The Outlook for the U.S. Economy And Some Longer Term Issues Anthony Murphy Federal Reserve Bank of Dallas (anthony.murphy@dal.frb.org) GIC Central Banking Conference Madrid, 3 Oct 2016 The views expressed are those of the author, and are not those of the Federal Reserve Bank of Dallas or of the Federal Reserve System. 1
General Remarks The Fed is tasked with Conducting monetary policy subject to a dual mandate (price stability and maximum employment), unlike the ECB; Supervising and regulating banks to ensure the safety and soundness of the banking and financial system; Maintaining financial stability and containing systematic risk; Providing financial services and playing a major role in operating the U.S. s payment systems I will talk about the U.S. economic outlook and some longer term aspects of U.S. monetary policy (but not timing issues) I will also discuss the limits of monetary policy 2
U.S. Economic Growth Has Been Pretty Modest and Uneven Contributions to Real GDP Growth (PPAR) 2011 2012 2013 2014 2015 2016H1 GDP Growth, % SAAR 1.6 2.2 1.7 2.4 2.6 1.0 - Personal Consumer Expenditure, PCE 1.6 1.0 1.0 2.0 2.2 2.0 - Non-Residential Fixed Investment 0.9 1.0 0.4 0.8 0.3-0.3 - Residential Fixed Investment 0.0 0.3 0.3 0.1 0.4 0.0 - Inventories -0.1 0.1 0.2 0.1 0.2-0.8 - Net Exports 0.0 0.1 0.3-0.2-0.7 0.1 - Government -0.6-0.4-0.6-0.1-0.3 0.0 Note: PPAR = percentage points at annual rates, SAAR = seasonally adjusted at annual rates. Source: BEA. 3
Many External and Internal and External Shocks Including Low Oil Prices Oil & Gas Related Investment v. Other Non-Residential Investment 2009$B, SAAR 2009$B, SAAR Structures + Equipment + IP 2,000,000 1,800,000 1,600,000 200,000 Structures & Equipment 1,400,000 180,000 1,200,000 160,000 140,000 120,000 100,000 Other Sectors Struct & Equip Mining Sector Struct & Equip 1,000,000 80,000 60,000 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Source: BEA and author s calculations. 4
Deleveraging Important Reason Why Recovery from Great Recession So Slow Household Deleveraging Probably Complete Percent 150 140 130 120 110 100 H'hold Net Worth / Income 660 640 620 600 580 560 90 80 H'hold Debt / Income 540 520 70 500 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Sources: BEA and Federal Reserve, 5
Unemployment Rate Close to NAIRU or Natural Rate U6 Includes Part Time for Economic Reasons and Discouraged Workers Percent, SA 18 16 14 12 10 "Broad" U6 Unemployment Rate "Headline" U3 Unemployment Rate 9.7% 8 6 4 2 Aug '16 4.9% CBO "NAIRU" or Natural Rate 96 98 00 02 04 06 08 10 12 14 16 Source: BLS and CBO. 6
Labor Force Participation Rate Ticks Up Uncertain Demographic + Cyclical + Residual (Secular Trends) Components ercent, SA 68 66 64 Labor Force Participation Rate 62 60 Employment to Population Rate 62.8% Aug '16 59.7% 58 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Source: BLS. 7
Wage Inflation Slowly Picking Up Need to Look at a Range of Wage Measures 6 Employee Cost Index (Y/Y,%) 6 Ave Hourly Earnings (Y/Y,%) 5 5 4 3 2.6% 2016 Q2 4 3 2.5% Aug 2016 2 2 1 1 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 6 5 4 3 2 Atlanta Fed Wage Tracker (Y/Y,%) 3.3% Aug 2016 Smoothed Median 1 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: BLS and Atlanta Fed. 8
