Regional President Speech

Tufts Economics Society Distinguished Speakers Series Cathy E. Minehan, President Federal Reserve Bank of Boston October 22, 2002 A Delicate Balance 1 • Consumer confidence has held up - Both by conventional measures - And as revealed through spending behavior • Spending on autos • Spending on houses • Business confidence has been shaky - As a result, hiring has been anemic • Posing a risk for consumer spending - Investment is still largely a twinkle in firms' eyes J.j_,t.tA.k), • This, balance has kept us growing modestly - But left us with unused capacity - And with risks distinctly tilted to the downside 2 Consumer confidence: Consumer spending has been a source of strength 115.0 8.5 While sentiment has fallen recently ... 105.0 6.5 95.0 85.0 / - c=o: 75.0 0.5 ,0 ( . I . ) Cl,) ~ 9 ... it is still currently · i consistent with e 01 65.0 -1.5 about 2.5-3%--i-.---:3r& J consumption growth. · ~ l.,( - Consumer Sentiment - Consumption Growth (4-qtr.) (Xj} - ,11.1. a.4 ~ j1.J 55.0 -1------.-----,----,----,----,----,-------,------,------,---r---1- - .5 1,., if 1 1982:Q2 1984:Q2 1986:Q2 1988:Q2 1990:Q2 1992:Q2 1994:Q2 1996:Q2 1998:Q2 2000:Q2 2002:Q2 1,,._ ~t., }, Sources: Consumer Sentiment (NSA, 1966:Ql = 100): University of Michigan. Personal Consumption Expenditures (SAAR, Chained 1996$): Bureau of Economic Analysis. ,_ IJ. ( ,::, dJh1( Note: Consumer Sentiment 2002:Q4 represents October only. f\6...t -~· ~ j/.J.,I f '/J.t r 9 ..f f;tLPt.C /- 1 · (l).'i.. Allff ,l, {!,&,1,,Sl rt(ftL"1 I Consumer confidence as revealed through spending: 3 Housing activity remains robust 1500 1100 114? - Single-family Starts ~ "='O - Single-family Permits ~ 1050 "=' -0= -New Home Sales ;t:, 1400 "'O .~Q) -OO()qq ~ I-, -0= .. = ... .. "='O ~ ~ "=' · . a ."..'. -0= ;:::, .;,;) - ... "'O =01 ) "=' 1300 950 0 0 0 = " Q ' ) --- "=' =0 "' "='O ~ ~ z "=' 900 -0= ;:::, ~ 1200 ..~... 00 ..O=..J ) 850 "=' =0 1100 +----.---,---,------,---,----~.._,_--,----,----,---,-----,--------r--.--------,------+- 800 1999:Jan 2000:Jan 2001:Jan 2002:Jan Source: Single-family Housing Starts, Housing Units Authorized, and New Houses Sold (SAAR, Thousands): Bureau of the Census. 4 Consumer confidence as revealed through spending: Auto sales continue at high levels - 21.0 10.0 "=' - Light-Weight Vehicle Sales ] 0 ---- - Domestic Light Truck Sales -"' 20.0 Q) to: - - Domestic Retail Auto Sales 9.0 00 ..0... = "=' < 0 == ] ..t.o.:. 19.0 Q) ~ ----- "' C,.j Q) '.l:::l to: 8.0 "' r-JJ aQ) .. Q .. ) 0 C,.j A--- -= >Q) 18.0 "=' ..... -= 0 .... ] bl) Q) 7.0 ~ ---- ...I. . "' -= -Q;) .... 17.0 0J) rJJ ~ .::d C=,.j l-, E-s -= 16.0 ~~ "' Q) 8 0 A 15.0 +---,-----,----------,----.