Regional President Speech

Cathy E. Minehan President and Chief Executive Officer Federal Reserve Bank of Boston The National Economy: Future Prospects versus Current Realities • Will the recovery pick up steam or will the long slow workout continue? • Right now the answer to that question is unclear. - Data on the real economy suggest the answer may be no. - But possible indicators of future activity are more upbeat. • For now, a renewed pace of growth is only in the outlook, not in the data. Percent 7 Payroll Employment 6 Cumulative percentage change from trough for 6 16 months into the recovery 5 5 4 4 Feb-61 Mar-75 Mar-91 3 3 Nov- 70 Nov-82 Jan-02 2 2 1 1 0 -1 -1 ast two recessions -2 --4...-1---1----r-------,i--------,r-------,i-------,r-------,---,----,-----r-----r---tt----,.---r---t---.l -2 1 2 3 4 5 6 7 8 9 10 11 12 14 15 16 Time (Months Into the Recovery Source: Bureau of Labor Statistics (Employment). Bureau of Economic Analysis (Recessions). And recent trends in the labor market are not encouraging Private Nonfarm Payroll Employment Initial Claims Change from Previous Months, Thousands (SA) Thousands (SAAR) 500 500 -----r---------------------------------.-- Employees on Private 400 Initial Claims Week ending N onfa rm Payrolls " (right scale) Sat. 5!2l!03 300 (left scale) ~ 41- 450 200 tJ/~ /3,,, 3 100 400 14-v 0--------+--l-+-------.---~---------~------+--,.t---+--t-----+ 3~4-wl, -100 350 ~(W -200 fl 4-;o > -300 300 4o0 ea 1 Recession -400 l4~ Began ----1-► ( -500 250 --1--~-+--+--1--1--+-+-+-+--+---l-+-+-+-+-+-+-+--t--t--,-+--+-+-+--+-+-+-+-~-+--,t-+-+--+-+-+-_._ Apr-00 Oct-00 Apr-01 Oct-01 Apr-02 Oct-02 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Sources: Bureau of Labor Statistics (Employment). Department of Labor (Initial Claims). ~Jdv,r,JJWA-h Consumption growth has been bouncy since the presumed beginning of the recovery Annualized Growth 5---r---------------------------, 5 Real Personal Consumption 4 4 3 3 2 2 1 1 0 0 02:Ql 02:Q2 102:QJ 02:Q4 03:Ql ~' ~ Sources: Bureau of Economic Analysis. And there are few indications of sustained strength $, Billions Millions of Units, Annualized 3 3 17.0 17.0 Retail Sales, excl. Autos Auto and Light Truck Sales 16.5 16.5 2 2 16.0 16.0 1 1 15.5 15.5 0 0 15.0 15.0 -1 -1 14.5 14.5 -2 -2 14.0 14.0 Jan-2003 Mar-2003 May-2003 -3 -3 Feb-2003 Apr-2003 03:Ql Apr-03 Sources: Board of Governors (Auto Sales). Census Bureau (Retail Sales). We have yet to see more than marginal improvement in investment in the current data New Orders($ billions) Shipments($ billions) 3-mo Moving Average 3-mo Moving Average 75--.------------------------------------66 64 70 62 65 60 60 Shipments: Nondefense Capital Goods, 58 excl. Aircrafts (right scale) 56 55 New Orders: Nondefense CaJ?ital Goods, 54 excl. Aircrafts (left scale) 50 52 Recession Began 45 50 ---1-----------t---1r----t----t---i----i--1"""""-t----i---i--t--t---t--;---1---t--t---1r----t----t---i---r---t---t-----t---t---+---.---.,--.,.--f-- Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 @-,._ A,hJJ.LN-;tl - J£M~ ~ /IA -+o ~ ~ ~➔ ~ VM-4 - .,{_,~ _ L .rt Source: U.S. Census Bureau. --;?!-- ~ % 1!tl/;}!f!f:;Ju~ ~ ~ll,U Yet consumers seem to be getting more optimistic Current Conditions Expectations 125 ~-------- ----------------+--~ 120 Current Economic Conditions 120 (left scale) 1IO ~} 115 Consumer Expectations 100 110 (right scale) 105 - 90 100 80 95 70 90 Recession Began ... 85 60 --i----+-+--+--+--t--t----+--+-+--+-+--+--+--+--+-+--+--+-+-+--+--+-+--+--+--+--t----t--+-+-+--+-+-+--+---+l-f----1-- Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar 03 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Although they are increasingly optimistic about th@ot the pre~ent_ Source: University of Michigan. Equity markets are moving upward Dow Jones S&P 11000 -,------------------------------- 1200 6.9% change since January 2, 2003 1100 10000 3. 7% change since January 2, 2003 9000 1~ 900 ~ y1J Dow Jones, Daily Closing Price ~r· ~J aooo (left scale) S&P 500, Daily Closing Price 800 (right scale) 7000 ---1,,.._ ---- 700 1/2/2002 5/7/2002 9/9/2002 1/10/2003 5/15/2003 3/6/2002 7/9/2002 11/7/2002 3/14/2003 ~[1 f~Jt V' Note: Updated until closing on June 3, 20.Q3 .. 5 Source:Bloomberg. 10 And residential investment has remained relatively strong Thousands of Units, Annualized 1900---r-----------;---------------------, 1900 1800 1800 April ,,,,,,,,...__ Penni ts • Building Permits 1700 1700 Housing Starts -~~ ~E 1600 ""? 1600 - 1500 1500 Recession Began 1400--i...------------.--------.-----.-----.-----.