Regional President Speech

Current Economic Conditions Cathy E. Minehan President and Chief Executive Officer Federal Reserve Bank of Boston Presented to Boston Patent Law Association March 28, 2003 Four Key Questions • Where are we now? • Where are we headed? • What are the risks? • What about New England? Where Are We Now? The economy started strong last year but slowed in the fourth quarter Annualized Growth 6 - Real GDP Growth - 4 ,- - 3 ,- - 2 ,- - 1 ,- - 0 I I I I I 02:Ql 02:Q2 02:Q3 02:Q4 Source: Bureau of Economic Analysis. But much of the early growth was inventory investment Annualized Growth Annualized Growth 25 3 --,·-----~- Inventories' Contribution to GDP 20 (right scale) 2 15 10 1 5 0 0 -5 Residential Investment Equipment and Software Investment -~s -1 -10 Consumption of Durables (left scale) -15 02:Ql 02:Q2 02:Q3 02:Q4 Source: Bureau of Economic Analysis. Growth was not strong enough to boost employment - 1.05 1.04 0 ,.... II ..s::: O> i5 1.03 .... :... X 11) ""C E 1.02 Employment 1.01 Dec. 2001: 109.8 Employment Feb. 2003: 109.2 1 111111111 II I II I I I I I I II 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 I I I I I I I I I I I II I II 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 I I I I I I I I I II II I I I I I I I I I I I I II I II II II I I I II I I I I I I II I I I I I II I I 0.99 L___ _ ___J_ _L__ ___.__ _.J.. ...L__ __J__ _____j_ _ 0 2 4 6 8 10 12 Number of months after business cycle trough Heavy black line represents average of recoveries Heavy red line represents current experience Shaded area shows range of outcomes across all business cycles Source: Employment at Private Non-farm Establishments (SA, Millions): Bureau of Labor Statistics. Au,Jf' And markets have been volatile 131 115 130 Trade-Weighted Value of the Dollar 110 129 128 105 127 126 100 125 124 Broad Index Major Currencies 95 123 (January 1997 = 100) (left scale) (March 1973 = 100) (right scale) 122 90 0l-Jan-02 0l-Apr-02 28-Jun-02 26-Sep-02 25-Dec-02 21-Mar-03 14-Feb-02 15-May-02 13-Aug-02 11-Nov-02 f).. ~-Feb-03 1200 it:JJ o,l . s~J 1100 , ~°:P.W' pip} 1000 , Pl))"~" t~·~ ~o"' 900 -t-~( 800 ~~ l,b ~t. 700 1...-.--------------- ~ ~ ·l\1 {r,ir 0l-Jan-02 01-Apr-02 28-Jun-02 26-Sep-02 25-Dec-02 21-Mar-03 14-Feb-02 15-May-02 13-Aug-02 11-Nov-02 07-Feb-03 1,~ f/J Sources: Federal Reserve Board (Dollar). Wall Street Journal (S&P). Where Are We Headed? The most common forecast of where we are headed expects the economy to expand as the year progresses Annualized Growth 5 4 3 2 Real G P Forecasts Range of Blue Chip Blue Ch p Economic Indicators, Forecasters 3/10/03 1 2003:Ql 2003:Q3 2004:Ql 2004:Q3 2003:Q2 2003:Q4 2004:Q2 2004:Q4 Sources: Boston Federal Reserve Bank, 3/11/03. Blue Chip Economic Indicators, 3/10/03. Range between top ten average and bottom ten average forecasts. ... with investment and consumption rebounding while government spending remains fairly robust Annualized Growth Annualized Growth 5 13 Government Spending 12 4 (left scale) 11 3 10 9 2 8 1 7 6 0 5 -1 Equipment and Software Investment 4 (right scale) -2 3 2003:Ql 2003:Q3 2004:Ql 2004:Q3 2003:Q2 2003:Q4 2004:Q2 2004:Q4 Is this likely? Sources: Boston Federal Reserve Bank, 3/11/03. (Consumption, Investment) Global Exchange (formerly DRI-WEFA) 3/10/03. (Government Spending). We have seen some growth in investment recently ... New Orders($ billions) Shipments ($ billions) Orders data suggest 75 .. 