The Outlook for the U.S. Economy And Some Longer Term Issues
Anthony Murphy
Federal Reserve Bank of Dallas (anthony.murphy@dal.frb.org)
GIC Central Banking Conference Madrid, 3 Oct 2016
The views expressed are those of the author, and are not those of the Federal Reserve Bank of Dallas or of the Federal Reserve System. 1
General Remarks The Fed is tasked with • Conducting monetary policy subject to a dual mandate (price stability and maximum employment), unlike the ECB; • Supervising and regulating banks to ensure the safety and soundness of the banking and financial system; • Maintaining financial stability and containing systematic risk; • Providing financial services and playing a major role in operating the U.S.’s payment systems I will talk about the U.S. economic outlook and some longer term aspects of U.S. monetary policy (but not timing issues) I will also discuss the limits of monetary policy
2
U.S. Economic Growth Has Been Pretty Modest and Uneven Contributions to Real GDP Growth (PPAR) 2011
2012
2013
2014
2015 2016H1
GDP Growth, % SAAR
1.6
2.2
1.7
2.4
2.6
1.0
- Personal Consumer Expenditure, PCE
1.6
1.0
1.0
2.0
2.2
2.0
- Non-Residential Fixed Investment
0.9
1.0
0.4
0.8
0.3
-0.3
- Residential Fixed Investment
0.0
0.3
0.3
0.1
0.4
0.0
- Inventories
-0.1
0.1
0.2
0.1
0.2
-0.8
- Net Exports
0.0
0.1
0.3
-0.2
-0.7
0.1
- Government
-0.6
-0.4
-0.6
-0.1
-0.3
0.0
Note: PPAR = percentage points at annual rates, SAAR = seasonally adjusted at annual rates. Source: BEA.
3
Many External and Internal and External Shocks Including Low Oil Prices Oil & Gas Related Investment v. Other Non-Residential Investment 2009$B, SAAR
2009$B, SAAR 2,000,000
Structures + Equipment + IP
1,800,000 1,600,000 200,000
1,400,000
Structures & Equipment
180,000
1,200,000
160,000
1,000,000 Other Sectors
140,000
Struct & Equip
120,000
Mining Sector Struct & Equip
100,000 80,000 60,000 00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15 16
Source: BEA and author’s calculations. 4
Deleveraging Important Reason Why Recovery from Great Recession So Slow Household Deleveraging Probably Complete
Percent 150
660 H'hold Net Worth /
140
640
Income
130
620
120
600
110
580
100
560
90
540 H'hold Debt /
80
520
Income
70 1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
500 2016
Sources: BEA and Federal Reserve, 5
Unemployment Rate Close to NAIRU or Natural Rate
U6 Includes ‘Part Time for Economic Reasons’ and Discouraged Workers Percent, SA 18 16 14 12
"Broad" U6
"Headline" U3
Unemployment
Unemployment
Rate
Rate
10
9.7%
8 Aug '16 6 4.9% 4 CBO "NAIRU" or Natural Rate 2 96
98
00
02
04
06
08
10
12
14
16
Source: BLS and CBO. 6
Labor Force Participation Rate Ticks Up
Uncertain Demographic + Cyclical + Residual (Secular Trends) Components
ercent, SA 68
66
Labor Force Participation Rate
64
62.8% 62 Aug '16 Employment to
60
59.7%
Population Rate
58 00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15 16
Source: BLS.
