U.S. Economic Outlook Daniel Cooper Federal Reserve Bank of Boston October 14, 2015 The views expressed in this presentation are those of the author and do not necessarily represent the views of the Federal Reserve Bank of Boston or the Federal Reserve System. frbbbigblacklog Cooper (Boston Fed) NCSL October 14, 2015 1 / 49
Outline 1 Background on the Federal Reserve 2 Current Economic Indicators and Outlook 3 The Road Ahead Cooper (Boston Fed) NCSL October 14, 2015 2 / 49
Background 1. What is the Federal Reserve? The Federal Reserve is the central bank of the U.S. and has several responsibilities: Monetary policy Lender of last resort Bank regulation Payments system Cooper (Boston Fed) NCSL October 14, 2015 3 / 49
Background 1. What is the Federal Reserve? Cooper (Boston Fed) NCSL October 14, 2015 4 / 49
Background 1. What determines monetary policy? Price level, inflation, output, and financial stability Required by congress: maximum employment, stable prices, and moderate long-term interest rates First two goals known as dual mandate What does historically? Inflation, unemployment, output growth, and financial instability Cooper (Boston Fed) NCSL October 14, 2015 5 / 49
Background 1. Dual Mandate. Two Goals: Stable prices (low inflation) Inflation goal: 2 percent per year Maximum (sustainable) employment Target often stated in terms of the unemployment rate relative to the so-called natural rate of unemployment or NAIRU (non-accelerating inflation rate of unemployment) Cooper (Boston Fed) NCSL October 14, 2015 6 / 49
Background 1. How can monetary policy achieve these goals? Monetary policy: Actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals. (Source: http://www.federalreserve.gov/monetarypolicy/fomc.htm) Cooper (Boston Fed) NCSL October 14, 2015 7 / 49
Background 1. Has the FOMC been successful historically? The FOMC and the Dual Mandate Percent, annual rate 5 0 5 10 15 20 Fighting Inflation Fighting Unemployment 1960q1 1970q1 1980q1 1990q1 2000q1 2010q1 2015q3 Source: FRB/BEA/BLS/CBO/Haver Analytics Federal Funds (effective) Rate Core PCE Inflation Unemployment Gap Cooper (Boston Fed) NCSL October 14, 2015 8 / 49
Background 1. How does the FOMC set the interest rate? The Federal Reserve requires banks to hold a minimum level of reserves based on their deposits, which can influence banks funds available for lending Banks with excess reserves (liquidity) can lend to banks needing reserves to cover deposit shortfalls/lending needs. The FOMC sets a target for the Federal Funds Rate (FFR) the overnight interest rate used by banks to borrow/lend reserve balances Cooper (Boston Fed) NCSL October 14, 2015 9 / 49
Background 1. The banking system: A stylized example. Citizen sells a machine for $100. Deposits into bank Loan: $90 Bank 1 10% reserves Checking Account 1: +$100 Another citizen borrows $90 to buy a machine. Seller deposits into bank Loan: $81 Bank 2 10% reserves Checking Account 2: +$90 And another citizen borrows $81 to buy a machine. Seller deposits into bank And so on... The initial $100 deposit has been followed by creation of $171 in new money. Bank reserves have increased by $19. Cooper (Boston Fed) NCSL October 14, 2015 10 / 49
