an update on the u.s. economy - federal reserve bank of st. louis · 2019-03-18 · 1 kevin l....

11

Kevin L. KliesenEconomist,

Federal Reserve Bank of St. Louis

Remarks to the Federal Reserve Bank of St. Louis Professors Conference

March 1, 2007

An Update on the U.S. Economy

22

Disclaimer

33

A Review of 2006

How Accurate Were Blue Chip Forecasters in 2006?

2005 (A) Forecast Actual ErrorReal Gross Domestic Product 3.1 3.2 3.1 -0.1

Personal Consumption Expenditures 2.9 3.0 3.6 0.6 Durables 2.5 5.4 7.4 2.0 Nondurables 4.4 2.1 3.7 1.6 Services 2.3 3.0 2.8 -0.2

Nonresidential Fixed Investment 5.6 7.2 6.2 -1.0 Equipment & Software 7.0 7.5 4.4 -3.1 Structures 1.8 6.5 10.7 4.2 Residential 9.0 -4.4 -12.6 -8.2 CBI (billions, $2000, annual avg.) 19.6 34.8 41.9 7.1

Net Exports (billions, $2000, annual avg.) -619.2 -639.9 -618.7 21.2 Exports 6.7 6.3 9.3 3.0 Imports 5.2 4.4 3.4 -1.0

Government Consumption & Gross Investment 1.2 3.2 2.6 -0.6

Real Personal Disposable Income 0.3 3.7 2.9 -0.8Personal Saving Rate (%, Annual Avg.) -0.4 -0.3 -1.1 -0.8

NOTE: Unless otherwise noted, percent changes are fourth quarter-to-fourth quarter. Blue Chip forecasts published in Dec. 10, 2005, Econometric Detail

2006

44

A Review of 2006









2006

55

A Review of 2006









2006

66

A Review of 2006









2006

77

A Review of 2006









2006

88

A Review of 2006









2006

99

A Review of 2006


2005 (A) Forecast Actual ErrorCompensation Per Hour 4.1 4.6 4.9 0.3Productivity 2.5 2.2 2.1 -0.1Unit Labor Cost 1.6 2.2 2.8 0.6

Chain-Type GDP Price Index 3.1 2.3 2.5 0.2Consumer Price Index 3.7 2.3 1.9 -0.4Producer Price Index 5.2 1.4 0.2 -1.2

Employment, Civilian 1.9 1.3 2.1 0.8Unemployment Rate (%) 5.0 5.0 4.5 -0.5

NOTE: Percent changes from annual average data. Blue Chip forecasts published in Dec. 10, 2005, Econometric Detail

2006

1010

A Review of 2006






2006

1111

A Review of 2006






2006

1212

A Review of 2006






2006

1313

Themes in the Outlook

1. Resilience in the face of numerous economic challenges; transition from soft patch to trend growth.

1414

The Resilient Economy

Significant economic shocks over the past few years:

• The stock market bust in 2000;

• Corporate governance issues;

• September 11, 2001;

• Military conflicts in Afghanistan and Iraq;

• Major hurricanes in 2004 (Ivan) and 2005 (Katrina);

• Housing (prices and quantities)

1515

The Great Moderation

Economic Volatilities:Output Growth and InflationRolling 40-Quarter Standard Deviations

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Jun-58

Jun-61

Jun-64

Jun-67

Jun-70

Jun-73

Jun-76

Jun-79

Jun-82

Jun-85

Jun-88

Jun-91

Jun-94

Jun-97

Jun-00

Jun-03

Jun-06

Real GDP Growth CPI Inflation Core CPI Inflation

1616


“I see an economy that appears to be transitioning quite nicely from last year’s slow patch to more sustainable growth.” President Poole, 2-9-2007

1717


Real GDP GrowthPercent Change, Annual Rate

2.1

4.1

0

1

2

3

4

5

6

2003

:H1

2003

:H2

2004

:H1

2004

:H2

2005

:H1

2005

:H2

2006

:H1

2006

:H2

1818


No signs of significant imbalances:Bouncing along around the economy’s trend rate of growth.