7
Wage Inflation Slowly Picking Up
Need to Look at a Range of Wage Measures Employee Cost Index (Y/Y,%)
Ave Hourly Earnings (Y/Y,%)
6
6
5
5
4
4 2.5%
2.6% 3
3
2016 Q2
2
2
1
1
0
Aug 2016
0 2000
2002
2004
2006
2008
2010
2012
2014
2000
2016
2002
2004
2006
2008
2010
2012
2014
2016
Atlanta Fed Wage Tracker (Y/Y,%)
6 5
3.3%
4
Aug 2016
3
Smoothed Median
2 1 0 2000
2002
2004
2006
2008
2010
2012
2014
2016
Source: BLS and Atlanta Fed. 8
Forecasts of Output and Unemployment
Moderate Output Growth and Unemployment Below NAIRU
Real GDP Growth FOMC (21 Sep) Blue Chip (10 Sep) SPF (12 Aug)
Unemployment Rate FOMC Blue Chip SPF
2016 Q3
2016 Q4
2016 Q4/Q4
2017 Q4/Q4
2018 Q4/Q4
2019 Q4/Q4
2.9 2.6
2.4 2.3
1.8 1.8 2.3
2.0 2.2 2.2 e
2.0 2.2e
1.8 2.2e
2016 Q3
2016 Q4
2017 Q4
2018 Q4
2019 Q4
4.8 4.8
4.8 4.9 4.7
4.6 4.5 4.6 e
4.5 4.6 e
4.6 4.7 e
Sources: Blue Chip Economic Indicators (10 Sep 2016), Survey of Professional Forecasters (SPF, 12 Aug 2016), and Federal Open markets Committee Summary of Economic Projections (FOMC, 21 Sep 2016, median). 9
Short-Term Output Forecasts and Outcomes Forecasts Mean Reverting and Over Optimistic
Percent, SAAR 6 4 2 0 -2 2009 M3 Forecast 2010 M3 Forecast 2011 M3 Forecast 2012 M3 Forecast 2013 M3 Forecast 2014 M3 Forecast 2015 M3 Forecast 2016 M3 Forecast
GDP Growth Rate -4 -6 -8 -10 2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Sources: Blue Chip Economic Indicators (March forecasts) and BEA (latest Estimates). 10
Unemployment Forecasts and Outcomes Forecasts Too Pessimistic
Percent, SA 11 10
2016 M3 Forecast 2015 M3 Forecast 2014 M3 Forecast 2013 M3 Forecast 2012 M3 Forecast 2011 M3 Forecast 2010 M3 Forecast
9 8 7 6 5 4 2008
2010
2012
2014
2016
2018
2020
2022
Sources: Blue Chip Economic Indicators (March forecasts) and BLS. 11
Underlying Inflation Close to 2% Target 12 Month PCE Inflation
Percent 5 4
2% Target
3 2 1 0 Headline (All Items) Trimmed Mean Core (Ex. Food & Energy)
-1 -2 00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15 16
Sources: BEA and Dallas Fed.
12
Consumer and Professional Long Run Inflation Expectations Fairly Well Anchored 3.4 3.2
Consumers' Expected Inflation
3.0
5 to 10 Years Ahead
2.8 2.6 2.5% 10 Years Ahead
2.4 Forecasters' Expected CPI Inflation
2.2
2.2% 2.1%
2.0
5 Years Ahead
1.8 2000
2002
2004
2006
2008
2010
2012
2014
2016
Sources: U. Michigan / Reuters Survey of Consumers and SPF. 13
Market and Professional Inflation Expectations Differ Percent 2.4 2.3 2.2
Survey Based (Blue Chip & SPF)
2.1
Sep 2014 Sep 2015 Sep 2016
2.0 1.9
Market Based (CL Fed)
1.8 1.7 1.6 10
20
30
40
50
60
70
80
90
100
110
120
Months
Sources: Aruoba (2016), Philly and Cleveland Feds. 14
Forecasts of Inflation Reverting to Target
2016 Q3
2016 Q4
2016 Q4/Q4
2017 Q4/Q4
2018 Q4/Q4
2019 Q4/Q4
1.6 2.0
2.4 2.2
1.8 1.6
2.3 2.3
2.3
-
PCE Inflation FOMC (21 Sep) SPF
1.5
1.9
1.3 1.4
1.9 1.9
2.0 2.0
2.0 -
Core PCE Inflation FOMC SPF
1.6
1.6
1.7 1.8
1.8 1.9
2.0 2.0
2.0 -
CPI Inflation Blue Chip (10 Sep) SPF (12 Aug)
Sources: Blue Chip Economic Indicators (10 Sep 2016), Survey of Professional Forecasters (SPF, 12 Aug 2016), and Federal Open markets Committee Summary of Economic Projections (FOMC, 21 Sep 2016, median).
