2018 Kansas City Economic ForecastGreater Kansas City Chamber of Commerce

October 26, 2018

Status of the U.S. Economy

The economy is a beacon of stability in a sea of uncertainty

Natural environment Hurricanes and wildfires and…

Fiscal policy environment Health care, debt ceiling, another shut down?, tax

reform/cut

Trade policy environment TPP and whither NAFTA?

Foreign policy environment Nuclear brinkmanship w/North Korea, the Wall vs

skills

Despite the first employment loss in nearly 7 years, the labor market is healthy and absorbing workers faster than new workers are entering

261219

148

-100-50

050

100150200250300350400

J M M J S N J M M J S N J M M J S N J M M J S

2014 2015 2016 2017

U.S. Non-Farm Payroll Employment Changemonthly change in thousands

Monthly change 12-month moving average

Both the official unemployment rate and the U-6 rate continue to decline, and more in the last year than the previous one.

Official unemployment is at the lowest level in 16 years.

5.95.0 4.9

4.2

11.8

10.0 9.78.3

0

2

4

6

8

10

12

14

J M M J S N J M M J S N J M M J S N J M M J S

2014 2015 2016 2017

Perc

ent

U.S. Unemployment Rates, monthly

Official unemployment rate

Plus marginally attached workers and those working part-time for economic reasons

Openings exceed hires, and the gap is increasing. Quits are rising in line with hires as workers more easily find new jobs

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

J M M J S N J M M J S N J M M J S N J M M J

2014 2015 2016 2017

Thou

sand

s

U.S. Job ChurnOpenings, Hires, Layoffs and Quits

Openings Hires Layoffs Quits

Wages are improving, but wage increases are not accelerating.

-1.5%

2.7%

2.1%2.3%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1 2 3 4 1 2 3 4 1 2 3 4 1 2

2014 2015 2016 2017

Real full-time median weekly wage Percent change since one year ago

Neither are prices.

Given the tightening labor market, why isn’t the inflation rate increasing?

1.7

1.3

1.8

1.3

0.0

0.5

1.0

1.5

2.0

2.5

J M M J S N J M M J S N J M M J S N J M M J

2014 2015 2016 2017

U.S. Inflation Rate: Core PCE vs. FOMC TargetPersonal Consumption Expenditures Price Index, Less

Food and Energy

Core PCE FOMC Target

To head off underlying inflationary pressures, the FOMC is raising interest rates and normalizing its balance sheet

0.40

1.15

0.0

1.0

2.0

3.0

4.0

5.0

6.0

J M M J S N J M M J S N J M M J S N J M M J S N J M M J S

2013 2014 2015 2016 2017

Pece

nt

Federal Funds Rate, monthly

Rising wealth creates economic resilience:

S&P up 15% Housing up 5%Net worth up 9%

-5

0

5

10

15

20

25

1 2 3 4 1 2 3 4 1 2 3 4 1 2

2014 2015 2016 2017

Perc

ent

Stock Market, Home Prices and Net Worth Percent change from one year ago, quarterly

S&P 500

S&P/Case-Shiller 20-City Composite Home Price Index

Households and Nonprofit Organizations; Net Worth,

Rising wealth leads to rising optimism which is now leading to rising investment in the real, as well as financial, economy.

15.5

3.3

-5

0

5

10

15

20

25

1 2 3 4 1 2 3 4 1 2 3 4 1 2

2014 2015 2016 2017

Perc

ent

Stock Market and Private InvestmentPercent change from one year ago, quarterly

S&P 500 Real Gross Private Domestic Investment

GDP rebounded sharply in the second quarter, to 3.1 percent.

Since a year ago, it is up 2.2 percent, the same as its post-recession average.

