Federal Reserve Bank Presentation

Economic Outlook Greater Winston-Salem, Inc. May 7, 2020

Matthew Martin, PhD Regional Executive

The views and opinions expressed herein are those of the author. They do not represent an official position of the Federal Reserve Bank of Richmond or the Federal Reserve System.

The Story 1) The Pre-Virus Economy • GDP was growing at a steady pace – Strong consumer spending and rebound in residential investment, albeit soft business investment and still some weakness in manufacturing

• Employment was expanding and the unemployment rate was at its lowest level since the late 1960s • The softer sentiment of late 2018/early 2019 was dissipating 2) Enter COVID-19 • December/January: Supply chain frictions emanating from China • February: Continued supply challenges mostly for manufacturers/retailers

• March: Labor supply and consumer demand shocks 3) Now where are we? And where might we go?

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National and Regional Economy

4

COVID-19: Economic effects Let’s start in March (not February) • It’s a direct supply shock: Temporary reduction in labor – Social distancing measures – Virus spread/safety

• It’s a direct demand shock: For nondurables and services (e.g. travel, tourism, restaurants) • Continuing demand impacts: Still highly uncertain – Demand declines • Unemployed/furloughed workers reduce spending; stock market declines affect spending; businesses have lower demand; uncertainty reduces purchases

– Consumer demand shifts • Restaurant supplies convert to grocery? Dining out convert to takeout? In-person retail shifts to online? (But: some not convertible; wait staff still affected; online retailers struggle to staff warehouses and find transportation…)

– Energy/other commodity price declines 5

The economy was chugging along % Change, SAAR

Real Gross Domestic Product

10

Q4: 6.0

5 0

Q3: -0.4

-5

-10

Q2: -26.5

-15 -20

Q1: 2020 US: -4.8%

-25 -30 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Bureau of Economic Analysis, IHS Markit/Haver Analytics 6

PCE makes up about 2/3 of GDP GDP Composition 2019 Nonresidential Investment Residential Investment Personal Consumption Expenditures Government Inventories

Source: Bureau of Economic Analysis/Haver Analytics

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A long trend of positive employment growth quickly went negative‌and it will be much lower in April Total Nonfarm Employment

Average Monthly Change, Thous.

300 200 100

0 -100 -200 -300

Monthly Change March: -701 February: 275 January: 214

-400 -500 -600 -700 -800

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Source: Bureau of Labor Statistics/Haver Analytics 8

Unemployment claims skyrocketed in the U.S‌.

United States Unemployment Insurance Initial Claims

Thousands

7000

Week ending March 7: Week ending March 14: Week ending March 21: Week ending March 28: Week ending April 4: Week ending April 11: Week ending April 18: Week ending April 25:

6000

5000

United States

211,000 282,000 3,307,000 6,867,000 6,615,000 5,237,000 4,442,000 3,839,000

4000

3000

2000

1000

0

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

Source: Department of Labor/Haver Analytics

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‌and in North Carolina Thousands 200

North Carolina Unemployment Insurance Initial Claims

North Carolina

Week ending February 22: 2852 Week ending February 29: 1767 Week ending March 7: 2575 Week ending March 14: 3533 Week ending March 21: 94083 Week ending March 28: 172145 Week ending April 4: 137422 Week ending April 11: 140155 Week ending April 18: 106266 Week ending April 25: 97232

160

120

80

40

0

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

Source: Department of Labor/Haver Analytics

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Retail Sales YoY % Chg 10

8 6 4 2 0 -2

YoY % Change March: -5.8% February: 4.5% January: 4.9%

-4 -6 -8 -10

-12 -14 2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Source: Census Bureau/Haver Analytics 11

Manufacturing indices will soften further‌

(Current Index) Manufacturing Composite April -53 March 2 February -2

ISM Manufacturing 42 49 50

Source: Federal Reserve Bank of Richmond/Institute of Supply Management/Haver Analytics 12

‌.as will service sector indices

(Current Index)

April March February

Richmond Revenues -87 1 26

ISM Nonmanufacturing 52.5 57.3

Source: Federal Reserve Bank of Richmond/Institute of Supply Management/Haver Analytics 13

How bad could it get?

Let’s try to scale things. For employment: • There are 150m workers in the U.S. economy. About 1/5 of them are in sectors that have been pretty directly hit: – 12m retail workers outside grocery stores – 12m food services (e.g., restaurants) – 2m accommodation services (e.g., hotels) – 2.5m arts, entertainment, recreation – Also seeing losses in manufacturing and other sectors What about in NC? • The NC sector breakdown is very similar to that of the US. • About 1 million workers in directly hit sectors

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Share of employment in the hardest hit sectors Percent of Total Employment 12

Employment by Industry

United States North Carolina

10 8 6

4 2 0

Non-Food Retail

Arts, Entertainment, Recreation

Accommodation

Food Services, Drinking Places

Food Retail

Source: Bureau of Labor Statistics/Haver Analytics 15

Employment share by Industry March 2020

U.S. North Carolina

0.5 0.1

Natural Resources & Mining

4.9 5.1

Construction Manufacturing

8.5

10.3 18.2 18.3

Trade, Transportation & Utilities 1.9 1.7

Information

5.8 5.7

Financial Activities

14.1 14.0

Professional & Business Services

16.3

Education & Health Services Leisure & Hospitality 3.9 3.6

Other Services

10.6 11.1

13.6

15.3

Government

0

2

4

6 8 10 12 14 Employment Share (Percent)

16

16.5

18

20

Source: Bureau of Labor Statistics/Haver Analytics 16

Change in business operations since March 9th Percent Change from January 2020

North Carolina

10 0 -10

Hours Worked by Hourly Employees

-20

Number Hourly Employees Working

-30

Number Businesses Open

-40 -50

-60 -70 March 09 March 16 March 23 March 30 April 06

April 13

April 20

April 27

Source: Homebase/Haver Analytics 17

Policy Response

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Three policy “lanes” open now Health policy (most important by far) • Goal: bend the curve and get beyond the inflection point • Economic policies are then left to address economic effects of health response (e.g. social distancing) Fiscal policy: can be targeted • Prevent needless bankruptcies/breaks in economic relationships • Support directly to households Monetary policy: supports economy more broadly • Reduced interest rates to effectively zero • Help keep financial markets functioning by providing liquidity (i.e. lending)

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Some Specifics on Federal Reserve Programs PPP Lending Facility • Intended to facilitate lending to small businesses under the PPP • PPP lenders post collateral at face value Main Street Lending Program • Intended to support lending to small and medium sized businesses • SPV will purchase 85 to 95% of eligible loans Municipal Liquidity Facility • SPV will but eligible notes directly from states and eligible cities and counties.

• 36 month maturity limit • Only a few cities and counties in NC are eligible, but state has $7.29 billion limit.

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Parting thoughts • Luckily, we came into this with a solid economy and a healthy banking system • What’s next depends largely on health policy.

– When will it be safe to come back?

– How do we come back? Phased approach, protocols? Consumer confidence?

– When will we have a vaccine.

Important Reminder: No downturn ever hits everyone equally.

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Questions?

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