Regional President Speech

Sloan Fellows Seminar November 13, 2002 A Delicate Balance 1 • Consumer confidence continues to have some strength - Evident in conventional measures of confidence - More clearly seen in spending behavior • Spending on houses • Spending on autos • 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 • This balance has kept us growing modestly - But left us with unused capacity - And with considerable uncertainty 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 4.5 85.0 2.5 - c=,s 0 75.0 0.5 (ll "a";' ~ .9 ... it is still currently ... -= consistent with ~ 0 65.0 -1.5 c:s about 1.5-2.0% consumption growth. - Consumer Sentiment - Consumption Growth (4-qtr.) 55.0 +--------,----,-----.------,--,---,-----,-----,----,-----.------,--'-- -3.5 1982:Q2 1984:Q2 1986:Q2 1988:Q2 1990:Q2 1992:Q2 1994:Q2 1996:Q2 1998:Q2 2000:Q2 2002:Q2 Sources: Consumer Sentiment (NSA, 1966:Q 1 = 100): University of Michigan. Personal Consumption Expenditures (SAAR, Chained 1996$): Bureau of Economic Analysis. Note: Consumer Sentiment 2002:Q4 represents October only. Consumer confidence as revealed through spending: 3 Housing activity remains robust 1500 1100 - Single-family Starts - Single-family Permits 1050 -New Home Sales 1000 950 900 850 1100 ---1---~--~-~-----r---~___J""-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 ... Although not at the record-breaking - Domestic Light Truck Sales pace of July 20.0 and August 9.0 - Domestic Retail Auto Sales ,;; = 0 :·s:3 - 19.o "~' -; 8.0 0-0 ~ :ca.J ~ 18.0 > .... -..=. 01.l ~ 7.0 ~ ..!, ~ 17.0 ~ 6.0 16.0 15.0 ..j__----~--~-~--~----------r---~--~--~-~--~-----__J_ 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 ... although some are questioning the 4 sustainability of price increases. 2 Recession begins 0 --1--------.-----,c------.------,--,----------,------,--,-------.--.----'='--,------,--------,--~,------.----, 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: - 1.04 0.... 1.03 II ..t: O> ::::s ...0..... Employment has been stagnant ~ 1.02 since the beginning of the year ... "O s:::: ... And is distinctly 1.01 Employment sub-par for economic Dec. 2001: 109,768 expansi• ons. , 11111111111 Employment Oct. 2002: 109,578 0.99 '-----'-----------'---------'------__________.-----.__- .,___ ___, 0 2 4 6 8 10 12 Number of months after business cycle trough 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 <:,} - ' = t, = <=:,} <:,} 't, = = 400 -. 0 .=.. <=:,} "' - -. 0 .=.. 141000 = O > l ) Q, ..=O..J ) Cj I-, > 0 ... suggesting little or no 0 ~ 5 350 I-, ~ 0 ,,=Q 140000 improvement in the Q, Q, ~ -~ .-.= = .. unemployment rate, and -.:t I " .... <:,} .... ..5.. > in tum posing a risk for - u ~ u- 300 139000 consumer spending. ..=.. ........ ..=.. - Civilian Labor Force - Initial Claims for Unemployment Insurance 138000 250 -1---~-----r------,--------,---,--~------,----.------,--------,~--.--~------,----,------,-__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. 8 Recent Growth in Spending on Capital Equipment and Software 10 5 While investment has not been robust lately ... . .. there has been some positive growth in equipment and software spending in the past two quarters. -10 -15 -20 2001:Ql 2001:Q2 2001:Q3 2001:Q4 2002:Ql 2002:Q2 2002:Q3 Source: Gross Private Domestic Investment in Nonresidential Equipment and Software (SAAR, Billions Chained 1996$): Bureau of Economic Analysis. We have seen some improvement in the outlook for 9 capital investment ... - - =<I) 68000 .-... . - . 0 .. -New Orders for Nondefense Capital Goods ex Aircraft .--. =< . I . ) 0 13200 .... -8 ~ -New Orders for Telecommunications Equipment -8 ~ it: ~ ..... "" = ..c.:..i Q,i "" 8 < 63000 .... 11200 C. ~ = Q,i ~ -<eI) ~ 0 <=I) -c0.., . . . . 0 . . . . . ....~..... 9200 ..~ c . :. . i = C. = ~ u 58000 8 8 Q <=I , ) i ... but the gain has 0 -c:.i ~ Q,i been uneven and -Qe,i Q,i = 7200 ~ z0 modest so far ... "" ~ "" <I) "" ~ 53000 -Qe,i < "" I) "" -Qe,i 0 5200 "" ~ 0 zQ,i ~ ... and nonexistent zQ,i for telecomm. 48000 3200 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,$ Millions): Bureau of the Census. 10 This balance has afforded us modest growth of late ... 6 2001 2002 5 ■ 1-quarter Growth Rate ■ 4-quarter Growth Rate 4 ■ First-Half 2002 Growth Rate ... averagi• ng Potential Growth Rate . ··························································- . :- ··· 3.1 % for the . . . first half of . . . this year . . . . and 3.1% . for the 3rd quarter, and projected at 1.0% to 1.5% for the 1 fourth. (Forecast) 0 1:Q3 2001:Q4 2002:Ql 2002:Q2 2002:Q3 2002:Q4 -1 Source: Real Gross Domestic Product (SAAR, Chained 1996$): Bureau of Economic Analysis. Modest growth has yielded little progress in absorbing 11 under-utilized labor and capital 3.5 Output Gap 3 (Congressional Budget Office 2.5 estimate) 2 1.5 Standard estimates of output relative to potential suggest that we have under-utilized labor and capital ... . .. although it is ..... = .S- 0.5 notoriously difficult to = 0 estimate potential output. 