The Certainty of Uncertainty: Forecasting Economic Indicators into the Near Future Sean Severe Drake University College of Business and Public Administration Iowa Actuaries Club February 14, 2017 The Certainty of Uncertainty: Forecasting Economic Indicators into the Near Future 1
Progression of Topics 1 U.S. Economy Since 2013 2 Clearer View of World Economy Since 2015-2016 3 More Uncertain View of Future 4 Federal Reserve Going Forward Introduction The Certainty of Uncertainty: Forecasting Economic Indicators into the Near Future 2
Responsibilities of Federal Reserve Fed has many mandates to ensure health of the economy Maintain full employment Stabilize prices Dual Mandate Moderate long-term interest rates Stabilize financial markets (since 2009) Mandates sometimes pull Fed in different directions Introduction The Certainty of Uncertainty: Forecasting Economic Indicators into the Near Future 3
Since 2013 Healthy economy since 2013 Adding 213,000 jobs per month Unemployment down to 4.8% from 8% Near short-run and long-run natural rates (NAIRU) GDP growth averaging 2.07% annually Inflation has been around 1.5%; below 2% target Stocks are up (e.g. DJIA up to 20,000 from 13,400) US Economy Since 2013 The Certainty of Uncertainty: Forecasting Economic Indicators into the Near Future 4
Job Creation 1/1/2014 2/1/2014 3/1/2014 4/1/2014 5/1/2014 6/1/2014 7/1/2014 8/1/2014 9/1/2014 10/1/2014 11/1/2014 12/1/2014 1/1/2015 2/1/2015 3/1/2015 4/1/2015 5/1/2015 6/1/2015 7/1/2015 8/1/2015 9/1/2015 10/1/2015 11/1/2015 12/1/2015 1/1/2016 2/1/2016 3/1/2016 4/1/2016 5/1/2016 6/1/2016 7/1/2016 8/1/2016 9/1/2016 10/1/2016 11/1/2016 12/1/2016 1/1/2017 Change in Non-farm Payrolls (1000s) 2014:1-2017:1 350 300 250 200 150 100 50 0 Monthly Change 3-Month Moving Average 12-Month Moving Average US Economy Since 2013 The Certainty of Uncertainty: Forecasting Economic Indicators into the Near Future 5
Unemployment Rate Unemployment Rate and Natural Rates of Unemployment 2013:1-2016:4 8 7.5 7 6.5 6 5.5 5 4.5 4 Unemployment Rate Short-Run Natural Rate of Unemployment Long-Run Natural Rate of Unemployment US Economy Since 2013 The Certainty of Uncertainty: Forecasting Economic Indicators into the Near Future 6
GDP Introduction US Economy Since 2013 More Certain Less Certain Looking Ahead Conclusion GDP and Economic Growth 2013:1-2016:3 6 5 4 3 2 1 0-1 -2 Yearly Change Quarterly Change US Economy Since 2013 The Certainty of Uncertainty: Forecasting Economic Indicators into the Near Future 7
Core PCE Inflation 1/1/2013 3/1/2013 5/1/2013 7/1/2013 9/1/2013 11/1/2013 1/1/2014 3/1/2014 5/1/2014 7/1/2014 9/1/2014 11/1/2014 1/1/2015 3/1/2015 5/1/2015 7/1/2015 9/1/2015 11/1/2015 1/1/2016 3/1/2016 5/1/2016 7/1/2016 9/1/2016 11/1/2016 1-Month, 3-Month, and 12-Month Change In Core PCE 2013:1-2016:12 3.5 3 2.5 2 1.5 1 0.5 0 1-Month Change 3-Month Change 12-Month Change Fed Target US Economy Since 2013 The Certainty of Uncertainty: Forecasting Economic Indicators into the Near Future 8
Stock Indices 01/01/2014 02/01/2014 03/01/2014 04/01/2014 05/01/2014 06/01/2014 07/01/2014 08/01/2014 09/01/2014 10/01/2014 11/01/2014 12/01/2014 01/01/2015 02/01/2015 03/01/2015 04/01/2015 05/01/2015 06/01/2015 07/01/2015 08/01/2015 09/01/2015 10/01/2015 11/01/2015 12/01/2015 01/01/2016 02/01/2016 03/01/2016 04/01/2016 05/01/2016 06/01/2016 07/01/2016 08/01/2016 09/01/2016 10/01/2016 11/01/2016 12/01/2016 01/01/2017 DJIA, SP500, and NASDAQ 2014:1-2017:1 135 130 125 120 115 110 105 100 95 DJIA SP500 NASDAQ US Economy Since 2013 The Certainty of Uncertainty: Forecasting Economic Indicators into the Near Future 9
