The Global Economy: Sustaining Momentum David J. Stockton Senior Fellow Peterson Institute for International Economics Chief Economist Monetary Policy Analytics October 5, 2017
What s Driving the Global Improvement? Accommodative monetary policies and supportive financial conditions Fiscal policies have shifted from restraint to mild stimulus Improved business and consumer confidence Commodity exporters emerge from weakness or recession, while commodity importers remain on an upswing 2
The Global Outlook: Improvement to be Sustained Real GDP Growth (Y/Y) 2016 2017 2018 Global Output Growth (PPP weights) 3.2 3.7 3.7 US: a modest step up in growth 1.6 2.1 2.4 Euro Area: widespread gains 1.8 2.2 2.1 Japan: firmer domestic demand 1.6 1.1 UK: slower growth amidst uncertainty 1.8 1.6 1.2 China: steady expansion most likely 6.7 6.8 6.6 India: solid gains 7.1 7.0 7.6 Russia: expansion gains some traction -0.2 1.8 Brazil: modest recovery -3.6 0.6 1.8 Source: Consensus Forecasts for 2016, PIIE for 2017-2018. Annual average over annual average. 3
The US Outlook: Steady Growth with Low Inflation 10 Percent Unemployment Rate () 3.5 Percent Core PCE Inflation (/) 8 3.0 2.5 6 4 1.5 2 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 Forecast 2016 2017 2018 2019 2020 Real GDP Growth (/) 1.8 2.3 2.3 2.1 1.8 Unemployment () 4.7 4.3 4.0 3.9 3.9 PCE Price Inflation (/) 1.6 1.5 1.7 2.1 Core PCE Price Inflation (/) 1.9 1.4 1.8 2.1 Note: Gray-shaded areas represent 70% confidence bands. 2019 2020 0.5 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 4
Still Expecting Some Fiscal Stimulus Impact in FRB/US of Assumed Fiscal Package Percent difference in level of real GDP relative to baseline 1.2 Spending effect Tax effect 0.8 0.6 0.4 0.2 2018 2019 2020 Source: FRB/US model, Author / Monetary Policy Analytics. Tax cuts of $120 bn per year The forecast without stimulus 2018 2019 2020 Real GDP baseline 2.3 2.1 1.8 no fiscal stimulus 1.9 1.7 Unemployment rate baseline 4.0 3.9 3.9 no fiscal stimulus 4.1 4.1 4.1 Core PCE inflation baseline 1.8 2.1 no fiscal stimulus 1.8 Taylor rule turned on Defense and nondefense spending increase of $40 bn per year Path of Fed funds rate about 50 b.p. lower 5
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Crosscurrents for Consumption Light Motor Vehicle Sales Net Worth to Disposable Income 22 Mn units, SAAR 8 20 7 18 6 16 14 5 12 4 10 8 2005 2007 2009 2011 2013 2015 2017 3 Source: BEA and Federal Reserve via FRED. 6
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Housing Continues Slow Upward Trend 2.5 1.5 0.5 Mn units, SAAR Total Housing Starts and Home Sales New privately owned housing units started (quarterly) New single-family houses sold (monthly) Equil. Housing Starts = 1.6 mn units 2002 2004 2006 2008 2010 2012 2014 2016 2018 H F 20 15 10 5 0-5 -10-15 -20-25 S&P/Case-Shiller 20-City Composite Home Price Index Percent change from year ago Source: Census and S&P Dow Jones Indices LLC via FRED, Author / Monetary Policy Analytics. 7
Business Investment Shows Signs of Life Nondefense Capital Goods Excluding Aircraft New orders Shipments Bn USD 75 70 65 60 55 50 45 2010 2011 2012 2013 2014 2015 2016 2017 7.0 6.0 5.0 4.0 3.0 - - -3.0 Business Fixed Investment, Contribution to Percent Change (/) Percentage points Intellectual property products Equipment Structures Business Fixed Inv. 2014 2015 2016 2017 2018 2019 Source: Census via FRED, BEA, Author / Monetary Policy Analytics. 8
