Download Current Economic Conditions

Current Economic Conditions
Regional and Community Bankers
Conference
May 18, 2004
Cathy Minehan
President & CEO,
Federal Reserve Bank of Boston
Overview
• U.S. recovery is now on a solid footing
– Self-generated private growth is substituting for
policy-induced growth
– Employment growth has picked up, while
productivity growth remains strong
– Inflation requires watching, but likely to remain
well-behaved
• New England fared worse than the nation,
but the regional outlook is improving
2
The recovery has gained steam
• Consumption spending has been strong
• Investment in equipment and software has
picked up
• And recent data point to continued strength
in both consumption and investment
3
The recovery has gained steam, and has
featured strong private spending
9
GDP growth
1-qtr. annualized growth rate
8
7
6
5
Consumption,
contribution to growth
E&S Investment,
contribution to growth
Forecast
4
3
2
1
0
2002:Q4
2003:Q1
2003:Q2
2003:Q3
2003:Q4
2004:Q1
2004:Q2
Source: Real Gross Domestic Product, Real Personal Consumption Expenditure: Contribution to Real GDP Change, Real Investment in Nonresidential
Equipment & Software: Contribution to Real GDP Change, (SAAR): Bureau of Economic Analysis.
4
Recent indicators of consumer spending suggest
continued strength this year
12
50
3-mo. growth rate, real retail sales
6-mo. growth rate, auto sales
40
30
20
9
10
0
6
-10
-20
3
Auto Sales growth (6-mo.)
Retail Sales growth (3-mo.)
15
-30
0
-40
2003:Jan
2003:May
2003:Sep
2004:Jan
Investment spending will likely grow at a solid double-digit pace
Millions of constant $
44000
Orders of Nondefense Capital Goods
42000
Shipments of Nondefense Capital Goods
40000
38000
36000
2003:Jan
2003:May
2003:Sep
2004:Jan
Sources: Total Light Weight Vehicle Sales, (SAAR, millions): Bureau of Economic Analysis. Retail Sales & Food Services, New Orders and Shipments
for Nondefense Capital Goods ex Aircraft, (SA, millions $): Census Bureau.
5
Consumption is supported by
rising income growth
• Consumption depends upon “disposable” or
after-tax income
• Earlier, tax cuts were responsible for most
of the growth in disposable income
• Now, income is growing on its own
6
Earlier tax cuts spurred growth in household
income. Now pre-tax income is improving.
6
After-tax income
Income growth (4-qtr. % change)
5
Before-tax income
4
3
2
1
0
2001:Q1
2001:Q3
2002:Q1
2002:Q3
2003:Q1
Source: Real Disposable Personal Income, Real Personal Income, (SAAR, Bil. Chn. 2000$): Bureau of Economic Analysis.
2003:Q3
2004:Q1
7
Household net worth is also
improving
• Improving financial markets and rising
home prices have boosted households’ net
worth
• Corporate cash flow is also growing
strongly, providing support to business
investment
8
Bond Spread (%)
4.0
3.6
Spread of BAA Corp. Bonds over 10-year Treasury
1200
S&P 500 Stock Price Index
1100
3.2
1000
2.8
900
2.4
S&P 500 Index
Financial markets have provided support …
800
2.0
2002:Jan
2002:M ay
2002:Sep
2003:Jan
2003:M ay
2003:Sep
2004:Jan
2004:M ay
1050
1000
46000
Corporate Net Cash Flow
Household Net Worth (FOF)
44000
950
900
42000
850
800
40000
750
700
1999:Q1
HH Net Worth (billions $)
Corporate Cash Flow (billions $)
… Boosting Household Net Worth and Improving Corporate Cash Flow
38000
1999:Q3
2000:Q1
2000:Q3
2001:Q1
2001:Q3
2002:Q1
2002:Q3
2003:Q1
2003:Q3
Sources: 10-year Treasury Bond Yield at Constant Maturity, Moody’s Yield on Seasoned BAA Corporate Bonds, Nonfinancial Corporate Business Total Internal
Funds + IVA (SAAR, Billions $), Households Net Worth (Billions $): Federal Reserve Board. S&P 500 Composite Index, (Monthly Average): Wall Street Journal.
9
More broadly, policy-induced growth
is being replaced by private spending
7
GDP growth (1-qtr. annualized rate)
6
5
GDP growth
"Private" GDP growth (ex tax cuts, federal spending
growth, monetary policy stimulus)
4
3
2
1
0
-1
-2
2001:H2
2002:H1
2002:H2
2003:H1
2003:H2
Source: Real Gross Domestic Product, (SAAR, Bil. Chn. 2000$): Bureau of Economic Analysis. Federal Reserve Bank of Boston estimates.
2004:Q1
10
We expect the recovery to be increasingly privately-driven
The effect of tax refunds will wane later this year, and
financial markets see the Fed raising rates soon
2.4
Today
Fed Funds Futures, 5/14/04
2.2
Federal Funds Target rate
Percentage (%)
2
1.8
1.6
1.4
1.2
1
0.8
2003:Jan
2003:Apr
2003:Jul
2003:Oct
Source: Federal Funds Target Rate (%): Federal Reserve Board.
