1. Economic Update
The Entrepreneurship Institute
Annual Presidents’ Forum of Philadelphia
June 6, 2012
Luke A. Tilley
FEDERAL RESERVE BANK
OF PHILADELPHIA

2. Today’s Agenda
• National Economy
• Regional Economy
• International
• Monetary Policy

3. FOMC Forecast - Real GDP Growth
5.0
2.5
0.0
Percent (%)
Real GDP
y/y
-2.5
Real GDP
-5.0 q/q
-7.5
-10.0
Long
2007 2008 2009 2010 2011 2012 2013 2014 2015 Run
Source: Bureau of Economic Analysis
Federal Reserve Board, FOMC Minutes , April 2012

4. Real Personal Consumption Expenditure Growth
4
3
Q/Q Annualized Change (%)
2
1
0
-1
-2
'09 '10 '11 '12 '13
Source: Federal Reserve Bank of Philadelphia, Survey of Professional Forecasters
Last Point Plotted: Historical 2012:Q1, Forecast 2013: Q2

5. Personal Consumption & Retail Sales
15
10
Retail Sales
Year-over-Year Change (%)
5
0
Personal Consumption
“The Consumer”
-5
-10
-15
'00 '02 '04 '06 '08 '10 '12
Source: Census Bureau, Bureau of Economic Analysis
Last Point Plotted: April 2012

6. Fixed Investment Growth Forecast
15
Q/Q Annualized Change (%)
5
-5
-15
-25
'09 '10 '11 '12 '13
Source: Federal Reserve Bank of Philadelphia, Survey of Professional Forecasters
Last Point Plotted: Historical 2012:Q1, Forecast 2013: Q2

7. Manufacturers’ New Orders & Shipments
Nondefense Capital Goods
75
70
65
New Orders
Billions ($)
60
55
Shipments
50
45
40
'00 '02 '04 '06 '08 '10 '12
Source: Census Bureau & Haver Analytics (NAICS)
Last Point Plotted: March 2012

8. Consumer and C&I Loans
2.0
1.5
($trillions)
C & I Loans
1.0
Consumer
Loans
0.5
0.0
'88 '91 '94 '97 '00 '03 '06 '09 '12
Source: Haver Analytics with Break adjusted % Changes reported by FRB
Last Point Plotted: April 2012

9. FOMC Forecast – Labor Market
400 10
9
200
Average Monthly Change (thous.)
8
0
Nonfarm 7
Percent (%)
Payrolls
-200 6
5
-400
Unemployment
4
Rate (%)
-600
3
-800 2
Long
'07 '08 '09 '10 '11 '12 '13 '14 Run
Source: Bureau of Labor Statistics
Federal Reserve Board, FOMC Minutes , April 2012

10. Monthly Private Employment Growth – U.S.
300
277
254
250
200
147
150
100 87 82
50
0
-50
2010 2011
Source: Bureau of Labor Statistics
Last Point Plotted: May 2012

11. FOMC Forecast – Inflation
6
PCE
Price Index
4
Percent (%)
2
0
Core PCE
-2
Long
'07 '08 '09 '10 '11 '12 '13 '14
Run
Source: Bureau of Economic Analysis
Federal Reserve Board, FOMC Minutes , April 2012

12. SPF: Inflation Expectations
8
6
10-yr CPI Inflation
Expectation
4
Percent (%)
2
Y/Y CPI
Inflation
0
-2
'88 '91 '94 '97 '00 '03 '06 '09 '12
Source: BLS, Philadelphia Fed Survey of Professional Forecasters
Last Point Plotted: BLS - 2012:Q1; SPF’s 10 yr. CPI Forecast - 2012-2021

13. Summary of the FOMC
Near-Term Forecasts
• GDP – Expected growth rate of 2.1% - 3.0% in 2012,
2.4% - 3.8% in 2013, and 2.9% - 4.3% in 2014
• Unemployment Rate - Expected rate of 7.8% - 8.2% in
2012, 7.0% - 8.1% in 2013, and 6.3% - 7.7% in 2014
• Inflation - Expected to remain contained 1.8% - 2.3% in
2012, 1.5% - 2.1% in 2013, and 1.5% - 2.2% in 2014

14. Today’s Agenda
• National Economy
• Regional Economy
• Monetary Policy

15. Philadelphia Fed Current Economic Activity Indexes
Three month Annualized Growth – April 2012
> 4%
3% to 4%
2% to 3%
0.5% to 2%
-0.5% to 0.5%
-2% to -0.5%
-3% to -2%
<-3%

16. Philadelphia Fed Leading Economic Activity Indexes
Predictions of change in Philadelphia Fed Current Economic Activity Indexes
over next 6 months – April 2012
> 4%
3% to 4%
2% to 3%
0.5% to 2%
-0.5% to 0.5%
-2% to -0.5%
-3% to -2%
<-3%

17. Third District Manufacturing – General Activity Index
80
6 Month Expected
60 May „12= 15.0
40
Diffusion Index
20
0
-20
Current Activity
May „12 = -5.8
-40
-60
'00 '02 '04 '06 '08 '10 '12
Source: Business Outlook Survey – Philadelphia Fed
Last Point Plotted: May 2012

