3 NASDAQ Dow Jones 15 1 135 13 1 Dow Jones Industrials 15 1 115 11 1 1 1 S&P 5 15 1 95 1 Jan 1 5 Jun 1 1 Dec 1 7 May 11 11 Nov 11 7 Apr 1 9 Daily data: Last point plotted is July 1, 1
Interest rates are very low across the maturity spectrum. Longer-term interest rates have fallen as investors seek the safe haven of U.S. Treasury securities. The Fed has kept the fed funds rate at essentially zero for 3-1/ years. 7.. 5. 3-year mortgage rate. 3.. 1-year Treasury bond yield 1. Fed funds effective rate. Jan 7 Jul 7 Jan Jul Jan 9 Jul 9 Jan 1 Jul 1 Jan 11 Jul 11 Jan 1 Jul 1 Weekly data: Last point plotted is July 1, 1 Calculation of LIBOR has come under increased scrutiny. 5.. 3. In September, the Fed announced new and expanded swap lines with other central banks to alleviate pressures in dollar short-term funding markets Overnight LIBOR rate. 1. Fed funds effective rate. Jan 7 Jul 7 Jan Jul Jan 9 Jul 9 Jan 1 Jul 1 Jan 11 Jul 11 Jan 1 Jul 1 Weekly data: Last point plotted is July 1, 1 9
What is LIBOR? LIBOR = London Interbank Offered Rate At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11 am London time? Not based on actual transactions Rates for 1 currencies and 15 maturities British Bankers Association collects responses from 1 banks; Thompson Reuters calculates the trimmed arithmetic mean 3 US banks: Bank of America, Citigroup, JP Morgan Chase Used as a reference rate in a variety of financial contracts including swaps, commercial loans, mortgages, student loans In the US, mortgages tied to LIBOR: % of number of 1 st mortgages = 3 million loans 9% of outstanding principle of 1 st mortgages = $ billion Central banks around the world have been easing monetary policy Fed Extended operation twist to year-end China, Brazil, South Korea, Australia, Denmark Cut policy rates Japan: Increased Treasury bill purchases under Asset Purchase Program ECB Cut central bank lending and deposit rates United Kingdom Increased asset purchases Funding for Lending Scheme low-cost funding to banks that increase lending to households and firms 1
Growth is expected to be modest in many countries over the next two years Real GDP Growth, SAAR 5 3 1-1 - -3 - -5-7 9 1 11 1 13 7 9 1 11 1 13 7 9 1 11 1 13 7 9 1 11 1 13 Euro Area Japan United United States Kingdom 7 9 1 11 1 13 China 1 1 1 1 Source: OECD Economic Outlook, May 1 for China and June 1 for others. Hatched bars are forecasts. The fiscal cliff is a risk to the forecast $ billions % of FY13 GDP Changes in Revenue Policies 399.5% Expiration of tax provisions and adjustments to AMT 1 1.% Expiration of employee s payroll tax reduction 95.% Other expiring provisions 5.% Taxes included in Affordable Care Act 1.1% Changes in Spending Policies 13.% Automatic sequestration 5.% Expiration of emergency unemployment benefits.% Reduction in Medicare payment rates for doctors 11.1% Other Changes in Revenues and Spending 15.7% Total Change in Deficit (without economic feedback effects) 7 3.% Source: Congressional Budget Office, May 1 11
Market participants continue to price in more accommodative policy given the weaker economic data 1. 3-day federal funds futures rates.75 April, 1 Jan 19, 1 June, 1.5.5 July 1, 1. Jan 1 Jul 1 Jan 13 Jul 13 Jan 1 Jul 1 Jan 15 1
Appendix: Additional Charts Economic activity continues to expand in most states, but at a slower pace than earlier this year Philadelphia Fed Current Economic Activity Indexes, annualized growth over the three months ending in May 1 > % 3% to % % to 3%.5% to % -.5% to.5% -% to -.5% -3% to -% <-3% 13
