Charting a Path to Lift Off? Understanding the Shifting Economic Winds Thomas F. Siems, Ph.D. Assistant Vice President and Senior Economist Federal Reserve Bank of Dallas Government Finance Officers Arlington, Texas November 13, 215 The views expressed are those of the speaker and should not necessarily be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System. 1
Charting a Path to Lift Off? Checking the Economic Gauges Prices, Labor and Growth Is the Regional Economy Faltering? Forward Guidance: Charting a Path? Headwinds or Tailwinds? Conclusions 2
Charting a Path to Lift Off? Checking the Economic Gauges Prices, Labor and Growth Is the Regional Economy Faltering? Forward Guidance: Charting a Path? Headwinds or Tailwinds? Conclusions 3
6.5 7 7.5 6 8 5.5 8.5 8.5 5 9 5.9 5.7 5. 6.3 6.1 5.5 5.1 5. 6.7 5.8 5.6 6.2 5.9 5.3.5 9.5 9.5 1 Unemployment rate 5.5 6 6.5 7 7.5 5 8.5 5.28 5.2 8.5 3.7 3.7 3.72 3.68 3.79 3.92.21.18.5 5.27.73.6.6.71.5.61. 5.12 6.1 5.7 5.67 5.57 9 3.5 9.5 3 Junk-bond 1 spread U.S. Economic Dashboard -.5-1 -1-1.5-1.5-2 -2.5-2.5-2.5 1.5 2 1 2.5 3 3.5 2.5 2.8 2.38 1.5 2.37 2.73 2.32 2.33 2.99 2.35 2.7 2.3 2.59 2.88 2.66 2.72 2.3 2.32 Year-over-year Real GDP growth Percent of jobs recovered 1 9 2 3 1 8 2 1 8 57... 7 9 2 3 6 7 Nonfarm payroll employment (millions) 1 1 2. 8 37 6.5 5 5.5 5.5 1.5 1.5 2 2.5 2.5 3 3 3.5 3.5 1.57 1.6 1.57 1.33 1.66 1.56 1.6 1.26 1.59 1.6 1.62 1.67 1.61 1.68 1.65 -.5.5.5-1 -1 5 5 Trimmed Mean PCE Inflation Warning Warning Engine Unemp. Yield Oil stall jump curve shock Engine Unemp. Yield Oil stall jump curve shock
6.5 7 7.5 6 5.5 5 9 6.3 7.3 7.6 6.7 5.9 6.1 6.6 6.2 7..5 9.5 1 Unemployment rate U.S. Economic Dashboard 8 8.5 7 5.5 6 5 6.5 7.5 8.5.7 3.65.6 8.5 3.7.72 3.7 3.68.6.59 3.95 3.66 3.72 9 3.59 3.5 9.5 3 1 Junk-bond 1 spread 1.5 2 1 2.5.5 -.5 -.5-1 -1-1.5-1.5-2 -2-2 -2.5-2.5 1.5 2.5 1.65 2.59 1.62 2.33 2.53 2.3 2.59 1.5 1.6 Year-over-year Real Real GDP growth Percent of jobs recovered 1 8 9 7 2 5 8 6 1... 8 39 7 Nonfarm 1 payroll employment (millions) 1 3 98. 7 3 6 3.5 3.5 1 1.5.5 1.5 2 1.5 2 2.5 2.5 3 3 3.5 3.5 1.57 1.33 1.3 1.66 1.26.92 1.31 1.57 1.65 1.35 -.5.5.5-1 -1 5 Headline 5 Trimmed Mean PCE PCE Inflation.5.5 5 5.5 5.5 Warning Warning Engine Unemp. Yield Oil Oil stall stall jump curve shock Engine Unemp. Yield Oil stall jump curve shock 5
Charting a Path to Lift Off? Checking the Economic Gauges Prices, Labor and Growth Is the Regional Economy Faltering? Forward Guidance: Charting a Path? Headwinds or Tailwinds? Conclusions 6
Inflation is Low and Stable 16 1 Inflation Rate (Percent) Headline Inflation 12 1 8 Headline Inflation 6 2 1958 1961 196 1967 197 1973 1976 1979 1982 1985 1988 1991 199 1997 2 23 26 29 212 215-2 - Federal Reserve Bank of Dallas, FIRM - Financial Institution Relationship Management
Inflation is Low and Stable 16 1 Inflation Rate (Percent) 12 1 8 Headline Inflation Core Inflation 6 2 1958 1961 196 1967 197 1973 1976 1979 1982 1985 1988 1991 199 1997 2 23 26 29 212 215-2 - Avg Inflation: 2.% Avg Inflation: 5.3% Avg Inflation: 2.% Federal Reserve Bank of Dallas, FIRM - Financial Institution Relationship Management
Inflation is Low and Stable 16 1 Inflation Rate (Percent) 12 1 8 6 Headline Inflation Core Inflation Trimmed Mean 2 1958 1961 196 1967 197 1973 1976 1979 1982 1985 1988 1991 199 1997 2 23 26 29 212 215-2 - Avg Inflation: 2.% Avg Inflation: 5.3% Avg Inflation: 2.% Federal Reserve Bank of Dallas, FIRM - Financial Institution Relationship Management
