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Twelfth Federal Reserve District
FedViews
October 10, 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/
Simon Kwan, vice president at the Federal Reserve Bank of San Francisco, provides his views on current
economic developments and the outlook.
•
Recent economic data suggest that, before the government shutdown, economic growth had lost a bit
of momentum. The partial shutdown of the U.S. government since the beginning of October took
even more wind out of the current quarter’s sails. Assuming the shutdown lasts through mid-October,
we now expect real GDP to grow at about a 2% pace over the second half of 2013.
•
Although the federal government makes up a relatively small share of the economy, a more
protracted government shutdown could spill over into the private sector by undermining confidence
and increasing uncertainty. In addition to the effects of the shutdown, the government’s inability to
raise the federal debt limit poses substantial risk to the economy. Assuming these downside risks do
not occur, we expect economic growth to firm as we go through 2014.
•
The labor market has been improving steadily since last year. Nonfarm payroll employment gained
184,000 jobs per month on average over the 12 months ending in August, although the pace of job
growth slowed a bit over the summer. The Bureau of Labor Statistics has not released the
employment report for September due to the government shutdown. However, data on initial claims
for unemployment insurance and estimates of private payroll gains from the privately produced ADP
National Employment Report both suggest that the gradual improvement in the labor market is
continuing.
•
Household spending has held up reasonably well, despite the moderate pace of economic growth and
still-elevated unemployment rate. Nevertheless, light vehicle sales in September were weaker than
expected, following a period of brisk sales earlier this summer. Smoothing monthly volatility, the
underlying trend in auto sales remains strong.
•
Shipments of core capital goods have moved lower on average in recent months, and the August data
were weaker than expected. However, new orders have outpaced shipments over the past few months,
suggesting a positive outlook for business investment. Of course, it is quite possible that the
government shutdown and related fiscal uncertainties could weigh on business spending, especially if
the stalemate in Washington continues.
•
The housing recovery still seems to be on track. The CoreLogic national home price index for August
showed strong gains across much of the country. While new home sales have softened a bit lately,
existing home sales have continued to rise. How higher mortgage rates will affect overall housing
activities remains to be seen, but one indicator, the forward-looking pending home sales index,
declined in August.
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 November 18, 2013.
•
Financial conditions tightened since summer as market participants revised their expectations about
the Federal Reserve’s large-scale asset purchases. With less growth momentum, as well as the
nontrivial risk from fiscal policy, the Federal Open Market Committee (FOMC) decided in its
September meeting to continue purchasing additional securities at a pace of $85 billion per month.
The Committee noted that “asset purchases are not on a preset course, and the Committee’s decisions
about their pace will remain contingent on the Committee’s economic outlook as well as its
assessment of the likely efficacy and costs of such purchases.”
•
The September 18 FOMC decision eased financial conditions: Bond yields declined and stock prices
rose in response to the announcement. Since then, bond yields have fallen further; but stock prices
also fell amid the government shutdown and the lack of progress in raising the federal debt ceiling.
Expect growth at moderate pace
Labor market improvement continues
Nonfarm Payroll Employment
Gross Domestic Product (GDP)
Percent change at seasonally adjusted annual rate
Percent
FRBSF
Forecast
5
0
Q2
Millions
Millions of employees; seasonally adjusted
140
Monthly Changes
May 176 K
138
Jun. 172 K
Aug.
Jul. 104 K
136
Aug. 169 K
12-mo. avg. 184 K
134
132
-5
130
07
08
09
10
11
12
13
-10
14
128
03
04
Unemployment rate remains elevated
Unemployment Rate
06
07
08
09
10
11
12
13
Financial conditions tightened
Interest Rates
Percent
11
Seasonally adjusted; forecast is quarterly average
05
Percent
5
9/13/12 FOMC
10
30-year Conforming
Mortgage
9
Aug.
4
10/4
8
7
FRBSF
Forecast
3
6
10-year Treasury
5
2
4
3
03
04
05
06
07
08
09
10
11
12
13
14
15
1
Jan-12
May-12
Household spending holding up
Sep-12
Jan-13
May-13
Auto sales eased
Light Vehicle Sales
Real Personal Consumption Expenditures
Percent
10
3-month percent change at seasonally adjusted annual rate
Sep-13
Millions of units
22
Seasonally adjusted annual rate
20
8
6
Aug.
Sep.
4
18
16
2
14
0
12
-2
10
-4
-6
03
04
05
06
07
08
09
10
11
12
13
8
03
04
05
06
07
08
09
10
11
12
13
Positive outlook for business investment
Nondefense Capital Goods (excluding Aircraft)
$ billions
70
Seasonally adjusted, 3-month moving average
Housing recovery seems on track
CoreLogic National House Price Index
Percent
20
Seasonally adjusted, year-over-year percent change
New Orders
15
65
Aug.
10
60
Aug.
Shipments
5
55
0
50
-5
-10
45
-15
40
03
04
05
06
07
08
09
10
11
12
13
-20
03
04
New home sales slower
New Home Sales
0.8
06
07
08
09
10
11
12
0
70
13
9/18/13 FOMC
10-year Treasury
(left scale)
Index
1750
1700
2.6
1675
10/4
2.4
1650
S&P 500 Index
(right scale)
1625
1600
7/22/13
11
12
13
8/12/13
9/2/13
9/23/13
Millions
6.5
Existing Home Sales
(right scale)
5.5
4.5
Pending Home
Sales Index
(left scale)
Aug.
3.5
2.5
03
1725
2.8
2.0
7/1/13
10
110
90
Market Reaction to September FOMC Statement
Percent
3.2
2.2
09
130
0.4
Financial market reactions
3.0
08
Seasonally adjusted annual rate
Index (2001=100)
150
Aug.
05
07
Home Sales
Millions
1.6
1.2
04
06
Pending home sales softened
Seasonally adjusted annual rate
03
05
04
05
06
07
08
09
10
11
12
13