0-,----------------------+-------------- -0.5 -1 -l.5+---,--------,-----------,---,---------,-------,--,-------.--------.----,-----,-------,----,------ 1999:Ql 2000:Ql 2001:Ql 2002:Ql Sources: Real Gross Domestic Product (SAAR, Chained 1996$): Bureau of Economic Analysis. Real Potential Gross Domestic Product, (Chained 1996$): Congressional Budget Office. 12 The downward trend in wage and price inflation confirms the conventional estimates of excess capacity ... 3-,--------------------------------------------~ 2 Q4/Q4 Real Wage Growth less Trend Productivity Change in Growth Q4/Q4 Core PCE Inflation 0 -+--- Annual Avg. Output Gap -1 Forecast' 2000 2002 2003 -2 ... and consensus forecasts suggest Change in inflation is positive when output exceeds potential (negative) (falls below) -3 excess capacity Nominal wage growth = Expected inflation + will continue Productivity growth + into 2003. Pressure from excess capacity -4 (which implies that) Real wage growth - productivity growth = Indicator of . excess capacity -5 "Output Gap forecast begins in 2002:Q4 ...1,..._ __J Sources: Real Gross Domestic Product (SAAR, Chained 1996$), PCE Less Food & Energy, Chain Price Index (SA, 1996=100): Bureau of Economic Analysis. Real Potential Gross Domestic Product (Chained 1996$): Congressional Budget Office. Nonfarm Business Sector: Real Compensation Per Hour (SA, 1992=100), Output Per Hour, All Persons (SA, 1992=100): Bureau of Labor Statistics. Trend productivity is computed from the BLS nonfarm labor productivity series using a statistical filter. 13 In manufacturing, without question we continue to have excess capacity, both overall and excluding high-tech sectors 90 85 -- - ~ Q = .... .0... ~ 80 :3 .... ;;;i c .... ,~:J c.. ~ u 75 70 - Manufacturing Capacity Utilization -Total ex High-Tech 65 ..0 ..0 ..0 ..0 ..0 ..0 ..0 ..0 ..0 ..0 ..0 ..0 ..0 ..0 ..0 ..0 ..0 ..0 µ 0 V 0. 1 - . 1 ) \ . .) ~ ( V 0. '< 1 - 1 " ) \ ) .) µ I 0 V . . 1 O - . 1 \ ) . .) ~ 0 0 V . 1 - 1 \ \ ) .) i \ 0 µ . - 1 0 - . - 1 \ . . i ) ~ V \ 0. 1 0 - 1 \ ) .) ~ 0 \ 0. 1 0 - 0 1 \ .) ~ . ~ .. 1 . - . 1 .. . . ) ~ 0. µ 1 - . 1 \ . .) 0 µ r r .. - - 1 . - . . - 1 \ - . . : . . - ) ~ 0 0 0... 1 . 0 1 .\. . . ) ~ ( 0 0. '< 1 - 0 1 " \ ) .) I 0 µ 0.. . 1 . O . 0 . 1 .\ . . . . ) & 0 0 0.... 0 .\ \ ! .. µ i ~ . - 1 - . - 1 . . i ) ~ ~ V .. 1 .. 1 ) . . . ) 0 ~ ~ .. 1 . 0 . 1 . . . ) N ~ . 8 1 - 1.) Sources: Capacity Utilization Percentage: Manufacturing and Manufacturing excluding Computers, Communication Equipment, and Semiconductors (SA): Federal Reserve Board. Looking forward, consensus forecasts suggest that 14 excess capacity will likely be with us through year-end 2003 3.5 3 2.5 Output Gap 2 -Optimistic forecast (4% growth in 2003) (Congressional Budget Office 1.5 - Baseline Forecast (growth at potential by year-end 2003) estimate) -Pessimistic forecast (2% growth in 2003) .... = .S- 0.5 = 0 / -0.5 --- / - - --- ---- -1 ~ ......__ ---........ -1.5 ---........ ' ..... -2 ---1--~-.....--.,--------r---,--,r-----;--,------r---,---,----,---,-- 1999:Ql 2000:Ql 2001:Ql 2002:Ql 2003:Ql Sources: Real Gross Domestic Product (SAAR, Chained 1996$): Bureau of Economic Analysis. Real Potential Gross Domestic Product (Chained 1996$): Congressional Budget Office. Risks to Outlook 15 • Positive side: - Stimulative effects of war spending - Extended effects of home refinancing/cash-out - Recent Fed easing: provides additional stimulus and removes some uncertainty • Negative side: - Additional profits surprises (further corporate governance/accounting issues, oil price hikes?) ➔ declines/volatility in equity prices - Geopolitical risks (war, terrorism, oil prices) - Growth in rest of the world sub-par - Weaker than expected investment demand (forecasts optimistic; business contacts less so) 16 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 attaining potential growth sometime next year - Considerable uncertainty remains; - But with the last FOMC action, the risks to maintaining that balance appear to be more symmetric than before.

Cathy E. Minehan (2002, November 12). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20021113_cathy_e_minehan

@misc{wtfs_regional_speeche_20021113_cathy_e_minehan,
  author = {Cathy E. Minehan},
  title = {Regional President Speech},
  year = {2002},
  month = {Nov},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20021113_cathy_e_minehan},
  note = {Retrieved via When the Fed Speaks corpus}
}