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.