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The Economic Outlook
Eric S. Rosengren
President & CEO
Federal Reserve Bank of Boston
Greater Providence Chamber of Commerce
Policy Forum
Providence, Rhode Island
January 15, 2013
EMBARGOED UNTIL TUESDAY, JANUARY 15, 2013 AT 8:15 A.M. EASTERN TIME, OR UPON DELIVERY
www.bostonfed.org
Rhode Island
 One of the states most severely impacted
by recession
 Remains one of the hardest-hit at this point
in the recovery
 One of two states (as of November) with
state unemployment rate above 10 percent
2
Monetary Policy and the Economic
Recovery
 Monetary policy is a key element to the
recovery – interest-sensitive sectors are
responding
 There are large personal and social costs to
high unemployment and we continue to
undershoot our 2 percent inflation target
 It is imperative that monetary policy continue
to support the economy, particularly as fiscal
policy becomes more restrictive
3
Some Underlying Strength
 Economy has grown 2.2 percent over the
recovery
 Housing and consumer durables continue
to improve (sectors likely responsive to
monetary policy/interest rates)
 Deferral of firm and household spending in
part due to fiscal uncertainty and fiscal
austerity – but signs of underlying strength
4
Figure 1
Growth in Real GDP and Real Residential
Investment
2011:Q4 - 2012:Q3
Percent Change at Annual Rate
25
Real GDP
20
Real Residential Investment
15
10
5
0
2011:Q4
Source: BEA / Haver Analytics
2012:Q1
2012:Q2
2012:Q3
5
Figure 2
Selected Housing Sector Indicators
Percent
Rate on 30-Year
Fixed-Rate Mortgage
CoreLogic
House Price Indices
Index Level
Jan 2000=100
155
5.5
150
5.0
145
4.5
140
4.0
135
National House Price Index
3.5
130
3.0
6-Jan-11
Ratio
5-Jan-12
3-Jan-13
125
Jan-11
Jul-11
Percent Change
from Year Earlier
2.5
Price-to-Rent Ratio
1.8
1.6
National Index, Distressed Sales Excluded
Ratio of FHFA
House Price Index
to Consumer Price
Index for Rent of
Primary Residence
Jan-12
Jul-12
Growth in Households
2.0
1.5
1.4
1.0
1.2
1.0
1990:Q1
0.5
1997:Q1
2004:Q1
2011:Q1
0.0
2003:Q1
2005:Q1
Source: FHLMC, CoreLogic, FHFA, BLS, Census Bureau / Haver Analytics
2007:Q1
2009:Q1
2011:Q1
6
Figure 3
Growth in Real GDP and Real Consumer
Durable Goods
2011:Q4 - 2012:Q3
Percent Change at Annual Rate
15
Real GDP
Real Consumer Durable Goods
10
5
0
-5
2011:Q4
Source: BEA / Haver Analytics
2012:Q1
2012:Q2
2012:Q3
7
Figure 4
Selected Auto-Related Indicators
Millions, Seasonally
Adjusted Annual Rate
16
Auto and Light
Truck Sales
Auto Loan Rate at Banks
Percent
6
5
14
4
12
3
48-Month Loan on New Car
10
Jan-11
Dollars
per Gallon
4.50
Jul-11
Jan-12
2
7-Jan-11
Jul-12
Percent Change
at Annual Rate
5
Retail Gasoline Price
4-Jan-13
Income Growth
Real Disposable Personal Income
4
4.00
6-Jan-12
3
2
3.50
1
0
3.00
-1
2.50
3-Jan-11
-2
2-Jan-12
31-Dec-12
2011:Q1
2011:Q3
Source: Bloomberg, Energy Information Administration, BEA / Haver Analytics
2012:Q1
2012:Q3
8
Headwinds
 Need a sustainable fiscal policy, but in the
short term fiscal austerity restrains
economic activity
 Want to achieve sustainability without
risking tentative improvements to date
 Fiscal issues in Europe
 Slow growth in Japan and Europe
9
Figure 5
Growth in Real GDP and Real Government Spending
2011:Q4 - 2012:Q3
Percent Change at Annual Rate
10
8
6
Real GDP
Real Federal Government Spending
Real State and Local Government Spending
4
2
0
-2
-4
-6
2011:Q4
Source: BEA / Haver Analytics
2012:Q1
2012:Q2
2012:Q3
10
Figure 6
Growth in Real GDP and Real Business Investment
2011:Q4 - 2012:Q3
Percent Change at Annual Rate
10
Real GDP
Real Business Investment
8
6
4
2
0
-2
2011:Q4
Source: BEA / Haver Analytics
2012:Q1
2012:Q2
2012:Q3
11
Figure 7
Growth in Real GDP in the United States,
Japan and the Euro Area
2011:Q4 - 2012:Q3
Percent Change at Annual Rate
8
United States
Japan
6
EU 17
4
2
0
-2
-4
2011:Q4
2012:Q1
2012:Q2
2012:Q3
Note: The Euro Area includes the 17 European Union members who have adopted the euro.
Source: BEA, Cabinet Office of Japan, Eurostat / Haver Analytics
12
Outlook Improving
 Assuming headwinds continue to abate,
there should be a steady improvement in
the economy
 I expect the economy to grow around its
potential rate in the first half of the year and
then pick up to 3 percent in the second half
of this year
 I expect inflation to remain below 2 percent
13
Figure 8
Inflation Rate: Change in Total and Core Personal
Consumption Expenditure (PCE) Price Indices
January 2003 - November 2012
Percent Change from Year Earlier
5
1
PCE
4
1
3
1
2
1
0
0
Core PCE
(Excluding Food and Energy)
0
-1
-2
0
Jan-2003
Jan-2005
Jan-2007
Jan-2009
Jan-2011
Recession
Source: BEA, NBER / Haver Analytics
14
Figure 9
Civilian Unemployment Rate
January 2003 - December 2012
Percent
12
1
10
1
8
1
6
0
4
Range of Longer-Run Projections
of Federal Reserve Board Members
and Federal Reserve Bank Presidents
as of December 2012
2
0
Jan-2003
0
0
Jan-2005
Jan-2007
Jan-2009
Jan-2011
Recession
Source: BLS, NBER / Haver Analytics
15
Figure 10
Construction and Durable Goods Manufacturing
Employment as a Share of the Labor Force
January 2000 - December 2012
Percent
10
1
8
1
Durable Goods Manufacturing
6
1
4
0
Construction
2
0
0
0
Jan-2000
Jan-2002
Recession
Jan-2004
Source: BLS, NBER / Haver Analytics
Jan-2006
Jan-2008
Jan-2010
Jan-2012
16
Figure 11
Unemployment Rate of Population 25
Years and Older by Educational Attainment
January 2000 - December 2012
Percent
18
Recession
Less than High School Diploma
High School Diploma, No College
Some College or Associate's Degree
Bachelor's Degree or Higher
16
14
12
10
8
6
4
2
0
Jan-2000
Jan-2002
Jan-2004
Jan-2006
Jan-2008
Jan-2010
Jan-2012
Recession
Source: BLS, Census Bureau, NBER / Haver Analytics
17
Concluding Observations
 Accommodative monetary policy is
absolutely appropriate and in fact is
needed as long as we miss on both
elements of the Fed’s mandate, inflation
and unemployment
 Monetary policy should be guided by
economic outcomes, not calendar dates
 It is important to promote a faster return to
full employment
18