15
Monetary Policy • U.S. is closer to normalizing monetary policy: o “The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress towards its objectives” FOMC Statement, 21 Sept 2016 o “Near term risks to the economic outlook appear roughly balanced” • By contrast, the ECB is unlikely to reduce monetary accommodation any time soon • The underlying problems of the EZ remain o It is not close to being an optimal currency union o There is no fiscal union, and adjustments costs are very unevenly distributed among member states o Supply side reforms have been slow 16
Longer Term Economic Issues in U.S. • Lower output growth and productivity growth in the long term? o Lower growth rate → lower r* (natural rate of interest) → near zero lower bound (ZLB) more likely to be hit in a recession • Combination of changing demographics, less capital deepening and lower total factor productivity etc. • At micro level, lower TFP reflected in: o Widening gaps between most and least productive firms o Fewer start-ups and less reallocation of production among firms • Aging demographics and the level of government debt • Limited role for monetary policy (or short-term fiscal policy) in addressing these issues • Some role for macro-prudential policies, but there are trade-offs • Sensible supply sides policies needed (Congress not FOMC) 17
Slow Growth in GDP and Hours Since 2006 Demographics Important 1949-2005
2006-2015
Memo: 1996-2003
GDP
3.4
1.4
3.4
Hours
1.4
0.4
1.1
- Population
1.4
1.0
1.4
- Labor force participation
0.2
-0.5
-0.1
- Employment rate
0.0
0.0
0.0
- Hours per person
-0.2
-0.1
-0.1
Note: Average annualized Q4/Q4 percentage change. Sources: BEA, BLS and Fischer (2016).Δ
18
Decline in Productivity Growth in Business Sector
TFP Badly Measured Etc., But Slowed Before the Great Recession 1949-2005
2006-2015
Output
3.6
1.6
Labor input
1.1
0.4
Labor productivity
2.5
1.2
- Labor composition
0.2
0.3
- Capital deepening
0.9
0.6
- Total factor productivity TFP
1.3
0.3
Note: Average annualized Q4/Q4 percentage change. TFP figures are adjusted for utilization. Sources: BEA, BLS, Fernard (2014) and Fischer (2016).
19
Laubach & Williams’ Estimates of Natural Rate of Interest r* At Lower End of Range of Estimates of r*
Percent 4 3 1.36 x Time Varying Long-Run Growth Rate (g*)
2 1
Natural Rate of Interest (r*) r* = 1.36 g* + z
0.2%
0 -1 -2
Other Unspecified Factors (z)
-3 -4 2000
2002
2004
2006
2008
2010
2012
2014
2016
Source: Laubach and Williams (2003, updated 2016).
20
Estimates of Long-Run GDP Growth Year
Blue Chip
SPF
CBO
FOMC
2000
3.1%
3.0%
2.9%
-
2005
3.2%
3.3%
2.6%
-
2010
2.6%
2.6%
2.2%
2.7%
2012
2.5%
2.5%
2.3%
2.5%
2014
2.4%
2.6%
2.1%
2.3%
2016
2.1%
2.3%
1.9%
2.0%→1.8%
Sources: Blue Chip Economic Indicators, Survey of Professional Forecasters (SPF), Congressional Budget Office (CBO) and Federal Open markets Committee (FOMC) Summary of Economic Projections (median). 21
Suggested Policies to Promote Productivity Growth Bailey & Montalbano, Brookings, Sept 2016
• Greater competition o Simplify regulation o Limit patents – too little competition, too much rent seeking o Reduce licensing restrictions – barrier to entry o More competition in health care • Invest in worker skills • Invest in infrastructure • Tax reform • Greater Federal support for R&D
22
U.S. Monetary Policy – Many Open Issues • Mechanics (and timing) of “normalization” o Very large balance sheet, the results of QE / LSAPs o At present, maturing Treasuries are rolled over and principal repayments on Agency debt and MBS are reinvested o Awash with reserves, so traditional tools for controlling short term rates supplemented o IOR (interest on reserves) and RRP (reverse repos) important • Longer term issues include: o ZLB (near zero lower bound) and the size of the Fed’s balance sheet o ZLB and inflation target – why not 3% rather than 2%? o Should the range of QE / LSAP assets be extended beyond Treasuries and Agency debt & MBS? 23