The U.S. Economy: Picking Through the Numbers

The U.S. Economy: Picking Through the Numbers State Chamber/AIA and GIC presentation The views expressed in this presentation are mine, and do not represent those of the Federal Reserve Bank of Atlanta, the Federal Reserve System, or anyone other than the presenter. If you think you heard otherwise, you are mistaken.

Little Rock, AK May 30, 2019

Our story (roughly): Economic growth Real GDP Growth Percent Q4/Q4 3.5

Actual

Projected

3 2.5 2.1

2

1.9

1.8

1.5 1 2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Note: The red line is the median projection from the March 2019 FOMC Summary of Economic Projections.

2

Why, given the strength last year and the beginning of this year, is the longer-run view so pessimistic?

Annualized Real GDP Growth

2018 (Q4/Q4)

2019:Q1

3.0

3.2

3

The Tax Cut and Jobs Act plausibly provided a measure of stimulus…

Source: “Did the 2017 Tax Reform Discriminate Against Blue State Voters?”, FRBA Working Paper 2019-7:

4

‌ and it is not yet conventional wisdom that growth fundamentals have changed.

Sources: https://www.cbo.gov/system/files?file=2019-01/54918-Outlook.pdf

5

As of now, it appears that second quarter will step down significantly.

Annualized Real GDP Growth

2018 (Q4/Q4)

2019:Q1

2019:Q2*

3.0

3.2

1.3

* GDPNow, May 24 6

As of now: This distance from the official BEA report, the average GDPNow error is still pretty large.

Percentage points

Average Absolute Error for GDPNow

1.4

1.2

You are here

1.0

0.8

0.6

0.4

0.2

0.0 97

94

91

88

85

82

79

76

73

70

67

64

61

58

55

52

49

46

43

40

37

34

31

28

25

22

19

16

13

10

7

Days until advance GDP release 7

A good part of the predicted drop-off in Q2 growth can be traced to inventories.

2018 (Q4/Q4)

2019:Q1

2019:Q2*

Annualized Real GDP Growth

3.0

3.2

1.3

Inventory Investment

0.4

0.5

-1.2

(contribution to growth, % points)

* GDPNow, May 24 8

Sales growth has slowed, but inventory-sales ratios do not look exceptionally high.

Sales growth As sales growth slowed

Inventory/Sales Ratios 1.550

Wholesalers

Retailers

Manufacturers

12

Retailers

Manufacturers

Wholesalers

10 1.475

8 6

1.400

4 2

1.325

0 -2

1.250

-4 -6

1.175 3 3 13 1 4 1 4 14 1 5 1 5 1 5 1 6 1 6 16 1 7 1 7 1 7 1 8 1 8 18 1 9 -1 y-1Census nSource: p- Bureau; ny-Haver p- Analytics nyppn- ay- ep- an- ay- ep- annya a J J March J Se Ja Ma Se Ja Ma Se Ja Ma Se Ja data S S M M through M 2019

-8 7 17 18 18 18 19 13 13 13 14 14 14 15 -15 -15 -16 -16 -16 -17 -1data - n- March - Retail - 2019, y y y n p n p pthrough a a a a a ay e p Jan Ja M Se Ja M Se Ja M Se Ja M Se Ja M data Ja April Se through S M 2019 Source: n- y- Census p- Bureau; n- y-Haver p- Analytics n-

9

Consumer spending was quite weak in the first quarter, but appears to be turning around.

Annualized Real GDP Growth Inventory Investment

(contribution to growth, % points)

Consumption Expenditures

2018 (Q4/Q4)

2019:Q1

2019:Q2*

3.0

3.2

1.3

0.4

0.5

-1.2

2.6

1.2

3.0

* GDPNow, May 24 10

Business investment spending, however, is looking soft.

Annualized Real GDP Growth Inventory Investment

(contribution to growth, % points)

Consumption Expenditures Business Fixed Investment

2018 (Q4/Q4)

2019:Q1

2019:Q2*

3.0

3.2

1.3

0.4

0.5

-1.2

2.6

1.2

3.0

7.0

2.7

2.4

* GDPNow, May 24 11

Though still stronger than the early phases of the recovery, investment indicators have noticeably weakend.

