Regional President Speech

Current Economic Developments Cathy E. Minehan President and Chief Executive Officer Federal Reserve Bank of Boston Presented to the New England Council July 23, 2003 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. - Most data on the real economy suggest we have not picked up steam yet. - But some indicators of future activity--especially financial market indicators--are more upbeat. - And policy is stimulative. • For now, a renewed pace of growth is mainly in the outlook, not in the data. 2 So far, this expansion has not been sufficiently robust to create jobs Percent 7 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 Nov-70 Nov-82 Jan-02 3 2 2 1 1 Last two recessions 0 0 } -1 -1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Time (Months Into the Recovery) 3 Sources: Bureau of Labor Statistics (Employment). Bureau of Economic Analysis (Expansions). And recent trends in the labor market are not encouraging Private Nonfarm Payroll Employment Initial Claims Change from Previous Months, Thousands (SA) Monthly Average, Thousands (SA) 500 ~-------------------------------~ 500 Employees on Private Initial Claims 400 Non farm Payrolls (right scale) 300 (left scale) 450 200 * 100 400 0--+-1-4------+--->c,-+--if---------------7"---+---t-+-----.c----lf- -100 350 -200 -300 300 -400 -500 --l--l-..-+-l,,_.,......j-,+,-i--+,....,i...-4-~f---1,,,.....,t,,,,,-t-+-+---+---+-+-t-,,,,t,--t---+--t--+......,i,.,....t,-,--i,,-,--t---t---+-+-t-,,,,t,-""""'r""-tl- 250 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 Jul-03 * July data represent 4-wk moving average of initial claims through the week ending July 12th. 4 Sources: Bureau of Labor Statistics (Employment). Department of Labor (Initial Claims). 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 02:Q3 02:Q4 03:Ql 5 Sources: Bureau of Economic Analysis. But there are some indications of sustained strength Monthly % Change Millions of Units, Annualized 1 1 Retail Sales, excl. Autos 17.0 17.0 Auto and Light Truck Sales 16.5 16.5 0.5 0.5 16.0 16.0 15.5 15.5 0 0 15.0 15.0 -0.5 -0.5 14.5 14.5 14.0 14.0 -1 -1 Jan-2003 Mar-2003 May-2003 Feb-2003 Apr-2003 Jun-2003 03:Ql May-03 Apr-03 Jun-03 6 Sources: Board of Governors (Auto Sales). Census Bureau (Retail Sales). We have yet to see prospects for 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 58 Shipments: Nondefense Capital Goods, 56 excl. Aircrafts (right scale) 55 54 New Orders: N ondefense Capital Goods, 50 excl. Aircrafts (left scale) 52 .. Recession Began Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 7 Source: U.S. Census Bureau. Perhaps because spending levels are relatively high and profits have only begun to improve Real Investment in Equip. & Software Corporate Profits Chained 1996$ billions (SAAR) $ billions (SAAR) 1100----------------------------------.- 900 1000 800 900 Corporate Profits 700 800 (right scale) 600 700 600 500 Spending on Equipment & Software 500 (left scale) Recession Began ... 400 92:Ql 93:Q3 95:Ql 96:Q3 98:Ql 99:Q3 01:Ql 02:Q3 8 Source: Bureau of Economic Analysis. And manufacturing, while looking up, is not out of the woods yet ISM Manufacturing: PM] Composite Index ISM Manufacturing: New Orders Index 50+ = Economic Expansion, SA 50+ = Economic Expansion, SA 70~--------- --------------------~ 70 New Orders Index PMI Composite Index (right scale) (left scale) 60 60 40 40 Recession Began .., 30-4--1--...,....,f.-+,.......,....,...~.....,...""""'"'~f.--l--l-..,...,.,........+,....,j,,,,.--+-,-i-,,,,+--+---!---+--~-t-....i......t--+~-+--,-,,.+......