Growth of Real GDPPercent

0

1

2

3

4

5

6

1994 1996 1998 2000 2002 2004 2006

4-Qtr 40-Qtr

1919


2. Two economies: Housing and everything else.


2020

500

800

1100

1400

1700

2000

1985 1988 1991 1994 1997 2000 2003 2006

Actual Average, 1985-2006 Average, 1997-2006

Single-Family Housing Starts


2121


Housing and Real GDP GrowthPercent

-2.0-1.00.01.02.03.04.05.0

GDP Housing GDP less Housing

4-Quarter Growth: 2-Quarter Growth:

2222



3. Solid labor market conditions.


2323


Monthly Employment GainsThousands

0

50

100

150

200

250

300

350

400

1/1/05 5/1/05 9/1/05 1/1/06 5/1/06 9/1/06 1/1/07 5/1/07

Monthly Delta Feb. 2007 Forecast 3-Month MA

2424


Average Monthly Payroll Employment Gain in 2006, Pre- and Post-Benchmark Revision

Thousands of Jobs

0

50

100

150

200

Pre-BM Post-BM

2525


Civilian Unemployment RatePercent

3.03.54.04.55.05.56.06.57.0

1994 1996 1998 2000 2002 2004 2006

Actual 40-Qtr Trend

2626



3. Solid labor markets.

4. Partial unwinding of energy prices. Repealing the tax hike.


2727


Energy Drag on Real After-Tax IncomePercent

-25.0-20.0-15.0-10.0-5.00.05.0

10.015.020.0

1989 1992 1995 1998 2001 2004 2007

NOTE: 4-Qtr growth of real DPI less 4-Qtr growth of consumer energy prices.

Stimulus

Drag

2828


Crude Oil Futures Prices: Near and Far$ per barrel

20.00

30.00

40.00

50.00

60.00

70.00

80.00

3/5/04 9/5/04 3/5/05 9/5/05 3/5/06 9/5/06 3/5/07

1-Month Dec. 2010

2929


Factors Affecting Consumer Spending, 2002-2005

2002 2003 2004 2005 2006Household Owners' Equity 8.5 8.1 11.3 12.6 6.4Financial Assets -7.3 15.4 8.7 6.5 6.9Real Compensation 1.5 3.0 2.8 2.4 2.7

Real Consumer Outlays 1.9 3.4 4.0 2.9 3.6

Personal Saving Rate 1.8 2.2 2.3 -0.3 -1.2

NOTE: Tangible and financial asset data through 2006:Q3.

3030



3. Solid labor markets.

4. Partial unwinding of energy prices. Repealing the tax hike.

5. Stable inflation expectations.


3131


CPI Inflation Expectations

1

1.5

2

2.5

3

3.5

4

4.5

1991 1996 2001 2006

1-Yr Forecast 10-Yr Forecast

SOURCE: Survey of Professional Forecasters (FRB Philadelphia)

3232

Let’s Turn to the Consensus Forecast

3333

A period of steady but below-trend growth of the economy characterized by:

A steady or gently rising unemployment rate.

No recession.

The vaunted soft-landing

The Consensus Forecast

3434


Forecasters Anticipate a Soft Landing

Forecast Unemployment RateForecaster Date (2007) 2007 2008 2007 2008 2007 2008FOMC Feb. 2.5 - 3.0 2.75 - 3.0 4.5 - 4.75 4.5 - 4.75 2.0 - 2.25 1.75 - 2.0 (Core PCE)Blue Chip Feb. 2.7 3.0 4.8 4.8 2.3 2.2 (Core CPI)M.A. Feb. 3.0 3.1 4.8 4.8 2.3 2.4 (Core CPI)SPF Feb 2.8 3.0 4.7 4.8 2.0 2.1 (Core PCE)CEA Feb 2.9 3.1 4.6 4.8 2.6 2.6 (CPI)NABE Feb 2.8 3.1 4.7 4.8 2.3 2.3 (Core CPI)Averages 2.8 3.0 4.4 4.5 2.4 2.4

NOTE: Real GDP forecasts from the SPF are annual average percent changes. Where possible, the unemployment rate forecast is the average of the fourth quarter for the year indicated.