-------------1 1400 00:Ql 00:Q3 01:Ql 01:Q3 02:Ql 02:Q3 03:Ql Source: U.S. Census Bureau. Rising productivity provides considerable support for the long-run ~ Percentage Change, 4Q Percentage Change, 4Q 8 8 Approximate Period where estimates of trend growth 6 were being gradually revised upward consensus 6 esti ate 1973-95 Trend 4 4 2 2 0 Recession Began ----- -2 1988:Ql 1990:Ql 1992:Ql 1994:Ql 1996:Ql 1998:Ql 2000:Ql 2002:Ql Source: Bureau of Labor Statistics. ClAL, Fiscal policy is stimulative, as federal tax cuts.seem certain ... ... but weakness in state and local budgets will 0.5 f .::: nt likely offset at least part of the federal stimulus =3•--- Sources: National Conference of State Legislatures (individual state budget documents). ■ Bureau of Economic Analysis. And monetary policy remains stimulative Percent 15 ---.---------------;--------------, 15 Real Federal Funds Rate 10 10 5 5 0 -5 -5 Recession -10 B_e_a_n_ _ _._._ , -10 Jan-60 Jan-70 Jan-80 Jan-90 Jan-00 0---------------------, 0 -0.2 Real Federal Funds Rate -0.2 -0.4 -0.4 -0.6 -0.6 -0.8 ---------t----t----r------i-----------,..---' -0.8 Oct-02 Dec-02 Feb-03 Apr-03 Recently, declining inflation has raised the real rate Sources: Board of Governors (Federal Funds Rate). Bureau of Labor Statistics (Inflation). Unemployment Rate, Percent 6.5 ecession 3 Began -~.- . 6 2.5 5.5 Core Inflation (right scale) 5 2 4.5 nemployment Rate (left scale) 1.5 4 3.5 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 Source: Bureau of Labor Statistics. Most forecasters anticipate a solid recovery as the year progresses ... Annualized Growth 5 5 4 4 3 3 Real GDP Forecasts Range of Blue Chip 2 2 Forecasters Blue Chip Economic Indicators,5/10/03 l--t---------------,...,-----;---------r------;----------fl 1 2003:Q2 2004:Q2 2004:Q4 2003:Q3 2004:Ql 2004:Q3 ... but we haven't seen it yet Ma~ ~ Note: Gray shading indicates range between top ten average and bottom ten average foreca-sts. -----,,,- Source: Blue Chip Economic Indicators, 5/10/03. Summary: • So far financial markets and sentiment are more optimistic than are data for the real economy. • Excess capacity and slowing inflation remain. • In the long run the economy is sound, as trend productivity growth remains robust. • Fiscal and monetary stimulus are in place -- but are they sufficient to spur consumption and investment? • If so, when? How is New England faring? • Suffering somewhat more than the nation since the recession began. • Within the region, some states are doing better than others. • No turnaround yet, but confidence seems to be improving. Employment Growth Percent change from year earlier 4 3 2 US Apr '02 - Apr '03: -0.3% NE Apr '02-Apr '03: -1.0% 1 MA Apr '02 -Apr '03: -1.5% -1 Shaded area indicates range -2 of growth rates in US census regi• ons. -3 -4 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 Apr-03 Source: Bureau of Labor Statistics. Unemployment Rates 10 Unemployment has risen steeply in New England 9 but remains below average. 8 US Apr '03: 6.0 % NE Apr '03: 5.2 % 7 6 5 4 3 Low Point: 2. 7% 2 -1--------.--------,---....-----~-------r----r----,------,----..--------r-- J an - 93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-03 Jan-03 Jan-03 Source: Bureau of Labor Statistics. Why steeper losses in New England? • National weakness in key regional industries: - money management ( stock market weakness) - software and other technology services - communications - computers and other capital goods • 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 ------------------------------------------------ 20 United States United States 15 15 10 ------------ 5 5 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Boston - - - - - - - - 0 L-...L.-----'-----'----'----'------'L--_.____._____.___~-~ 0 .....__....______._____.____.__...__....______.____._____._____...____.______._____, Ql-90 Ql-92 Ql-94 Ql-96 Ql-98 Ql-00 Ql-02 Ql-90 Ql-92 Ql-94 Ql-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 2004 deficits .... Projected FY04 Deficits as Projected FY93 Deficits as a Percent of 2000 GSP a Percent of 1989 GSP ■ ■ 1 S percmt and above I .S percmt and abOYe 1 to 1.S percent □ 1 to 1.5 percent D ■ .s to 1 percent ■ 5 to 1 pen:ent ■ less than .5 percent ■ less than .5 percent nodehclt nodeficlt ... considerably worse this time than in the early 1990s Confidence Indicators State fiscal worries, along with job concerns and Consumer Confidence geopolitical uncertainties, weakened confidence, but the Business Confidence consumer view is now brightening. 90 140 New England Consumer Confidence 80 110 70 80 60 Massachusetts Business Confidence 50 50 20 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Source: Conference Board, Associated Industries of Massachusetts. Key factor in regional outlook is the 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, June 4). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20030605_cathy_e_minehan

@misc{wtfs_regional_speeche_20030605_cathy_e_minehan,
  author = {Cathy E. Minehan},
  title = {Regional President Speech},
  year = {2003},
  month = {Jun},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20030605_cathy_e_minehan},
  note = {Retrieved via When the Fed Speaks corpus}
}