Economic Outlook Peter Rupert Professor and Chair Department of Economics, UCSB Director, UCSB Economic Forecast Project League of California Cities Monterey, CA December 3, 2014
Economic Update economic data providing mixed signals but they always do!!! important to take a long-run view
Real GDP Logged Billions of 2009$, Seasonally Adjusted 7.5 8.0 8.5 9.0 9.5 1947 1955 1965 1975 1985 1995 2005 2014 Economic Forecast Project Source: BEA
Real Per Capita GDP Log, 1990 int. GK$ 7.5 8.0 8.5 9.0 9.5 10.0 1800 1830 1860 1890 1920 1950 1980 2010 Economic Forecast Project Source: Angus Maddison
Real GDP Logged Billions of 2009$, Seasonally Adjusted 8.4 8.6 8.8 9.0 9.2 9.4 9.6 9.8 Linear Trend 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 Economic Forecast Project Source: BEA
GDP Growth During an Expansion Average, annualized rate of change 0 2 4 6 8 5.71 3.82 5.35 4.88 4.44 3.91 4.18 3.5 2.74 2.17 1949 Q1 1954 Q2 1958 Q2 1961 Q1 1970 Q4 1975 Q1 1982 Q4 1991 Q1 2001 Q4 2009 Q2 Economic Forecast Project Trough Date Source: BEA
Forward Guidance for Today s Talk describe current conditions globally, nationally and locally discuss Fed policy reactions QE3...gone but not forgotten CA outlook
Real GDP Growth Annualized percent change from last quarter 10 5 0 5 3.9 quarterly change at an annual rate year over year change 2014 Q3 annualized growth rate 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Economic Forecast Project Source: BEA
Real Personal Consumption Expenditures Annualized percent change from last quarter 10 5 0 5 10 15 20 1947 1955 1965 1975 1985 1995 2005 2014 Economic Forecast Project Source: BEA
S&P 500 Index 2000=100 800 1000 1200 1400 1600 1800 2000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2014 Economic Forecast Project Source: BLS
Why Are You Spending so Little? uncertainty? already have everything? other issues out there in the world...
How Does the U.S. Compare? U.S. and some trading partners doing well...and some not...
How Bad was Japan s Lost Decade
How Bad was Japan s Lost Decade Europe wishes it were Japan!!!
Real Gross Domestic Product 85 90 95 100 105 110 115 120 United States (2007Q4=100) Japan (1991Q2=100) Europe (2008Q1=100) Cooley Rupert European Economic Snapshot; www.europeansnapshot.com Source: Eurostat 12 6 0 6 12 18 24 30 36 Quarters from Peak
Real Personal Consumption Expenditures 85 90 95 100 105 110 115 120 United States (2007Q4=100) Japan (1991Q2=100) Europe (2008Q1=100) Cooley Rupert European Economic Snapshot; www.europeansnapshot.com Source: Eurostat 12 6 0 6 12 18 24 30 36 Quarters from Peak
Real Gross Fixed Capital Formation 75 80 85 90 95 100 United States (2007Q4=100) Japan (1991Q2=100) Europe (2008Q1=100) Cooley Rupert European Economic Snapshot; www.europeansnapshot.com Source: Eurostat 12 6 0 6 12 18 24 30 36 Quarters from Peak
Financial Landscape households deleveraging portfolio rebalance
Household Leverage Liabilities to Income 0.4 0.6 0.8 1.0 1.2 1949 1960 1970 1980 1990 2000 2010 Economic Forecast Project Source: Flow of Funds, Federal Reserve
Checkable Deposits and Currency, Households Percent of GDP 0 5 10 15 20 1949 1960 1970 1980 1990 2000 2010 Economic Forecast Project Source: Flow of Funds, Federal Reserve
Household Net Worth (Assets Liabilities) Ratio to GDP 3.5 4.0 4.5 1949 1960 1970 1980 1990 2000 2010 Economic Forecast Project Source: Flow of Funds, Federal Reserve
Household s Summary...so far household net worth up consumption growth slow deleveraging
Financial Landscape business sector net worth still about 10% below peak cash holdings up
Net Worth, Nonfinancial Corporate Business Percent of GDP 80 90 100 110 120 1949 1960 1970 1980 1990 2000 2010 Economic Forecast Project Source: Flow of Funds, Federal Reserve
Checkable Deposits and Currency, NFCB Percent of GDP 2 4 6 8 1949 1960 1970 1980 1990 2000 2010 Economic Forecast Project Source: Flow of Funds, Federal Reserve
Banks Awash in Cash Too
0 500 1000 1500 2000 2500 3000 Reserves Billions of Dollars Excess Reserves Required Reserves Total Reserves Cash Assets 1984 1988 1992 1996 2000 2004 2008 2012 2014 Economic Forecast Project Source: FRB St. Louis
And How About California s Finances? getting better...
