Regional President Speech

Boston Security Analysts Society November 19, 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 • But due to strong productivity growth, it is a twinkle that remains in the eyes of most forecasters too. • This balance has kept us growing modestly - But left us with unused capacity - And with continued 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 ~ O' I :!,, Q,l ..i=... ..... 95.0 4.5 "=C Q,l =- ~ ~ ..=. ..0... 85.0 2.5 =-- El = "=' u-0 ~ = 75.0 0.5 0 "' i.. ... it is still currently Q,l .~.. = consistent with -= ..... ~ about 1.5-2.0% E 65.0 - 1.5 C, consumption growth. - Consumer Sentiment - Consumption Growth (4-qtr.) 55.0 --1----------.------.----,---------,-------,----,----------,------.----,----------,---'- -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:Ql = 100): University of Michigan. Personal Consumption Expenditures (SAAR, Chained 1996$): Bureau of Economic Analysis. Note: Consumer Sentiment 2002:Q4 represents November only. Consumer confidence as revealed through spending: 3 Housing activity remains robust 1500 1100 - Single-family Starts - Single-family Permits 1050 - New Home Sales 1400 1000 - "C 1300 950 0 0 0. C~l) C=l) = i z 900 1200 850 1100 +--------,-------r---r---,------,-------,---,--------,---------,--,-----,-----------,-----,---,------t- 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 -Light-Weight Vehicle Sales ... Although not at the record-breaking - Domestic Light Truck Sales pace of July 20.0 and August - - Domestic Retail Auto Sales "=-' i 19.0 -'- ' "~-' c,s r.r;_ - ~ i(:,I > 0 18 . .... -= -~ 0() ~ ..!, ~ 17.0 ::s .... 6.0 -= 16.0 :: 0 s () ·- .(.:.,.I e "~-' 0 A 15.0 --l----~-----.---,------,-----,------,----,--------,----,----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 - ~ co: 8 ~ -= ■ i ■ ■ ,.. ■ 0 ■ ■ C-, ■ .: 6 ■ ... although ■ O" ■ some are ~I questioning the 4 sustainability . of price increases. 2 Recession begins 0 ■ 1999:Ql 1999:Q3 2000:Ql 2000:Q3 2001:Ql 2001:Q3 2002:Ql 2002:Q3 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. 6 And business confidence should be bolstered by recently expanding profits -Nonfinancial Corporate Business Profits with IV A and CCAdj -S&P Operating Earnings per Share 1999:Ql 2000:Ql 2000:Q3 2001:Ql - ,;; i= ~ -20 i=.. "' "' Ql C ·;;; = -30 ~- Ql to; I-, 0c.. ~ -40 u -; ·c:; C ~ -50 i= C z0 Sources: Nonfinancial Corporate Bus: Profits with IV A & CCAdj (SAAR, Bil.$) and Nonfinancial Corporate Business: Profits Tax Liability (SAAR, Bil.$): Bureau of Economic Analysis S&P Operating Earnings per share ($/share): Standard and Poor's. But business confidence has proven to be weak, 7 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 ..c 0) -:::s 0 "- Employment has been stagnant ~ 1.02 since the beginning of the year ... "O C ... And is distinctly 1.01 sub-par for economic Employment Dec. 2001: 109,768 expansi• ons. , lllllltllll Employment Oct. 2002: 109,578 0.99 L___--'-- __,_ ___.__ ___,_ c__ _.___ __, 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. 8 As employment stagnates, the labor force continues to grow, initial unemployment claims remain elevated ... 143000 450 142000 ,_ -tei.) 400 Cl i:: t=i.) -0 141000 ..C...l. - ~ CJ 0- ... suggesting little or no r;.. 350 0 improvement in the ,Q 140000 i:: ~ unemployment rate, and Cl .-.e.-.:.: ..... u~ in tum posing a risk for 300 consumer spending. 139000 - Civilian Labor Force - Initial Claims for Unemployment Insurance 138000 -1---~-~----.--~-----.----r---.---------,---~-~----.--~-----.-------,--L 250 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. 9 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$): Bureau of Economic Analysis. And there is some improvement in the outlook for 10 capital investment ... - - .- -. =r . l. . l 68000 r=l.l .. 0 .. -New Orders for Nondefense Capital Goods ex Aircraft .--. 0 .. 13200 .... 8 -New Orders for Telecommunications Equipment 8 ~_, .. ~_, ¢: ..... ~.. = tJ Q 8 ,j < .... 63000 11200 0, = ~ Q,j C"' ~ rl.l "0 0 .. r= . l. . l -0 0 ..0... ..~.. ....~..... 9200 tJ = ~ 0 , e = u 58000 e Q r=l. ,j l ... but the gain has - 0 tJ Q,j ~ " Q 0 ,j been uneven and 7200 ~ Q..,j = modest so far ... z0.. c.S. r.l..l c.S. Q,j 53000 "0 .rl..l 0 Q,j "0 5200 ~ 0 zQ,j ~ ... and nonexistent zQ,j for telecomm. 48000 3200 2000:Jan 2000:Jul 2001:Jan 2001:Jul 2002:Jan 2002:Jul Source: Manufacturers' New Orders for Nondefense Capital Goods excluding Aircraft and for Communication Equipment (SA,$ Millions): Bureau of the Census. 11 The consumer/business balance has afforded us modest growth of late ... 