Chad Wilkerson Oklahoma City Branch Executive and Economist

Federal Reserve Bank of Kansas City www.kansascityfed.org/oklahomacity

OSU Economic Outlook Conference December 5, 2012

• U.S. economic growth has been moderate and is expected to remain sluggish in Q4 • How the fiscal cliff is resolved has bearing on both near-term growth and long-term debt

• The range of views among FOMC members about monetary policy remains relatively wide

• The regional economy reflects the nation, though Oklahoma continues to outperform

Highlights

2.0 2.4

20.5

7.5

4.4

-3.0

1.3 1.5

8.5

3.6 5.3

-0.7

2.7 1.4

14.2

-2.2

1.1

3.5

-5

0

5

10

15

20

25

Total GDP Consumerspending

Residentialinvestment

Businessinvestment

Exports Governmentspending

2012 Q1

2012 Q2

2012 Q3

Growth in Components of Real GDP Actual thru Q3 2012, Projected for Q4 and 2013

Percent change from the previous period, SAAR

Source: U.S. Bureau of Economic Analysis, Macroeconomic Advisors

GDP growth rebounded somewhat in Q3, but business spending weakened

-40

-30

-20

-10

0

10

20

30

30

35

40

45

50

55

60

65

Nov-94 Nov-96 Nov-98 Nov-00 Nov-02 Nov-04 Nov-06 Nov-08 Nov-10 Nov-12

Composite (left axis)

Exports (right axis)

Index

Sources: ISM, FRBKC Manufacturing Survey

ISM Manufacturing Survey Indexes

The national ISM index fell in November, as exports declined and uncertainty remained

-2

-1

0

1

2

3

4

5

6

-2

-1

0

1

2

3

4

5

6

Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12

European Financial Stress Index

U.S. Financial Stress Index

Financial stress in Europe remains higher than a few years ago, but has improved

Eurozone and U.S. Financial Stress

Source: FRBKC

Index

-5.0

-4.5

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

Sequestration - $110 bn

Tax extenders - $20 bn

Payroll tax - $120 bn

Bush tax cuts - $180 bn

AMT - $120 bn

Obamacare - $20 bn

Business expensing - $10 bn

Medicare doc fix - $20 bn Other - $40 bn

Initial debt plan - $40 bn

Pending tax increases

Pending expiring programs

Pending spending cuts

Components of the “Fiscal Cliff” In dollars and as a share of GDP

Percent of GDP

Source: Merrill Lynch

The “fiscal cliff” and political uncertainty are weighing on the economy

Extended UI - $40 bn

Economic forecasters generally assume the fiscal cliff will be avoided, without recession

Sources: Blue Chip Economic Indicators, Congressional Budget Office, Haver Analytics

Real GDP Projections

-5

-4

-3

-2

-1

0

1

2

3

4

2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4

Real GDP, under CBO fiscal cliff scenario

Real GDP, Blue Chip forecasts

Percent change, quarter-over-quarter (SAAR)

However, avoiding fiscal changes means further increases in the national debt

Source: Congressional Budget Office

Federal Debt as a Share of GDP

0

20

40

60

80

100

120

0

20

40

60

80

100

120

1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Actual Projected

Alternative Fiscal

Scenario

Percent

CBO’s Baseline

Projection

Fiscal cliff components have varying effects on GDP and the federal deficit

Source: Moody’s Analytics

Implied Multipliers on GDP and the Federal Deficit

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Emergency UI

Sequestration Bush taxcuts (below

$250K)

Payroll taxholiday

AMT patch Bush tax cuts (above

$250K)

Affordable CareAct

Medicaredoc fix

Bonusdepreciation

Tax extenders

Ratio of GDP to debt decline

Unemployment Rate Seasonally Adjusted

Percent

Source: U.S. Bureau of Labor Statistics, FOMC

0

2

4

6

8

10

12

0

2

4

6

8

10

12

1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

Sept. FOMC Forecast Ranges in Yellow

At its Sept. meeting, the FOMC expected unemployment to gradually improve

Long Term

PCE Inflation Index

Percent change, year-over-year

Source: U.S. Bureau of Economic Analysis, FOMC

0

1

2

3

4

5

6

7

8

0

1

2

3

4

5

6

7

8

1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

Sept. FOMC Forecast Ranges in Yellow

And for inflation to remain at or near its long-term target through 2015

Long Term

0

2

4

6

8

10

12

0

2

4

6

8

10

12

1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

(1)

