kevin l. kliesen federal reserve bank of st. louis march 14, 2012 not an official document
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The Economic Outlook for 2012 Presentation to the Financial Executives Network Group St. Louis, Missouri. Kevin L. Kliesen Federal Reserve Bank of St. Louis March 14, 2012 Not an official document. Outline of Today’s Talk. The Big Picture - PowerPoint PPT PresentationTRANSCRIPT
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The Economic Outlook for 2012 Presentation to the Financial Executives Network GroupSt. Louis, Missouri
Kevin L. KliesenFederal Reserve Bank of St. LouisMarch 14, 2012
Not an official document
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• The Big Picture
• Current Conditions: Steadily Improving Economic and Financial Conditions
• An Update on Economic Conditions in St. Louis and Missouri
Outline of Today’s Talk
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The views I will express are my own and do not necessarily reflect the positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.
Disclaimer
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The Big Picture• The economy is improving and the unemployment rate has
receded faster than expected; 2012 should be better than 2011.
• Threats to the economy and financial markets have receded noticeably over the past six months, although a further rise in oil prices could be damaging.
• Headline inflation has eased of late, but rising energy prices and strengthening economy could reverse that trend.
• The St. Louis economy generally appears weaker than the nation’s.
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• A deep recession, followed by an uneven recovery, and then a steady, slow return to “trend growth.”
The consensus forecast calls for weaker growth during the first half of 2012 with slightly faster growth during the second half.
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0
1
2
3
4
5
2009 2010 2011 2012 2013
Real Gross Domestic Product (GDP)Percent change at annualized rate
Last actual observation is 2011:Q4
The Economy's EstimatedTrend Growth Rate
Forecasts
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• Global financial strains pose a “significant downside risk.”
• As a result, uncertainty and volatility remain high.
• Negative wealth effects (mainly housing).
• Consumer and business confidence remains tepid.
• Few worries about accelerating inflation.
• Additional Fed actions may be needed.
One Narrative: The Worrywarts
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• Dynamic economies have strong self-corrective mechanisms.
• The recovery was derailed last year by bad luck and policies that elevated uncertainty among businesses. The former have, by and large, disappeared.
• The effects on the U.S. economy from Europe’s recession are likely less debilitating than many expect.
• Momentum swing . . . Strengthening economy, improving labor markets, and a modest housing upturn (yes, you read that right!).
An Alternative View
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• As the economy gathers steam, uncertainty begins to wane, consumer and business confidence builds.
• Corporate balance sheets are in excellent shape; firms begin to put cash to work. Money and credit growth accelerating.
• Supporting evidence: Global stock markets roar ahead thus far in 2012 and measures of financial market stress ebb.
• Under this scenario, inflation pressures could begin to build unless policymakers “normalize” policy quicker than most people expect.
An Alternative View
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• The nation’s unemployment rate remains stubbornly high—but we’re making progress.
In Feb. 2012, the unemployment rate was 8.3%.
0
2
4
6
8
10
2005 2006 2007 2008 2009 2010 2011 2012
Number of Unemployed Persons for Each Job OpeningRatio of unemployed to private job openings
Last actual observation is January 2012
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• Continued good news in the labor markets in Feb.
Over the past 6 months, private job gains have averaged 215,000 per month.
200
250
300
350
400
450
500
550
600
650
700
Dec.2005 Dec.2006 Dec.2007 Dec.2008 Dec.2009 Dec.2010 Dec.2011
Initial Weekly Claims for State Unemployment BenefitsThousands, Four-week moving average
Data through the week ending March 3, 2012.
Key Threshold
Start of recession
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• Following a fourth-quarter lull, business capital spending is expected to be strong this year and next.
800
900
1,000
1,100
1,200
1,300
1,400
2005 2006 2007 2008 2009 2010 2011 2012 2013
Real Business E&S Spending: Actual and ForecastBillions of $2005
Last actual observation is 2011:Q4
Peak of 2001-2007 Expansion
E&S: Equipment and software
Forecasts
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• Homebuilder sentiment is improving at a healthy clip. Inventories of new homes at record lows.
0
10
20
30
40
50
60
70
80
Jan.2005 Apr.2006 Jul.2007 Oct.2008 Jan.2010 Apr.2011
National Home Builders Housing Market IndexIndex, All Good = 100
Source: NAHB Last actual observation is Feb. 2012.
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• Housing affordability is at a record high.
100
120
140
160
180
200
220
Jan.2005 Jul.2006 Jan.2008 Jul.2009 Jan.2011
Housing Affordability IndexFixed plus ARM Mortgages
Last actual observation is January 2011.
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• The end of the road for house price declines?
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-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
2000 2002 2004 2006 2008 2010 2012 2014 2016
Actual
Jan. 2012 Forecast
Case-Shiller National House Price Index: Actual and ForecastPercent change, annual data
SOURCE: Zillow Home Price Expectations Survey, Jan. 2012
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• Forecasters expect housing construction to continue to increase this year and in 2013.
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400
500
600
700
800
900
2005 2006 2007 2008 2009 2010 2011 2012 2013
Real Housing Investment: Actual and ForecastBillions of $2005
Last actual observation is 2011:Q4
Peak of 2001-2007 Expansion
SOURCE: Blue Chip Forecasts
Forecasts
However, we are still far below the 2006 peak—and likely to remain so for several more years.
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• Financial Stresses on a Rollercoaster . . . But Returning to Normal
The St. Louis Financial Stress Index is a barometer of U.S. and global financial markets.