2004:Jan
2004:Apr
2004:Jul
2004:Oct
2005:Jan
11
Labor Markets are Improving
Layoffs have been declining for a while
Flows as a % of the labor force
3
0.5
2.5
Total worker flows
into U
0.3
Claims as a % of the labor force
0.7
3.5
2
Initial Claims
1.5
0.1
1976:II
1982:II
1988:II
1994:II
2000:II
Sources: Initial Claims for Unemployment Insurance, State Programs, (Wkly Average, SA): Department of Labor. Employment flows based upon
Current Population Survey data along with author’s calculations.
12
Hours growth (4-qtr. % change)
Employment and hours have shown significant improvement
4
5
4
3
2
1
0
-1
-2
-3
-4
-5
Productivity growth
(4-qtr. % change)
8
3
Nonfarm payroll employment growth
2
1
0
-1
-2
-3
-4
1997:Q1
9
Nonfarm hours growth
1998:Q1
1999:Q1
2000:Q1
2001:Q1
2002:Q1
2003:Q1
Payroll growth (4-qtr. % change)
And Now Hiring Appears to Have Turned the Corner
2004:Q1
As productivity growth has receded to merely spectacular
rates of growth
Qtly.
growth
rates
7
6
5
4
3
2
1
0
1997:Q1
1998:Q1
1999:Q1
2000:Q1
2001:Q1
2002:Q1
2003:Q1
Source: Nonfarm Business Sector: Output per Hour, Hours of All Persons, Total Nonfarm Employment, (SA): Bureau of Labor Statistics.
2004:Q1
13
Is inflation an issue?
• Some commodity prices have risen sharply
• Core inflation has edged up, although still
low
• Is this cause for worry? Probably not
14
Trend inflation is probably still well-contained
6
5
Core CPI
5
4
Core PCE Chain-wt.
4
3
3
2
2
1
1
0
0
1991:Jan
1993:Jan
1995:Jan
1997:Jan
1999:Jan
2001:Jan
YOY % change
YOY % change
6
2003:Jan
Much of the recent rise in core inflation is pass-through of oil prices
and other one-time price increases
2.2
YOY % change
2
1.8
1.6
1.4
Core CPI
Excl. oil price effects
Forecast
1.2
1
Forecast
0.8
2003:Mar
2003:Jun
2003:Sep
2003:Dec
2004:Mar
2004:Jun
2004:Sep
Sources: CPI-U All Items Less Food & Energy, (SA, 1982-84=100): Bureau of Labor Statistics. PCE Less Food & Energy Chain Price Index, (SA, 2000=100):
Bureau of Economic Analysis.
2004:Dec
15
Restraining forces on inflation:
Corporate Profit Growth Has Been Strong
1200
Nonfarm business profits, after tax, including IVA and CCADJ
Billions $
1000
800
600
400
200
0
1990:Q1
0.14
0.13
1992:Q1
1994:Q1
1996:Q1
1998:Q1
2000:Q1
2002:Q1
2004:Q
And Profit Margins are High
Unit profit, nonfinan. corporate business, including IVA and CCADJ
Dollars $
0.12
0.11
0.10
0.09
0.08
0.07
0.06
1990:Q1
1992:Q1
1994:Q1
1996:Q1
1998:Q1
2000:Q1
2002:Q1
2004:Q
Source: Corporate Profits After Tax with IVA and CCAdj (SAAR, Billions $), Corporate Profits with IVA and CCAdj per Unit of Real Gross Value Added of
Nonfinancial Corporate Business (SA): Bureau of Economic Analysis.
16
Economic slack is likely to persist for another year or so,
whether measured by employment
139000
116000
Estimates
of full
employment
137000
135000
114000
133000
112000
131000
110000
129000
Nonfarm employment
Private employment
127000
108000
125000
Private Employment (thous.)
Nonfarm Employment (thous.)
Restraining forces on inflation:
106000
1999:Jan
2000:Jan
2001:Jan
2002:Jan
2003:Jan
2004:Jan
Or by output
3
Forecast
Percentage (%)
2
1
0
-1
-2
-3
Estimate of “output gap”
(Actual GDP less potential)
Gap implied
By Blue Chip
forecast
-4
1997:Q1
1998:Q1
1999:Q1
2000:Q1
2001:Q1
2002:Q1
2003:Q1
2004:Q1
2005:Q1
Sources: Total Nonfarm and Total Private Nonfarm Employment (SA, Thousands): Bureau of Labor Statistics. Real Gross Domestic Product (SAAR, Chained 2000$):
Bureau of Economic Analysis. Real Potential Gross Domestic Product, (Chained 2000$): Congressional Budget Office. Forecast: Blue Chip Economic Indicators.