6 2001 2002 5 ■ I-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$): Bureau of Economic Analysis. But this has yielded little progress in absorbing 12 under-utilized labor and capital 3.5 Output Gap 3 (Congressional Budget Office 2.5 estimate) 2 1.5 Standard estimates of output relative to potential suggest that we have .... under-utilized labor and capital ... . .. although it is = .S- 0.5 notoriously difficult to = 0 estimate potential output. ---------------------lllilli-------------- 0 ....... -0.5 -1 -1.5 -1--~-~---.-----,---,------,-------,---r----~-~--~-~-~--~- 1999:Ql 1999:Q3 2000:Ql 2000:Q3 2001:Ql 2001:Q3 2002:Ql 2002:Q3 Sources: Real Gross Domestic Product (SAAR, Chained 1996$): Bureau of Economic Analysis. Real Potential Gross Domestic Product, (Chained 1996$): Congressional Budget Office. 13 The growth in potential may be even stronger as productivity has been growing 6.00 rapidly since the end of the recession -Output Per Hour, NonfarmBusiness Sector ; 5.00 Qj ~ .sI aI . ~ Qj ~ 4.00 a. 0 "t Qj rJ1 "' ..".' Q=j i"' 3.00 8 a. JS = z0 i=: 2.00 = ..... = .e, = o 1.00 0.00 -1----.---------.--r-----,---------,-------,---,---------,---------,-------,---,-----------,------r--------,-----, 1999:Ql 1999:Q3 2000:Ql 2000:Q3 2001:Ql 2001:Q3 2002:Ql 2002:Q3 Sources: Nonfarm Business Sector: Output Per Hour/All Persons (SA, 1992=100):Bureau of Labor Statistics. That strong productivity growth has allowed 14 - unit labor costs to fall while hourly labor costs - -= have only gradually decelerated ~ 0 ""' C, 5.00 ""' C: Q) ~- I 0 I 4.00 ""' C: tQ,) 3.00 2.00 1.00 0.00 - ... = -1.00 ~ "=Cl C: -Compensation Per Hour, Nonfarm Business Sector "="' =0 -2.00 -Unit Labor Cost, Nonfarm Business Sector ""' Q) ~ .-.=. -3. 00 0 --1----~-~----,----------,-----,---,------,----~----,----.-----.----------,------.---.----------,------, C f=l. : ) 1999:Ql 1999:Q3 2000:Ql 2000:Q3 2001:Ql 2001:Q3 2002:Ql 2002:Q3 a Q) Source: Nonfarm Business Sector: Real Compensation Per Hour (SA, 1992=100) and Nonfarm Business Sector: Unit Labor Cost (SA, u0 1992=100): Bureau of Labor Statistics. 15 This slowing of compensation costs has occurred despite rising health insurance costs - 5.00 12.0 -..=.. ~ 0 "" c., " ~ " 10.0 ;;<.:.I.I 4.50 .0..I . I "~" <:II t, .. = .. 8.0 .0... ~ ~ = 4.00 <:II aQ. , u0 .... 6.0 <:II ~ .... > "" ~ ~ 3.50 <:II "C = ......,.; - Employment Cost Index, Private Compensation 4.0 ~ u0 .... - Private Health Insurance Costs = <a:II ..., - 3.00 0 Qa. , 2.0 ~ 2.50 0.0 -1---~--.----------,---i------,---------,-----.---,--r----,----,-----,-----.-----+ 1999:Ql 1999:Q3 2000:Ql 2000:Q3 2001:Ql 2001:Q3 2002:Ql 2002:Q3 Sources: ECI: Compensation: Private Industry Workers (SA, JUN 89=100):Bureau of Labor Statistics. 16 As a result, core inflation has begun to decline 2.20 2.80 -.... -= ~- 2.70 0 - C, ~ 2.00 Q,j 2.60 ~... 0-I I ~ Q,j 2.50 ~ - ... -.... 0 -= 1.80 CJ ~- 0 Q 0 , . j 2.40 0 r,J - r,J C, ·-Q=,j ~ r=,J ~ . Q .. ,j 2.30 ~ a- -I 0 1.60 I ~ ~ = Q,j 2.20 z0 ~ ...:- ~ u r,J u.0.. ~- ·- 2.10 Q,j = 1.40 - u 0 -CorePCE -Core CPI ~ 't = :, 0 .Q. ~ 2.00 ~ .-I ~ ~ u- Q,j 0 1.20 1.90 u 1999:Ql 1999:Q3 2000:Ql 2000:Q3 2001:Ql 2001:Q3 2002:Ql 2002:Q3 Source:CPI-U: All Items Less Food and Energy (SA, 1982-84=100): Bureau of Labor Statistics. and PCE less Food and Energy: Chain Price Index (SA, 1996=100): Bureau of Economic Analysis. Looking forward, consensus forecasts suggest that 17 excess capacity and low inflation will likely be with us 3.5 through year-end 2003 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) '-' 1 c.. ~ c., .... = .c.... . 0.5 = 0 0 / -0.5 --- / - -- --- ---- -1 ~ ......... ............ -1.5 " ' ' -2 -4--.---~~-~---r-----;---,-----------r---,------.----,-------,--~-~----,-- 1999:Ql 1999:Q3 2000:Ql 2000:Q3. 2001:Ql 2001:Q3 2002:Ql 2002:Q3 2003:Ql 2003:Q3 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 18 • Positive side: - Stimulative effects of war spending - Extended effects of home refinancing/cash-out - Recent Fed easing: provides additional stimulus and removes some uncertainty - Long-run effects of strong trend productivity growth • 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) 19 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 - 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 18). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20021119_cathy_e_minehan

@misc{wtfs_regional_speeche_20021119_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_20021119_cathy_e_minehan},
  note = {Retrieved via When the Fed Speaks corpus}
}