66 Shipments: Nondefense Capital 64 that growth is likely 70 Goods, excl. Aircrafts (right scale) 62 to continue in the 65 New Orders: Nondefense Capital 60 near term 60 Goods, excl. Aircrafts (left scale) 58 56 55 54 50 52 45 50 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 ... but spending remains ... forcing companies to rely on high relative to cash flows external sources of funds Ratio of Levels Spread from the Treasury 10-Year Bond 2.4 12 Low Grade Corporate Bonds Spread Business Fixed 10 2.2 Moody's Baa Spread Investment/Cash 8 Moody's Aaa Spread 2 Flows 6 1.8 4 1.6 2 1.4 0 87:Ql 90:Ql 93:Ql 96:Ql 99:Ql 02:Ql Jan-87 Jan-91 Jan-95 Jan-99 Jan-03 Sources: Bureau of Economic Analysis (Investment). FAME Database (Low Grade Bonds) Federal Reserve Board (Moody's Aaa and Baa and Cash Flows), Census Bureau (New Orders and Shipments) Consumer income continues to grow even as tax effects wane Annualized Growth 20 Real Disposable Personal Income 15 10 5 0 -5 -10 01 :Ql 01 :Q3 02:Ql 02:Q3 01:Q2 01:Q4 02:Q2 02:Q4 Source: Bureau of Economic Analysis. And low mortgage rates have kept residential investment strong Thousands of Units, Annualized 1900 1800 Housing Starts 1700 Building Permits 1600 1500 .. Recession Began 1400 Feb-00 Aug-00 Feb-01 Aug-01 Feb-02 Aug-02 Feb-03 Source: U.S. Census Bureau. But Risks Remain With large amounts of unused capacity, the need to invest may be marginal Level Level 90 13 Unemployment Capacity Utilization 12 Rate (right scale) (left scale) 11 85 10 9 80 8 7 6 75 5 4 70 3 86:Ql 90:Ql 94:Ql 98:Ql 02:Ql 88:Ql 92:Ql 96:Ql 00:Ql Sources: Federal Reserve Board (Capacity Utilization). Bureau of Labor Statistics (Unemployment Rate). Indicators suggest hiring may not rebound soon Thousands of Units, Annualized 500 Initial Claims Week ending March 15lt h: 450 402,000 • Unemployment 400 usually rising --- ------------ ---------------- - 350 ----------------- Unemployment usually falling 300 .. Recession Began 250 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Source: Department of Labor. Consumer confidence has declined Level Year-to-Year Growth 120 7 Asian : Russian LTCM :NASDAQ Sept.J 1 • . Currency I: Default : I Collapses Sentiment 1s consistent with 6 Crises : 110 2% growth in I Michigan Index of Consumer I consumption 5 spendmg. Sentiment (left scale) 100 4 3 90 2 Personal Consumption 80 xpentiure (right scale) 1 70 0 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Year-to-Year Growth Millions of Units, Annual Rates 20 19 ... and consumption Auto Sales 15 right scale) 18 10 Jan/Feb has slowed. ave (2.3) 5 • 17 0 -5 etail Sales, Exel. Autos 16 Jan/Feb • -10 left scale) ave (15.8) -15 15 01:Q4 02:Q2 02:Q4 Sources: Bureau of Economic Analysis, University of Michigan. 02:Ql 02:Q3 Jan/Feb average Oil prices add to uncertainty $/Barrel 40 War with Iraq begins West Texas Intermediate 35 Spot Price March 27, 2003 30 $29.65 I I ' .... 25 .... ... ... ... - I Futures: Light, Sweet Crude Oil 20 Recession Began 15 ... 10 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-OS Sources: Wall Street Journal (Spot Oil Price). New York Mercantile Exchange (Futures Price: Most Recent Settle). And the degree of fiscal stimulus is a question Projected Pf 2004 Structural Deficits as a Percent of 2COO GSP !No Structural Deficit l · · · 1 Less than .5" :=====:I . 5 to 1" - 1 to 1. 