Interesting presentation from recent GABB meeting by G Alexeenko, Federal Reserve Bank of Atlanta

1. The economic and
policy outlook
Galina Alexeenko
March 2017
The views expressed are mine, and not necessarily those of
the Atlanta Fed or the Federal Reserve System.

2. 1. The Fed and monetary policy developments
2. State of the economy: growth, labor market,
and inflation
3. Risks to the outlook
Outline of the Presentation:
2

3. The Fed’s Dual Mandate:
• The Federal Reserve System (the Fed) is the central
bank of the United States.
• The Fed is pursuing two objectives as given to us by
Congress — maximum employment and price
stability.
3

4. Monetary Policy Developments:
• In March, the Fed raised the target range for the federal funds
rate by ¼ percentage point to ¾ to 1 percent, as the labor
market continued to improve and inflation increased.
• The overall posture of monetary policy remains
accommodative.
• The process of normalizing interest rates will likely be
gradual. Monetary policy decisions are not on a preset path and
will be data-dependent.
4

5. Monetary Policy Outlook:
“During the Great Recession
and the recovery phase, the
Fed and monetary policy took
the lead. Now I think it’s time
for the Fed and monetary
policy to shift to more of a
support role.”
(Atlanta Fed President Dennis
Lockhart, January 2017)
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6. Summary of the Economic Environment:
• The economy is expected to accelerate slightly in 2017.
• The labor market continues to strengthen, approaching
maximum employment.
• Inflation has increased, moving close to the Fed’s 2 percent
longer-run objective.
• Near-term risks to the economic outlook appear roughly
balanced.
6

7. The economy is expected to accelerate this year and in
2018 as business investment rebounds.
Sources: Bureau of Economic Analysis, Blue Chip Consensus Forecast
0
0.5
1
1.5
2
2.5
3
2010 2011 2012 2013 2014 2015 2016 2017 2018
Real GDP Growth and Projections
annual percent change (y/y)
Recovery avg. growth rate = 2.1%
7

8. Consumer activity is likely to remain a growth engine.
Source: Bureau of Economic Analysis through January
10
12
14
16
18
20
10 11 12 13 14 15 16
Light Weight Vehicle Sales
autos + light trucks, SAAR, mil. units
Source: Bureau of Economic Analysis through February
Pre-recession average
0%
1%
2%
3%
4%
12 13 14 15 16
Real Personal Consumption
Expenditures
year-over-year percent change, SA
8

9. Consumer spending fundamentals appear favorable.
20
40
60
80
100
120
140
1981 1988 1995 2002 2009 2016
Leverage ratio: Household liabilities to disposable personal income**
Percentage points
Source: Federal Reserve Board
20
30
40
50
60
70
80
90
100
110
120
Conference Board Consumer Confidence
Index
Index, 1985=100
Source: Conference Board through February
9

10. Business investment spending has been tepid throughout the
recovery, leading to a marked slowdown in productivity growth.
75
100
125
150
175
200
225
0 2 4 6 8 1012141618202224262830323436384042
Real Business Fixed Investment
Over the Business Cycle
Index=100 at business cycle peak
2007q4 2001q1
1990q3 1981q3
1973q4 1969q4
1960q2
Quarters since business cycle peak
Business cycles (length of line is equal to
the number of quarters between “peaks”):
Sources: BEA, FRBA calculations
0%
1%
2%
3%
4%
86 89 92 95 98 01 04 07 10 13 16
Real Output per Hour of All Persons
nonfarm business sector, 20-quarter annualized percent
change
Source: Bureau of Labor Statistics through Q3 2016 10

11. Capital expenditures are starting to pick up.
-40
-30
-20
-10
0
10
20
30
New Orders for Core Capital
Goods: February 2017= 2.73
year-over-year percent change, seasonally
adjusted
Source: U.S. Bureau of Census through February
40
45
50
55
60
65
ISM Manufacturing Indexes
SA, 50+=expansion
ISM Manufacturing: PMI Composite Index
ISM Manufacturing: New Export Orders
through FebruarySource: Institute for Supply Management 11