Private sector payroll growth has slowed in recent months Thousands of jobs Monthly change in private nonfarm payrolls - - - - -1 7 9 1 11 1 Last month plotted is June 1. Average monthly gains for each year are indicated by the grey lines. Recent modest job growth has retarded progress on recovering lost jobs % of jobs lost from employment peak to employment trough and % of lost jobs regained since employment trough 7.% 7.%.3% 5 3 1 3.% % of lost jobs regained.% % of jobs lost 5.% 7.%.9% US PA NJ DE Incorporates June 1 data for US and May 1 data for states 1
Employment in our three states decelerated since the beginning of the year Annualized 3-month payroll job growth, as of May 1 Job growth ann. 3-month as of May 1 1 3 5 7 9 1 1 13 11 1 1 1 15 1 17 19 3 US:.9% 3-state:.3% PA:.5% NJ: 1.% DE: 3.% < 3%.9% to % 1.9% to 1%.9% to %.1% to 1% 1.1% to % > % 1. Pittsburgh,. Erie, 3. Johnstown,. Altoona, 5. State College,. Williamsport, 7. Harrisburg-Carlisle,. York-Hanover, 9. Lebanon, 1. Lancaster, 11. Reading, 1. Scranton-Wilkes-Barre, 13. Allentown-Bethlehem-Easton, 1. Newark-Union, 15. Bergen-Passaic-Hudson, 1. Trenton-Ewing, 17. Edison, 1. Philadelphia, 19. Camden,. Wilmington, 1. Dover,. Vineland-Millville-Bridgeton, 3. Atlantic City,. Ocean City Employment growth in our three states is lower than in the nation. So far this year, job growth in NJ has offset weakness in PA and DE. Annualized year-to-date payroll job growth, as of May 1 Job growth ann. yr-to-date as of May 1 1 3 5 7 9 1 11 13 1 15 1 17 US: 1.5% 3-state:.% PA:.% NJ:.1% DE:.1% 1 1 1 19 3 < 3%.9% to % 1.9% to 1%.9% to %.1% to 1% 1.1% to % > % 1. Pittsburgh,. Erie, 3. Johnstown,. Altoona, 5. State College,. Williamsport, 7. Harrisburg-Carlisle,. York-Hanover, 9. Lebanon, 1. Lancaster, 11. Reading, 1. Scranton-Wilkes-Barre, 13. Allentown-Bethlehem-Easton, 1. Newark-Union, 15. Bergen-Passaic-Hudson, 1. Trenton-Ewing, 17. Edison, 1. Philadelphia, 19. Camden,. Wilmington, 1. Dover,. Vineland-Millville-Bridgeton, 3. Atlantic City,. Ocean City 15
Household net worth is beginning to recover after the sharp contraction in 15 1 5 Change in household net worth Trillions of $ $9 $ $3 $ -5-1 -15 age change, year to year -$3 -$ -$9 - -5 $ Change 1995 1997 1999 1 3 5 7 9 11 Source: FRB Flow of Funds, annual data for 1995-11; quarterly data for 1Q1 1 Q1 -$1 -$15 Private sector job growth in the U.S. is slowing compared with the 1991 jobless recovery. And this recession was much sharper. Cumulative % change in private nonfarm payrolls since recession trough 1 U.S. private payroll employment - Avg of recoveries, 199-19 1991 9 1 - -1 - - 1 1 3 3 Last point plotted for 9 recovery is June 1 Trough Mar 1991 Nov 1 Jun 9 Months Since Recovery Began 1
Unlike prior recessions, government jobs are being cut Cumulative % change in government nonfarm payrolls since recession trough 1 U.S. government payroll employment Census workers => +1K in May 1 Avg of recoveries, 199-19 1991-9 1 - -1 - - 1 1 3 3 Last point plotted for 9 recovery is June 1 Trough Mar 1991 Nov 1 Jun 9 Months Since Recovery Began Total employment growth in the nation is weaker than in the 1991 recovery Cumulative % change in nonfarm payrolls since recession trough 1 U.S. payroll employment Avg of recoveries, 199-19 1991 9 1 - - -1 - - 1 1 3 3 Last point plotted for 9 recovery is June 1 Trough Mar 1991 Nov 1 Jun 9 Months Since Recovery Began 17