Manufacturers Shipments and New Orders (nondefense excluding aircraft) Percent change, year-over-year

20 15 10

Shipments

5 0 -5

Orders

-10 -15

1 1 1 2 2 2 3 3 3 4 4 4 5 5 5 6 6 6 7 7 7 8 8 8 9 -1 y-1 p-1 n-1 y-1 p-1 n-1 y-1 p-1 n-1 y-1 p-1 n-1 y-1 p-1 n-1 y-1 p-1 n-1 y-1 p-1 n-1 y-1 p-1 n-1 n Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma Se Ja

data through April 2019 Sources: U.S. Census Bureau; Haver Analytics

12

Will the growth push from the foreign sector continue?

Annualized Real GDP Growth Inventory Investment

(contribution to growth, % points)

Consumption Expenditures Business Fixed Investment Net Exports

(contribution to growth, % points)

2018 (Q4/Q4)

2019:Q1

2019:Q2*

3.0

3.2

1.3

0.4

0.5

-1.2

2.6

1.2

3.0

7.0

2.7

0.8

1.0

0.02

* GDPNow, May 24 13

Worries over the global growth picture have intensified.

GDP Growth Forecasts for Advanced Economies annualized semiannual percent change

3.0

October 2018 Forecast

April 2019 Forecast

IMF World Economic Outlook projections for 2019 Real GDP Growth (Q4/Q4)

Oct ‘18 forecast

Apr ’19 forecast

Emerging Economies

4.6

4.9

Euro Area

1.7

1.6

UK

1.5

1.0

Japan

1.0

0.3

2.5

2.0

1.5

1.0

14

Growth and trade tensions are taking their toll.

6

World Trade & Industrial Production three month moving average year-over-year Industrial production percent change World trade volumes

5 4 3 2 1 0 -1

15

What costs the tariffs?

Tax Payments 2018 tariffs

$36 billion

Additional 15% Tariff on $200 $26.9 billion billion Total

Efficiency Losses $16.8 billion

Total Cost to Consumers $52.8 billion

Per person costs $414

$79.1 billion

$106.1 billion

$831

$158.9 billion

$1245

Source: “New China Tariffs Increase Costs to U.S. Households�, Federal Reserve Bank of New York:

16

In sum – We are still looking for 2 to 2-1/2 percent growth in 2019.

• In the consumer we trust.

• Business investment is a question mark.

• The international picture is worrisome.

17

It’s an interesting policy environment.

10-Year Treasury/Funds rate spread Color Basis Points Blue

Rate Measures

3.5

3.0

Federal Funds [effective] Rate (% p.a.)

10-Year Treasury Note Yield at Constant Maturity (% p.a.)

2.5

1.51-1.75

Purple

1.26-1.50

Green

1.01-1.25

Black

0.56

1

1

1

1.76-2.0

Orange

1

1

2.0

1

1.5

0

0

1.0

0

0.5 0

0.0

Source: Federal Reserve Board; Haver Analytics

0

data through April 2019

18

It’s an interesting policy environment.

10-Year Treasury/Funds rate spread Color

Basis Points

Blue

1.76-2.0

Orange

1.51-1.75

Purple

1.26-1.50

Green

1.01-1.25

Black

0.56

Rate Measures

3.5

3.0

1

Federal Funds [effective] Rate (% p.a.)

10-Year Treasury Note Yield at Constant Maturity (% p.a.)

2.5

1

1

1

1

2.0

1

1.5

0

0

1.0

0

0.5

0.0

Source: Federal Reserve Board; Haver Analytics

Yesterday’s spread: Slightly negative data through April 2019

0

0

19

In our opinion…

“If you ask me how the scales are, I don’t feel like for me they are tilted more to the cut than the hike.”

Source: Bloomberg. May 20, 2019.

20

The U.S. Economy: Picking Through the Numbers