Regional President Speech

1 Su0101ary • The economy is going through a soft patch - Consumers have held up well, although slowing wealth growth and sluggish labor markets will probably limit spending increases in 2003 - Business investment is increasing, but at a slow pace - State and local fiscal problems will be partly offset by federal fiscal stimulus • Consumers and businesses are rebuilding wealth and repairing their balance sheets - Households' savings are increasing - Investment is about in line with cash flow • Considerable uncertainty remains - Policy is stimulative but downside risks are real Resilience: Consumer sentiment and spending have remained 2 a source of strength through many crises . 115 Asian LTCM : NASDAQ Sept. 11 . Currency: 5.5 110 Crises : .. . . 105 100 95 90 85 80 -..=.. - Consumer Sentiment .~.. 0 75 ~ 1.5 - Consumption Growth 70 (4-qtr.) Recession . . 65 0.5 -l------,---,----,--------,------,a----,---,..-..~------.---.---.------------,-----,---~,-■-----,-------,-----+ 1995:Jan 1996:Jan 1997:Jan 1998:Jan 1999:Jan 2000:Jan 2001:Jan 2002:Jan Sources: Consumer Sentiment (NSA, 1966:Q I = I 00): University of Michigan. Personal Consumption Expenditures (SAAR, Chained 1996$): Bureau of Economic Analysis. Consumers have spent even as household net worth has slid 3 over the past two+ years 45000 ....-----------------------------------------,- 10000 -Household Net Worth - Household Net Holdings of Corporate Equities 40000 - ="' 0 35000 6000 3 e -= t: -0 ~ Net worth has zQ,> declined almost "O 30000 4000 0 -= entirely due ="Q,>' =0 to the decline in equities. 25000 2000 20000 0 ..i..-~.,J/C_~--..-----,-----,c--------r-----r----r-----r----"-T""----,------,-----,-----+ 1990:Ql 1992:Ql 1994:Ql 1996:Ql 1998:Ql 2000:Ql 2002:Ql Source: Net Worth of Households and Nonprofit Organizations, Household Net Holdings of Corporate Equities excluding Mutual Fund Shares (Billions$): Federal Reserve Board. 4 Offsetting the decline in equity prices has been the improvement in households' net position in owner-occupied housing ... 8000 --,--------------------------------------, - ... but this has flattened recently, ► ,,, 7500 - = 0 and with slower increases in § e house prices projected, .,6 0 , 1 , ) 7000 = will likely not provide the same = spur to growth early this year. ·~ <al> 6500 = i:J i:J 0 "I" =<l> 6000 ~ 0 .6 = -...0.. :. ,,, 5500 - Household Net Assets Held in 0 ~.... Owner-occupied Housing Less z<l> Household Net Mortgage Liabilities ,,, -~ 5000 ~ -0= ,,, <l> = =0 4500 4000 -1----~--~----,----..--------r--- --r----,------,------,------,------,--~-___.J 1990:Q] 1992:Ql 1994:Ql 1996:QJ 1998:Ql 2000:Ql 2002:Ql Source: Household Assets, Total Owner-Occupied Real Estate and Household Liabilities, Home Mortgages (Billions$): Federal Reserve Board. 5 In addition, the employment outlook has yet to brighten ... - - 1.04 - - - - - - - - - - - - -- ,0.. .. - -- - .. I c I 1.03 - - - -- - C> - - :::s -- 0 -- +lo-.. - - - - - X 1.02 -- Q) -- "O - C -- -- - - -- - - -- -- 1.01 - - - - -- Employment &#45;&#45;&#45; - - - Dec. 200 I: I 09,768 - - -- - - 1 11111111111 Employment Dec. 002: 109,330 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, Thousands): Bureau of Labor Statistics. 6 And the most recent initial claims data suggest no improvement in the unemployment rate 500 ....-------------------------------------------, 450 ~ "0 ; 400 Unemployment ="' -..0=. . usually rising '-" "' El ·; 0 -; '.C 350 :s Unemploy ent usually fal ing 300 250 -l-------,----,-----,---,---,----,----,----,---,-----,,----.----,----.----,----.---,-----,--.----,----.----,----.---,----,----r---l 1990:Jan 1991:Jan 1992:Jan 1993:Jan 1994:Jan 1995:Jan 1996:Jan 1997:Jan 1998:Jan 1999:Jan 2000:Jan 2001:Jan 2002:Jan Source: Initial Claims for Unemployment Insurance, State Programs, Weekly Average (SA, Thousands): Department of Labor. 