1/17/17 Economic Outlook Cortney Cowley Economist Federal Reserve Bank of Kansas City Omaha Branch October, 17 The views expressed are those of the author and do not necessarily reflect the opinions of the Federal Reserve Bank of Kansas City or the Federal Reserve System Structure and Function of the Federal Reserve System The Fed consists of three main entities: Board of Governors: 7 members appointed by U.S. President Federal Reserve Banks: 1 total, semi-independent by design Federal Open Market Committee: 19 members, 1 voting As with most central banks, the Fed s primary responsibilities fall within three general areas: Monetary policy: promote maximum employment and low inflation Bank regulation: ensure soundness and fair lending of banks Financial services: serve as bank for banks, bank for federal government 1
1/17/17 Of the 1 Fed Districts, the 1 th District is the most concentrated in agriculture by some measures. Average Farm Income as a Share of Total Personal Income Average Across Counties by Fed District Source: BEA. *Agricultural banks are defined as banks with farm production and farm real estate loans equaling approximately 1 percent or more of total loans. Proportion of Farm Dependent Counties and Agricultural Banks Percent Kansas City Minneapolis Chicago St. Louis Dallas San Francisco Atlanta Cleveland Richmond New York Share of U.S. Ag Banks* Philadelphia Farm Counties Boston 1 3 Source: BEA, USDA, Ag Finance Databook and staff calculations Omaha Branch Regional Affairs As economists in the Omaha Branch, we 1. focus on providing insights and analysis on Nebraska s economy and. lead agricultural research for the Federal Reserve Bank of Kansas City and the Federal Reserve System. For more information, visit: https://www.kansascityfed.org/omaha
1/17/17 Outline Moderate economic growth in the U.S. and Oklahoma Economic growth in Oklahoma Generally steady through the recovery Hurt by downturn in commodity prices Some areas hurt more than others Stabilized in 17 Slower growth in rural areas has been related to agriculture and energy sectors. Implications for agricultural finance Outlook for the U.S. and Oklahoma 3
1/17/17 U.S. economic growth has generally been positive, but has often fallen short of expectations. U.S. Real GDP Growth. Percent, annualized.. 3.. 1.. -1. Beginning-of-Quarter Forecast -. 1 11 1 13 1 1 1 17 Sources: Bureau of Economic Analysis, Haver Analytics, Macroeconomic Advisors and Blue Chip Financial Forecasts. Globally, economic growth has also been sluggish. 3 1-1 Global Real GDP Growth Annual Percent Change Annual Percent Change 1 17 1 19 1 Canada (Left Scale) Sources: IMF and Haver Analytics. Real GDP 199 - Average Annual Rate 1 17 1 19 1 Euro Zone (Left Scale) 1 17 1 19 1 Mexico (Left Scale) 1 17 1 19 1 Japan (Left Scale) 1 17 1 19 1 China (Right Scale) 1 9 7 3
1/17/17 Economic activity in Oklahoma improved in 17 after declining in 1. Coincident Economic Index..... -. -. -. -. -1. Percent change from previous year 7 9 1 11 1 13 1 1 1 17 Source: Federal Reserve Bank of Philadelphia and Haver Analytics. Note: Shaded regions depict NBER-defined recessions. Index (7 = 1) OK (Left Scale) U.S. (Left Scale) OK (Right Scale) U.S. (Right Scale) 1 1 11 11 1 1 9 9 Despite a recent uptick, unemployment rates in Oklahoma are slightly better than last year. Unemployment Rate 11 1 9 7 3 Percent (sa) OK U.S. 7 9 1 11 1 13 1 1 1 17 11 1 9 7 3 Source: Bureau of Labor Statistics. Note: Shaded regions depict NBER-defined recessions.