18. National & Regional Unemployment
10
U.S.
8 8.2%
PA
7.5%
6
4
2
0
'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12
Source: Bureau of Labor Statistics
Last Point Plotted: U.S. – April 2012 ; PA – March 2012

19. Year-over-Year Job Growth by Sector
PA, NJ, DE – April 2012
45.8
40
Total Jobs = 86.9
Y/Y Job Growth (thousands)
Total Private Jobs = 104.7
19.1
20
12.1
8.3 6.7 8.1
3.0 4.2
0
-10.0
-17.3
-20
Source: BLS

20. Pennsylvania Housing Starts
60
50
Housing Starts (thousands)
40
30
20
10
0
'89 '93 '96 '00 '04 '08 '12
Source: Bank of Tokyo Mitsubishi UFJ – Housing Starts
Last Point Plotted: 2012: Q1

21. Regional Home Prices
20
Y/Y Change in FHFA Home Price Index (%)
15
10
Philadelphia
Metro Division
5
Pennsylvania
0
-5
-10
'92 '96 '00 '04 '08 '12
Source: Federal Housing Finance Agency
Last Point Plotted: PA - 2012: Q1; Phila Metro Division – 2012:Q2

22. Mortgage Delinquencies – 90+ and in Foreclosure
April 2008
Source: LPS Applied Analytics

23. Mortgage Delinquencies – 90+ and in Foreclosure
April 2012
Source: LPS Applied Analytics

24. Today’s Agenda
• National Economy
• Regional Economy
• International
• Monetary Policy

25. Euro Area GDP Share and Growth
Share of Euro Area GDP
2011Q1
Real GDP Growth
Greece, 2.3 2012Q1
All Others, 14.5 (%) q/q
Euro Area 17 0.07
Germany, 28.2
Netherlands, 6. Germany 2.06
5 France 0.18
Spain, 11.1
Italy -3.21
Spain -1.28
France, 20.9 Netherlands -0.63
Italy, 16.6
Source: EuroStat

26. China Manufacturing Index
65
60
55
Index
50
45
40
35
'06 '07 '08 '09 '10 '11 '12
Source: China Federation of Logistics & Purchasing
Last Point Plotted: May 2012

27. Exchange Rate Regimes Chinese Yuan (¥/$)
8.50
8.00
7.50
Floating-Peg Soft-Pegged Floating-Peg
Rate Rate Rate
7.00 Recent
Depreciation
6.50
6.00
'05 '06 '07 '08 '09 '10 '11 '12
Source: Federal Reserve Board
Last Point Plotted: June 1, 2012

28. Today’s Agenda
• National Economy
• Regional Economy
• International
• Monetary Policy

29. Fed Transparency: A Long Process
1994 – First announcement of policy decision (policy changes only)
2000 – Regular post meeting statements, regardless of policy
2002 – Post meeting statements include voting information
2004 – FOMC minutes released after three weeks (from six)
2007 – Economic projections of FOMC participants released
2009 – Economic projections include long-run tendencies
2011 – Chairman starts giving quarterly press conferences
2012 – Statement of long run goals and strategy
Start releasing assessments of appropriate policy

30. FOMC Statement of Longer-Run Goals and
Policy Strategy
• The FOMC is committed to statutory mandate to promote
• Maximum employment, stable prices, moderate long-term interest rates
• Longer run inflation is mainly influenced by monetary
policy, so a nominal target is appropriate
• Sets an inflation target of 2 percent in annual change of PCE price index
• Maximum employment determined by non-monetary
factors, so a nominal target is not appropriate
• Determined by labor force dynamics, fiscal policies, and more
• Inflation and employment goals are generally
complementary
• When they are not, the FOMC takes a balanced approach
Source: FOMC Statement of January 25, 2012

31. Federal Funds Effective Rates & Limits
6
5
4
Fed Funds
Effective Rate
3
2
Fed Funds Rate
1
Upper & Lower Limits
0
'06 '07 '08 '09 '10 '11 '12
Source: U.S. Treasury Department, Haver Analytics
Last Point Plotted: Week Ending April 25th, 2012

32. FOMC Projections of Appropriate Policy
Appropriate Timing of Policy Firming:
Year of first increase in federal funds rate
8
7 January 2012
7
April 2012
Number of Participants
6
5
5
4 4
4
3 3 3 3
3
2
2
1
0
2012 2013 2014 2015 2016
Source: FOMC Statements of Jan 2012 and April 2012
FIG. 2 Overview of FOMC Participants’ Assessments of Appropriate Monetary Policy

33. FOMC Projections of Appropriate Policy
Appropriate Pace of Policy Firming:
Percent Year-end federal funds rate
6
5
4
3
2
1
0
2012 2013 2014 Longer
Run
Source: FOMC Statement of April 25, 2012
FIG. 2 Overview of FOMC Participants’ Assessments of Appropriate Monetary Policy