Making Sense of Policy? to what does the Fed respond? two key elements inflation labor market
To What Does the Fed Respond? inflation Inflation has continued to run below the Committee s longer-run objective. Market-based measures of inflation compensation have declined somewhat; survey-based measures of longer-term inflation expectations have remained stable. (FOMC statement, October 29, 2014)
0 2 4 6 8 10 12 PCE, Chain type Price Index Percent change from last year 1959 1964 1970 1976 1982 1988 1994 2000 2006 2012 Economic Forecast Project Source: BEA
5 Year Inflation Expectations Percent 0.5 1.0 1.5 2.0 2.5 3.0 2003 2004 2006 2007 2009 2010 2012 2013 2014 Economic Forecast Project Source: FRB St. Louis
To What Does the Fed Respond?...and wage growth is subdued
Hourly Earnings, Production and Salary Workers Percent change from a year ago 2 4 6 8 1964 1970 1976 1982 1988 1994 2000 2006 2012 Economic Forecast Project Source: BLS
The Point? no inflationary pressures...now or later
The Labor Market On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. (FOMC statement, October 29, 2014)
Unemployment Rate Percent 4 6 8 10 1948 1955 1965 1975 1985 1995 2005 2014 Economic Forecast Project Source: BEA
Labor Force Participation Rate Percent 30 40 50 60 70 80 All Age 25 54 Age 55 and over 1948 1955 1965 1975 1985 1995 2005 2014 Economic Forecast Project Source: BLS
Employment to Population Ratio Percent 56 58 60 62 64 1948 1955 1965 1975 1985 1995 2005 2014 Economic Forecast Project Source: BLS
The Taylor Rule and Monetary Policy Measures how the Fed responds (historically)
Taylor Rule FF =.5*(6.0 URATE) + 2 + INF +.5*(INF 2) Implied Taylor Rule Effective Fed Funds Rate 0 5 10 15 1954 1960 1970 1980 1990 2000 2010 Economic Forecast Project Source: BLS, BEA
A California Perspective employment diffusion index up...a quick aside
Unemployment Rate in Monterey County, Unadjusted 20 Percent (%) 15 10 5 Source: California Employment Development Department 1990 1995 2000 2005 2010 Year
Unemployment Rate, Monterey County 20 Original Seasonally Adjusted Percent (%) 15 10 5 Source: California Employment Development Department 1990 1995 2000 2005 2010 Year
Unemployment Rate in Santa Clara County, Unadjusted 12 Percent (%) 10 8 6 4 2 Source: California Employment Development Department 1990 1995 2000 2005 2010 Year
Unemployment Rate, Santa Clara County 12 Original Seasonally Adjusted Percent (%) 10 8 6 4 2 Source: California Employment Development Department 1990 1995 2000 2005 2010 Year
...A California Perspective now back to the program
Housing a large decline prices rising...how fast? how far?
Zillow Home Value Index (ZHVI) Index (100 = Max Value) 30 40 50 60 70 80 90 100 California [ $ 538,300 ] United States [ $ 196,400 ] 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 www.ucsb efp.com Source: Zillow Research Data Note: Maximum value in brackets.
Zillow Home Value Index (ZHVI), by County Index (100 = Pre 2012 Max Value) 40 60 80 100 120 San Francisco [ $ 822,500 ] Los Angeles [ $ 568,500 ] California [ $ 538,300 ] Santa Barbara [ $ 692,400 ] Monterey [ $ 685,600 ] San Joaquin [ $ 415,100 ] 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 www.ucsb efp.com Source: Zillow Research Data Note: Pre 2012 Max Value value in brackets.
0 Peak to Trough Percentage Change, by County 10 20 30 40 Bottom Six Counties Top Six Counties 50 60 70 San Joaquin Stanislaus Solano Colusa Yuba Lake California Orange Humboldt San Mateo Santa Clara Marin San Francisco
Peak to Current Value Percentage Change, by County 20 10 0 10 Bottom Six Counties Top Six Counties 20 30 40 50 Lake Lassen San Joaquin Madera Colusa Stanislaus California Siskiyou Alameda Marin San Mateo Santa Clara San Francisco
Zillow Home Value Index (ZHVI) YoY Growth Rate (%) 20 10 0 10 20 Santa Barbara, CA California United States 2006 2007 2008 2009 2010 2011 2012 2013 2014 www.ucsb efp.com Source: Zillow Research Data
Final Thoughts Although mixed signals, on net, positive signs QE3...gone but not forgotten Fed has created room to bring back QE if necessary tighten sooner rather than later CA rebounding on most fronts
Thank You