Real GDP Growth Inflation

3535

What a difference a month makes!

2006:Q4 real GDP growth was revised down by 1.3 percentage points to 2.2%


3636


Macroeconomic Advisers 2007:Q1 Tracking Forecast

Real GDP Growth

0

1

2

3

4

12/20/2006 1/4/2007 1/19/2007 2/3/2007 2/18/2007 3/5/2007 3/20/2007

Percent

GDP Dec. 22 Baseline Feb. 2 Baseline

Real Business Fixed Investment Growth

-3

0

3

6

9

12

15

12/20/2006 1/4/2007 1/19/2007 2/3/2007 2/18/2007 3/5/2007 3/20/2007

Percent

Real Business Fixed Investment StructuresEquipment & Software Dec. 22 BaselineFeb. 2 Baseline

3737

Recession Probabilities

Recession Probability in the Next 12 Months According to WSJ Forecasters

0%

5%

10%

15%

20%

25%

30%

Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07

3838

Recession ProbabilitiesBased on the term structure

Probability of Recession from Markov-Switching Model with Term Structure

0

0.2

0.4

0.6

0.8

1

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Note: Term structure is the 10 year constant maturity Treasury security yield less the effective federal funds rate. Feb. data is estimated using the average of the daily data.Source: Haver/U.S. Treasury, author's calculations.

3939

Recession ProbabilitiesBased on payroll employment

Probability of Recession from Markov-Switching Model with Employment Data

0

0.2

0.4

0.6

0.8

1

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005Note: February 2007 is forecasted.Source: Haver/BLS, author's calculations.

4040

Estimates of Neutral Fed Funds Target Rate

012345678

Dec-91 Dec-94 Dec-97 Dec-00 Dec-03 Dec-06

Actual FFR Equil. FFR Estimate


4141

Market Expectations of the FOMC Federal Funds Target Rate

9/20/06

10/24/0612/12/06

Expected Federal Funds Rates Estimated from Financial Futures

1/31 3/21 5/9 6/28 8/7 9/18 10/31 12/114.00

4.25

4.50

4.75

5.00

5.25

5.50

1/31/07 4/30/07 7/31/07 10/31/07 1/31/08 4/30/08 7/31/08 10/31/08

Percent

12/12/06 02/26/07 02/27/07 FOMC Meeting Dates

4242

Inflation recedes back into the Chairman’s “comfort zone.”

Comfort zone is 1-2% year-over-year growth of the PCE price index that excludes food and energy prices (core inflation)


4343


3-, 6-, and 12-Month Core PCE Inflation and Chairman Bernanke's "Comfort Zone"

Percent

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan-05

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

3-Month 6-Month 12-Month

4444


Mean Probability Attached to Core PCE InflationPercent

404244464850525456

Less than 2% More than 2%

06Q4 TO 07Q4 07Q4 TO 08Q4Forecasters see a higher probability that core inflation will be above 2% in 2007 and in 2008 than less than 2%.

4545

Risks to the Outlook

4646

1. Housing correction intensifies by more than expected and spills over to other aspects of the economy.

Two-Sided Risks to the Outlook

4747

1. Housing correction intensifies by more than expected and spills over to other aspects of the economy.

2. Housing correction over; consumer and business spending pickup as energy prices fall and foreign demand growth strengthens; wage growth begins to outpace gains in labor productivity; inflation expectations trend upward. Bond yields on the upswing.


4848

3. Energy prices spike again. Instability in the Middle East (Iraq and Iran), Nigeria, Venezuela, etc.; Chinese authorities fail to slow economic growth;


4949

3. Energy prices spike again. Instability in the Middle East (Iraq and Iran), Nigeria, Venezuela, etc.; Chinese authorities fail to slow economic growth.

4. Low household saving rate; slower growth of household equity; no cushion to soften another significant demand shock.


5050

Questions?

an update on the u.s. economy - federal reserve bank of st. louis · 2019-03-18 · 1 kevin l....

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