Altig presentation

The Answer Is Yes and No. New College Lecture

Sarasota, FL February 2, 2015

In the beginning there was the V-shaped vs. Swooshshaped question.

2010

2011

2012

2013

2014

Real GDP 2.7% FOMC Midpoint Projection NA

Note: All figures are Q4/Q4 growth rates. FOMC projections are take from the 1st Summary of Economic Projections of the year.

Sources: Bureau of Economic Analysis

Even the swooshers were disappointed in 2011‌

2010

2011

2.7%

1.7%

NA

3.2%

2012

2013

2014

Real GDP FOMC Midpoint Projection

Note: All figures are Q4/Q4 growth rates. FOMC projections are take from the 1st Summary of Economic Projections of the year.

Sources: Bureau of Economic Analysis

‌ and again in 2012.

2010

2011

2012

2.7%

1.7%

1.6%

NA

3.2%

3.0%

2013

2014

Real GDP FOMC Midpoint Projection

Note: All figures are Q4/Q4 growth rates. FOMC projections are take from the 1st Summary of Economic Projections of the year.

Sources: Bureau of Economic Analysis

Learning our lesson, projections were downgraded in 2013‌ 2010

2011

2012

2.7%

1.7%

1.6%

NA

3.2%

3.0%

2013

2014

Real GDP FOMC Midpoint Projection 2.6%

Note: All figures are Q4/Q4 growth rates. FOMC projections are take from the 1st Summary of Economic Projections of the year.

Sources: Bureau of Economic Analysis

‌ and GDP growth came in 3%.

2010

2011

2012

2013

2.7%

1.7%

1.6%

3.1%

NA

3.2%

3.0%

2.6%

2014

Real GDP FOMC Midpoint Projection

Note: All figures are Q4/Q4 growth rates. FOMC projections are take from the 1st Summary of Economic Projections of the year.

Sources: Bureau of Economic Analysis

You probably guessed what happened last year.

2010

2011

2012

2013

2014

2.7%

1.7%

1.6%

3.1%

2.5%

NA

3.2%

3.0%

2.6%

2.9%

Real GDP FOMC Midpoint Projection

Note: All figures are Q4/Q4 growth rates. FOMC projections are take from the 1st Summary of Economic Projections of the year.

Sources: Bureau of Economic Analysis

Our forecast for GDP growth: Yep, about 3%.

2015: q4/q4

2016: q4/q4

Real GDP Growth*

Jan FRBA preliminary forecast

*: QIV/QIV Source: FRBA forecasts

3.2

2.9

Next year – the consumer takes over?

5%

Nonresidential Fixed Investment and Personal Consumption Year-over-Year Percent Change

4%

Personal Consumption Expenditures (lhs)

15%

10%

3% 5%

2% 1%

Nonresidential Fixed Investment (rhs)

0%

0% -5% -1% -2% 2010

-10% 2011

Source: Bureau of Economic Analysis

2012

2013

2014 through Q4 2014

9

Studies suggest energy production is price-insensitive, but energy-relates investment is sensitive to price.

Real Business Fixed Investment (BFI) (percentage point deviation from baseline level) 2

oil @ $50/bbl.

1 oil @ $73/bbl.

0

-1

-2

14

15

Source: Federal Reserve Bank of Atlanta Calculations

16

17

Though it takes awhile, our analysis indicates lower energy costs are net positive for consumer spending‌ Real Personal Consumption Expenditures (percentage point deviation from baseline level) 1.4

oil @ $50/bbl.

1.2 1.0 0.8 0.6

oil @ $73/bbl.

0.4

0.2 0.0

-0.2 14

15

Source: Federal Reserve Bank of Atlanta Calculations

16

17

… and anywhere from ½ to 1 percent extra push to GDP growth.

Impact on real GDP Growth (in percentage points (pp))

Real GDP Growth

2014:q4/ q4

2015: q4/q4

2016: q4/q4

2017: q4/q4

Oil prices at $50/bbl

-0.2 pp

1.0 pp

0.2 pp

0.1 pp

Oil prices at $73/bbl.