Background 1. The transmission of monetary policy in action. Monetary Policy Transmission Mechanism Percent, annual rate 0 5 10 15 1985q1 1990q1 1995q1 2000q1 2005q1 2010q1 2015q3 Source: Federal Reserve Board/Haver Analytics Federal Funds (effective) Rate 10 Year Treasury Note Yield at Constant Maturity Cooper (Boston Fed) NCSL October 14, 2015 11 / 49
The Labor Market Cooper (Boston Fed) NCSL October 14, 2015 12 / 49
2. The U.S. labor market has improved notably since the Great Recession. Unemployment is down... Unemployment Rates Percent 5 10 15 20 1995m1 2000m1 2005m1 2010m1 2015m9 Unemployment Rate U 6: Unemployed, marginally attached, & part time for econ reasons Source: Bureau of Labor Statistics/Haver Analytics Note: Seasonally Adjusted, 16 years old and older Cooper (Boston Fed) NCSL October 14, 2015 13 / 49
2....and the long-term unemployment rate is much improved. Thousands 0 2000 4000 6000 8000 Long Term Unemployed 1980m1 1985m1 1990m1 1995m1 2000m1 2005m1 2010m1 2015m9 Source: Bureau of Labor Statistics/Haver Analytics Note: Seasonally Adjusted Cooper (Boston Fed) NCSL October 14, 2015 14 / 49
2. Nonfarm payroll gains also have been strong, although payroll growth has slowed a bit recently. Monthly Change in Nonfarm Payroll Employment Thousands 0 100 200 300 400 2012m1 2013m1 2014m1 2015m1 2015m9 Source: Bureau of Labor Statistics/Haver Analytics Note: Seasonally Adjusted 6 month moving average Cooper (Boston Fed) NCSL October 14, 2015 15 / 49
2. In comparison, public sector employment has improved in recent months. Monthly Change in Public Payroll Employment Thousands 40 20 0 20 40 2012m1 2013m1 2014m1 2015m1 2015m9 Source: Bureau of Labor Statistics/Haver Analytics Note: Seasonally Adjusted 6 month moving average Cooper (Boston Fed) NCSL October 14, 2015 16 / 49
2. Still, the labor force participation rate is quite low... Labor Force Participation Rate Percent 62 63 64 65 66 67 1980m1 1985m1 1990m1 1995m1 2000m1 2005m1 2010m1 2015m9 Source: Bureau of Labor Statistics/Haver Analytics Note: Seasonally Adjusted, 16 years old and older Cooper (Boston Fed) NCSL October 14, 2015 17 / 49
2....and the number of workers employed part-time for economic reasons remains elevated. Thousands 2000 4000 6000 8000 10000 Employed Part Time for Economic Reasons 1995m1 2000m1 2005m1 2010m1 2015m9 Source: Bureau of Labor Statistics/ Haver Analytics Note: Seasonally Adjusted Cooper (Boston Fed) NCSL October 14, 2015 18 / 49
Inflation Cooper (Boston Fed) NCSL October 14, 2015 19 / 49
2. PCE inflation is subdued despite the labor market improvement. Even core PCE inflation, which excludes volatile food and energy goods, is low. Total PCE Inflation and Core PCE Inflation 4 quarter Percent Change 1 0 1 2 3 4 2000m1 2002m1 2004m1 2006m1 2008m1 2010m1 2012m1 2014m1 2015m9 Source: Bureau of Economic Analysis/Haver Analytics Note: Seasonally Adjusted, 2009=100 Core PCE Inflation Total PCE Inflation Cooper (Boston Fed) NCSL October 14, 2015 20 / 49
2. Transitory factors such as oil prices and import prices are thought to be holding down core PCE inflation. Core PCE Inflation vs. Oil Prices Core PCE Inflation vs. U.S. $ Exchange Rate 4 quarter Percent Change 0 1 2 3 40 60 80 100 120 Dollars per Barrel 4 quarter Percent Change 0 1 2 3 90 100 110 120 Index 2010m1 2011m1 2012m1 2013m1 2014m1 2015m1 Core PCE Inflation West Texas Intermediate Crude Source: BLS/Energy Information Administration/Haver Analytics 2010m1 2011m1 2012m1 2013m1 2014m1 2015m1 Core PCE Inflation Broad Trade Weighted $ Exchange Rate Source: BLS/JP Morgan/Haver Analytics Cooper (Boston Fed) NCSL October 14, 2015 21 / 49