34. Questions
Luke A. Tilley, Ph.D.
Regional Economic Advisor
luke.tilley@phil.frb.org
Follow us on Twitter: @philadelphiafed
@philfedresearch
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35. FEDERAL RESERVE BANK
OF PHILADELPHIA

36. The Federal Reserve’s Tools
for Monetary Tightening
• Higher interest on Bank Reserves
• Reverse Repurchase Agreements
• Term Deposits
• Redemption and sales of long term assets:
Treasuries, Agency Debt, MBS

37. Year-over-Year Job Growth by Sector
Pennsylvania – April 2012
20
16.9
14.2
Y/Y Job Growth (thousands)
10 7.8
7.1 6.1
3.5
0.9 0.4
0
-1.5
-10
Total Jobs = 45.7
Total Private Jobs = 63.0
-16.8
-20
Source: BLS

38. SPF: Long Term Inflation Expectations
8
6
10-yr CPI Inflation
Expectation
Percent (%)
4
2
y/y CPI
Inflation
0
-2
'88 '91 '94 '97 '00 '03 '06 '09 '12
Source: BLS, Philadelphia Fed Survey of Professional Forecasters
Last Point Plotted: 2012: Q2

39. Bond Market Implied Inflation Expectations
3.0
2.0
Percent (%)
10 Year Implied
Inflation Rate
1.0
0.0
1/08 7/08 1/09 7/09 1/10 7/10 1/11 7/11 1/12
Source: Haver Analytics Using Treasury Constant Maturity Yields
Last Point Plotted: April 2012

40. Survey of Professional Forecasters: Treasury yields move up
9
8
BAA Corp
7
6
Percent (%)
5
4 AAA Corp
3 10 year T-note
2
3 month T-bill
1
0
'00 '02 '04 '06 '08 '10 '12
Source: Federal Reserve Board, Moody’s, FRB Philadelphia
Last Point Plotted: 2012:Q1 (historical), 2013:Q2 (forecast)

41. U.S. Home Sales and Starts
3.00 8.0
2.50 Existing Home
Sales (right)
6.0
2.00
Millions
Millions
1.50 4.0
1.00
Housing Starts 2.0
0.50 (left)
0.00 0.0
'80 '84 '88 '92 '96 '00 '04 '08 '12
Source: National Association of REALTORS, Census Bureau
Last Point Plotted: Home Sales 2011:Q4, Housing Starts 2012:Q1

42. US Dollar versus Major Currencies
120
110
100
March 1973=100
90
80
70
60
'00 '02 '04 '06 '08 '10 '12
Source: Federal Reserve Board
Last Point Plotted: March 2012

43. Crude Oil Prices
150
125
100
WTI $/barrel
75
50
25
0
'07 '08 '10 '12
Source: Haver Analytics
Last Point Plotted: Week of May 11, 2012

44. Job Openings Labor Turnover Survey
4500
Hires / Separations
4250
Thousands
4000
3750
Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12
Source: BLS/Haver Analytics
Last Point Plotted: March 2012

45. Weekly Initial Unemployment Insurance Claims
800
Number of Claims (thousands)
650
Initial weekly
claims
500
370
350
4 week moving average
200
'00 '02 '04 '06 '08 '10 '12
Source: Department of Labor, BLS
Last Point Plotted: Week of May 19, 2012

46. Total Unemployed & Long Term Unemployed
41%
Apr. „12
16
Number of Unemployed People (millions)
12
17%
Apr. „07
8
Unemployed
0-26 wks
4
Long-term
Unemployed
(over 27 wks)
0
'00 '02 '04 '06 '08 '10 '12
Source: BLS, Department of Labor
Last Point Plotted: April 2012

47. Federal Reserve Balance Sheet: Selected Assets
3,000
GSE Securities
2,500
2,000
Totals ($ Bill)
GSE MBS
1,500
Liquidity
Liquidity Swaps Programs Treasuries
1,000 Long-Term
500
Treasuries
0
Short-Term
'07 '08 '09 '10 '11 '12
Source: Federal Reserve Board
Last Point Plotted: April 2012

48. Federal Reserve Balance Sheet: Selected Liabilities
3,000
2,500
2,000
Totals ($ Bill)
Bank Reserves
1,500
Treasury Balance and
Other Liabilities
1,000
500 Currency in Circulation
0
'07 '08 '09 '10 '11 '12
Source: Federal Reserve Board
Last Point Plotted: April 2012

49. Monetary Policy Normalization
Expected Sequence of Key Elements
1. Cease reinvesting some or all payments of principal on the securities
holdings in the SOMA
2. Modify forward guidance on the path of the federal funds rate and
initiate temporary reserve-draining operations
3. Begin raising target for the federal funds rate, and make
adjustments to interest on excess reserves and excess reserve levels
4. Commence sales of agency securities from the
SOMA, communicated to public, and at a steady and gradual pace
5. Eliminate the SOMA’s holdings of agency securities over a period of
three to five years
Source: Minutes of the FOMC June 21-22, 2011