David Altig - 2015 Where is the U.S. Growth?

2015: Where is the US Growth?

GIC Central Banking Series Madrid, Spain May 13, 2015

The year started out with a bust.

Real GDP For 2015: Q1

Real GDP Growth (annualized % change)

2014 Actual*

Advance Estimate (April 29)

2.4

0.2

*: Four quarters ending 2014:Q4 **: Median survey response Source: Federal Reserve Bank of Atlanta Calculations, Macroeconomic Advisors LLC, CNBC

2

The final numbers for Q1 may well be worse when all is said and done.

Real GDP and Tracking Forecast For 2015: Q1

Real GDP Growth (annualized % change)

2014 Actual*

Advance Estimate (April 29)

2.4

0.2

Macro. CNBC Rapid Advisors Update** (May 8) (May 8) -0.6

-0.5

*: Four quarters ending 2014:Q4 **: Median survey response Source: Federal Reserve Bank of Atlanta Calculations, Macroeconomic Advisors LLC, CNBC

3

Weak first quarter growth has been a pattern during the recovery.

Real Gross Domestic Product (GDP) Growth by Quarter percent change, SAAR

6 5

average growth by quarter (2010-2014)

4 3 2 1 0 Q1

Q2

Q3

Q4

-1 -2 -3 Source: Bureau of Economic Analysis

4

Our first excuse explanation: It was a rough winter.

5

Fact: According to the National Oceanic and Atmospheric Administration, 7 of the 9 U.S. census divisions had a significantly colder-thannormal February.

Result: By our estimates, the weather knocked 0.6 percentage points off of first quarter GDP. 6

Arithmetically, the Q1 trade deficit and structures investment were a big drag on US GDP. 3

Contributions to Q1 2015 Real GDP Growth quarterly, percent, seasonally adjusted annualized rate

2

1

Private Inventory Investment, 0.7 Intellectual Property Products, 0.3 Residential Investment , 0.04 Consumer Spending, 1.3

0 Government Spending, -0.2 Nonresidential Structures, -0.8 -1

-2

-3

Source: Bureau of Economic Analysis

Net Exports, -1.3

The sad summary: • So, so consumer spending.

• Weak investment in equipment, software, intellectual property, and residential structures.

• Very weak spending on nonresidential structures and exported goods and services.

8

The dollar and oil prices are a big part of the story.

Spot Oil Price vs. Broad Dollar Exchange Rate

$140

$120

Brent Spot, $/barrel (lhs)

120

Broad Dollar Exchange Rate (rhs)

116

$100

112

$80

108

$60

104

$40 Jan-14

100 Feb-14

Apr-14

Jun-14

Aug-14

Oct-14

Source: Federal Reserve Board, Energy Information Administration

Dec-14

Jan-15

Mar-15 Through May 8, 2015

9

Point 1: Energy independence is a mixed blessing in the short-run.

10

Mining and oil-field investment, as a share of business spending, has risen dramatically.

Investment shares of mining + oil-field investment

40

percent, SA Share of Structures Investment Share of Structures + Equipment Investment

35 30 25 20 15 10 5 0 59

64

69

74

79

84

89

94

99

04

09

14

What happens when oil drops by $50 per barrel?

Real Business Fixed Investment (BFI) (percentage point deviation from baseline level) 4 0

Real BFI

-4 -8

Real mining + oil investment

-12 -16 -20

14 q2

15q2

Source: Federal Reserve Bank of Atlanta Calculations

16q2

17q2

What happens when oil drops by $50 per barrel?

Real GDP and Real Consumption (percentage point deviation from baseline level) 1.4

Real consumption

1.2 1.0 0.8

Real GDP

0.6 0.4 0.2 0.0 -0.2 14q2

15q2

Source: Federal Reserve Bank of Atlanta Calculations

16q2

17q2

The signs of of weakness in oil-related investment and production are clear.

Retail Gasoline

Baker Hughes Active Total Rig Count

all grades, US avg, $/gallon

weekly, number of active rigs

$4.50

2,200

$4.00 1,600

$3.50 $3.00

1,000

$2.50 400

$2.00 10

11

12

13

14

Source: EIA, Department of Energy

10

15

through April 2015

Industrial Production

13

14

15

through May 8, 2015

percent change, year-over-year, NSA 20%

Mining Manufacturing

10%

12

Mining Payroll Employment

percent change, year-over-year 14%

11

Note: Rotary rigs include both oil and natural gas rigs.

Source: Baker Hughes

15% 10%

6% 5% 2%

0% 10

11

12

13

14

15

-5%

-2% 10

11

Source: Federal Reserve Board

12

13

14

15

through March 2015

Source: Bureau of Labor Statistics

through April 2015

14

Oil prices are – umm – kind of hard to predict.

West Texas Intermediate (WTI) Crude Oil Price dollars per barrel

220 200

Historical spot price

180

STEO price forecast

160

NYMEX futures price

140

95% NYMEX futures upper confidence interval 95% NYMEX futures lower confidence interval

120 100 80 60 40 20 0 Jan 2014

Jul 2014

Jan 2015

Jul 2015

Jan 2016

Jul 2016

Note: Confidence interval derived from options market information for the 5 trading days ending Apr. 2, 2015. Intervals not calculated for months with sparse trading in near-the-money options contracts.

Source: Short-Term Energy Outlook, April 2015.

15

Point 2: “King dollar� is a mixed blessing in the short-run.

16

Dollar appreciation and global weakness look to be impacting domestic manufacturing.

ISM Manufacturing Indices

Industrial Production Manufacturing Index

SA, 50+ = Expansion

percent change 20%

65

year-over-year

3-month, annualized

Composite

15%

60

10%

55

5%

50

0%

45

-5% 10

11

12

Source: Federal Reserve Board

13

14

15

through March 2015

New Export Orders

40 10

11

12

13

Source: Institute for Supply Management

14

15

through Apr 2015 17

Historically, runs in the dollar tend to persist for a good bit of time.

Real Broad Trade-Weighted Exchange Rate Indices Index (Jan-73=100)

135

125

115

105

95

85

75 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 Source: Federal Reserve Board

11

13 15

data through April 2015

18

Point 3: Consumer spending doesn’t quite add up.

19

By our calculation, consumer spending growth over the past 4 months is much less than predicted.

Real Personal Consumption Expenditures Four-month percent change (SAAR)

8

90 percent confidence interval

Counterfactual forecast beyond Nov-2014 conditional on actual values of “other� data*

6 4 2 0 -2

Actual -4 -6 Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

*Other data includes real disposable personal income, payroll employment, the unemployment rate, the indices of Consumer Confidence and Consumer Sentiment, PCE prices, the S&P 500 Index, and an average of Brent and West20 Texas Intermediate oil prices.

2015: Where is the Growth?