2. Wage growth also has yet to pick up substantially. Average Hourly Earnings Production and Nonsupervisory Workers 4 quarter Percent Change 0 1 2 3 4 5 2005m1 2007m1 2009m1 2011m1 2013m1 2015m9 Source: Bureau of Labor Statistics/Haver Analytics Note: Seasonally Adjusted Cooper (Boston Fed) NCSL October 14, 2015 22 / 49
2. Inflation expectations remain stable and reasonably well anchored, but are being closely watched. 10 year Ahead Median Inflation Expectations Percent, annual rate 2 2.5 3 3.5 1995q1 2000q1 2005q1 2010q1 2015q1 Survey of Professional Forecasters University of Michigan Survey Source: University of Michigan/Federal Reserve/Federal Reserve Board of Governors/Haver Analytics Cooper (Boston Fed) NCSL October 14, 2015 23 / 49
Household Sector Cooper (Boston Fed) NCSL October 14, 2015 24 / 49
2. House prices have rebounded from their post-recession lows... National House Price Index Index: January 2000 = 100 120 140 160 180 200 2003q1 2005q1 2007q1 2009q1 2011q1 2013q1 2015q3 Source: CoreLogic/Haver Analytics Note: Seasonally Adjusted Cooper (Boston Fed) NCSL October 14, 2015 25 / 49
2....and foreclosures are way down... Consumers with New Foreclosures Percent.05.1.15.2.25 2000q1 2005q1 2010q1 2015q3 Source: FRBNY Consumer Credit Panel/Equifax/Haver Analytics Cooper (Boston Fed) NCSL October 14, 2015 26 / 49
2....but housing starts and residential investment remain at low levels... Thousands of units 500 1000 1500 2000 2500 Housing Starts 1990m1 1995m1 2000m1 2005m1 2010m1 2015m9 Source: Census Bureau/Haver Analytics Note: Seasonally Adjusted Annual Rate, 3 month moving average Billions of 2009 dollars 300 500 700 900 Real Private Residential Fixed Investment 2003q1 2006q1 2009q1 2012q1 2015q3 Source: Bureau of Economic Analysis/Haver Analytics Note: Seasonally Adjusted Annual Rate Cooper (Boston Fed) NCSL October 14, 2015 27 / 49
2....perhaps due to subdued household formation rates. Thousands 100000 105000 110000 115000 120000 125000 Number of U.S. Households 2000 2005 2010 2015 Source: Author s calculations using Census data Actual Number of Households Predicted Base 2001 Predicted Base 2009 Cooper (Boston Fed) NCSL October 14, 2015 28 / 49
2. Indicators of consumer demand, such as vehicle sales, have been strong recently... Light Weight Vehicle Sales Millions of units 10 12 14 16 18 1990q1 1995q1 2000q1 2005q1 2010q1 2015q1 Source: Bureau of Economic Analysis/Haver Analytics Note: Seasonally Adjusted Annual Rate Cooper (Boston Fed) NCSL October 14, 2015 29 / 49
2....and households future income expectations have moved a good bit higher in recent months. Expected Change in Income Percent 0 1 2 3 4 5 6 0.5 1 1.5 2 2.5 3 3.5 Percent 2003m1 2005m1 2007m1 2009m1 2011m1 2013m1 2015m9 Mean Median Source: Survey of Consumers/University of Michigan Note: 6 month moving average Cooper (Boston Fed) NCSL October 14, 2015 30 / 49
2. Consumer sentiment has declined some recently, but remains at a high level. Consumer Sentiment 1966Q1 = 100 60 70 80 90 100 110 120 45 50 55 60 65 70 75 80 85 90 95 1966Q1 = 100 2003m1 2005m1 2007m1 2009m1 2011m1 2013m1 2015m9 Source: University of Michigan/Haver Analytics Note: Seasonally Adjusted, 3 month moving average Current economic conditions Consumer expectations Cooper (Boston Fed) NCSL October 14, 2015 31 / 49