5" 1 .5" and above However, longer-run prospects are good: Year-to-Year Growth 8 Output per Hour: Nonfinancial Corporate Business Output per Hour: N onfarm Business 6 rend Growth (Est.) 4 2 0 -2 .. Recession Began - 4 l'I I I 11 17 I 11 I I I I I 11 I I I I 11 I I I I I 11 I I I I I 11 I I I I I 11 I I I I I 11 I I I I 11 I I I I I 11 I I I I I 11 I I I I I 11 I I I I 79:Ql 81:Ql 83:Ql 85:Ql 87:Ql 89:Ql 91:Ql 93:Ql 95:Ql 97:Ql 99:Ql 01:Ql ... even though productivity appears to be holding back employment in the short run. Source: Bureau of Labor Statistics. Summary and Outlook • Consumption and investment must propel the expansi• on. • And the best guess is that they will. • But, for the time being, important imponderables remai• n. - On the upside, will easing uncertainties spur confidence, spending and hiring? - On the downside, even after the war will excess capacity continue to constrain? How is New England faring? • Mostly tracking the nation until recently. • No turnaround yet. Employment Growth Percent change from year earlier 4--.--------------------------------------, 3 2 US Feb'02-Feb'03: -0.1% NE Jan '02-Jan '03: -1.0% 1 MA Jan '02-Jan '03: -1. 7% -1 Shaded area indicates range of growth rates in US census -2 regions. -3 -4 _L_ ____, Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 .Jul-02 Oct-02 Jan-03 Source: US Bureau of Labor Statistics Why steeper losses in New England? • National weakness in key regional industries: money management ( stock market weakness) 0 software and other technology services 0 communications 0 computers and other capital goods 0 • Steep regional job losses in manufacturing and professional and business services. • Steadier sectors, such as private education and health services, not strong enough to offset. Office Vacancy Rates The weak jobs picture has moved vacancy rates up sharply in greater Boston 25 ,----------------, 25 .-------------~ Downtown Suburban 20 ----------------------------------------------- United States 15 5 --------------------------------------------- 0 .___.,_____.___~~~~~~~~~~~ 0 .___.,____.,____.,____.,____~~~~....__....__~.....__. Ql-90 Qt-92 QJ-94 QJ-96 QJ-98 Ql-00 QJ-02 Ql-90 QJ-92 Ql-94 QJ-96 Ql-98 Ql-00 Ql-02 Office rents have also fallen as vacancies have risen Source: CB Richard Ellis New England state governments face sizable FY 2004 deficits ... Projected FY04 Deficits as Projected FY93 Deficits as a Percent of 2000 GSP a Percent of 1989 GSP ■ ■ 1.5 p,e«ent and above 15 peroont alld above □ 1 to 1.S percent □ 1 to 1.5 percent ■ ■ .5 to 1 percent .5 to 1 percent ■ less than ..5 percent ■ less than ..5 pemmt nodeficlt nodeftdt ... considerably worse this time than in the early 1990s Confidence Indicators State fiscal worries, along with job concerns and geopolitical uncertainties, have weakened confidence Consumer Confidence Business Confidence .-------------------------------------~ 90 New England 140 Consumer Confidence 80 Future Expectations 110 70 80 60 Massachusetts Business Confidence 50 50 20 Jan-98 May-98 Sep-98 Jan-99 May-99 Sep-99 Jan-00 May-00 Sep-00 Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 Source: Conference Board, Associated Industries of Massachusetts Key factor in regional outlook is national economy, but New England will lag • Region will recover later than nation, with recovery contingent on national pickup in business spending.

Cathy E. Minehan (2003, March 27). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20030328_cathy_e_minehan

@misc{wtfs_regional_speeche_20030328_cathy_e_minehan,
  author = {Cathy E. Minehan},
  title = {Regional President Speech},
  year = {2003},
  month = {Mar},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20030328_cathy_e_minehan},
  note = {Retrieved via When the Fed Speaks corpus}
}