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1 2 3 4 1 2 3 4 1 2 3 4 1 2

2014 2015 2016 2017

U.S. Real GDP GrowthSeasonally adjusted at annual rates, quarterly

A “Goldilocks” economy

Growing at its current potentialBased on rate of growth of the labor force

(0.8 %) plus rate of growth of productivity (1.3%)

Unemployment rate at lowest level since 2001Rising wagesNo sign of inflation

U.S. Economic Forecast

The median FOMC forecast for GDP calls for 2017 to be better than 2016. But growth is expected to slow in 2018 from 2.4 to 2.1 percent

2.7 2.6

2.3

2.0 2.22.4

2.1 2.01.8 1.8

1.8

2.2

1.7

1.4 1.4

1.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2012 2013 2014 2015 2016 2017 2018 2019 2020 Longer run

Perc

ent

U.S. Real GDP Projections, FOMC vs. RSQE

Actual FOMC Median FOMC Range

The University of Michigan forecast used to drive the regional forecasting model is slightly more optimistic than the FOMC median.

1.8

2.4 2.32.1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2012 2013 2014 2015 2016 2017 2018 2019 2020 Longer run

Perc

ent

U.S. Real GDP Projections, FOMC vs. RSQE

Actual RSQE FOMC Range

Median FOMC projection is to raise Fed Funds once more in 2017, 3 times in 2018 and 2 more in 2019, each by . be 0.25%, ending between 2.5% and 2.75%

0

0.5

1

1.5

2

2.5

3

3.5

4

2016 2017 2018 2019 2020 2021 2022

Perc

ent

FOMC Participants' Assessment of Appropriate Monetary Policy

Expected Federal Funds Rate at end of year

2017 2018 2019 2020 Longer run

Longer run

Status of the KC Economy

Lots of construction, especially industrial space. Also much redevelopment in and around Downtown. Biggest mixed use is Brookridge. Biggest retail is Metro North mall

More on the horizon…

Buck O’Neil bridgeKCI modernizationStreet car expansion

The region’s job growth has ramped up in recent years, to about 22,000 per year. But the geographic composition of job growth has shifted.

0

5,000

10,000

15,000

20,000

25,000

30,000

2012 2013 2014 2015 2016 2017

Employment Change in the Kansas City MetroKansas side vs. Missouri side

Year-over-year change in 12-month moving average

Mo Side KS Side MSA

Which is cause and which is effect is unclear, but there is a high degree of correlation between the fortunes of the states and the two halves of our region.

(10,000)

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2012 2013 2014 2015 2016 2017

Employment Change in Kansas and MissouriYear-over-year change in 12-month moving average

KS MO

KC’s employment growth appears to be matching that of the U.S., except for two sectors –Information and Prof/Sci/Tech services

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Construction Manufacturing WholesaleTrade

Health Careand SocialAssistance

Information Finance andInsurance

Transportationand

Warehousing

Professional,Scientific, and

TechnicalServices

KC Employment Change by Industry, 2010-2016Major traded sectors

Prof/Sci/Tech includes Life Sciences, Engineering and Architecture, and IT (Cerner, cybersecurity). The region is growth twice as fast as the U.S in these innovative sectors.

17%

7%3%

15%

-38%

6%

17%

29%

15%

7% 7%

14%

3% 6%

15% 16%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Construction Manufacturing WholesaleTrade

Health Careand SocialAssistance

Information Finance andInsurance

Transportationand

Warehousing

Professional,Scientific, and

TechnicalServices

U.S. and KC Employment Percent Change, 2010-2016Major traded sectors

KC Rate US Rate

Doing as well as the U.S. used to be good enough. No more. Compared to our peer metros, the region is slipping on several key indicators.

Metropolitan Kansas City currently ranks 17th in GDP, 12th in quality jobs, and 14th in real median household income. But its rank on how fast these are growing is 19th, 24th, and 20th, respectively.

KC’s growth is sufficient to lower its unemployment rate, though it appears to be leveling out. It is still slightly lower than the U.S rate.

0

2

4

6

8

10

12

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Une

mpl

oym

ent R

ate

U.S. and KC Unemployment Rate ComparisonNot Seasonally Adjusted

KC US

KC wages have tended to grow slightly slower than the U.S. , and their average just slightly above 2% is modest. But their 5.3% growth rate over the past year suggests wage growth is beginning to improve.