-----,------,-----,----,-----,----,-----,---,------,-----,-----+ 5.0 1999:Jan 1999:Jul 2000:Jan 2000:Jul 2001:Jan 2001:Jul 2002:Jan 2002:Jul Source: Light-Weight Vehicle Sales (US Purchases of Autos and Light Trucks), Domestic Truck Sales (US Purchases of Light Trucks Assembled in North America, 0-10,000 Lbs. GVW) and Domestic Retail Auto Sales (US Purchases of Autos Assembled in North America, SAAR, Millions): Bureau of Economic Analysis. Another support for consumer spending: 5 Housing prices continue to grow, Reflecting strong demand and providing a source of strength 12 - House Price Index (OFHEO) - Median Existing Home Price Index 10 - Median New Home Price Index - ~ .,, ~ 8 ~ -= ■ i.. ■ ■ ■ 0 ■ c., ■ - ■ .: 6 ■ ■ ■ O" ~I 4 2 Recession begins 0 --l----------r---r--.-----,---------,----.~-~-----.------,--,----,----,----,-----,------, 1999:Ql 2000:Ql 2001:Ql 2002:Ql Sources: House Price Index (1980:Ql = 100): Office of Federal Housing Enterprise Oversight. Existing I-Family Homes, Median Sales Price (NSA): National Association of Realtors. New I-Family Homes, Median Sales Price (NSA): Bureau of the Census. But business confidence has been much weaker, 6 leading to another "jobless recovery" Year-to-date cumulative private employment growth vs. cumulative employment growth from beginning of average expansion: 1.05 1.04 0 r- 1.03 11 .c en ::J 0,_ +-' Employment has been stagnant ~ 1.02 "Cl since the beginning of the year ... C ... And is distinctly ' sub-par for economic 1.01 expansi• ons. Employment, ? Sep. 2002: 09,569 ) 0 2 4 6 8 12 Number of months after business cycle trough 0 Heavy black line represents average of recessions Heavy red line represents current experience Shaded area shows range of outcomes across all business cycles Source: Employment at private non-farm establishments (SA): Bureau of Labor Statistics. As employment stagnates, the labor force continues to grow, 7 and initial unemployment claims remain elevated ... 143000 450 142000 ,-.. Cll "=Cl ,-.. CIS C=ll Cll " = Cl 400 -0= ..... CIS C=ll " ojJ --0=- 141000 > ..... CIS .. (1) ·-0=1 ) CJ .. > 0 ... suggesting little or no 0 i;.. 8 350 ~ 0 .c improvement in the (1) c,: 140000 (1) ..:l - ~ - ·-- = unemployment rate, and -::t I " ·-CIS ·-Cll ·- 8 > in tum posing a risk for - u CIS u- 300 139000 consumer spending. ·- ·.-.C.I.S. ..=.. - Civilian Labor Force - Initial Claims for Unemployment Insurance 138000 250 +--------.------,-----,----,-------.--,------,-----.--,-----,-----,------,----,-----,----,----L 1999:Jan 1999:Jul 2000:Jan 2000:Jul 2001:Jan 2001:Jul 2002:Jan 2002:Jul Sources: Civilian Labor Force, 16yr. + (SA, Thousands): Bureau of Labor Statistics. Initial Claims for Unemployment Insurance, State Programs (Weekly Average, SA, Thousands): Department of Labor. Note: October Initial Claims represent claims through the week ending October 12. While we have seen some improvement in the outlook 8 for capital investment ... - - ,.,., = 68000 ,.,., .-... 13800 = . - . 0 .. -New Orders for Nondefense Capital Goods ex Aircraft .-... -0 .... -8 -New Orders for Telecommunications Equipment -8 fA fA ~ = .. = ... '"' ..c '" .:..i ' 11800 Q 8 J -< 63000 .. C .. . ~ = ,Q.,.J, ~ O" ,.,., 't:I = 0 .... 0 0 -0 ..... 9800 = = .... ......... c:.i = =C . = u 58000 8 8 Q,.,J., = -0 c:.i QJ ~ ... the gain has been 7800 -QeJ ~ QJ = modest so far ... '"' z0 ~ ,.,., '"' '"' ~ 53000 QJ ,.,., 't:I '"' '"' 0 -QeJ 5800 '"' ~ 0 zQJ ~ ... and nonexistent zQJ for telecomm. 