Unemployment Continues to Fall 12 Unemployment Rate 1 8 6 5.% 2 198 1952 1956 196 196 1968 1972 1976 198 198 1988 1992 1996 2 2 28 212 Federal Reserve Bank of Dallas, FIRM - Financial Institution Relationship Management
Unemployment Continues to Fall 12 Unemployment Rate 1 8 6 5.% 2 198 1952 1956 196 196 1968 1972 1976 198 198 1988 1992 1996 2 2 28 212 Federal Reserve Bank of Dallas, FIRM - Financial Institution Relationship Management
Unemployment Continues to Fall 12 Unemployment Rate 1 8 6 5.5% 5.% 2 CBO Natural Rate of Unemployment 198 1952 1956 196 196 1968 1972 1976 198 198 1988 1992 1996 2 2 28 212 Federal Reserve Bank of Dallas, FIRM - Financial Institution Relationship Management
But Headline Unemployment Is Not the Full Story 18 16 Rate 1 12 1 8 6 2 U3 = Headline Unemployment Rate U = U3 + Discouraged Workers U5 = U + Marginally Attached Workers U6 = U5 + Involuntary Part-Time Workers 199 1996 1998 2 22 2 26 28 21 212 21 Federal Reserve Bank of Dallas, FIRM - Financial Institution Relationship Management
But Headline Unemployment Is Not the Full Story 8 Rate There are More Discouraged Workers, Marginally Attached Workers and Involuntary Part-Time Workers Now Than Before the Great Recession 7 6 U6 minus U3 5 3 2 1 199 1996 1998 2 22 2 26 28 21 212 21 Federal Reserve Bank of Dallas, FIRM - Financial Institution Relationship Management
Job Growth is Steady 6 Monthly Change in Payroll Employment 2 26K -2 2 21 22 23 2 25 26 27 28 29 21 211 212 213 21 215 - -6-8 -1 Federal Reserve Bank of Dallas, FIRM - Financial Institution Relationship Management
But Econ Growth Lower Than in Past 1 8 6 GDP Year Over Year, Percent Change 2 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 21 25 29 213-2 - -6 16
But Growth Is Lower Than Historically 1 8 6 GDP Year Over Year, Percent Change -Quarter Percent Change 2 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 21 25 29 213-2 - -6 17
Charting a Path to Lift Off? Checking the Economic Gauges Prices, Labor and Growth Is the Regional Economy Faltering? Forward Guidance: Charting a Path? Headwinds or Tailwinds? Conclusions 18
Our Region Generally Outperformed Until Now 5 TX and US Employment Growth, Year over Year, Percent 215 (Thru Sep) TX (1.28%) US (1.7%) 3 2 1-1 199 1991 1992 1993 199 1995 1996 1997 1998 1999 2 21 22 23 2 25 26 27 28 29 21 211 212 213 21 215 YTD -2-3 - -5 19
Employment By Fed District Since 199 17 16 Job Growth Index, 1 = January 199 Dallas 15 1 13 12 11 1 Kansas City San Francisco Atlanta Minneapolis U.S. Richmond St. Louis Chicago Philadelphia Cleveland Boston New York 9 199 1992 199 1996 1998 2 22 2 26 28 21 212 21 2
Confidence Is Rising 16 1 Consumer Confidence, 6 Month Moving Average 1985 = 1 12 1 Oct 215= 97.6 8 6 2 1967 197 1973 1976 1979 1982 1985 1988 1991 199 1997 2 23 26 29 212 21
U.S. Census Bureau Regions 22
U.S. Consumer Confidence 12 Consumer Confidence Index, 1985 = 1 12 1 1 8 United States 8 6 6 2 Shaded Area = Range of Nine Census Regions 28 29 21 211 212 213 21 215 2 23
Confidence Stronger in the West South Central The West South Central Region of the U.S. has been More Optimistic 12 Consumer Confidence Index, 1985 = 1 12 1 West South Central Census Region United States 1 8 8 6 6 Shaded Area = Range of Nine Census Regions 2 28 29 21 211 212 213 21 215 2 2