1/17/17 Broader measures of unemployment have also shown improvement in 17. Alternative Unemployment Rate (U)* 1 1 1 1 1 Percent, 1 month mov. avg. OK U.S. 7 9 1 11 1 13 1 1 1 17 * The U unemployment rate adds to the headline (U3) unemployment rate the following groups: discouraged workers, marginally attached workers, and workers who are employed part-time for economic reasons. Source: Bureau of Labor Statistics. Note: Shaded regions depict NBER-defined recessions. 1 1 1 1 1 Personal income in Oklahoma fell in 1 and 1, but has rebounded in 17.,,,,,, 3, 3, Real Per Capita Personal Income Dollars (Inflation adjusted) 3, 7 9 1 11 1 13 1 1 1 17 Source: Bureau of Economic Analysis and Haver Analytics. Note: Shaded regions depict NBER-defined recessions.,,,,,, 3, 3, 3,
1/17/17 Recent weakness in income growth is common across commodity-dependent states. Per Capita Personal Income Change from to 1 Change from 1 to 1 Most of Oklahoma s growth has been concentrated in metro areas since 13. Employment Growth in Oklahoma by Region Type Percent change from previous year Percent change from previous year - - - OK Metro - - 7 9 1 11 1 13 1 1 1 17 - Source: Bureau of Labor Statistics. 7
1/17/17 In 1 and 1, the largest drop in jobs in non-metro areas was in the mining sector. OK Non-Metro Job Growth by Industry 1 1 - - -1-1 - Percent Total Non- Metro Constr. Mining Edc. & Health Mfg. Fin. Act. State & Local Govt. Leis. & Hosp. Jul-1 to Jul-1 Jul-1 to Jul-1 Jul-1 to Jul-17 Trade & Transp. Fed Govt. Percent Prof. & Bus. Services 1 1 - - -1-1 - Source: U.S. Bureau of Labor Statistics Outlook for the Ag Economy
1/17/17 1 Recently, production growth in the U.S. has out-paced the rest of the world. Thousand metric tons 1 Corn 1 17 Domestic Production Excess Thousand head 9 Cattle - 3-3 -1 U.S. Arg. (3%) (%) Can. F.S.U. Ind. (1%) (%) (%) Brz. (%) Mex. (3%) E.U. (7%) Chn. (1%) Source: USDA, staff calculations Note: Production estimate for each country is a function of previous year production and domestic consumption growth. U.S. (1%) Chn. (17%) Ind. (%) Brz. (17%) - At the same time, global export competition has increased and domestic consumption has slowed relative to production. Corn Export-to-Production Ratio Soybean Consumption-to- Production Ratio ** Percent * Percent * 1 Percent *** Percent *** 1 1 1 United States Rest of World 1 1 1 1 Rest of World United States 1 1 1 3 7 9 11 13 1 17 1 3 7 9 11 13 1 17 * Exports as a percent of domestic production. ** A ratio of 1 would mean a country (or countries) consumes 1 percent of the soybeans it (they) produces. *** Domestic consumption as a percent of domestic production. Source: USDA 9
1/17/17 The strength of the dollar relative to the currencies of other key agricultural producers is important for exports. Currency Exchange Rates 3 Index (Jan. 1 = 1) Index (Jan. 1 = 1) 3 3 Brazil (Real/US$) Russia (Ruble/US$) Argentina (Peso/US$) 3 1 Stronger Dollar 1 1 1 13 1 1 1 17 Sources: FRB, IMF and Haver Analytics. Despite a large bump in exports, soybean inventories are expected to rise dramatically in the current crop year. U.S. Bulk Soybean Exports Million metric tons 1 1 3 Soybean Inventories Stocks-to-use ratio 1 17 1-1 Range -1 Average Jan Mar May Jul Sep Nov Note: In the right panel, crop years are given in the legend. The U.S. crop year for soybeans begins September 1 st and ends August 31 st of the next year. Sources: USDA World Agricultural Supply and Demand Estimates (WASDE) and USDA Foreign Ag Service (FAS). 1 1 1 United States Rest of World 1-11 11-1 1-13 13-1 1-1 1-1 1-17 17-1 1
1/17/17 Multiple years of record production, and the drop in commodity prices, have cut farm income. Net Farm Income and Production 1 1 1 1 Billion Dollars, 1 Dollars Record Global or U.S. Production U.S. Farm Income (Left Scale) U.S. Corn Price (Right Scale) 19 197 197 19 19 199 199 1 1 Note: The shaded areas represent years when either U.S. or global production of corn, soybeans and wheat set a new record. Sources: USDA. $/bu 7 3 1 Implications for Ag Finance 11