7 ... With employment uncertain, households are increasing their saving rate ~------------------------------------------~ 5.5 - Civilian Unemployment Rate 5.9 -Personal Savings Rate (2-qtr. moving average) 5.0 4.5 --:- Oil > C: .... 5.4 Oil QJ ·! C: ~.... 4.0 5 0 = l: QJ 5 -..... -C I -" ' 0 N .... Q.. 3.5 QJ 5 C: =QJ ~ 4.9 "-' ~ Oil ·! =~ ... 3.0 C: > 00 u -; = - 0 "-' QJ 2.5 ~ 4.4 2.0 3.9 -i-- ------------.-----------,------,-----"'------__JL-~-- -----------1--- 1.5 1996:Jan 1998:Jan 2000:Jan 2002:Jan Sources: Civilian Unemployment Rate, l 6yr.+ (SA): Bureau of Labor Statistics. Personal Savings Rate (SAAR): Bureau of Economic Analysis. 8 • Which implies that consumption will grow slowly--perhaps 2.5 to 3%--in 2003 • But investment in equipment and software should exceed that pace - Not fast growth, but faster than the rest of GDP - Investment in equipment and software is projected to rise to 10-plus percent growth late in 2003/2004 9 There has been some positive growth in investment lately ... 7 2 -3 Investment in Equipment & Software -8 -13 -18 2001:Ql 2001:Q2 2001:Q 3 200]:Q4 2002:QI 2002:Q 2 2002:Q 3 64500 --Ne"" Orders tor Nonclefcnse Capital Goods ex Aircraft 68000 --Shipments of Nondefcnse Capital Goods ex Aircraft 62000 ,-... "' -C ·0 - 63000 ... and orders data 59500 6"t ,... suggest that it fl) ",~.0.. 58000 should continue 1n 57000 0 the near term i z 53000 54500 -1---- --~- -~---~---~------r----~---~--~---~---~ ---~-----1. 48000 52000 2000:.Tan 2000:Jul 2001:.lm1i 2001 :Jul 2002:Jan 2002:Jul Sources: Gross Private Domestic Investment in Nonresidential Equipment and Software (SAAR,Chained 1996$): Bureau of Economic Analysis. Manufacturers' New Orders and Shipments for Nondefense Capital Goods ex Aircraft (SA,$ Millions): Bureau of the Census. High productivity is keeping costs low ... 10 2 --Change in Real Unit Labor Costs -I -2 ... and helping firms to make progress in rebuilding their balance sheets ... 100 --Short-term debt to total credit market debt --Ratio of I iquid assets to short-term Iiabil ities 80 60 ~ Oil .... ~ = .. c~.> 40 ~ =-- 20 0 -l-----l,,--'---,--_,_____._--r_ __- -,-_..__-=--,-___._---,------,--___1.-i-1-----.---.--- - -.----1--.1 1967:Ql 1973:QJ 1979:Ql 1985:Q l 1991:Ql 1997:Ql Source: Nonfinancial Corporate Business, Flow of Funds: Federal Reserve Board and Bureau of Labor Statistics. 11 Yield spreads are improving somewhat ... 7.0 6.0 5.0 .-.. 4.0 '~ ~- ' ~ 01) .c.-.= = 3.0 u~ '"" ~ =-- 2.0 1.0 0.0 -!-------~---~---~---~---~--~---~---~---~------~ 2000:Jan 2000:Jul 2001:Jan 2001:Jul 2002:Jan 2002:Jul - 10-year AAA spread - 10-year A spread - 10-Year Jtmk Spread -10-year BBB spread Sources: I 0-year Treasury Bond Yield at Constant Maturity: U.S. Treasury. I0 -year Industrial Corporate Bond Yields: S&P Global Fixed Income Research. 12 And equity markets have stabilized recently ... 15000 1450 14000 1350 Q) OJ) ~ Q) 13000 I-, OJ) Q > ) ~ -< I-, Q) ..... > ... -< -= 1250 ..... = ... -= 12000 0 = ~ 0 r;,) =Q) ~ 0 1150 0 0 11000 ~ trl ~ ~ 0 ~ ~ 00 0 0 1050 0 10000 trl Q) · -- I = --, ·r-;,) ~ 950 9000 850 8000 +-------,------,--------,---------,----,----,-------,---,--------,----.-------.-==--------+ 2000:Jan 2000:Jul 2001:Jan 2001:Jul 2002:Jan 2002:Jul - S&P 500 - Wilshire 5000 - Dow Jones Industrial Average Source: S&P 500 Composite Index, Wilshire 5000 Stock Index, Dow Jones Industrial Average (Monthly Average): Wall Street Journal. 13 A stronger rebound in investment is in the making, but not yet entirely in place 140 - = Q,) 8 ·c-.. = O" - ~ Q,) ,,Q e':I 1=- ~ r, "' 1- Q,) =CJ ,:, 0 1- ~ 80 -l----~-'----,---'-----'-----.----,-.____.___._,--..____.--------.-----"--T'--------.-----,---,-------' 1967:Ql 1970:Ql 1973:Ql 1976:Ql 1979:Ql 1982:Ql 1985:Ql 1988:Ql 1991:Ql 1994:Ql 1997:Ql 2000:Ql Source: Nonfinancial Corporate Business, Flow of Funds: Federal Reserve Board. 