Year of Clarification GDP growth strong 0.69% 2015:4 growth was low point Stocks have stabilized Highs and lows through 2015; steady growth in 2016 Crude Oil has Stabilized Drop through 2015 to low in 2016:1 Euro area and China uncertainty has eased Negative Euro rates are positive Yuan devaluation one year ago More Certain The Certainty of Uncertainty: Forecasting Economic Indicators into the Near Future 10
Oil Prices $ per Barrell 2013:1-2017:1 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0 Brent Crude Oil 3-Month Average More Certain The Certainty of Uncertainty: Forecasting Economic Indicators into the Near Future 11
10-Year German Bond Yield 2015:10-2017:2 More Certain The Certainty of Uncertainty: Forecasting Economic Indicators into the Near Future 12
Economic Uncertainty 01/01/2014 02/01/2014 03/01/2014 04/01/2014 05/01/2014 06/01/2014 07/01/2014 08/01/2014 09/01/2014 10/01/2014 11/01/2014 12/01/2014 01/01/2015 02/01/2015 03/01/2015 04/01/2015 05/01/2015 06/01/2015 07/01/2015 08/01/2015 09/01/2015 10/01/2015 11/01/2015 12/01/2015 01/01/2016 02/01/2016 03/01/2016 04/01/2016 05/01/2016 06/01/2016 07/01/2016 08/01/2016 09/01/2016 10/01/2016 11/01/2016 12/01/2016 01/01/2017 Strong USD depresses exports Inflation still below 2% target, but trending up 170.0 160.0 150.0 140.0 130.0 120.0 110.0 100.0 90.0 Euro/USD Yuan/USD Peso/USD Less Certain The Certainty of Uncertainty: Forecasting Economic Indicators into the Near Future 13
Political Uncertainty Less Certain The Certainty of Uncertainty: Forecasting Economic Indicators into the Near Future 14
Normalization of MP Interest Rates FOMC increased target rate from 0.50% to 0.75% on December 14, 2016 Held constant in January 2017 The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. Many anticipate rates up to 2% within a few years Crisis Policies Policies implemented for crises have been over since 10/2014 These programs have left Fed with large asset balance Gradually undo these programs by allowing securities to mature without rollover Once rates have gradually risen Looking Ahead The Certainty of Uncertainty: Forecasting Economic Indicators into the Near Future 15
Federal Funds Rate 2014:1-2017:1 0.75 0.14 0.65 0.12 0.55 0.1 0.45 0.08 0.06 0.35 0.04 0.25 0.02 0.15 0 0.05-0.02-0.05-0.04 Looking Ahead The Certainty of Uncertainty: Forecasting Economic Indicators into the Near Future 16
Total Federal Reserve Assets 1/1/2008 4/1/2008 7/1/2008 10/1/2008 1/1/2009 4/1/2009 7/1/2009 10/1/2009 1/1/2010 4/1/2010 7/1/2010 10/1/2010 1/1/2011 4/1/2011 7/1/2011 10/1/2011 1/1/2012 4/1/2012 7/1/2012 10/1/2012 1/1/2013 4/1/2013 7/1/2013 10/1/2013 1/1/2014 4/1/2014 7/1/2014 10/1/2014 1/1/2015 4/1/2015 7/1/2015 10/1/2015 1/1/2016 4/1/2016 7/1/2016 10/1/2016 Millions of USD 2008:1-2016:12 5000000 4500000 4000000 3500000 3000000 2500000 2000000 1500000 1000000 500000 0 Looking Ahead The Certainty of Uncertainty: Forecasting Economic Indicators into the Near Future 17
Conclusion U.S. has experienced a near-complete recovery from crisis 2016Q1 was very uncertain time in global economy Uncertain response from Federal Reserve Resolution in last year Questions in other areas 2017 and forward New evidence (may) again shift direction Conclusion The Certainty of Uncertainty: Forecasting Economic Indicators into the Near Future 18
Thank You Questions or Comments? Contact me: Sean Severe sean.severe@drake.edu Conclusion The Certainty of Uncertainty: Forecasting Economic Indicators into the Near Future 19