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Twelfth Federal Reserve District
FedViews
August 8, 2013
Economic Research Department
Federal Reserve Bank of San Francisco
101 Market Street
San Francisco, CA 94105
Also available upon release at
http://www.frbsf.org/economic-research/publications/fedviews/
Bharat Trehan, research advisor at the Federal Reserve Bank of San Francisco, provides his views on current
economic developments and the outlook.
•
The latest GDP report contained a comprehensive data revision going all the way back to 1929. The
Bureau of Economic Analysis makes these revisions about every five years to incorporate new data
and new methodology. The most important change this time was the introduction of a new category
of capital called intellectual property investment. This new component capitalizes expenditures on
research and development and on entertainment, literary, and artistic originals. Software, which was
previously grouped with equipment, has also been moved into this category. This is a significant
conceptual change, meant to better account for innovation and intangible assets.
•
The new component is less volatile than business equipment expenditures, which is another key
component of investment. Both intellectual property and business equipment investment grow faster
than real GDP, which grew at an average rate of 2¾% over the past three decades. But intellectual
property investment is a relatively small share of the economy, so its inclusion had only a small effect
on real GDP growth since 1929.
•
The expanded definition of GDP, along with new source data and other minor statistical and
definitional changes, raised the level of nominal GDP $560 billion in 2012. These factors have
boosted the real GDP growth rate since the most recent recession began by two-tenths of a percentage
point.
•
GDP growth in the second quarter of 2013 was better than we were expecting. However, this was
roughly offset by first-quarter growth, which was revised down. Trade data released after the GDP
report suggest that output growth in the second quarter could be revised up as much as one
percentage point.
•
Overall, recent data support our forecast that growth will pick up in the second half of the year. Fiscal
drag is likely to fade going forward, and the economy will be helped by rising equity and home
prices. We expect real GDP growth to average close to 3.5% over 2014 and 2015.
•
We continue to see risks associated with this forecast. Contentious debate in Washington could act as
a negative shock, and the lingering effects of tax increases could restrain consumption longer than we
are expecting. On the other hand, risks associated with Europe have diminished somewhat.
•
The comprehensive data revision did not significantly change historical inflation rates. Core personal
consumption expenditures (PCE) price inflation in June came in slightly above expectations, while
headline PCE inflation, which includes food and energy, was boosted by rising oil prices. These data
The views expressed are those of the author, with input from the forecasting staff of the Federal Reserve Bank of San Francisco.
They are not intended to represent the views of others within the Bank or within the Federal Reserve System. FedViews generally
appears around the middle of the month. The next FedViews is scheduled to be released on or before September 20, 2013.
did not affect our inflation forecast beyond the current quarter. We’re still calling for a gradual rise in
the inflation rate to levels consistent with the Fed’s mandate.
•
Turning to the labor market, the July employment report was mixed. Payroll employment went up by
162,000, which is not bad. But it was noticeably below the 197,000 average over the previous six
months. While the unemployment rate fell from 7.6% in June to 7.4% in July, part of this reflected a
decline in the labor force participation rate. Even so, recent data on initial unemployment claims look
quite good and are consistent with our forecast of gradual improvement in the labor market.
•
Both home and auto sales have benefited from low interest rates. Looking at key components of
manufacturing provides another take on the same issue. Both durable and nondurable goods
production fell noticeably during the recession. Durables fell much more sharply, but have recovered
more strongly as well. Motor vehicles and parts follow the general path of durable goods but with
more exaggerated changes. Following a decline of more than 50%, the sector rebounded to levels
higher than those that prevailed before the past recession.
•
Interest rates have risen in recent months. The conventional mortgage rate is up roughly one
percentage point from its lows, and other long-term rates have risen significantly as well. However,
rates on auto loans have not gone up very much. Some of the increase in long-term rates reflects an
improving economy, but other factors have also played a role. One risk is that rising rates might slow
the economy more than we expect.
•
Of course, interest rates are not the only things that have gone up. Major stock indexes are up
between 18 and 20% since the beginning of the year. And home prices continue to rise. Over the first
six months of the year, home prices have climbed faster than at any point since the recession began.
Rising asset prices should help boost consumption and output growth.
•
Developments outside the financial markets should reinforce this momentum. The Thomson
Reuters/University of Michigan Consumer Sentiment Index shows consumers continue to be more
optimistic about the economy. Other major consumer surveys show the same thing. And the recent
improvement is not confined to consumer surveys. In the manufacturing sector, the Institute for
Supply Management (ISM) index rose higher than expected in July, with increases in both orders and
production. The ISM survey of nonmanufacturing firms showed similar results.
•
Recent data on orders for nondefense capital goods excluding aircraft point in the same direction.
While shipments have leveled off, orders have resumed their upward climb. This suggests healthy
growth in business investment in coming months.
•
To conclude, recent data from both inside and outside financial markets are consistent with our
forecast that the pace of growth will pick up in the second half.
New GDP component relatively smooth
We continue to expect second-half pickup
Growth of Investment
Percent
Year-on-year change
Gross Domestic Product (GDP)
Percent change at seasonally adjusted annual rate
20
Intellectual
Property
Percent
5
FRBSF
Forecast
Equipment
10
0
0
Avg
Share
growth of GDP
(30 yrs) (2012)
Equipment 4.9%
5.6%
Intellectual
5.9%
3.8%
property
Q2
-10
-5
-20
-30
84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Source: Bureau of Economic Analysis
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Inflation remains subdued
-10
Unemployment continues to decline
Unemployment Indicators
PCE Price Inflation
Percent
5
Percent change from four quarters earlier
4
Overall PCE
Price Index
FRBSF
Forecast
2
500
.
8
7
450
FRBSF
Forecast
400
6
5
350
-1
300
-2
250
2003
Initial Claims*
(left scale)
7/27
2005
2007
2009
2011
2013
4
2015
Manufacturing
But interest rates are going up
Interest Rates
Index
110
Percent
5.0
Weekly average
8/1
100
30-year Mortgage
3.5
80
8/2
Durable
70
4-year Auto Loan
50
10-year Treasury
2008
2010
2012
2.0
1.5
1.0
40
2000
2002
2004
2006
Source: Board of Governors
3.0
2.5
8/2
60
Motor Vehicles
and Parts
4.5
4.0
90
Jun.
3
Source: Department of Labor; Bureau of Labor Statistics; FRBSF
* 4-week moving average of weekly data
Interest-sensitive sectors boost recovery
Nondurable
10
9
Jul
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Bureau of Economic Analysis; FRBSF
Seasonally adjusted; 2007 = 100
Percent
11
600
550
Q2
Unemployment Rate
(right scale)
650
3
1
Core PCE
Price Index
Thousands
700
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Source: Federal Reserve Board of Governors; Bankrate.com
Rising stock markets support growth
Rising consumer sentiment also a plus
Stock Market Indices
Index of Consumer Sentiment
Weekly price; indexed to 100 at 1/6/2012
Index
140
Index
110
Not seasonally adjusted; 1966:Q1 = 100
100
130
NASDAQ
8/2
120
110
Jul.
Average since 2003
90
80
S&P 500
Dow Jones
100
70
90
60
80
Jul-11
Jan-12
Source: Wall Street Journal
Jul-12
Jan-13
Jul-13
Source: Thomson Reuters/University of Michigan Survey of Consumers
As are orders for business equipment
Nondefense Capital Goods (excluding Aircraft)
Three-month moving average; seasonally adjusted
New
Orders
Billions of $
70
65
Jun.
60
55
Shipments
50
45
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Census Bureau
50
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
40