Forecasts of Output and Unemployment Moderate Output Growth and Unemployment Below NAIRU 2016 Q3 2016 Q4 2016 Q4/Q4 2017 Q4/Q4 2018 Q4/Q4 2019 Q4/Q4 Real GDP Growth FOMC (21 Sep) - - 1.8 2.0 2.0 1.8 Blue Chip (10 Sep) 2.9 2.4 1.8 2.2 - - SPF (12 Aug) 2.6 2.3 2.3 2.2 e 2.2 e 2.2 e 2016 Q3 2016 Q4 2017 Q4 2018 Q4 2019 Q4 Unemployment Rate FOMC - 4.8 4.6 4.5 4.6 Blue Chip 4.8 4.9 4.5 - - SPF 4.8 4.7 4.6 e 4.6 e 4.7 e Sources: Blue Chip Economic Indicators (10 Sep 2016), Survey of Professional Forecasters (SPF, 12 Aug 2016), and Federal Open markets Committee Summary of Economic Projections (FOMC, 21 Sep 2016, median). 9
Short-Term Output Forecasts and Outcomes Forecasts Mean Reverting and Over Optimistic Percent, SAAR 6 4 2 0-2 -4-6 -8-10 GDP Growth Rate 2009 M3 Forecast 2010 M3 Forecast 2011 M3 Forecast 2012 M3 Forecast 2013 M3 Forecast 2014 M3 Forecast 2015 M3 Forecast 2016 M3 Forecast 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Sources: Blue Chip Economic Indicators (March forecasts) and BEA (latest Estimates). 10
Percent, SA 11 Unemployment Forecasts and Outcomes Forecasts Too Pessimistic 10 9 8 2016 M3 Forecast 2015 M3 Forecast 2014 M3 Forecast 2013 M3 Forecast 2012 M3 Forecast 2011 M3 Forecast 2010 M3 Forecast 7 6 5 4 2008 2010 2012 2014 2016 2018 2020 2022 Sources: Blue Chip Economic Indicators (March forecasts) and BLS. 11
Underlying Inflation Close to 2% Target Percent 5 12 Month PCE Inflation 4 3 2% Target 2 1 0-1 -2 Headline (All Items) Trimmed Mean Core (Ex. Food & Energy) 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Sources: BEA and Dallas Fed. 12
Consumer and Professional Long Run Inflation Expectations Fairly Well Anchored 3.4 3.2 3.0 Consumers' Expected Inflation 5 to 10 Years Ahead 2.8 2.6 2.5% 2.4 2.2 Forecasters' Expected CPI Inflation 10 Years Ahead 2.2% 2.0 5 Years Ahead 2.1% 1.8 2000 2002 2004 2006 2008 2010 2012 2014 2016 Sources: U. Michigan / Reuters Survey of Consumers and SPF. 13
Market and Professional Inflation Expectations Differ Percent 2.4 2.3 2.2 2.1 2.0 1.9 Survey Based (Blue Chip & SPF) Market Based (CL Fed) Sep 2014 Sep 2015 Sep 2016 1.8 1.7 1.6 10 20 30 40 50 60 70 80 90 100 110 120 Months Sources: Aruoba (2016), Philly and Cleveland Feds. 14
2016 Q3 Forecasts of Inflation Reverting to Target 2016 Q4 2016 Q4/Q4 2017 Q4/Q4 2018 Q4/Q4 2019 Q4/Q4 CPI Inflation Blue Chip (10 Sep) 1.6 2.4 1.8 2.3 - - SPF (12 Aug) 2.0 2.2 1.6 2.3 2.3 - PCE Inflation FOMC (21 Sep) - - 1.3 1.9 2.0 2.0 SPF 1.5 1.9 1.4 1.9 2.0 - Core PCE Inflation FOMC - - 1.7 1.8 2.0 2.0 SPF 1.6 1.6 1.8 1.9 2.0 - Sources: Blue Chip Economic Indicators (10 Sep 2016), Survey of Professional Forecasters (SPF, 12 Aug 2016), and Federal Open markets Committee Summary of Economic Projections (FOMC, 21 Sep 2016, median). 15
Monetary Policy U.S. is closer to normalizing monetary policy: o The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress towards its objectives FOMC Statement, 21 Sept 2016 o Near term risks to the economic outlook appear roughly balanced By contrast, the ECB is unlikely to reduce monetary accommodation any time soon The underlying problems of the EZ remain o It is not close to being an optimal currency union o There is no fiscal union, and adjustments costs are very unevenly distributed among member states o Supply side reforms have been slow 16