Unemployment rates vary across the region, with higher rates in southern New Jersey County Unemployment Rates: May 1 (Preliminary) Erie Warren McKean Potter Tioga Bradford Susquehanna Crawford Wayne Forest Wyoming Venango Elk Cameron Sullivan Lackawanna Mercer Clinton Lycoming Pike Clarion Jefferson Luzerne Montour Sussex Monroe Passaic Lawrence Clearfield Centre Union Columbia Warren Bergen Butler Armstrong Northumberland Carbon Morris Snyder Essex Beaver Schuylkill Northampton Indiana Mifflin Union Hudson Lehigh Allegheny Cambria Dauphin Hunterdon Blair Juniata Somerset Perry Lebanon Berks Westmoreland Huntingdon Bucks Middlesex Montgomery Mercer Monmouth Washington Cumberland Bedford Lancaster Chester Fayette Somerset Philadelphia Franklin York Ocean Greene Fulton Delaware Adams Camden Burlington Gloucester New Salem Castle Atlantic Cumberland Cape Kent May Less than 7.5% 7.5% - 9.% 9.% - 11.% Greater than 11.% Sussex The share of unemployment that is long-term remains high of Unemployed 7 5 15 weeks or longer 3 1 7 weeks or longer Jan.71 Jan.7 Jan.5 Jan.9 Jan.99 Jan. Monthly data: Last point plotted is June 1 1
. Long-term unemployment remains high. Progress has stalled in the past two months. Weeks 5. 35. 3. Job losers as percent of civilian labor force Average weeks unemployed 1. 1 1.. Long-term unemployed as percent of civilian labor force 9 91 9 93 9 95 9 97 9 99 1 3 5 7 9 1 11 1 7 Monthly data: Last point plotted is June 1. Job losers are people unemployed for less than 5 weeks. Long-term unemployed are people unemployed for more than weeks. 1 1 1 1 1 The unemployment rate is higher when we include all marginally attached workers and those working part-time for economic reasons. This rate ticked up in May and June. U: Unemployed in U3 plus all marginally attached workers and those working part-time for economic reasons 1.9%.% U3 = Official unemployment rate 9 91 9 93 9 95 9 97 9 99 1 3 5 7 9 1 11 1 Monthly data: Last point plotted is June 1 19
Labor force participation is below the level that would be predicted by cyclical factors and demographics Civilian Labor Force Participation Rate (SA) 7 5 3 Nonlinear trend 3.7 1 77Q1 Q1 3Q1 Q1 9Q1 9Q1 95Q1 9Q1 1Q1 Q1 7Q1 1Q1 13Q1 Quarterly data: Last point plotted for participation is 1Q Source: Bureau of Labor Statistics. Trend is author s calculation controlling for the unemployment rate, share of working age population over 5, share of working age population female, time, and time-squared. Total inflation is down from its peak reflecting the drop in oil prices. Total CPI Inflation and Core CPI Inflation 1-month % change 5.. 3.. 1..% 1.7%. -1. -. 1 3 5 7 9 1 111 Monthly data: Last month plotted is June 1
Longer-term inflation expectations appear to be well-anchored. 3.5 3. Survey of Professional Forecasters Median 1-Year CPI Inflation Expectations Jan 5: FOMC releases % inflation target.5. 1.5 1..5 1-Year Inflation Compensation from Treasury Inflation- Indexed Securities. Jan- Jul- Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-1 Jul-1 Daily data: Last point plotted is July 13, 1 for inflation compensation and Second Quarter 1 SPF for 1-year CPI inflation expectations Consumer sentiment has fallen over the past three months on uncertainty over the European sovereign debt problems, the global slowdown, and U.S. fiscal problems looming at year-end Sentiment index, Q1 = 1 Confidence index, 195 =1 1 1 Consumer Sentiment Index, University of Michigan Consumer Confidence Index, Conference Board Jan 7 Jul 7 Jan Jul Jan 9 Jul 9 Jan 1 Jul 1 Jan 11 Jul 11 Jan 1 Jul 1 Monthly data: Last point plotted is June 1 for Confidence and July 1 (preliminary) for Sentiment 1
