FEDERAL RESERVE BANK OF KANSAS CITY

Economic Outlook

July 14, 2021 – Colorado Hispanic Chamber of Commerce

Nicholas Sly

Assistant Vice President, Economist and Denver Branch Executive

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY

• Consumer spending continues to grow, supported by healthy household balance sheets and

ongoing labor market improvement

• The balance of consumer spending between goods and services has yet to fully normalize, which

has implications for the inflation outlook over the medium term

• Recruiting workers is a key challenge for many businesses, keeping the focus on wage pressures

in coming months

• Readings of inflation picked up recently due to a variety of factors, many of which that will likely

fade in the near term

Outlook themes

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FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY

Source: BEA, Haver Analytics

Note: Grey bars indicate recession shading3

Consumer activity and business investment activity are supporting

ongoing economic growth this year

-10

-8

-6

-4

-2

0

2

4

6

8

10

-10

-8

-6

-4

-2

0

2

4

6

8

10

2007 2009 2011 2012 2014 2016 2018 2020

Real GDP q/q Real GDP y/y

% chg, saar % chg, saar

-31% q/q change

(Q2 2020)

33% q/q change

(Q3 2020)

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY

Source: Opportunity Insights

Note: Zero line corresponds to January 2020 levels4

Consumer spending in Colorado now exceeds pre-pandemic levels

-40

-30

-20

-10

0

10

20

-40

-30

-20

-10

0

10

20

Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21

Retail Spending: U.S. Retail Spending: CO

% chg 7d ma, sa % chg 7d ma, sa

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY

Sources: BEA, NBER, Haver Analytics5

The composition of spending remains shifted more towards goods than

is typical, especially during economic downturns

20

40

60

80

100

120

140

20

40

60

80

100

120

140

2005 2008 2011 2014 2017 2020

Durables Consumption Services Consumption

Index, Feb-20 = 100 Index, Feb-20 = 100

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY

Sources: BEA, NBER, Haver Analytics6

Services prices are typically the primary driver of overall inflation rates,

but goods and import prices are making outsized contributions currently

-25

-20

-15

-10

-5

0

5

10

15

20

25

-5

-4

-3

-2

-1

0

1

2

3

4

5

2005 2008 2011 2014 2017 2020

Core PCE: Services Inflation (Left) Core PCE: Goods Inflation (Left) Import Price Index (Right)

y/y % chg y/y % chg

2004 – 2006 Average

2004 – 2006 Average

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY

60

80

100

120

140

160

180

60

80

100

120

140

160

180

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

ISM Manufacturing: Supplier Deliveries Index ISM Manufacturing: Prices Paid Index

Diffusion Index

Slower Deliveries/

Higher Prices

Diffusion Index

Sources: Institute for Supply Management, Haver Analytics7

Supplies of many goods and services are having trouble keeping pace

with demand, leading to delays and cost pressures

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY

0

4

8

12

16

20

0

4

8

12

16

20

2010 2011 2013 2014 2016 2017 2019 2020

Unemployment Rate: White Unemployment Rate: Black

Unemployment Rate: Asian Unemployment Rate: Hispanic

Natural Rate of Unemployment

% %

Sources: BLS, CBO, NBER, Haver Analytics8

The unemployment rate continues to trend downward, though it is still

elevated for some minority workers

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY

Source: FRBKC Surveys9

Majority of firms report that the inability to find qualified workers is

primary challenge affecting hiring plans

0

10

20

30

40

50

60

70

80

90

0

10

20

30

40

50

60

70

80

90

Can't find workers with

required skills

High labor costs Uncertainty about

govt. policies

Want to keep

operating costs low

Uncertainty about

Coronavirus

What are the three most important factors restraining your hiring plans?

1st 2nd 3rd

% %

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY

Sources: BLS, Haver Analytics

Note: Each data series shows the size of the respective labor force above the age of 20, indexed to Jan 2020 levels

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Labor force participation is recovering faster for minority workers

94

95

96

97

98

99

100

101

94

95

96

97

98

99

100

101

Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21

Black Hispanic White

Index Index

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY

Sources: FRB Summary of Economic Projections11

Recent projections from the FOMC for the median participant indicate

expectations for stability in the rate environment through 2022

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2021 2022 2023 Longer Run

Median FOMC Projection of Fed Funds Rate Target Fed Funds Rate

% %

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY

Looking forward

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• Private demand from consumers and businesses are going to be drivers of the outlook

• Low labor supply may pose a more persistent headwind and its implications for hiring and wage

growth will warrant close monitoring in coming months

• The stance of monetary policy remains accommodative.

FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY

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