An index level of zero is “normal.”
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1/4/08 10/4/08 7/4/09 4/4/10 1/4/11 10/4/11
The St. Louis Financial Stress IndexWeekly Data
Last. Obs.: Week ending March 2, 2012
European turmoil,May-June 2010
Week of Aug. 5, 2011:S&P Downgrade
and FOMC
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• Money and C&I loans are growing at a decent clip, consumer credit growth moderately less so.
-25.0-20.0-15.0-10.0
-5.00.05.0
10.015.020.025.0
Jan.2005 Jul.2006 Jan.2008 Jul.2009 Jan.2011
Growth of the M2 Money Supply, C&I Loans andConsumer CreditPercent change from a year earlier
Last observation is January 2012 .
C&I Loans
M2
Consumer
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Threats? 1. Rising energy prices2. Slowing productivity growth
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• Rising energy prices: A looming threat?
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400.0
450.0
Jan.2007 Nov.2007 Sep.2008 Jul.2009 May.2010 Mar.2011 Jan.2012
National Retail Gasoline Prices (Weekly)Cents per gallon
Last observation: Week ending March 12, 2012
$3.83
$4.11
Oil and gasoline prices are up about 18% year-to-date
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Rising Oil Prices: A Looming Threat?• Higher oil prices increase inflation (actual and
expected) and act as a tax on consumers and businesses.
• Research finding: Large increases in oil prices increase the probability of a recession.
• A mitigating factor: mild winter, natural gas prices are low
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• A permanent slowing in labor productivity growth would be exceedingly worrisome
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-2
0
2
4
6
8
2006 2007 2008 2009 2010 2011 2012
Growth of Labor Productivity and Unit Labor CostsPercent change from 4 quarters earlier
Last actual observation is 2011:Q4
Productivity
Unit Labor Costs
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-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
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5.0
6.0
Jan.2005 Apr.2006 Jul.2007 Oct.2008 Jan.2010 Apr.2011
CPI and Core CPI InflationPercent change from a year earlier
Total
Core
Last actual observation is Jan. 2012
• Inflation remains uncomfortably high
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0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2005 2006 2007 2008 2009 2010 2011 2012
Long-Term Inflation Expectations of Consumers and Financial MarketsPercent
Financial Markets (TIPS Spreads)
Consumers (Michigan Survey)
Last observation is Feb. 2012.
• But inflation expectations, while volatile, suggest consumers and financial markets remain sanguine.
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Current Conditions: The St. Louis and Missouri
Economy
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• On net, states and local governments continue to trim payrolls from year-earlier levels.
-8%
-6%
-4%
-2%
0%
2%
4%
6%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
State Govt.Local Govt.Private Payrolls
Growth of Private and Public Payroll EmploymentPercent change from 12 months earlier
Jan.2012
State and local payrolls tend to lag the private sector.
Governments tend to respond to changes in tax receipts.
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• Missouri’s unemployment rate is trending below the nation’s; Illinois’ rate is still well above the nation’s.
4.0
5.0
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8.0
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12.0
Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Jan.12
Illinois
USA
Mo.
State Unemployment RatesPercent
SOURCE: Bureau of Labor Statistics
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• St. Louis’ unemployment rate is about equal to the nation’s; still above K.C.’s rate, though.
Chicago’s unemployment rate than St. Louis’ or Kansas City’s rate.
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7.0
8.0
9.0
10.0
11.0
12.0
Jan-09 Aug-09 Mar-10 Oct-10 May-11 Dec-11
Chicago
K.C.
St. Louis
U.S.
Unemployment Rates in Selected CitiesPercent
St. Louis
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• St. Louis’ unemployment rate is well above other key Missouri cities
The trend is in the right direction.
Faster-growing areas of the state have much lower unemployment rates.
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
St. Louis
K.C.
Springfield
Jeff City
Columbia
Unemployment Rates in Selected Missouri CitiesPercent
St. Louis
Columbia
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• Weak labor force growth in St. Louis explains much of its weaker job growth.
To achieve faster growth, state and local policymakers need to focus on the fundamentals.
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0.5
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0.2
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0.1
0.2
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0.9
Columbia Jeff City K.C. St. Louis Springfield US
Growth of Labor Force in Selected Missouri CitiesPercent change over the past 5 years ending in Dec. 2011
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• How cities (or countries) grow and prosper: An economist’s perspective– One model is to use natural resource
endowments; however, that rarely works for the long-run.
– The most successful entities rely on a well educated work-force, cutting edge technologies, and growth-oriented public policies.
– Inevitably, this means top-notch primary and secondary education systems and research universities.
– The goal is to adapt to a rapidly changing global economy.
– Since many firms start small, access to venture capital and policies that encourage start-ups are also key.
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• Where will the jobs of the future come from?
6.1
5.5
4.7
3.9
3.2
3.2
2.9
2.6
2.5
2.5
0.0 2.0 4.0 6.0 8.0
Home Health care Individual Health care
Man., Scientific, and Tech. …Computer Systems Design
Office of Health Care …Outpatient, Lab & Ambulatory
Construction Childcare Assistance
Universities, colleges, prof. …Architectual and Engineering
Which Sectors are Projected to Have the Fastest Job Growth Over the Next 10 Years (U.S. Total)Percent change, average annual rate
SOURCE: BLS Employment Projections, 2010 to 2020
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Questions?