Job Growth Stronger in the West South Central Job Growth Increased Most in the West South Central Region 19 17 Payroll Employment (Sum of States Data) Indexed to December 27 = 1 West South Central 15 Pacific 13 11 99 United States West North Central New England Middle Atlantic South Atlantic Mountain East South Central East North Central 97 95 93 91 Source: The Bureau of Labor Statistics; Haver Analytics 28 29 21 211 212 213 21 215 25
Charting a Path to Lift Off? Checking the Economic Gauges Prices, Labor and Growth Is the Regional Economy Faltering? Forward Guidance: Charting a Path? Headwinds or Tailwinds? Conclusions 26
The Fed s Forward Guidance 1 Rate FOMC Economic Projections 8 6 2 Inflation Rate 2 21 22 23 2 25 26 27 28 29 21 211 212 213 21 215 216 217 Longer Run -2 27
The Fed s Forward Guidance 1 Rate FOMC Economic Projections 8 6 2 Inflation Rate 2 21 22 23 2 25 26 27 28 29 21 211 212 213 21 215 216 217 Longer Run -2 28
The Fed s Forward Guidance 1 Rate FOMC Economic Projections 8 Unemployment Rate 6 2 Inflation Rate 2 21 22 23 2 25 26 27 28 29 21 211 212 213 21 215 216 217 Longer Run -2 29
The Fed s Forward Guidance 1 Rate FOMC Economic Projections 8 Unemployment Rate 6 2 Inflation Rate 2 21 22 23 2 25 26 27 28 29 21 211 212 213 21 215 216 217 Longer Run -2 3
The Fed s Forward Guidance 5 Annualized GDP FOMC Economic Growth Projections 3 2 1 2 21 22 23 2 25 26 27 28 29 21 211 212 213 21 215 216 217 218-1 Long Run -2-3 - -5 31
The Fed s Forward Guidance 5 Annualized GDP FOMC Economic Growth Projections 3 2 1 2 21 22 23 2 25 26 27 28 29 21 211 212 213 21 215 216 217 218-1 Long Run -2-3 - -5 32
The Fed s Forward Guidance 1 Number of FOMC Participants FOMC Assessment of Appropriate Timing of Policy Firming Sep-15 12 1 8 6 2 33 215 216 217
The Fed s Forward Guidance 5 FOMC Assessment of Appropriate Pace of Policy Firming 3 2 1 3 Average.% 215 216 217 218 Longer Run
The Fed s Forward Guidance 5 FOMC Assessment of Appropriate Pace of Policy Firming 3 2 1 35 Average.% Average 1.8% 215 216 217 218 Longer Run
The Fed s Forward Guidance 5 FOMC Assessment of Appropriate Pace of Policy Firming 3 2 1 36 Average.% Average 1.8% Average 2.6% 215 216 217 218 Longer Run
The Fed s Forward Guidance 5 FOMC Assessment of Appropriate Pace of Policy Firming 3 2 1 37 Average.% Average 1.8% Average 2.6% Average 3.3% 215 216 217 218 Longer Run
The Fed s Forward Guidance 5 FOMC Assessment of Appropriate Pace of Policy Firming 3 2 1 38 Average.% Average 1.8% Average 2.6% Average 3.3% 215 216 217 218 Longer Run Average 3.6%
The Fed s Forward Guidance 5 3 2 1 39 Blue = Sep 21 Red = Sep 215 Average 1.27% Average.% FOMC Assessment of Appropriate Pace of Policy Firming Average 1.8% Average 2.6% Average 3.3% 215 216 217 218 Longer Run Average 3.6%
The Fed s Forward Guidance 5 3 2 1 Blue = Sep 21 Red = Sep 215 Average 1.27% Average.% FOMC Assessment of Appropriate Pace of Policy Firming Average 2.68% Average 1.8% Average 2.6% Average 3.3% 215 216 217 218 Longer Run Average 3.6%
The Fed s Forward Guidance 5 3 2 1 1 Blue = Sep 21 Red = Sep 215 Average 1.27% Average.% FOMC Assessment of Appropriate Pace of Policy Firming Average 2.68% Average 1.8% Average 2.6% Average 3.3% 215 216 217 218 Longer Run Average 3.79% Average 3.6%
Charting a Path to Lift Off? Checking the Economic Gauges Prices, Labor and Growth Is the Regional Economy Faltering? Forward Guidance: Charting a Path? Headwinds or Tailwinds? Conclusions 2
