Regional President Speech

Cathy E. Minehan President and CEO, Federal Reserve Bank of Boston Presentation to Vanderbilt University Monetary and Fiscal Policy Seminar February 12, 2003 1 Summary • The recovery continues, but slowly - Consumers have held up; - Business investment is increasing, but slowly; - Federal stimulus may be partly offset by state and local fiscal problems. • Considerable uncertainty remains Resilience: Consumer sentiment and spending have remained 2 a source of strength through many crises 115 Asian . LTCM .~ Sept. 11 .. Currency: .. 110 Crises .. .. 5.5 Recession ::;- .... 105 = 0 8 I 4.5 ~ '-" 100 t ...=..... "=0 ~ 95 Q ~ . , ~ 3.5 § ·..:: Q., 90 8 = "=' u- 0 85 ~ = 2.5 0 ~ ~ ~ 80 ..=.. -= 1 - Consumer Sentiment Sentiment 75 is consistent ~ 1.5 with 2-3% - Consumption Growth. growth in 70 (4-qtr.) ~ consumption spending. 65 +----,----,----,---r-----,"~-r---.~~,----.---------,,----~------,------------,----,-------.---,----,---L 0.5 1995:Jan 1996:Jan 1997:Jan 1998:Jan 1999:Jan 2000:Jan 2001:Jan 2002:Jan 2003:Jan Sources: Consumer Sentiment (NSA, 1966:Q I = I 00): University of Michigan. Personal Consumption Expenditures (SAAR, Chained 1996$): Bureau of Economic Analysis. Consumers have spent even as household net worth has slid 3 over the past two+ years 45000 ,---------------------------------------~ 10000 - Household Net Worth -Household Net Holdings of Corporate Equities 40000 - t=i) s0 35000 6000 ~ '--=" t: 0 ~.... The net worth zQ,l decline is - "O 30000 4000 -0= almost entirely Q,l t=i) attributable = to the decline in equities. 25000 2000 20000 0 ...j..All!~..,L_----,-----,----,----,-----,,-------,-----,---~-----r--~--~----l-- 1990:Ql 1992:Ql 1994:Ql 1996:Ql 1998:Ql 2000:Ql 2002:Ql Source: Net Worth of Households and Nonprofit Organizations, Household Net Holdings of Corporate Equities excluding Mutual Fund Shares (Billions$): Federal Reserve Board. 4 Spending has been supported by rising equity in housing, but this effect may be diminishing ... 8000 -.---------------------------------------, ... Net wealth in housing has 7500 flattened recently, and with slower increases in house prices projected, 7000 will likely not provide the same spur to growth early this year. 6500 6000 5500 - Household Net Assets Held in Owner-occupied Housing Less Household Net Mortgage Liabilities 5000 4500 4000 -+-----r-----ir-----,---~-----r-----,------,---,-------,r-----,---~-------,--__, 1990:Ql 1992:Ql 1994:Ql 1996:Ql 1998:Ql 2000:Ql 2002:Ql Source: Household Assets, Total Owner-Occupied Real Estate and Household Liabilities, Home Mortgages (Billions$): Federal Reserve Board. In addition, the employment outlook has yet to brighten ... 5 1.04 0 T""" 1.03 II ..s:::: en :l 0 :.... +- x- 1.02 OJ -0 s:: 1.01 Employment Dec. 2001: 109,768 Employment Jan. 2003: 109,438 ■ 1 II I I I I I I II ----""~I l~l l,l !l~l l~l l~l l~l l:1-1:-11111111 I I I II I I I I I I I I I I I I I I II I I I I I I I I I I I I I JI I I I I I I I I I I I Ill I I I II I l I I I I I I I I I I I I I I I I I I I II I I I I I I I I 1111111111111111111111111 I I I I I I I 0.99 L___ _ __l.. -1- ____,.__ _,_ ,._ --'- ..,____ 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 Unemployment usually rising Unemployment - r;,: usually stable -,.:::: 350 :s 1 Unemploy ent usually fal ing 300 250 +----.---r-----,-----,---,--,-,---,---,---,-----,---r---,----,---,--,---,---,---,-------,----,----,--,------,---,--,--,J 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 2003:Jar Source: Initial Claims for Unemployment Insurance, State Programs, Monthly Average of weekly data(SA, Thousands): Department of Labor. 7 ... With employment uncertain, households are increasing their saving rate ,-----------------------------------------------,-- 5.5 - Civilian Unemployment Rate - Personal Savings Rate (2-qtr. moving average) 5.9 5.0 - 4.5 ~ > = .... 5.4 ~ = Q> "> = ~.... 4.0 0s = .,...:. Qs> O" ->. . I 0 ~ s0. 3.5 ~ ~ Q=> ~ 4.9 ;;;> "~' = = = "> .... 