48000 3800 2000:Jan 2000:Jul 2001:Jan 2001:Jul 2002:Jan 2002:Jul Source: Manufacturers' New Orders for Nondefense Capital Goods excluding Aircraft and for Communication Equipment (SA,$ ~1 Millions): Bureau of the Census. ~JµV This balance has afforded us modest growth of late ... 9 6 2001 2002 5 ■ I-quarter Growth Rate ■ 4-quarter Growth Rate 4 ■ First-Half 2002 Growth Rate ~f ·· P ··· o ·· t · e ·· n ·· t ·· i · a ·· l · · G ···· r · o ·· w ···· t · h ·· · R ··· a ·· t ·· e · ················~. -- . . . . . . .. . . . . . . . . . . . . . . . . . . . . ].)'1:)i ' . ' . . . . ... averagi• ng . . 3.1 % for the . first half of . . . this year, and . . projected at 3 . . . to 3-1/4% . . . . for the 3rd . . 1 . quarter, and . (Forecast) . . 2% for the . . fourth . . . 0 1:Q3 2001:Q4 2002:Ql 2002:Q2 2002:Q3 2002:Q4 -1 Source: Real Gross Domestic Product (SAAR, Chained 1996$): Bureau of Economic Analysis. Modest growth has yielded little progress in absorbing 10 under-utilized labor and capital 3.5 Output Gap 3 (Congressional Budget Office 2.5 ~d:u1- estimate) l 1l(l.(ll 2 1 11. t f.;,D ' _µ(1Ji ;tuJJ. · I rµ,, Ip al vs () · ,:, r· 601 - 1.5 Standard estimates of output relative to potential suggest that we have .... under-utilized labor and capital ... . .. although it is = _e, 0.5 notoriously difficult to = 0 Oi------------------------~-est-im-at-e p-ot-en-tia-l o-ut-pu-t. -0.5 -1 -1.5 +------.---.-------,---,------,----,----,------,----r-------.---.-------,-----r-------, 1999:Ql 2000:Ql 2001:Ql 2002:Ql Sources: Real Gross Domestic Product (SAAR, Chained 1996$): Bureau of Economic Analysis. Real Potential Gross Domestic Product, (Chained 1996$): Congressional Budget Office. 11 The downward trend in wage and price inflation confirms the conventional estimates of excess capacity ... 2 Q4/Q4 Real Wage Growth less Trend Productivity Change in Growth Q4/Q4 l Core PCE Inflation o-- Annual Avg. Output Gap -1 Forecast" 2002 2003 -2 ... and consensus forecasts suggest Change in inflation is positive when output exceeds potential (negative) (falls below) -3 excess capacity t>u' Nominal wage growth= Expected inflation+_,,,,. will continue [ Productivity growth+ , into 2003. ~ Pressure from excess capacity ( -1-- o.A - J -4 (which implies that) Real wage growth - productivity growth = Indicator of . ---- excess capacity "Output Gap forecast begins in 2002:Q3 .l...-------------+------------------------------' -5 Sources: Real Gross Domestic Product (S , Chained 1996$), PCE Less Food & Energy, Chain Price Index (SA, 1996=100): Bureau of Economic Analysis. Real Potential Gross omestic Product (Chained 1996$): Congressional Budget Office. Nonfarm Business Sector: Real Compensation Per Hour (SA, 1992=100), Output Per Hour, All Persons (SA, 1992=100): Bureau of Labor Statistics. Trend productivitzy . ist r computed from the BLS nonfarm labor P oductivity series using a statistical filter. IJ. . • 1 1 J .. MAJ.)