2. Real consumption (PCE) growth has been strong, and is forecast to remain strong in the near-term. Real PCE Growth Rate Percent 2 0 2 4 2007 2008 2009 2010 2011 2012 2013 2014 2015q1 2015q2 2015q3 2015q4 Annual Growth Forecast of Real PCE Growth (Annual Rate) Source: Bureau of Economic Analysis/Macroeconomic Advisers/Haver Analytics Note: Seasonally Adjusted Annual Rate Cooper (Boston Fed) NCSL October 14, 2015 32 / 49
2. Still, saving remains above where we might expect given current levels of net worth, which poses a downside risk to the consumption outlook. Saving and Wealth Percent, annual rate 2 4 6 8 10 5 5.5 6 6.5 Ratio 1995q1 2000q1 2005q1 2010q1 2015q1 Saving Rate Wealth to Income Ratio Source: BEA/FRB/Haver Analytics Cooper (Boston Fed) NCSL October 14, 2015 33 / 49
Government Spending Cooper (Boston Fed) NCSL October 14, 2015 34 / 49
2. State and local government spending was a big drag on output in the early part of the recovery. State/Local Government State/Local Gov. Spending, Average Contribution to GDP growth 12 quarters into the recovery Federal Government Federal Government Spending, Average Contribution to GDP growth 12 quarters into the recovery.6.6 0.60.4 0.41.4 Percentage.2 0 0.08 0.21 Percentage.2 0 0.13 0.00.2.2.4 0.32 1975q1 1982q4 1991q1 2009q2 Source: Bureau of Economic Analysis/Haver Analytics Note: Dates indicate end of recession.4 0.28 1975q1 1982q4 1991q1 2009q2 Source: Bureau of Economic Analysis/Haver Analytics Note: Dates indicate end of recession Cooper (Boston Fed) NCSL October 14, 2015 35 / 49
2. State and local government spending has improved recently, even as overall government spending has fallen as a share of GDP. Government Spending Share in GDP Percent of GDP 6 7 8 9 10 11 55 60 65 70 Percent of Government Spending 1980q1 1985q1 1990q1 1995q1 2000q1 2005q1 2010q1 2015q3 Source: Bureau of Economic Analysis/Haver Analytics Gov. spending share of GDP State and Local share of Gov. Spending Cooper (Boston Fed) NCSL October 14, 2015 36 / 49
2. Indeed, government spending has made small positive contributions to GDP growth in recent quarters. Contribution of Government Spending to GDP growth Percent 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 2007q1 2009q1 2011q1 2013q1 2015q3 Government Spending GDP Growth Source: Bureau of Economic Analysis /Haver Analytics Note: Seasonally Adjusted Annual Rate Cooper (Boston Fed) NCSL October 14, 2015 37 / 49
2. Local and federal budget deficits have also improved. 50 Government Savings 500 0 0 Local/State Billions of dollars 50 100 500 Federal Billions of dollars 150 1000 200 1500 1980 1985 1990 1995 2000 2005 2010 2015 Source: Bureau of Economic Analysis/Haver Analytics State Local Federal Cooper (Boston Fed) NCSL October 14, 2015 38 / 49
Output (GDP) Cooper (Boston Fed) NCSL October 14, 2015 39 / 49
2. Output during this recovery has been sluggish compared to previous ones... Output: Current versus Previous Business Cycles Business Cycle Trough = 100 100 110 120 130 Real GDP, recent recession 2001:Q4 1991:Q1 1982:Q4 0 4 8 12 16 20 24 Quarters from business cycle trough Source: Bureau of Labor Statistics /Haver Analytics Cooper (Boston Fed) NCSL October 14, 2015 40 / 49