Longer Term Economic Issues in U.S. Lower output growth and productivity growth in the long term? o Lower growth rate lower r* (natural rate of interest) near zero lower bound (ZLB) more likely to be hit in a recession Combination of changing demographics, less capital deepening and lower total factor productivity etc. At micro level, lower TFP reflected in: o Widening gaps between most and least productive firms o Fewer start-ups and less reallocation of production among firms Aging demographics and the level of government debt Limited role for monetary policy (or short-term fiscal policy) in addressing these issues Some role for macro-prudential policies, but there are trade-offs Sensible supply sides policies needed (Congress not FOMC) 17
Slow Growth in GDP and Hours Since 2006 Demographics Important 1949-2005 2006-2015 Memo: 1996-2003 GDP 3.4 1.4 3.4 Hours 1.4 0.4 1.1 - Population 1.4 1.0 1.4 - Labor force participation 0.2-0.5-0.1 - Employment rate 0.0 0.0 0.0 - Hours per person -0.2-0.1-0.1 Note: Average annualized Q4/Q4 percentage change. Sources: BEA, BLS and Fischer (2016).Δ 18
Decline in Productivity Growth in Business Sector TFP Badly Measured Etc., But Slowed Before the Great Recession 1949-2005 2006-2015 Output 3.6 1.6 Labor input 1.1 0.4 Labor productivity 2.5 1.2 - Labor composition 0.2 0.3 - Capital deepening 0.9 0.6 - Total factor productivity TFP 1.3 0.3 Note: Average annualized Q4/Q4 percentage change. TFP figures are adjusted for utilization. Sources: BEA, BLS, Fernard (2014) and Fischer (2016). 19
Laubach & Williams Estimates of Natural Rate of Interest r* Percent 4 At Lower End of Range of Estimates of r* 3 2 1.36 x Time Varying Long-Run Growth Rate (g*) 1 0 Natural Rate of Interest (r*) r* = 1.36 g* + z 0.2% -1-2 Other Unspecified Factors (z) -3-4 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: Laubach and Williams (2003, updated 2016). 20
Estimates of Long-Run GDP Growth Year Blue Chip SPF CBO FOMC 2000 3.1% 3.0% 2.9% - 2005 3.2% 3.3% 2.6% - 2010 2.6% 2.6% 2.2% 2.7% 2012 2.5% 2.5% 2.3% 2.5% 2014 2.4% 2.6% 2.1% 2.3% 2016 2.1% 2.3% 1.9% 2.0% 1.8% Sources: Blue Chip Economic Indicators, Survey of Professional Forecasters (SPF), Congressional Budget Office (CBO) and Federal Open markets Committee (FOMC) Summary of Economic Projections (median). 21
Suggested Policies to Promote Productivity Growth Bailey & Montalbano, Brookings, Sept 2016 Greater competition o Simplify regulation o Limit patents too little competition, too much rent seeking o Reduce licensing restrictions barrier to entry o More competition in health care Invest in worker skills Invest in infrastructure Tax reform Greater Federal support for R&D 22
U.S. Monetary Policy Many Open Issues Mechanics (and timing) of normalization o Very large balance sheet, the results of QE / LSAPs o At present, maturing Treasuries are rolled over and principal repayments on Agency debt and MBS are reinvested o Awash with reserves, so traditional tools for controlling short term rates supplemented o IOR (interest on reserves) and RRP (reverse repos) important Longer term issues include: o ZLB (near zero lower bound) and the size of the Fed s balance sheet o ZLB and inflation target why not 3% rather than 2%? o Should the range of QE / LSAP assets be extended beyond Treasuries and Agency debt & MBS? 23