1/17/17 Weaker farm income and credit conditions have weighed on the financial outlook in the ag sector. Tenth District Farm Income and Credit Conditions 1 1 1 1 1 Diffusion index Farm income Repayment rates Farm Loan Demand 1 1 1 1 Diffusion index 1 1 1 1 1 Sources: Federal Reserve Bank of Kansas City Survey of Agricultural Credit Conditions and Agricultural Finance Databook, Table B.1. Repayment rates on farm loans have declined in each major industry in the District s agricultural economy 17 1 1 1 7 Farm Loan Repayment Rate Expectations Diffusion Index * Diffusion Index * Corn and soybeans 1 1 1 1 Wheat Cow/calf Feedlots Hogs Dairy 17 1 1 1 7 Source: Federal Reserve Bank of Kansas City. 1
1/17/17 However, repayment problems have been less severe in the eastern portion of the Tenth District. 3 3 1 1 Percent of responses Loan Repayment Problems, Severe repayment problems Major repayment problems Minor repayment problems Second Quarter Percent of responses 13 1 1 1 17 13 1 1 1 17 East West 3 3 1 1 Source: Federal Reserve Bank of Kansas City. Corresponding to repayment problems, loan performance has weakened slightly in recent quarters, Delinquency Rates at Commercial Banks 1 1 Percent, seasonally adjusted Percent, seasonally adjusted Non-Real Estate Farm Loans* Farm Real Estate Loans* All Bank Loans** 1 1 7 9 1 11 1 13 1 1 1 17 * Includes the share of all past due, non-accruing and net charge-off loans. ** All bank loans include all loans made at commercial banks. Sources: Agricultural Finance Databook, Table B., B.3. and Board of Governors 13
1/17/17 alongside increasing farm debt at commercial banks and moderate declines in farmland values. 1 1 - - Farm Debt Outstanding at Commercial Banks Percent change from previous year 1 1 - - Tenth District Farmland Values 3 3 1 1 - -1 Percent change from previous year 3 3 1 1 - -1 Nonirrigated Irrigated Ranchland Source: Federal Reserve Bank of Kansas City. Liquidity is a growing issue for farm operations. Farm Solvency and Farm Liquidity 1 1 Ratio Farm Debt / Income Farm Debt / Assets Ratio 197 197 197 197 197 19 19 19 19 19 199 199 199 199 199 1 1 1 1 1 1 1 1
1/17/17 However, if debt continues to grow, and land values continue to fall, significant problems may not arise until or later. 1 1 Farm Sector Debt-to-Asset Ratio % Annual Change in Farmland Values Number of Years to Reach Debt-to-Asset Ratio of % Annual Change in Farm Debt % % % % % 1% % --.7 1.... -% 31.7 13.7.9..3. -% 1. 9.... 3. -% 1.3 7... 3.9 3. -% 7.7..7 3.9 3. 3. -1%... 3. 3..7-1%..1 3. 3.1.7. Source: USDA and author s calculations. Liquidity is also a concern at agricultural banks. 9% 9% % % 7% 7% % % Percent of loans* All US Banks Agricultural Banks Highly Concentrated Ag Banks Loan-to-Deposit Ratios *Deposits as a percent of loans Source: Reports of Condition and Income 1
1/17/17 In response to these conditions, bankers have taken steps to manage risk in their agricultural loan portfolios. 3 3 1 1 How is your bank working with agricultural borrowers this year in ways that might be different from 3 to years ago? Percent of Respondents Increased Debt Restructuring Increased Loan Analysis Increased Use of Secondary Markets No Change Better Expense Tracking Percent of Respondents Increased use of Real Estate Collateral Pro-Active Business Planning 3 3 1 1 Source: Federal Reserve Bank of Kansas City. Prolonged weakness has continued to dampen business activity on Main Street in rural areas. Is a weakening agricultural economy leading to weaker Main Street business activity? 1 Percent responding Yes Percent responding Yes 1 1 1 17 1 Tenth District Kansas and Western Missouri *Mountain States include Colorado, northern New Mexico and Wyoming Source: Federal Reserve Bank of Kansas City Mountain States* Nebraska Oklahoma 1
1/17/17 Concluding Remarks The U.S. economy continues to grow at a moderate pace. Low commodity prices weighed on the Oklahoma economy in 1 and 1, but the economy has stabilized in 17. Farm income is expected to remain low in both the nation, the District, and Oklahoma, but has shown recent signs of stabilizing. Agricultural credit conditions remain a concern, and have continued to weaken. But the pace of deterioration has slowed. Questions? Cortney Cowley Economist Federal Reserve Bank of Kansas City Email: cortney.cowley@kc.frb.org Website: http://www.kansascityfed.org/omaha/ 17