3.0 -= ~ 00 u = = 0r: pQ.>. 2.5 4.4 2.0 3.9 --1---------,-------,--------,--------,------------llL---,------,---------,-'- 1.5 1996:Jan 1998:Jan 2000:Jan 2002:Jan Sources: Civilian Unemployment Rate, 16yr.+ (SA): Bureau of Labor Statistics. Personal Savings Rate (SAAR): Bureau of Economic Analysis. 8 • Consumption growth at 2-3% won't do the job alone (would leave unused capacity). • Many forecast that investment in equipment and software will grow faster than that - Why do they say that? • Capital spending has grown about 5% over the past three quarters, an improvement over the recession; • Orders growth is consistent with continued growth; • Firms have made improvements in efficiency, balance sheets; • Overall financial environment has improved somewhat - But there remains considerably uncertainty about that outlook • Is it "geopolitical" uncertainty that holds back investment and employment? • Or is it uncertainty about the robustness of the recovery and prospects for strong sales? 9 We have seen modest growth in investment lately . • • 7 2 -3 Investment in Equipment & Software -8 -13 -18 2001:Ql 2001:Q2 2001:Q3 2001:Q4 2002:Ql 2002:Q2 2002:Q3 2002:Q4 64500 -- New Orde"" £or Nonde£ense Capital Goods ex Aircraft -- 68000 -- --Ship,nents o£Nonde£ense Capital Goods ex Aircraft .."=.' 62000 - "' .-.0. C: . .S: s 63000 . . and orders data =·- - e Vt suggest that modest 59500 - V-} "' I. gr~wth is most likely "' " Q O ,) 58000 C: I. 1n the near term 57000 Qe,) 0 ·- i C. z .c: rJ1 53000 54500 -I----~---,-----~---~---~---~----,------,-----~---,-------,-----+ 48000 52000 2000:Jan 2000:Jul 2001:Jnn 2001 :Jul 2002:Jan 2002:Jul Sources: Gross Private Domestic Investment in Nonresidential Equipment and Software (SAAR,Chained 19%$): Bureau of Economic Analysis. Manufacturers' New Orders and Shipments for Nondefense Capital Goods ex Aircraft (SA,$ Millions): Bureau of the Census. 10 ISM manufacturing indicators for overall activity and new orders also show some improvement. 65 ~------------------------------------------,- 65 - ISM Composite Index 60 60 - ISM New Orders Index 55 55 ~ ~ ~ ~ "=O "=O .-4 .-4 . ~ ... --------- !; ~ 50 50 ~ "O 0 i.. Cel . 0 u0 ~ ~ z ~ 00 ~ .-4 45 45 00 .-4 40 40 35 ---1--------,----------,----------,------------,--------.--------,---L35 2000:.Jan 2001:.Jan 2002:Jan 2003:.Jan Source: ISM Manufacturing, PMI Composite Index and New Orders Index, 50+ = economic expansion (SA): Institute for Supply Management. Firms are taking steps to improve efficiency and rebuild 11 balance sheets, as evidenced by productivity growth ... 2 - Change in Real Unit Labor Costs -I -2 ... and key balance sheet ratios. JOO - Short-term debt to total credit market debt -Ratio of liquid assets to short-term liabilities 80 -~ 60 0.() ~ = ~ ~ a.. 40 ~ ~ 20 0 -+---...1.r-....L---,___L-L.....,-----,-------L____J"",--'----.-----,---__.__~ __ ,-------,-----,__.-__, 1967:Ql 1973:Ql 1979:Ql 1985:QI 1991:Ql 1997:Ql Source: Nonfinancial Corporate Business, Flow of Funds: Federal Reserve Board and Bureau of Labor Statistics. But considerable uncertainty remains: 12 Yield spreads have improved somewhat, but remain elevated relative to historical standards ... 7.0 6.0 5.0 -- 4.0 - ~ 0 a- ec = ..... = a- 3.0 I:> a.. a- ~ 2.0 1.0 0.0 -1-----~--~---.-----,----,-----,-----,-----,----,-----,-------,---------,- 2000:Jan 2000:Jul 2001:Jan 2001:Jul 2002:Jan 2002:Jul 2003:Jan -10-year AAA spread - 10-year A spread - 10- Year Junk Spread - 10-year BBB spread Sources: I 0-year Treasury Bond Yield at Constant Maturity: U.S. Treasury. I 0-year Industrial Corporate Bond Yields: S&P Global Fixed Income Research. 13 And equity markets remain shaky. 1550 15000 1450 14000 ..~.. ~ I-, 1350 13000 ~ 0Jl .9 - ..~ ~ .. " 0 1 u I-, 1250 12000 - ~ ..>.. . ..= 0.J. l i:o= - Q "1 0 ~"1 u 1150 11000 = ...Q.. ~ 0 i:o= ~ Q 0 Q Q 10000 ... Q 1050 II') Q Q ~ Q ~ II') rJJ. ..~.. I-, 950 9000 .-Cl .."..' ~ 8000 850 750 7000 -1----~~--~------T------,------,--,----,-----,----,-----,----,c-----.