17
Risks
• Inflation – likely to remain low; risks fairly
balanced
– Recent increases largely due to one-time factors
– Significant economic slack remains
• Real growth – likely to remain solid; risks
fairly balanced
– As tax cuts fade, we expect strong employment
growth to create income, support spending
– Some uncertainty about employment forecast
– Some uncertainty about geopolitical situation
18
What About Deficits?
Federal budget deficit/surplus as % of GDP, with OMB projections
3
2
OMB Forecast
1
Percentage
0
-1
-2
-3
-4
-5
-6
-7
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: Federal Deficit/Surplus as a Percent of GDP (Fiscal year, %): Office of Management and Budget.
19
Deficits are a long run concern,
not a near term problem
• Will deficits cause inflation?
– Still have some economic slack despite growth
in federal spending
– Our forecasts for next few years indicate solid
growth, fairly stable inflation, and a declining
deficit/GDP ratio
• Will deficits crowd out investment?
– Long term interest rates should already reflect
what we know about the path of deficits
– Near-term outlook for investment is positive
20
How is New England faring?
• Suffered greater employment losses than the
nation in the recession; losses continued in
the “recovery”
• Turnaround is beginning – slower than
nationally
• Within the region, some states are doing
much better than others
21
Employment has fallen more in New England than the Nation
Index, Pre-Recession Peak = 1
1.01
1.00
0.99
United States
0.98
New England
0.97
0.96
NBER Dated Recession
0.95
2000-Jul
2001-Jan
2001-Jul
2002-Jan
Source: U.S. Bureau of Labor Statistics, seasonally adjusted data.
2002-Jul
2003-Jan
2003-Jul
2004-Jan
22
But weakness is much less severe than early 1990s (dotted lines)
Index, Pre-Recession Peak = 1
1.02
United States
Nov ’89-Aug ‘93
1.00
0.98
United States
Jul ’00-Jan ’04
New England
Jul ’00-Jan ‘04
0.96
0.94
0.92
New England
Nov ’89-Aug ‘93
0.90
months prior
recession
months after
0.88
-9
-7
-5
-3
-1
Source: U.S. Bureau of Labor Statistics.
2
4
6
8
10
12
14
16
18
20
22
24
27
29
23
Considerable variation among the New England states –
Massachusetts hit hardest, Rhode Island showing minimal job losses
Index, Pre-Recession Peak = 1
1.02
1.01
RI
1.00
ME
0.99
US
VT
0.98
NH
0.97
CT
0.96
0.95
MA
0.94
NBER Dated Recession
0.93
2000-Jul
2001-Jan
Source: U.S. Bureau of Labor Statistics.
2001-Jul
2002-Jan
2002-Jul
2003-Jan
2003-Jul
2004-Jan
24
Why is New England faring worse?
• Steeper losses in recession attributable to
national weakness in key regional industries:
– software and other technology services
– communications
– computers and other capital goods
• Steadier sectors important in New England,
such as private education and health services,
not strong enough to offset
25
In past year, manufacturing, information and professional services lost jobs;
Gains in construction and hospitality
Percent Change, March 2003 – March 2004
3.0
Construction
4.5
-2.6
Manufacturing
-3.3
0.7
0.3
Retail Trade
0.0
Wholesale Trade
-0.6
-0.1
-0.5
Trans., Warehousing, & Utilities
-1.7
Information
-4.1
0.6
Financial Activities
-0.4
2.2
Professional & Business Services
-1.3
United States
Private Education & Health Services
1.9
0.7
New England
1.3
Leisure and Hospitality
2.4
-0.1
Other Services
0.2
-0.2
-0.8
Government
-8.0
Source: U.S. Bureau of Labor Statistics.
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
26
For all New England, job losses have moderated
Thousands of Jobs
30
20
10
0
-10
-20
-30
Jan-00
Jul-00
Jan-01
Source: U.S. Bureau of Labor Statistics.
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
27
Unemployment is coming down in the region
Percent, Seasonally Adjusted
8
7
6
United States
5
4
3
New England
2
1
NBER Dated Recession
0
1994-Jan 1995-Jan 1996-Jan 1997-Jan 1998-Jan 1999-Jan 2000-Jan 2001-Jan 2002-Jan 2003-Jan 2004-Jan
Source: U.S. Bureau of Labor Statistics.
28
Confidence is rising in New England
Index of leading indicators for Massachusetts points to growth
8
74
U Mass Leading Index (Left Axis)
6
68
AIM Business Confidence (Right Axis)
4
62
2
56
0
50
-2
44
-4
38
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Source: Associated Industries of Massachusetts and the University of Massachusetts.
Jul-02
Jan-03
Jul-03
Jan-04
29
Key factor in regional outlook
continues to be national economy,
but New England lags
• Regional recovery will continue, following
nation
• Pace of region’s recovery is contingent on
national (and global) economy Æ hence
regional pace likely to speed up
30
Boston Fed Experience
• According to our own HR department,
- recent falloff in job applicants
- less desperation, more negotiation
- counter-offers and turndowns
• “The tide is turning”
31