2. Consumption and investment have made positive contributions to GDP growth in recent quarters. Percent 6 4 2 0 2 4 6 8 10 Contribution to real GDP growth 2007q1 2008q1 2009q1 2010q1 2011q1 2012q1 2013q1 2014q1 2015q1 C contribution G contribution I contribution NX contribution Source: Bureau of Economic Analysis /Haver Analytics Note: Seasonally Adjusted Annual Rate Cooper (Boston Fed) NCSL October 14, 2015 41 / 49
2. Net exports will act as a drag on output in the near-term... Jan1997=100 90 95 100 105 110 115 120 Exchange Rate and Net Exports 2005q1 2010q1 2015q1 2017q4 date 900 800 700 600 500 400 300 Bil.$ Trade Weighted Exchange Value of the US$ Net Exports of Goods and Services (Exchange Rate) Source: Federal Reserve Board /Haver Analytics (Net Exports) Source: Bureau of Economic Analysis /Haver Analytics (Forecasts) Source: Macroeconomic Advisers /Haver Analytics Cooper (Boston Fed) NCSL October 14, 2015 42 / 49
2....but overall GDP should continue to grow moderately as consumer spending is forecast to remain strong. Real GDP Growth Rate Percent 4 2 0 2 4 2007 2008 2009 2010 2011 2012 2013 2014 2015q1 2015q2 2015q3 2015q4 Annual Growth Forecast of Real GDP Growth (Annual Rate) Source: Bureau of Economic Analysis/Macroeconomic Advisers/Haver Analytics Note: Seasonally Adjusted Annual Rate Cooper (Boston Fed) NCSL October 14, 2015 43 / 49
Road Ahead The Road Ahead Cooper (Boston Fed) NCSL October 14, 2015 44 / 49
Road Ahead 3. The evolution of the FOMC s outlook Core PCE Inflation (%) 2015 2016 2017 2018 Dec. 2014 1.7 1.9 1.9 n.a. March 2015 1.4 1.7 1.9 n.a. June 2015 1.3 1.8 2.0 n.a. Sept. 2015 1.4 1.7 1.9 2.0 Real GDP Growth (%) Dec 2014 2.8 2.8 2.4 n.a. Mar 2015 2.5 2.5 2.3 n.a. June 2015 1.9 2.5 2.3 n.a. Sept. 2015 2.1 2.3 2.2 2.0 Unemployment Rate (%) Dec 2014 5.3 5.1 5.1 n.a. Mar 2015 5.1 5.0 4.9 n.a. June 2015 5.3 5.1 5.0 n.a. Sept. 2015 5.0 4.8 4.8 4.8 Source: FOMC Summary of Economic Projections. Note: Table reports the median projection of FOMC participants. Cooper (Boston Fed) NCSL October 14, 2015 45 / 49
Road Ahead 3. The current policy debate. The labor markets have improved and the unemployment rate is close to the natural rate. Inflation is subdued, and the longer-run inflation outlook has softened a bit. Output growth is expected to be moderate over the next few years. There is some downside risk to the outlook in the near-term from global economic conditions and financial market volatility. The key question is when the FOMC should begin raising the Federal Funds rate. This year? Next year? Cooper (Boston Fed) NCSL October 14, 2015 46 / 49
Road Ahead 3. The vast majority of FOMC participants in September anticipated lift-off in 2015. Appropriate Pace of Policy Firming Target Level for the Federal Funds Rate.5 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 2015 2016 2017 2018 Longer Run 2019m11 Source: Board of Governors of the Federal Reserve System Cooper (Boston Fed) NCSL October 14, 2015 47 / 49
Road Ahead 3. However, the Federal Funds rate is anticipated to rise more gradually than previously thought. Effective Federal Funds Rate Percent 0 1 2 3 4 2013q3 2015q1 2016q3 2018q1 2019q3 Source: IHS Economics/Haver Analytics July 2015 August 2015 September 2015 October 2015 Cooper (Boston Fed) NCSL October 14, 2015 48 / 49
Road Ahead Thank You Cooper (Boston Fed) NCSL October 14, 2015 49 / 49