-0.2 pp

0.4 pp

0.04 pp

0.03 pp

Source: Federal Reserve Bank of Atlanta Calculations

There is every reason to believe that, by the end of this year, the unemployment rate will be close to “normal.”

2015: q4/q4

2016: q4/q4

Real GDP Growth*

Jan FRBA preliminary forecast

3.2

2.9

5.2

5.2

Unemployment Rate** Jan FRBA preliminary forecast

Source: FRBA forecasts

With respect to the labor market, unemployment rate projections have been persistently overly pessimistic.

Percent, quarterly average

10

9.5

9

8.5 8

Actual

7.5

“Tapering� announced

7

6.5 6

5.5

Dec-13

Dashed lines represent midpoint of FOMC Summary of Economic Projections as of the indicated date.

5 Dec-14

4.5 4Q2010

4Q2011

4Q2012

4Q2013

Source: U.S. Bureau of Labor Statistics, Federal Reserve Board

4Q2014

4Q2015

4Q2016

4Q2017 14

On inflation, this is our story and we are sticking to it.

2015: q4/q4

2016: q4/q4

Real GDP Growth*

Jan FRBA preliminary forecast

3.2

2.9

5.3

5.2

0.8

1.9

Unemployment Rate** Jan FRBA preliminary forecast Inflation* Jan FRBA preliminary forecast *: QIV/QIV; ** QIV Source: FRBA forecasts

The trend in inflation hasn’t budged much off of 1.5 percent for a couple of years.

PCE Price Index year-over-year percent change, monthly

4.5

PCE Core PCE

4.0 3.5 3.0 2.5 2.0

FOMC’s inflation objective 1.5 1.0 0.5 0.0 10

11

Sources: Bureau of Economic Analysis

12

13

14 through November 2014

According to the “Bullard loss function” we are pretty close to the FOMC’s mandate.

Progress Towards Objectives (Using Core PCE) 6

5

4

3

2

Distance from goal based on U-3 gap

1

0 1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

through December 2014 Source: Bureau of Labor Statistics; James Bullard’s July 17, 2014 speech; authors’ calculations 17

By broader measures of labor market underutilization, we are not quite so close to a victory declaration.

Progress Towards Objectives: U-3 gap versus U-6 gap (Using Core PCE) 6

5

Distance from goal based on U-6 gap

4

3

2

Distance from goal based on U-3 gap

1

0 1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

through December 2014 Source: Bureau of Labor Statistics; James Bullard’s July 17, 2014 speech; authors’ calculations 18

Though there may be some cause for optimism, wage growth still looks rather anemic.

Wage Measures year-over-year change, SA

4.0%

3.5%

Wage growth (3.4%) = Inflation (2%) + Real Wage growth (1.4%)

3.0%

2.5%

2.0%

Average Hourly Earnings: Total Private Industries (SA, $/Hour) % Change - Year to Year

1.5%

Employment Cost Index 1.0% 07

08

Source: Bureau of Labor Statistics

09

10

11 12 13 14 ECI data through Q4 2014, AHE data through December 2014

19

Yes and no, in a nutshell.

• On liftoff timing, diffuse expectations are probably appropriate.

Yes and no, in a nutshell.

• On liftoff timing, diffuse expectations are probably appropriate. • The more important question may be: What happens after liftoff?

--- Is the path of rates inexorably upward?

--- What do we expect to happen to rates?

There remains a whole lot of stimulus in the U.S. – even if rates rise.

Growth of Selected Central Bank Balance Sheets 6

(2007=1)

Bank of England 5

Federal Reserve 4

Bank of Japan 3

2

ECB 1

Assumes a program of 60 bill. euro a month until at least September 2016

0

22

Longer-dated Treasury yields have yet to conform to a more hawkish sentiment.

Treasury Yields daily average, percent 10-Year Treasury

3.6

FOMC Statement

3.4

30-Year Treasury

5-Year Treasury

Meeting minutes released

3.2 3.0 2.8 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 06-14

07-14

Source: Federal Reserve Board

08-14

09-14

10-14

11-14

12-14

01-15 through January 27, 2015

23

The Answer Is Yes and No.