---r--------r--.----------.---.----------.----,------.----,------'- 1/3/2000 3/29/2000 6/23/2000 9/19/2000 12/13/2000 3/13/2001 6/7/2001 8/31/2001 12/3/2001 3/1/2002 5/28/2002 8/21/2002 11/14/2002 -S&P 500 - Wilshire 5000 - Dow Jones Industrial Average Source: S&P 500 Composite Index, Wilshire 5000 Stock Index, Dow Jones Industrial Average (Daily Closing Price): Bloomberg. 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 - Has supported growth in housing and consumer durables - And helped to reduce headwinds from financial markets 15 • Fiscal Policy: could be a source of strength, but considerable uncertainty remains. • Proposed fiscal stimulus packages: - 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 the combination offe deral and state and local policies will be 16 Some Federal stimulus is needed to offset weakness at the State and Local level Spending has grown, buoyed by construction spending and education employment 1.2 1.0 - State and Local Government Consumption Expenditures and Gross Investment - State and Local Government Gross Investment in Structures - State and Local Government Employment in Education 0.9 +--.---,----------.----,------.-----,--------,----------,-----,-----.------,---,-----,---,---,--------,------,-~-~ 1998:Ql 1998:Q3 1999:Ql 1999:Q3 2000:Ql 2000:Q3 2001:Ql 2001:Q3 2002:Ql 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 Structural Deficits as a Percent of 20CO GSP I No Structura 1 Deficit I .. · ,; ·• .:I Less than . 5~ ~I . MHm 5 to 1 ~ 1 to 1 . 5~ ;==I - 1 . 5~ and above 18 And by this measure, things look worse this time around than they did in the early 1990s. Projected FY 1993 Structural Deficit as a Percent of 1989 GSP I I _:_;;:: t\,I No Structura 1 Deficit Less than . SX ;:::::==:==;I . 5 to 1 X All of which implies a forecast of modest growth in 2003, 19 with consumption growth lagging a bit behind GDP ... 4~-------------------------------, Forecast of GDP and Consumption Growth 3.8 ■ l-qtr, Growth in Consumption ■ 1-qtr. Growth in GDP 3.6 ~ Q4/Q4 Growth in Consumption ~ Q4/Q4 Growth in GDP 3.4 Potential ... and GDP . growing below potential, implying no progress 2.6 in reducing labor 2.4 market slack. 2.2 2 2003:Ql 2003:Q2 2003:Q3 2003:Q4 Source: Forecasts based upon Federal Reserve Bank of Boston staff estimates. The longer-run prospects are good: 20 Looking forward, strong trend productivity growth should support real incomes for consumers and investment payoffs for firms ... 4-quarter % change in Productivity --Nonfarm Business - 8 Nonfmancial Corporate Business <Trend growth (est.) 6 - ..~... ~ = ~ = = g 2 z "=0 ~ ~ ~ a=> ·;=i 0 0 ~ ! ... Even though it ~ = 0 z appears to be holding = -2 -2 ..... back employment in the short run. -4 -l-----,---.......------,,------,-----,---.....---,----,---~--,-----,---~---,----.----,-----,-----,-----,------,,-------,-___J_ -4 1960:Ql 1964:Ql 1968:Ql 1972:Ql 1976:Ql 1980:Ql 1984:Ql 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. 21 Summary and Outlook • With ongoing balance sheet restructuring, the near-term outlook calls for modest spending increases in both the household and business sectors. - Consumption will grow slower than GDP for the reasons discussed; the savings rate will rise a bit Investment will grow 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 - Geopolitical uncertainty • War more likely now than a few weeks ago • Effects on oil prices? Terrorism? - But also economic uncertainty • Will overall policy stimulus spur spending? • Will businesses then see justification for hiring and investment?

Cathy E. Minehan (2003, February 11). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20030212_cathy_e_minehan

@misc{wtfs_regional_speeche_20030212_cathy_e_minehan,
  author = {Cathy E. Minehan},
  title = {Regional President Speech},
  year = {2003},
  month = {Feb},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20030212_cathy_e_minehan},
  note = {Retrieved via When the Fed Speaks corpus}
}