FEDERAL RESERVE BANK OF KANSAS CITYFEDERAL RESERVE BANK OF KANSAS CITY – OKLAHOMA CITY BRANCH

U.S. and Oklahoma Economic OutlookClaremore Economic ForumAugust 28, 2018

Chad WilkersonOklahoma City Branch Executive and Economist*The views expressed herein are those of the presenter only and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System.

Structure & Functions of the Federal Reserve

The “Fed” consists of three main entities:• Board of Governors: 7 members appointed by U.S. President• Federal Reserve Banks: 12 total; semi-independent by design• Federal Open Market Committee: 19 members; 12 voting

Primary responsibility areas:• Monetary policy• Bank regulation • Financial services

• Functions and purposes ~ 45 staff• Research on U.S. and Oklahoma economies; energy and manufacturing sectors• Economic and financial education outreach, including to low/moderate income• Examinations of Oklahoma financial institutions (~50 banks, ~175 holding cos.)

• 2018 OKC Fed Branch Board of Directors• Clint Abernathy (chair), Owner, Abernathy Farms, Inc., Altus• Susan Chapman Plumb, Board Chair & CEO, Bank of Cherokee County, Tahlequah• Michael Coffman, CEO (retired), Panhandle Oil & Gas, Inc., Oklahoma City• Tina Patel, Co-Owner & CFO, Promise Hotels, Tulsa• Chris Turner, President & CFO, First State Bank, Oklahoma City• Katrina Washington, Owner/Broker, Stratos Realty, Oklahoma City• Dana Weber, Vice-Chair & CEO, Webco Industries, Sand Springs

• Oklahomans on Kansas City Fed head office Board• Rose Washington (chair), Exec. Director, Tulsa Econ. Dev. Corp., Tulsa• Doug Stussi, EVP & CFO, Love’s Travel Stops & Country Stores, OKC

The Oklahoma City Branch of the Federal Reserve Bank of Kansas City

FEDERAL RESERVE BANK OF KANSAS CITY – OKLAHOMA CITY BRANCH

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The U.S. Economyand Monetary Policy

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Payroll Employment (left axis)

ISM Manufacturing Index (right axis)

ISM Non-Manufacturing Index (right axis)

Change from previous month, thousands

Source: Institute for Supply Management, Bureau of Labor Statistics

U.S. Payroll Employment and Business Indexes

Monthly data on U.S. business activity and also show economic growth remains strong in mid-2018

Index

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Unemployment Rate Seasonally Adjusted

Percent

Sources: U.S. Bureau of Labor Statistics, FOMC

Jun. FOMC Forecast Ranges in Yellow

Current (July 2018): 3.9%

“The labor market has continued to strengthen…job gains have been strong and the unemployment rate has declined.”

PCE Inflation Index

Percent change, year-over-year

Sources: U.S. Bureau of Labor Statistics, FOMC

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Current Overall PCE (June 2018): 2.2%Current Core PCE (June 2018): 1.9%

Jun. FOMC Forecast Ranges in Yellow

“On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent.”

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Federal Funds RateYear-End Target

Percent

Sources: Federal Reserve Board, FOMC

Jun. FOMC Forecast Ranges in Yellow

“The [FOMC] expects that further gradual increases…for the federal funds rate will be consistent with sustained expansion...”

Current Target: 1.75-2.00%

Federal Reserve Balance Sheet

Source: Federal Reserve Board

The Fed has also begun to reduce its balance sheet

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Treasury securities and other assets

Short term lending, targeted lending programs, and rescue operations MBS & agency debt

$Trillions $Trillions

FEDERAL RESERVE BANK OF KANSAS CITY – OKLAHOMA CITY BRANCH

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Trends in the Oklahoma &Claremore Area Economies

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U.S. OK

Percent change, quarter-over-quarter

Source: U.S. Bureau of Economic Analysis

Real Gross Domestic Product

Oklahoma GDP dropped considerably in 2015-16, after oil prices fell, but has mostly grown solidly since

Percent change, year-over-year

Source: U.S. Bureau of Labor Statistics

Payroll Employment Growth

In 2018, state job growth has matched the nation after lagging in 2015-16 the most since the 1980s

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U.S.OK

Percent change, year-over-year

Oklahoma Job Growth by IndustryJuly 2018

Source: Bureau of Labor Statistics

State job gains the past year have been led by mining (oil & gas), and most sectors have added workers

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Total Mining Prof. &Bus.

Services

Trade Leis. &Hosp.

Mfg. Fin.Act.

Edc. &Health

State &LocalGovt.

FedGovt.

Transp. Constr.

