U.S. U S Economic Outlook and Monetary Policy Global Interdependence Center Meeting Buenos Aires November 1, 2012
Daniel Sullivan Executive Vice President and Director of Research Federal Reserve Bank of Chicago
0
Labor Market Is Slowly Improving … Private Nonfarm Payroll Employment
Unemployment Rates
(average monthly change, thousands)
(percent)
300
10 Q3‐2012
0
8 Sep‐2012
-300
6
-600
4
-900 2000
2 2000
'02
'04
'06
'08
'10
'12
'02
'04
'06
'08
'10
'12
1
…But Has A Big Gap To Make Up Total Nonfarm Payroll Employment (SA, millions)
Employment 7.2 7 2 million below a
150
145
reasonable notion of its maximum sustainable level
Trend Employment based on Aaronson, Davis, and Hu (2012) LFP and CBO long run NAIRU projections
Growth needed to close the
140
employment gap: – 150,000 , / month for 7 years y
135
– 200,000 / month for 5 years – 250,000 / month for 4 years
Sep‐2012
130
125 2003
'07
'11
'15
'19
2
Crisis Destroyed Much Household Wealth … Loan Performance Home Price Index
Wilshire 5000 Stock Price Index
(Jan-2000=100) 225
16000 Incl. Distressed
200
14000
175
12000 Aug‐2012 26‐Oct‐2012
150
10000
125
8000
100 2000
'02
'04
'06
'08
'10
'12
6000 2000
'02
'04
'06
'08
'10
'12
3
…Which Forced Deleveraging Household Liabilities
Household Obligations
(% of DPI)
(% of DPI)
140 120
20 Financial Obligations Debt Service Average since 1980
Home Mortgages Consumer Credit Other Debt
18
100 16
80
Q2‐2012
60
14
40 12 20 0 1980 '84
'88
'92
'96 2000 '04
'08
'12
10 1980 '84
'88
'92
'96 2000 '04
'08
'12
4
Greater Savings Pushed Down Interest Rates Ten Year Treasury Interest Rates
TIPS-based Inflation Compensation
(percent)
(percent)
8
4 Nominal Real
6
3 24‐Oct‐2012
4
2
2
1 5 yr y 5‐10yr ahead
0
0
-2 2
-1 1
-4 2005
-2 2005
'06
'07
'08
'09
'10
'11
'12
'06
24‐Oct‐2012
'07
'08
'09
'10
'11
'12
5
Household Demand Now Recovering … Indices of Overall Consumer Sentiment Single Family Housing Market (Michigan: Q1-1996=100; Conference Board: 1985=100) (millions of units, annual rate) 150
2.0 Conference Board Consumer Confidence Michigan Consumer Sentiment
Permits Starts
118
1.5
Oct‐2012
85
1.0 Sep 2012 Sep‐2012
53
0.5
Sep‐2012
20 2000
'02
'04
'06
'08
'10
'12
0.0 2000
'02
'04
'06
'08
'10
'12
6
… But Risks Have Made Businesses Cautious Nondefense Capital Goods ex. Aircraft Purchasing Managers Index (Bils. $, 3-month MA)
(50+ equals manufacturing expansion)
75
65 Shipments New Orders
70
60 Sep‐2012
Aug‐2012
65
55
60
50
55
45
50
40
45
35
40 2000
30 2000
'02
'04
'06
'08
'10
'12
'02
'04
'06
'08
'10
'12
7
Headwind/Risk I: Global Growth Slowdown Real Net Exports
Real World GDP Growth
(SA, Bils. 2005$)
(4-quarter percent change)
-200
6
-300
5
IMF Forecasts As of September 2011 As of October 2012
Q3‐2012
-400 400
4
-500
3
-600 600
2
-700
1
-800
0
-900
-1 2006
'07
'08
'09
'10
'11
'12
2006
'07
'08
'09
'10
'11
'12
'13
8
Headwind/Risk II: U.S. Fiscal Consolidation Contributions to Real GDP Growth
Disposable Personal Income
(percent, annual rate)
(Trils. 2005$, SAAR)
6
13
Government Expenditures Government Expenditures Other Contributions
Before Social Security, Taxes, and Transfers Disposable Personal Income
4 12 2
Sep‐2012
0
11
-2 Q3 2012 Q3‐2012
10
-4 -6
9 -8 -10 2007
'08
'09
'10
'11
8 2004
'06
'08
'10
'12
9
Fiscal Cliff According to current law, many significant changes to taxes and
spending are scheduled for January 1, 2013 – Substantial uncertainty about what will happen and the impact on the economy Many analysts expect an end to only the payroll tax holiday and
extended unemployment insurance program – Reasonable estimates of the implied reduction in 2013 growth range from 0.5 to 1.0 percentage points of GDP If all possible tax and spending changes occurred
– CBO’s midpoint point estimates show an additional 2.0 percentage reduction in GDP growth in 2013
10
Unemployment Rate Forecasts: SEP and BC Unemployment Rate (percent) 10
9 FOMC Central Tendency
8 Range between the top 10 and bottom 10 Blue Chip projections
7
Blue Chip Consensus
6 FOMC central tendency for longer‐run unemployment rate
5
4 2010
2011
2012
2013
*2014 Blue Chip forecasts are from October 2012 Long-run Projections
2014 11
Recent And Forecast Inflation Below Target PCE Price Index (12-month percent change) 5
4
Total Core
3 FOMC Long-Run Target
2 FOMC forecasts*
1
Sep�2012
0
-1
*Midpoints of the central tendency of the forecasts made by the FOMC participants
12
Wages And Commodity Prices Tame Wages
Commodity Prices
(4-quarter percent change)
(Index 1967=100 and $/bbl)
6
1200 Nonfarm Business Compensation Employment Cost Index
150 KR‐CRB Index Brent Oil
5
1000
125
4
800
100
Q2‐2012
Sep‐2012
3
600
75
2
400
50
1
200
25
0 2002
'04
'06
'08
'10
'12
0 2002
0 '04
'06
'08
'10
'12
13
Traditional Monetary Policy At Its Limit Fed Funds Rate (percent) 8
History Market Expectations Taylor (1999) Rule
6 4 2
Sep‐2012
0 -2 -4 -6 2001
'03
'05
'07
'09
'11
'13
14
September FOMC Actions Begin open-ended purchases of Agency MBS at a pace of
$40B per month Continue Maturity Extension Program purchases of long-term
Treasury securities at pace of $45B per month – Simultaneously Si lt l selling lli same amountt off short-term h tt Treasuries T i Pledge Resolve: If labor market outlook does not improve
substantially, continue purchasing Agency MBS substantially MBS, other assets assets, and employ other tools until the outlook does improve Expect highly accommodative policy to be appropriate for a
considerable period after economic recovery strengthens – In particular, expect near zero funds rate to be warranted at least through mid 2015 15
GDP Growth and Consensus Projections Real GDP Growth (percent change, annual rate) 6 Consensus Blue Chip Forecasts as of October 2012
3
Q3‐2012
0
-3
-6
-9 2004
'06
'08
'10
'12
16
Greater Underlying Strength But Big Risks U.S. household demand strengthening
– Debt burdens becoming g more manageable g Should lead to stronger growth despite continued headwinds
– Modestly better in 2013 – Significantly better in 2014 as headwinds abate But, But there are significant downside risks
– Further slowing in world economy – Possible intensification of European financial crisis – U.S. fiscal cliff – Uncertainty related to downside risks likely already holding back growth 17