Regional President Speech

Current Economic Developments Cathy E. Minehan President and Chief Executive Officer Federal Reserve Bank of Boston Presented to MIT CIO Summit 2003 May 22, 2003 1 Summary • After a relatively weak recession, a relatively weak recovery • So far financial markets and sentiment are more optimistic than are data for the real economy • Excess capacity and slowing inflation are issues • Fiscal and monetary stimulus are in place -- but are they sufficient? • When will we see investment spending pick-up? • What is the role of productivity growth in all this? 2 The recent recession was unusually mild, but the ongoing recovery is proving to be much weaker than usual as well Output Gap in Recession Output Gap in Expansion Percent Deviation from Peak Percent Deviation from Trough 8,---------------, \ . Current Cycle Histcri al Average Currcn1 Cycle Historical Average -3 -6 2001 Q4 (Trough) -9 ----1----4-----1--+---4--- -9 -4 l"\---+----4----+--+--f---+---4-- -4 Time (Quarters from Peak) Time (Quancrs from Trough) Source: Bureau of Economic Analysis. Note: Gray shading indicates historical rungc. 3 The successful war in Iraq has contributed to a rally in financial markets that has raised stock prices to their highest levels in almost a year Dow Jones S&P I 1000 1200 1100 10000 1000 9000 900 8000 800 7000 700 1/2/2002 517/2002 9/9/2002 1/10/2003 5/15/2 03 3/6/2002 7/9/2002 11/7/2002 3/14/2003 Dow Jones 30 S&P 500 Source: Bloomberg. 4 Consumer sentiment also rebounded in April and May, raising hope that consumer spending may be firming, but sentiment remains relatively low Consumer Sentiment Personal Consumption Index (i966QI=I00) Percent Change (6M, AR) 120 110 100 90 80 70 Jan-I 997 Jan-1998 Jan-1999 Jan-2000 Jan-200 I Jan-2002 Jan-2003 Sources: Bureau of Economic Analysis (Consumption), Consumer Sentiment Personal Consumption University of Michigan (Sentiment). 5 New orders for capital goods looked promising in March but the ISM report in April showed new orders contracting as factories still struggle to recover New Ordc!s. Nondcfcnsc ( ioods l.-,cludi11g Aircraf ISM New Orders Index Percentage Ch;rngc, Jt\.1 MJ\ +50 = Economy Expanding 70 Recession ISM New O rdcrs 60 50 -I -~ 40 -3 -4 30 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Apr-99 Ocl-99 Apr-00 Ocl-00 Apr-OJ Ocl-01 Apr-02 Ocl-02 Apr-03 New Orders ISM New Orders Index Sources: Bureau of the Census, Institute for Supply Management. 6 The wobbly recovery faltered as employment fell again recently and new unemployment claims headed back up Private No11far111 Payroll Employment Initial ( 'la1111s Change from Previous Months, Thousands (SA) I housauds (S/\/\R) 500 400 300 200 100 .I()() 0 -100 .150 -200 -300 300 -400 -500 250 Apr-00 Oct-00 Apr-O I Oct-0 I Apr-02 Oct-02 Apr-03 Jul-00 Jan-0 I Jul-0 I Jan-02 Jnl-02 Jan-03 Payroll Employment Initial Claims Sources: Bureau of Labor Statistics (Payroll Employment). Department of Labor (Initial Claims). 7 The current recovery continues to look "jobless" compared with past recoveries -- even compared with the 1990-91 recession Cumulative Percentage Change, from Trough 6 6 Feb-61 Nov-82 -1 -1 -2 -2 4 9 10 11 12 13 14 16 Months Into the Recovery Sources: Bureau of Labor Statistics Board of Governors. Bureau of Economic Analysis. 8 Weakening in labor markets comes at an inopportune time with stubbornly high levels of underutilized resources in labor and capital markets Unemployment Rate, Percent Utilization Percent of Capacity 6.5 85 Recession 84 6 Began 83 5.5 Capacity 82 Utilization 81 80 79 4.5 78 77 76 75 3.5 I I I I I I I I I I I I I I I I 74 Apr-00 Oct-00 Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Unemployment Rate Capacity Utilization, Industry Source: Bureau of Labor Statistics. 9 Oil prices fell and inflation remains low, but weakness in early 2003 is contributing to greater disinflation in core consumer prices Core Inflation Oil Price Percent Change. 12M S Per Barrel 12 40 10 6 0 13cgan -- -2 0 Jan-1988 Jan-1990 Jan-1992 Jan-I 994 Jan-1996 Jan-1998 Jan-2000 Jan-2002 Sources: The Wall Street Journal, Bureau of Labor Statistics. Oil Price Consumer Price Producer Price 10 Additional fiscal stimulus from expected tax cuts boosts forecasts of income, but 2001-02 tax cuts have had only a modest effect on growth Annualized Growth, Previous Quarter 20.0 -------------------------------- 20.0 15.0 15.0 Real Disposable Personal Income ,0~ 10.0 10.0 5.0 . ,,~:---. ¥" ··-:::: ::: 5.0 0.0 0.0 -5.0 Recession -5.0 Began --------------. -10.0 -l--~e--4---+-+---+-+---+-l--t---1-+---+-+--+-+---+-e--+~-+---+----< -10.0 30-Jun-99 30-Jun-00 30-Jun-0 I 30-Jun-02 30-Jun-03 30-Jun-04 31-Dec-99 31-Dec-00 31-Dec-0I 3 I-Dec-02 3 I-Dec-03 3 I-Dec-04 Disposable Personal Income Projected Disposable Personal Income Personal Income Projected Personal Income Source: Global Insight. 