14 Policy stimulus: A key source of strength • Monetary Policy - 12 reductions in interest rates since early 2001 -Latest 50 basis points in November 2002 - Rates at lowest point in 60 years - Less headwind from financial markets 15 Policy stimulus: A key source of strength • Fiscal Policy: The Administration's fiscal stimulus package - Move 2004, 2006 tax rate cuts forward; increase tax credit for children; lower "marriage penalty" - Eliminate double-taxation of dividend income - Extend emergency unemployment insurance benefits - Provide direct aid to states (in Democratic proposal) - Tax rebates (Democratic proposal) • Don't know yet what will be passed, or how stimulative different provisions will be 16 Some Federal stimulus is needed to offset weakness at the State and Local level Spending has held up, buoyed by construction spending and education employment 1.2 s ~ 'ii O' I.I -00 °' °' ,._, - ~ "=O 1.0 - State and Local Govermnent Conswnption Experx:litures and Gross Investment - State and Local Govermnent Gross Investment in Structures - State and Local Govermnent Employment in Education 0.9 --1-----------,-~---,----.-----,-----,---.--,--------,---,-----,----.-----,-----,--,----,----------,----, 1998:QI 1998:Q3 1999:QI 1999:Q3 2000:QI 2000:Q3 2001:QI 2001:Q3 2002:QI 2002:Q3 Sources: Bureau of Economic Analysis and Bureau of Labor Statistics. 17 But deficits for fiscal year 2004 still loom, and will likely constrain State and Local spending Projected FY 2004 Budget Gaps as a Percent of General Fund Expenditures I Io I I Less than 5X .______.I s to 1 ox - 10 to 15X - 15X and above Sources: Projections of public officials, National Conference of State Legislatures, and Center on Budget and Policy Priorities. All of which implies a forecast of modest growth in 2003-2004, 18 with consumption growth lagging a bit behind GDP -r-----------------------------------, 4.5 Forecast of GDP and Consumption Growth ■ 1-qtr. Growth in Conswnption 1-qtr. Growth in GDP ■ 4 ~ Q4/Q4 Growth in Consumption 1Z1 Q4/Q4 Growth in GDP Potential •••••••••••••••••• ■ ■ ••••••••••••••••••••••• 2.5 2 2003:Ql 2003:Q2 2003:Q3 2003:Q4 2004:Ql 2004:Q2 2004:Q3 2004:Q4 Source: Forecasts based upon Federal Reserve Bank of Boston staff estimates. The longer-run prospects are good: 19 Looking forward, strong trend productivity growth will support real incomes for consumers and investment payoffs for firms ... -- 4-quarter % change in Productivity ..: --Nonfarm Business O" 8 - 8 I ::!, Non:financial Corporate Business .0..... :c - Trend growth (est.) =C.> "'O 6 0 i. ~ a> tu i. 0 C. i. u0 -; .... =C.> a ~ = z0 "'O ~ ~ ~ -=~ 0 0 ~ 8 i. ... Even though it ~= 0 Z ..=.. -2 appears to be holding -2 back employment in the short run. -4 -1------.----.--........--..----r----,---~----r----r----r----i,------.-.....---,----r----,----,-----,-----,--,-----,,--L -4 1960:Ql 1964:Ql 1968:Ql 1972:Ql 1976:Ql 1980:Ql 1984:QJ 1988:Ql 1992:Ql 1996:Ql 2000:Ql Source: Nonfarm Business Sector and Nonfinancial Corporations: Output per Hour of All Persons (SA): Bureau of Labor Statistics. I < 20 Summary and Outlook • With the ongoing balance-sheet restructuring, the short-term outlook calls for modest spending increases in both the household and business sectors. - Consumption growing slower than GDP for the reasons discussed, savings rate rising a bit - Investment faster than consumption, but still relatively modest • Considerable reliance on this component, and considerable uncertainty about its contours - Some excess capacity remains at least through 2003 (thus, inflation not a problem) • Considerable uncertainty remains - But more symmetric than earlier • The foundations are being laid for a rneaningful upturn in the second half of next year.

Cathy E. Minehan (2003, January 13). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20030114_cathy_e_minehan

@misc{wtfs_regional_speeche_20030114_cathy_e_minehan,
  author = {Cathy E. Minehan},
  title = {Regional President Speech},
  year = {2003},
  month = {Jan},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20030114_cathy_e_minehan},
  note = {Retrieved via When the Fed Speaks corpus}
}