U.S. OK

Farm Income Indexes

Source: FRBKC Agricultural Credit Survey

The Oklahoma agriculture sector has improved from a year ago, but conditions remain challenging overall

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Oklahoma

Tenth Fed District

Expectations

Diffusion Index Diffusion Index

Percent

Source: OK Tax Commission

Oklahoma State Tax Revenues Q3-18 through July

Tax revenues are also growing strongly, following revenue declines and budget cuts in recent years

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OK TotalOK Sales

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U.S.

OK

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Source: FDIC

Share of Banks Not Making a ProfitCommercial Banks

Banking conditions in Oklahoma remain very good despite the 2015-16 economic slowdown

Percent

Percent

Unemployment ratesSeasonally Adjusted

Source: U.S. Bureau of Labor Statistics

Unemployment has come down across the state, including in Rogers County and the Tulsa MSA

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U.S.OKTulsa MSARogers County

Percent

Unemployment across northeast Oklahoma is now below 5%, and is below 4% in many counties

June 2017 Unemployment Rates

Source: U.S. Bureau of Labor Statistics

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US OK Rogers County

Percent change

Percent Change in Number EmployedYear-over-year, not seasonally adjusted

Source: U.S. Bureau of Labor Statistics,

Employment growth in Rogers County was very strong in 2017 after falling considerably in 2015-16

Percent change

Source: U.S. Bureau of Economic Analysis

Personal Income Share by Industry, 2016

Industries with the highest concentrations in Rogers County are construction and manufacturing

Note: Location quotient is the division of local share by national share

Percent of Total Income Location Quotient

IndustryU.S. OK Rogers

County OK Rogers County

Construction 6.0 6.4 14.4 1.1 2.4Manufacturing 9.4 8.2 19.2 0.9 2.0State & Local Government 12.6 13.8 19.5 1.1 1.5Transportation & Utilities 4.4 10.7 5.7 2.4 1.3Trade 10.9 10.2 11.2 0.9 1.0Federal Government 4.0 5.9 3.0 1.5 0.7Education & Health 12.9 11.5 7.2 0.9 0.6Leisure & Hospitality 4.6 3.8 2.7 0.8 0.6Mining 1.1 6.6 0.6 5.8 0.5Agriculture 0.6 1.0 0.2 1.6 0.4Financial Activities 6.6 3.6 1.7 0.5 0.3Professional & Business Services 22.8 14.4 N/A 0.6 N/A

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Manufacturing Construction Transportation,warehousing,

& utilities

Finance,insurance,

& real estate

Mining,quarrying,oil & gas

extraction

Health care& social

assistance

Retail &wholesale

trade

Accommodation& food services

OtherIndustries

Q4 2015 Q4 2016 Q4 2017

Percent change, year-over-year

Source: U.S. Bureau of Labor Statistics

And the turnaround in Rogers Co. employment has been largely driven by turnarounds in those industries

Rogers County, OK Change in Employment by Industry

Note: Employment by industries defined by two-digit NAICS codes for private sectors with more than 100 employees

Source: U.S. Census Bureau

Growth in new housing units in Rogers County has greatly outpaced the state and nation since 2010

Annual Estimates of Housing Units

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US

OK

Rogers County

Index 2010=100 Index 2010=100

Source: Institute for Supply Management, FRBKC

Manufacturing activity in the region has posted record growth in 2018, even with trade concerns

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KC Fed

ISM

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Monthly Manufacturing Composite Indexes Seasonally Adjusted

Index

Note: Indexes are shown as three-month moving averages

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Capital Spending

Employment

Production

Source: Institute for Supply Management, FRBKC

Expectations for manufacturing also remain strong, including for capital spending and employment

Tenth District Manufacturing ExpectationsSix-month-ahead indexes

IndexIndex

Note: Indexes are shown as three-month moving averages

Oklahoma Oil & Gas Rig Count, Employment, and Production

Source: Baker Hughes, EIA/Haver Analytics

Oil and gas production is at a record high, but with considerably fewer rigs and workers than in the past

Note: Employment is for total mining and logging, which in Oklahoma is almost completely oil and gas related. Production is shown as a 3-month moving average.

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1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Rig count

Employment

Production (BOE/day)

Index May-90=100 Index May-90=100

Energy Survey Oil & Gas Prices

Source: FRBKC Energy Survey

Most firms can profitably drill for oil in the areas they are active, and natural gas prices work for some firms

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$52$3.04 $2.92

$3.60

$2.85 $2.90 $3.05$3.34

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$/barrel $/million Btu

Survey ranges in orange

Survey average

Oil (WTI) Natural Gas (Henry Hub)

Summary

• The U.S. economy continues to grow despite headwinds, and the Fed has been raising rates.

• The state and local economies were hurt by low commodity prices, but now are growing solidly.

• Strong productivity growth in the oil and gas sector could potentially limit future job growth.

Questions?