(3)

(2)

(12)

Federal Funds Rate Year-end target

Percent

Source: U.S. Bureau of Economic Analysis, FOMC

Sept. FOMC Forecast Ranges in Yellow

On monetary policy, over a third of FOMC participants disagree about timing

Long Term

Note – Number of participants who project the initial increase will occur in the specified year in parenthesis

Source: U.S. Bureau of Labor Statistics

Employment Growth, Year-over-Year (percent) October 2012

There remains considerable variation in the rate of job growth across the nation

2.7 U.S. = 1.4

1.8

0.4 1.1

0.6 1.0

(0.7)

Source: U.S. Bureau of Labor Statistics

Unemployment Rates (percent) October 2012

Unemployment is lowest in energy and agriculture states, highest on the coasts

5.3

U.S. = 7.9

7.9

5.2 3.8

5.7 6.9

6.3

Number of rigs

Source: Baker Hughes

U.S. Rig Count Seasonally Adjusted

The rig count is down from summer highs, as natural gas prices remain too low

0

500

1000

1500

2000

2500

0

500

1000

1500

2000

2500

Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12

Oil

Natural Gas

Diffusion Index

Source: ISM, Federal Reserve Banks

Manufacturing Month-over-Month PMI Indexes Seasonally Adjusted

Regional manufacturing activity has also slowed in recent months

30

35

40

45

50

55

60

65

30

35

40

45

50

55

60

65

Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12

KC FedISMNY, Philly, Rich, Dallas Avg.

Diffusion Index

Source: ISM, Federal Reserve Banks

Manufacturing 6-Month Ahead Indexes Seasonally Adjusted

Expectations also eased, especially for hiring

-40

-30

-20

-10

0

10

20

30

40

50

-40

-30

-20

-10

0

10

20

30

40

50

Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12

ProductionEmploymentCapital Spending

3.4 2.3 2.8 2.1 2.2

1.3 1.5 1.7

9.1 9.8 9.3

6.6 4.6

4.9 4.6 3.8

0

2

4

6

8

10

12

14

U.S. NE KS MO CO WY OK NM

Rest of World

Europe

Exports as Share of GDP, 2010 U.S. and Tenth District states

Percent

Sources: U.S. Bureau of Economic Analysis, USDA, WISERTRADE

Exposure to Europe is much less in Oklahoma than in the nation or even region

Federal Expenditures Per Capita, Fiscal Year 2010 U.S. and Tenth District states

Percent

Sources: U.S. Census Bureau, Consolidated Federal Funds Report

Exposure to the “fiscal cliff” is probably about average in Oklahoma as a whole

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

U.S. NM MO WY OK KS CO NE

Salaries & WagesProcurement ContractsGrantsOther Direct PaymentsRetirement & Disability

The ongoing drought has had mixed effects across the region

0

5

10

15

20

25

30

35

40

0

5

10

15

20

25

30

35

40

District NE MO KS Mtn States (CO, NM,

WY)

OK

Q1 2012Q2 2012Q3 2012

Source: FRBKC Agricultural Credit Survey

Tenth District Non-Irrigated Cropland Values Percent Change, Year-over-year

Growth in regional farmland values eased, but prices are still up considerably over last year

Percent

0

1,600

3,200

4,800

6,400

8,000

9,600

11,200

12,800

14,400

16,000

0

16,000

32,000

48,000

64,000

80,000

96,000

112,000

128,000

144,000

160,000

Oct-96 Oct-98 Oct-00 Oct-02 Oct-04 Oct-06 Oct-08 Oct-10 Oct-12

US (left)

Tenth District (right)

Number, 3-month moving avg.

Single-Family Housing Permits Seasonally adjusted

On the positive side, housing activity has grown solidly in the District the past year

Source: U.S. Census Bureau

Source: U.S. Bureau of Labor Statistics

FHFA Purchase-Only Home Price Index Peak to Current (2007Q1 to 2012Q3)

District home prices are still in much better shape, with some above the 2007 peaks

Recent U.S. economic growth has

been moderate, with low inflation, as fiscal concerns remain a focus

Regional activity largely reflects the

nation, though Oklahoma remains stronger, and housing is better

Summary