~ LI e..., 5 /, y( ~1- Ut fl CUrtqJJ.1 .,_, 12 In manufacturing, without question we continue to have excess capacity, both overall and excluding high-tech sectors 90 85 -,-._ ~~ Average = 1970-2002 ....... 0 80 ,:,: ~ ;;;;i c .... tJ ,:,: Q. u,:,: 75 70 - Manufacturing Capacity Utilization -Total ex High-Tech 65 ..0 ...0 ...0 ...0 ...0 ..0 ...0 ...0 ...0 ...0 ...0 ..0 ...0 ...0 ...0 ...0 ...0 ..0 ~ 0 ~ 0 ~ 0 ~ 0 ~ 0 ~ 0 ~ 0 -~ 0 ~0 ~ 0 ~ 0 ~ 0 ~ 0 ~ 0 ~0 ~ 0 ~0 ~ 0 0 V ° - ) ' ( V ° -'< ) ' ) ' °. V .. ° . ) '.. ° °. V ... ) '. ' . ' N ° -° ' ' °. V .. ° .. ) '. ' 0 ° -° 0 ' ° r--- ' - ° t - - ' r r ° -- - - - ' - - 0 0 °... 0 ..'. 0 M ° - 0 ' 0 ' °... ° 0 ..'. 0 ° ° -0 ' ' N ~ - ~ -V) ~ 0 - 0 . 8 ..... N Sources: Capacity Utilization Percentage: Manufacturing and Manufacturing excluding Computers, Communication Equipment, and Semiconductors (SA): Federal Reserve Board. Looking forward, consensus forecasts suggest that 13 3.5 excess capacity will likely be with us through year-end 2003 3 2.5 Output Gap 2 (Congressional Budget Office 1.5 estimate) - -Optimistic forecast (4% growth in 2003) .... = .e, - -Baseline Forecast (growth= potential in 2003) = 0o.5 - -Pessimistic forecast (2.5% growth in 2003) 0 .... --------------------------------------...--- -0.5 -1 -1.5 -l-------~-~-,---,---,----,~--,------,-----,---,--~-~-~-~-~-----~--~ 1999:Ql 2000:Ql 2001:Ql 2002:Ql 2003:Ql Sources: Real Gross Domestic Product (SAAR, Chained 1996$): Bureau of Economic Analysis. Real Potential Gross Domestic Product (Chained 1996$): Congressional Budget Office. 14 Risks to Outlook • Positive side: . . ~~ - Stimulative effects of war spending - ~/ - Extended effects of home refinancing/cash-out -100 ~ r:": ~ • Negative side: ~ - Additional profits surprises (further corporate governance/accounting issues, oil price hikes?) ➔ further declines/volatility in equity pricesv ~- M- fl-/1 u-tNf Stagnant employment/rising unemployment ~. . ~-~ - Geopolitical risks (war, terrorism, oil prices) '~s!,, ttl-- ~,6:t~- Refinancing waves end as mortgage rates -; ~~ stabilize (FNMA incre~sing points for cash-~ 1u- U:Ull4IL, 'ii ·- Weaker than expected mvestment demand - '~~ 1 '---) (forecasts optimistic; business contacts less so) -~ 4 '¥. - ~ PN-1 - /;al f/.0~ 10 ~ :ftL4JuJ-?0J-wt~ ntU)~ 15 Policy Considerations • Inflation appears quiescent for now - Edging down a bit? - Possible temporary effect of oil prices. • We've attained a balance between consumers and firms to date • The current outlook has us growing near potential next year - But the risks to maintaining that balance appear to be on the downside, as the FOMC suggested at its last meeting. - Implying that excess capacity will remain, and possibly deteriorate further.

Cathy E. Minehan (2002, October 21). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20021022_cathy_e_minehan

@misc{wtfs_regional_speeche_20021022_cathy_e_minehan,
  author = {Cathy E. Minehan},
  title = {Regional President Speech},
  year = {2002},
  month = {Oct},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20021022_cathy_e_minehan},
  note = {Retrieved via When the Fed Speaks corpus}
}