-4%

-2%

0%

2%

4%

6%

8%

2010 2011 2012 2013 2014 2015 2016 2017

U.S and KC Average Weekly WagePercent change from one year ago

US KC KC Trend

KC Economic Forecast

KC and U.S. GDP grew an identical 2.2 percent over the last year. KC is shown rebounding less strongly from temporary slowdowns. This is probably a modelling anomaly

1.7%

2.1%

2.3%2.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

2016 2017 2018 2019

U.S. and KC GDP GrowthPercent change from one year ago, quarterly

KC US

The KC economy will catch up to U.S. growth and stabilize at 2.3 percent per year. U.S. growth rates are expected to gradually decline. at 2.3

1.7%

2.1%

2.3%2.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

2016 2017 2018 2019

U.S. and KC GDP GrowthPercent change from one year ago, quarterly

KC US

The story is similar for employment, though both KC and U.S. employment growth rates are gradually declining.

1.5%1.3%

1.3%1.4%

0.0%0.2%0.4%0.6%0.8%1.0%1.2%1.4%1.6%1.8%2.0%

2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

2016 2017 2018 2019

U.S. and KC Total Employment Growth RatePercent change from one year ago, quarterly

KC US

As a result, KC is will add an average of 20,000 jobs over the last 2 years, and will add an average of 19,000 jobs over the next two.

20,782 18,729

19,694 18,392

-

5,000

10,000

15,000

20,000

25,000

2015-16 2016-17 2017-18 2018-19

KC Total Employment GrowthFourth quarter to fourth quarter

Health Care, Government, Retail, Prof/ Sci/Tech and Accommodation and Food Service are the region’s largest industries in terms of jobs.

2,611 3,083 5,469

11,893 21,355

27,282 31,698 31,912

53,821 59,511 59,836

69,441 71,469 75,862

91,626 94,801

101,233 125,016

135,760 162,974 163,145

- 50,000 100,000 150,000 200,000

Forestry, Fishing, and Related…UtilitiesMining

FarmInformation

Educational services; privateArts, Entertainment, and Recreation

Management of CompaniesTransportation and Warehousing

Real Estate and Rental and LeasingWholesale Trade

ManufacturingConstruction

Other Services, except Public AdminFinance and Insurance

Administrative and Waste…Accommodation and Food Services

Professional, Scientific, and TechnicalRetail Trade

GovernmentHealth Care and Social Assistance

KC Employment by IndustrySecond quarter, 2017

Prof/Sci/Tech, Construction, and Health Care are expected to grow the fastest, followed by Finance, Administrative support, and Local government (which includes schools)

(387)

(263)

(240)

(229)

(180)

(99)

77

243

262

339

479

583

606

678

1117

2,167

2,729

3,776

3,833

4,643

(2,000) (1,000) - 1,000 2,000 3,000 4,000 5,000

Accommodation and Food ServicesUtilities

Other Services, except Public AdminManufacturing

InformationTransportation and Warehousing

Forestry, Fishing, and Related…Arts, Entertainment, and Recreation

MiningEducational services; privateManagement of Companies

Wholesale TradeReal Estate and Rental and Leasing

Retail TradeGovernment

Administrative and Waste…Finance and Insurance

Health Care and Social AssistanceConstruction

Professional, Scientific, and Technical

KC Employment Growth by IndustryFourth quarter to fourth quarter change

2016-17 2017-18 2018-19

Risks to the forecast

Upside risks include:Construction of New KCI terminalBuck O’Neil bridge replacementStreet car expansion

Amazon HQ2Downside risks include:Sprint merger with T-MobileDecline of in-store retailSwirling uncertainty

Conclusion

Despite being the third longest expansion in U.S. history, nothing foreseeable appears likely to knock it off course

Low unemployment, rising wages, low inflation suggest we are in a rare “Goldilocks” moment

KC is matching the U.S. stride for stride

But it is falling behind peer metros on several key metrics

To increase economic resilience in the face of uncertainty, civic leaders must continue to focus on improving the drivers of regional prosperity—trade, talented people, and innovation and entrepreneurship.