1/2005 10/2005 7/2006 4/2007 1/2008 10/2008 7/2009 4/2010 1/2011 10/2011 7/2012 4/2013 1/2014 10/2014 7/2015 4/2016 1/2017 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 A More Supportive External Environment is Helping 105 100 95 90 85 80 Real Trade-Weighted US Dollar Index 1.2 0.8 0.6 0.4 0.2-0.2-0.4-0.6-0.8 Percentage points Net Exports of Goods and Services, Contribution to Growth in Real GDP H F Source: Federal Reserve and BEA via FRED. 9
Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 The Labor Market Has Tightened: And Will Tighten Further 300 250 200 150 100 50 0 Monthly rate, thousands Change in Nonfarm Payrolls 3-month average 6-month average 18 16 14 12 10 8 6 4 2 0 Official and Expanded Unemployment Rate Share of labor force U6 Expanded unemployment rate U3 Official unemployment rate Note: Shaded area is range of payroll gains consistent with growth of the labor force. Source: BLS via FRED. Note: Shaded areas represent ranges of respective unemployment rates consistent with full employment. 10
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Just How Tight Is It? 4.5 Percent of labor force Job Openings 1.20 Index of Recruiting Intensity per Vacancy 4.0 1.15 1.10 3.5 5 3.0 0 2.5 0.95 0.90 0.85 1.5 0.80 Source: BLS and DHI Group via FRED. 11
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 A Hot Labor Market is Producing Benefits 7 Part-Time Employment for Economic Reasons Share of labor force 67 Percent Labor Force Participation 6 66 5 65 4 3 2 1 1987-2007 average 64 63 62 61 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 60 Source: BLS via FRED. 12
Some Signs of Wage Pressure Admittedly Faint 5.0 4.5 4.0 Percent change from year ago Labor Compensation 2011-2015 2016-2017 ECI 2.2 AHE 2.1 2.6 Atlanta 2.4 3.4 H F Atlanta Fed Median Wage Growth 3.5 3.0 2.5 1.5 Employment Cost Index: Compensation: Private Industry Workers Average Hourly Earnings of All Employees: Total Private 0.5 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Note: Atlanta Fed indicator was calculated as a quarterly average of monthly data. For Q3 2017, it was calculated as the average of July and August 2017. Source: BLS via FRED, Atlanta Fed, Author / Monetary Policy Analytics. 13
Signs of Price Pressure Even Fainter Consumer Price Inflation 3.0 12-month percent change Core CPI Median CPI Underlying Inflation Gauge: Full data set measure 2.5 1.5 0.5 2011 2012 2013 2014 2015 2016 2017 Source: BLS and FRB Cleveland via FRED, FRB New York. 14
7/2009 1/2010 7/2010 1/2011 7/2011 1/2012 7/2012 1/2013 7/2013 1/2014 7/2014 1/2015 7/2015 1/2016 7/2016 1/2017 7/2017 Inflation Expectations: Steady to Lower 5-Year, 5-Year Forward Inflation Expectation Rate SPF 10-year PCE SPF 10-year CPI 3.5 3.0 2.5 1.5 0.5 Source: Bloomberg, FRB Philadelphia via Haver Analytics. 15
Inflation: A Gradual Return to Target Consumer Price Inflation 3.5 12-month percent change Headline PCE Inflation Core PCE Inflation H F 3.0 2.5 Target 1.5 0.5-0.5 - -1.5 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: BEA via FRED, Author / Monetary Policy Analytics. 16
The Fed Slowly Removes Accommodation Effective Federal Funds Rate 10-Year Treasury Constant Maturity Rate 4.5 $Trillion The Balance Sheet Shrinks For a Time 3.5 3.0 2.5 Percent H F 4.0 3.5 3.0 2.5 Agency MBS Total Securities Portfolio 1.5 1.5 0.5 2012 2013 2014 2015 2016 2017 2018 2019 2020 0.5 Treasury Securities 2017 2018 2019 2020 2021 2022 2023 2024 2025 Source: Federal Reserve, Author / Monetary Policy Analytics. 17
Challenges for Monetary Policy Guiding inflation back to 2 percent Avoiding the build up of financial imbalances A substantial change in Fed leadership A tilt toward easier policy 18