11 The magnitude of expected fiscal stimulus is restraiv.ed by forecasts of high budget deficits and offsetting contraction i ~ ~pvernment budgets ,9.., ( f)'b Billions of Dollars 500 500 400 400 300 300 Federal Government Deficit 200 200 100 100 0 0 -100 -100 -200 -200 -300 -300 80 82 84 86 88 ■90 92 94 96 98 00 02 04 Federal Government Deficit ■ Global Insight Forecast, Federal Government Deficit ,.______..--- Sources: Bureau of Economic Analysis. Global Insight (Forecasts) .. 12 Monetary policy remains stimulative with the real federal funds rate below zero, but declining inflation has raised the real rate in recent months Percent 15 15 Real Federal 10 10 -5 Recession -5 Began -10 -10 Jan-60 Jan-66 Jan- 72 Jan- 78 Jan-84 Jun-90 Jan-96 Jan-02 Jan-63 Jan-69 Jan-75 Jan-81 Jan-87 Jan-93 Jan-99 Percent -0.J -0.J -0.2 -0.2 Real Federal Funds Rate -0.3 -0.3 -0.4 -0.4 -0.5 -0.5 -0.6 -0.6 -0.7 -0.7 -0.8 -0.8 Oct-02 Dcc-02 Fcb-03 Apr-03 Nov-02 Jan-03 Mar-03 Sources: Boord of Governors. Bureau of Labor Statistics (Core CPI). 13 Prospects for robust recovery depend importantly on investment. Information processing is growing, but other investment is still weak, and the long-run trend is quite uncertain after the 1990s boom Percentage Change, 4Q Percentage Change, 4Q 30 30 Forecast Info. 20 Processing 20 10 10 0 -10 -10 -20 -20 -30 -30 1990:QI 1994:QI 1998:QI Total Structures -Info. Proce-ssing - • • I Sources: Bureau of Economic Analysis, Survey of Professional Forecasters. 14 The investment recovery still faces "headwinds" from sagging profits growth, rising interest costs, and reduced credit ratings. Risk premia are lower but still high Billions of Dollars, SAAR 1200 1200 Profit bust IOOO Profit boom 800 800 600 600 400 400 200 200 1983:QI 1987:Ql 1991:Ql 1995:Ql 1999:Ql 2003:Ql 1985:Ql 1989:Ql 1993:Ql 1997:Ql 20 1:Ql Profits Net Interest Investment &#45;&#45;&#45; Source: Bureuu of Economic Analysis. 15 Although nominal spending on high tech investment is still relatively weak, investment in real (price-adjusted) terms has recovered to its peak level in 2000. Higher real tech investment contributes to real output and productivity growth. Billions of Dollars Percent of Nominal GDP 800 Nominal Real Percent of Nominal GDP 4 600 400 , , 200 I 980:Q I I 986:Q I 1992:Q I 1998:Q I 1983:Ql 1989:Ql 1995:QI 2001 :QI Source: Bureau of Economic Analysis. 16 Productivity growth has been remarkably strong during this business cycle but identifying trend vs. cycle is still difficult Percentage Change, 4Q Percentage Change, 4Q 8-r------------------------------"T' Approximate 6 consensus 6 1973-95 Trend 4 4 2 Recession Begun -2 -2 1988:QJ 1990:Ql 1992:QJ 1994:QJ 1996:Ql I 998:QJ 2000:QI 2002:QJ Source: Bureau of Labor Statistics, 17 Views on Trend Labor Productivity • The Optimists - Emergence of "New Economy," IT Revolution in mid 1990s boosts growth to historic rates of 3 % or more • The Pessimists - Not much changed, growth still much less than 2% • Centrists - Best estimate is in between, around 2-1/4% - Most analysts were slow to raise estimates (late 90s) - But they never got caught up in euphoric overestimates 18 Productivity Growth this Business Cycle· cjk ·. , _ /} • Relatively strong «..,lJ.J.J{ - Smaller d~ne .during_recession - - Greater, more persistent rebound as recov4~ !~ • Why is it so strong? ~ - Is trend growth sublli!,Utially.high§r now? - Or is the cyclical response different this time? -- • Productivity may be restraining employment more than usual • Is it sustainable? - To what extent will robust productivity growth "support" the current~ 19 Understanding Resurgent Productivity • How much is tied to investment growth? - Capital deepening helped during the boom .... - .... but outlook for investment is less certain now • How much is due to IT innovations? - Innovative process improvements, workforce practices? - Is IT capital more productive than other capital? • How much depends on fallin IT rices? - What is expected rate of ongoing technical change? • If IT and productivity are linked: - Will productivity growth remain high in the future? - Or is this a gradual rise in the level of productivity? 20

Cathy E. Minehan (2003, May 21). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20030522_cathy_e_minehan

@misc{wtfs_regional_speeche_20030522_cathy_e_minehan,
  author = {Cathy E. Minehan},
  title = {Regional President Speech},
  year = {2003},
  month = {May},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20030522_cathy_e_minehan},
  note = {Retrieved via When the Fed Speaks corpus}
}