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Twelfth Federal Reserve District
FedViews
March 14, 2013
Economic Research Department
Federal Reserve Bank of San Francisco
101 Market Street
San Francisco, CA 94105
Also available upon release at
www.frbsf.org/publications/economics/fedviews/index.php
Òscar Jordà, research advisor at the Federal Reserve Bank of San Francisco, states his views on the current
economy and the outlook.
•
We expect the economy to grow at a moderate pace this year and next year as consumer demand and
the dynamics of recovery gain momentum. Our current forecast is that GDP will grow 2.4% in 2013
and 3.2% in 2014, up from 1.6% in 2012.
•
However, uncertainty about federal fiscal policy complicates the forecast. At the beginning of March,
sequestration cuts in federal spending took effect. Sequestration will reduce overall spending
authority for fiscal year 2013 by about $85 billion. Since some government contracts spill over to
fiscal 2014, the effective cuts for calendar year 2013 are closer to $60 billion.
•
Meanwhile, two additional fiscal deadlines are looming. First, current federal spending authorization
expires at the end of March. Congress and the White House must reach an agreement on a continuing
resolution to prevent a government shutdown. Second, the statutory debt ceiling goes into effect in
mid-May. In practical terms, the debt ceiling would not be expected to block federal outlays until
later in the summer.
•
We assume that Congress and the Obama administration will reach an agreement addressing the debt
ceiling and preventing a government shutdown. Such an agreement may also reverse some of the
sequestration cuts. Altogether, we have trimmed our forecast for 2013 GDP growth by nearly 0.4
percentage point because of these budgetary issues, largely reflecting our estimates of the effects of
the sequestration cuts. We don’t expect sequestration to have a material effect on GDP growth in
2014.
•
The nation’s economy added 246,000 private-sector jobs outside the farm sector in February, a solid
rate of job creation. On the other hand, 10,000 jobs were lost in federal, state, and local government.
Government employment has been declining steadily and is now about 2% lower than when the
2007-09 recession began. This drop contrasts with previous recoveries, when the government sector
contributed to job growth. Sequestration cuts are expected to further reduce government jobs and
slow private-sector hiring, reducing the projected decline in the unemployment rate this year.
•
Even if some of the sequestration cuts are reversed, the expected lower rate of 2013 GDP growth will
mean that the unemployment rate is likely to be about 0.2 percentage point higher than it otherwise
would be. Fed policymakers have stated they don’t expect to begin raising the policy interest rate at
least until the unemployment rate has fallen to 6.5% and certain other conditions are met. We expect
that the unemployment rate will be 7.6% at the end of 2013 and will not cross the FOMC’s 6.5%
threshold until mid-2015.
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 April 15, 2013.
•
Labor force participation has remained lower than expected. In addition, the proportion of part-time
employees who would prefer a full-time job continues to be elevated. Long-term unemployed
workers, that is, those without a job for 27 weeks or more, represent about 40% of the unemployed.
Their share has been stuck at that level since 2010.
•
As job market conditions improve, we would expect participation to rise, and involuntary part-time
employment and long-term unemployment to fall. Specifically, a more favorable labor market is
likely to push up labor force participation as more workers actively seek jobs. The larger pool of
jobseekers associated with this higher participation rate could slow the drop in the unemployment
rate at a given pace of job creation.
•
Inflation remains in check. Lower commodity prices, slow wage growth reflecting considerable slack
in the labor market, and an appreciation of the dollar against currencies of primary trading partners
have kept inflation quite subdued. We expect that 2013 core personal consumption expenditures price
index inflation will come in at 1.5% and roughly the same level in 2014, below the Fed’s 2% target.
Favorable medium-term trends in oil prices should push down headline inflation even a bit lower.
•
Since consumption is a very large component of GDP, small changes in consumer spending can have
a big effect on measured GDP growth. So far through February, disagreements about fiscal policy,
including last year’s fiscal cliff showdown and this year’s sequestration cuts, do not appear to have
dented consumer sentiment much. The Dow Jones industrial average recently reached values last
seen in 2007, before the Great Recession began. House prices have also moved higher over the past
year. As a result, household net worth expressed as a multiple of disposable income is now at levels
last seen in the late 1990s. This increase has helped households in the ongoing process of repairing
their finances and should provide significant support for consumer demand.
Forecast includes sequestration drag
GDP Growth: Actual and FRBSF Forecast
Job growth held down by the public sector
Percent
6
Quarterly observations; seasonally adj; annualized growth rate
Employment
Percent
4
Percent change since the start of the recession
2
2
0
Actual
Government
FRBSF
forecast
-2
-2
Feb.
-6
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
-10
Source: Bureau of Economic Analysis and FRBSF staff
Private
Monthly observations; forecast is quarterly average
Feb
7.7
Percent
12
-8
Inflation remains subdued
PCE Inflation
Overall PCE
price index
8
Unemployment
rate
Percent
5
Percent change from four quarters earlier
10
FRBSF
forecast
-6
2008
2009
2010
2011
2012
Source: Bureau of Labor Statistics and author's calculations
Unemployment rate declining very slowly
Unemployment rate
-4
4
FRBSF
forecasts
3
2
6
1
Core PCE
price index
4
0
2
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Bureau of Labor Statistics and FRBSF staff
-1
0
2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Bureau of Economic Analysis and FRBSF staff
Consumption gradually improving…
Real PCE vs. Consumer Confidence
Index
Real personal
consumption expenditures*
(right scale)
140
120
Dec.
100
…with recovering stock and house prices
Percent
8
160
6
4
2.2
0
40
0
As a multiple of disposable income
7.0
6.5
Net worth
(right scale
6.0
2.0
1.8
80
20
Household Wealth
2.6
2.4
2
60
* Annualized quarterly
growth rate
Consumer confidence
(left scale)
2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Bureau of Economic Analysis, Conference Board
-2
5.5
1.6
5.0
-2
1.4
-4
1.2
-6
1.0
1980 1984 1988 1992 1996 2000 2004 2008
Source: Federal Reserve Board - Flow of Funds Report
Real estate assets
(left scale)
4.5
4.0
2012