Headwinds or Tailwinds? Household Debt! Household Debt-to-Income Ratio 13 125 12 115 11 15 1 95 9 85 8 1997 1998 1999 2 21 22 23 2 25 26 27 28 29 21 211 212 213 21 215 Federal Reserve Bank of Dallas, FIRM (Financial Institution Relationship Management)
Headwinds or Tailwinds? Long Run View of Household Debt Household Debt-to-Income Ratio 13 12 11 1 9 8 7 6 5 3 195 1952 195 1956 1958 196 1962 196 1966 1968 197 1972 197 1976 1978 198 1982 198 1986 1988 199 1992 199 1996 1998 2 22 2 26 28 21 212 21 Federal Reserve Bank of Dallas, FIRM (Financial Institution Relationship Management)
Is Confidence Rising? 11 15 NFIB Small Business Optimism Index, 3-month moving Small Business Owners Getting More Optimistic? 1 95 9 85 8 1986 1987 1988 1989 199 1991 1992 1993 199 1995 1996 1997 1998 1999 2 21 22 23 2 25 26 27 28 29 21 211 212 213 21 215 5
Is Confidence Rising? 35 3 25 Percent Responding What Keeps Small Business Owners Up at Night? 28 2 15 1 5 6
Is Confidence Rising? 35 3 25 Percent Responding What Keeps Small Business Owners Up at Night? 28 21 2 15 1 5 7
Is Confidence Rising? 35 3 25 2 Percent Responding What Keeps Small Business Owners Up at Night? 28 21 215 15 1 5 8
Is Confidence Rising? 35 3 25 2 Percent Responding What Keeps Small Business Owners Up at Night? 28 215 15 1 5 9
Is Confidence Rising? 35 3 25 2 Percent Responding What Keeps Small Business Owners Up at Night? 28 215 15 1 5 5
Is Confidence Rising? % 35% Percent of Net Jobs Created Job Creation Has Slowed for Small Businesses 3% Pre-Recession (1992-27) 25% 2% 15% 1% 5% % 51 Under 5 Emp 5 to 29 Emp 25 to 999 Emp Over 1 Emp
Is Confidence Rising? % 35% Percent of Net Jobs Created Job Creation Has Slowed for Small Businesses 3% 25% Pre-Recession (1992-27) Post-Recession (21-21) 2% 15% 1% 5% % 52 Under 5 Emp 5 to 29 Emp 25 to 999 Emp Over 1 Emp
The National Debt Continues to Grow 26% Percentage of GDP Can Government Close the Gap? 2% Federal Government Expenditures 22% 2% 18% 16% Federal Government Receipts 1% 53 '52 '56 '6 '6 '68 '72 '76 '8 '8 '88 '92 '96 ' ' '8 '12
Headwinds or Tailwinds? Headwinds Regulatory Burdens Declining Oil Exploration Declining Exports Rest of World (ROW) Slower GDP Growth Permanently Unemployed High Federal Debt Large Federal Reserve Balance Sheet 5
Headwinds or Tailwinds? Headwinds Regulatory Burdens Declining Oil Exploration Declining Exports Rest of World (ROW) Slower GDP Growth Permanently Unemployed High Federal Debt Large Federal Reserve Balance Sheet Tailwinds Low/Stable Inflation Rising Household Wealth Strong Biz Balance Sheets Healthy Banking System Solid Employment Growth Low Interest Rates Low Gasoline/Energy Prices Confidence Rising 55
Charting a Path to Lift Off? Checking the Economic Gauges Prices, Labor and Growth Is the Regional Economy Faltering? Forward Guidance: Charting a Path? Headwinds or Tailwinds? Conclusions 56
Conclusions Growth: Weak Q1, Better Q2/Q3 prospects good for 215 Inflation: low and stable; expectations anchored; move closer to 2% target Employment: Lower US unemployment rate likely; job growth in the 11 th FR District lower than nation in 215 Some Necessary Conditions for Lift Off (Chair Yellen, 3/15): Continued improvement in labor markets No weakening in wage inflation No further weakening in core inflation, survey measures of inflation expectations, market measures of inflation compensation 57