12. International trade has begun to increase again as foreign
economic growth has stabilized.
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
monthly, seasonally adjusted
Imports (left axis)
Exports (left axis)
Trade balance (right axis)
percentchange,yeartoyear
billiondollars
Source: U.S. Census Bureau through January 2017 12

13. Housing market continues to recover slowly.
1288
872
0
500
1000
1500
2000
2500
2002 2004 2006 2008 2010 2012 2014 2016
monthly, SAAR, thousand units
Total Single-Family
Source: U.S. Census Bureau through February 2017
Housing Starts
13

14. 4.7
63.0
60
62
64
66
68
70
0
2
4
6
8
10
12
14
16
18
07 08 09 10 11 12 13 14 15 16
monthly, percent, seasonally adjusted
through February 2017Source: Bureau of Labor Statistics
Civilian Unemployment Rate (U3)
(left axis)
Broad Unemployment Rate (U6)
(left axis)
Labor Force Participation Rate
(right axis)
9.2
Unemployment data show that the labor market has
tightened.
14

15. 1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
07 08 09 10 11 12 13 14 15 16 17
Wage Measures
year-over-year change, SA
Average Hourly Earnings: Total Private Industries (SA,
$/Hour) % Change - Year to Year
Wage Growth Tracker, 3-month moving average of median
wage growth
Source: Bureau of Labor Statistics; FRBA February 2017
Wage growth over the past two years has accelerated slightly, perhaps
indicating that the Fed is close to its maximum employment objective.
15

16. Consumer price inflation has increased, approaching the
Fed’s longer-run objective.
Source: Bureau of Economic Analysis through January
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2010 2011 2012 2013 2014 2015 2016 2017
PCE Price Index
year-over-year percent change, monthly
PCE Core PCE
FOMC’s inflation target
16

17. One risk to our outlook is, given the unemployment rate is
already down to 4.7 percent, we may soon enter a “high-
pressure” economy.
0
2
4
6
8
10
12
60 64 68 72 76 80 84 88 92 96 00 04 08 12 16
"Undershooting" the Natural Unemployment Rate
percent
Actual unemployment (U3) Natural rate of unemployment (CBO)
“High pressure”
periods, where the
unemployment
rate falls below its
natural rate.
Sources: Bureau of Labor Statistics; Congressional Budget Office (CBO); BEA; Federal Reserve Board
1987:Q3
1997:Q1
2005:Q4
1978:Q2
1971:Q4
1964:Q3
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18. Potential downside risks are mainly related to policy
changes and global developments.
What are the 3 biggest threats to continued U.S. economic growth in 2017?
(From the Jan. ‘17 Blue Chip Panel)
Ranked according to frequency of mention
1. Trade war/tariffs/protectionism
2. Further strengthening of the U.S. dollar depresses export demand and reduces American companies’ profits
generated abroad
3. Rising U.S. interest rates/Fed Reserve tightens policy too much
4. Gridlock in Washington/less-than-expected tax cuts & spending increases
5. Geopolitical risks/implosion of China’s economy/breakup of Eurozone/European banking crisis/North Korea
6. Global economic growth disappoints again
7. Rapid wage and salary growth hurts corporate profits
8. Productivity growth remains poor
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19. Key points:
• The economy is performing solidly and is expected to accelerate
slightly this year. The labor market has been steadily improving and
is likely to strengthen further.
• Inflation is approaching the Fed’s longer-run objective.
• There’s a number of risks, both positive and negative, that are being
closely monitored.
• The Fed’s monetary policy remains accommodative. The decision to
raise policy rates will be determined by the incoming economic data.
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20. Don’t forget to check out the Atlanta
Fed’s vibrant new online magazine,
Economy Matters. (frbatlanta.org)
The views expressed are mine, and not necessarily those of the Atlanta Fed or the Federal Reserve System.
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