Billions of Dollars $, $5, $, $3, $, $1, $ -$1, -$, -$3, -$, -$5, -$, The rebound in the stock market contributed to a sizable rise in household wealth in the first quarter Change in households stock and mutual fund holdings Change in households real estate equity 97 9 99 1 3 5 7 9 1 11 1Q1 Source: FRB Flow of Funds, annual data for 1997-11; quarterly data for 1Q1 Auto production remains strong. Auto sales slowed in the second quarter from the robust first quarter pace. Millions of Units, Annual Rate 1 1 15 1 9 3 Auto and light truck sales 1. mill 1.3 mill Auto and light truck assemblies 7 9 1 11 1 Monthly data: Last point plotted is June 1
Household debt-to-disposable income is falling 15 15 1 Debt-to-Disposable Income 75 5 19 19 19 19 19 199 199 199 199 199 1 1 Quarterly data: Last point plotted is 1 Q1 Households debt-service burdens are falling. This partly reflects low interest rates. Total financial obligations to disposable personal income* 19 1 17 1 15 1 19 19 19 19 19 199 199 199 199 199 1 1 Quarterly data: Last point plotted is 1 Q1 Source: Federal Reserve Board *Includes payments on mortgage debt, consumer debt, auto leases, rental properties, homeowners insurance, and property taxes. 3
Inventories of unsold homes are down from their peaks Months supply at current sales pace 1 1 1 1 1 Months supply of condos and co-ops.7.5 Months supply of single family homes 1 3 5 7 9 1 11 1 Source: National Association of Realtors Monthly data: Last point plotted is May 1 House prices are firming in the western part of Pennsylvania and the Marcellus shale area Change in FHFA House Price Index For Metro Areas (as of 1 Q1) 1 1 5 15 13 1 3 7 9 11 1 17 1 1 19 Not Reported Less than 5% % to 5% % to % % to % % to % % to % Greater than % 1 3 1- Pittsburgh, - Erie, 3- Johnstown, - Altoona, 5- State College, - Williamsport, 7- Harrisburg-Carlisle, - York-Hanover, 9- Lebanon, 1- Lancaster, 11- Reading, 1- Scranton-Wilkes-Barre, 13- Allentown-Bethlehem-Easton, 1- Newark-Union, 15- Bergen-Passaic-Hudson, 1- Trenton-Ewing, 17- Edison, 1- Philadelphia, 19- Camden, - Wilmington, 1- Dover,- Vineland-Millville-Bridgeton, 3- Atlantic City,- Ocean City
11 1 9 7 5 3 1 Delinquencies continue to move down. Still, one in 13 mortgages is seriously delinquent. of all mortgages outstanding, 1- residential units Past due at least 3 days Seriously delinquent: Past due at least 9 days or in foreclosure New foreclosures 5Q1 Q1 7Q1 Q1 9Q1 1Q1 11Q1 1Q1 Quarterly data: Last point plotted is 1Q1 Source: Mortgage Bankers Association, seasonally adjusted Stock prices abroad have recovered a bit as the European countries have agreed on some initiatives to help with the sovereign debt and banking problems London FTSE& German DAX 7 75 7 9 3 57 5 51 5 German DAX London FTSE Japan Nikkei Hong Kong Hang Seng Jan 1 5 May 1 3 Aug 1 3 Dec 1 19 Apr 11 1 Aug 11 7 Dec 11 Apr 1 Hong Kong Hang Seng & Japan Nikkei 5 35 5 19 175 1 15 13 115 1 5 7 Daily data: Last point plotted is July 1, 1 5
The value of the dollar continues to rise on safe-haven flows Index, March 1973 = 1 95 Trade-weighted value of $ against major currencies and Euros per $ Euros/US $ 1.1 9 5 75 7 5 5 7 9 1 11 1 1..9..7..5 Weekly data: Last point plotted is July 13, 1 The Fed holds nearly $1 trillion in agency mortgage-backed securities and agency debt. Operation twist continues to lengthen the portfolio s maturity. By the end of the year, the Fed will hold no short-term Treasury securities. Trillions $ 3..5 Assets. 1.5 1..5. -.5-1. -1.5 -. -.5-3. Treasury Supplementary Financing Program Liabilities Other assets Loans Other Liabilities Agency securities Treasury securities Federal Reserve notes in circulation Reserve Balances Jan-7 Nov-7 Sep- Jul-9 May-1 Mar-11 Jan-1 Trillions $ 3..5. 1.5 1..5. -.5-1. -1.5 -. -.5-3. Weekly data: Last point plotted is July 9, 1
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