+-+,.,~~30 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 Jul-03 9 Source: Institute for Supply Management. Yet consumers seem to be getting more optimistic Current Conditions Expectations -------------------~ 120 125--------- Current Economic Conditions 120 (left scale) 110 115 Consumer Expectations 100 110 (right scale) 90 105 100 80 95 70 Recession 90 Began --•- 85-1------1---1---+-+-+-+--+---+---l---+--+----+-f----+--+-+-+--+---+-lc-l----l---l---+-+-+-+--+----l---l---+-+-+-+--+--+-+-+-l---+-ll-60 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 Jun-03 10 Source: University of Michigan. Probably because both equity and housing markets have added to household net worth S&P 500 Median Sales Price, Existing Homes $ thousands 1000 S&P 500 Daily Closing Price 170 (left scale) 0 June Estimate 900 160 800 Median Home Price ( right scale) M M M M M M M M M M M M M M M M M M M M M M- M- 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 M 0 ~ =I I . ~ 0 . = ~ . I I. ~. M . = ~ . I I . M ~ 0 = ~ ' I I , \ 0 . ~ , Q 0 Q I I I . ~ " . , . ' Q Q 1 . I I . ' I . ~ " M , Q Q I I ' I ~ 0 " ~'" I I' " ~ . M . '~" . I I " . ~ M .. '~" . I I " . ~ M .. '~" . I I " . Q 0 < 'Q" I 0 I " . < \ .. 'Q 0 " .I I " . . M < " ' Q " I I ' " . 0 ~ " > ~ I I ' . M ~ .. > ~ . I I . . M ~.. ~ . I I . 0 M ~ > ~ I I . ~ 0 0 = = ' I I , . ~ t. = = -. I I -. M ~ " = I I ' ~ M 0 I I ~ " .. '1 . I I . ' 11 Sources: Bloomberg (S&P 500). National Association of Realtors (Home Price). Residential investment has remained relatively strong Thousands of Units, Annualized 1900-,----------------------------- 1900 1800 1800 Building Permits 1700 1700 1600 1600 1500 1500 Housing Starts Recession Began 1400-1-----------,.--------------------' 1400 00:Ql 00:Q3 01:Ql 01:Q3 02:Ql 02:Q3 03:Ql 12 Source: U.S. Census Bureau. And yield spreads have improved Spread of indicated rate over 10-year Treasury rate 3.5 8 - 10-year A spread 3.0 - 10-year BBB spread 7 - IO-Year Junk spread (right scale) 2.5 6 4 1.0 3 0.5 0.0 -+------.----------.---------,-------,----------r----~----~--'-- 2 2/13/1996 3/4/1997 4/7/1998 4/13/1999 4/18/2000 4/17/2001 4/30/2002 4/29/2003 13 Sources: Federal Reserve Board (IO-year Treasury Bond Yield at Constant Maturity). Standard & Poor's (10-year Industrial Corporate Bond Yields). Energy prices remain elevated 40 135 West Texas Intermediate Crude Oil Spot Price (left axis) 35 130 30 125 25 120 20 Nominal Broad Dollar Index 115 15 ( right axis) 10 -+---------,-------,---------,------,-------~------r-------r'- 110 01/07/2000 07/07/2000 01/07/2001 07/07/2001 01/07/2002 07/07/2002 01/07/2003 07/07/2003 But the weakening dollar should help improve exports ... 14 Sources: ORI (Crude Oil Spot Price). FAME (Broad Dollar Index). ... Growth among our trading partners will likely remain only moderate 3.5 Expected Foreign Output Growth 3 (Trade-Weighted) 2.5 ~ 1.5 0 ~ 0.5 0 +------" 2003 2004 15 Source: Blue Chip Forecasts, 6/10/03. Rising productivity provides considerable support for the long-run Percentage Change, 4Q Percentage Change, 4Q 8 8 Approximate Period where estimates of trend growth consensus 6 were being gradually revised upward estimate 6 1973-95 Trend 4 4 2 2 2-1/4% ------¥--------------~ 0 ~---- 0 Recession Began .,. 1988:Ql 1990:Ql 1992:Ql 1994:Ql 1996:Ql 1998:Ql 2000:Ql 2002:Ql 16 Source: Bureau of Labor Statistics. Federal tax cuts are providing stimulus to the economy ... Great IW1 1.0 pm- r LJ ■ ~S!I- Ill 0.:5 '-~ril Sourt11i.c- ~Ii~ Cr;r,it,l'efr,11 ~ :Sr;,'kl L111111l~10,11: tn,livid w4 eltllle- b.11.J~ diXiumfY!l1.14ur DL IA. UT: No lru! 1 , I l},.;,lfk11 IJ,..r~u of [rx,11r.rTiir. (INlvtS ... but weakness in state and local budgets will likely offset at least part of the federal stimulus 11 ·-:.-- '" With lingering unused capacity, inflation will likely continue its gradual decline Unemployment Rate, Percent Core CPI, Year-to-Year Percent Change 6.5 3 Recession 6 2.5 5.5 Core Inflation (right scale) 5 2 Unemployment Rate 4.5 (left scale) 1.5 4 3.5 1 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 18 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 2 2 Range of Blue Chip Blue Chip Economic Forecasters Indicators, 7 /10/03 1 1 2003:Q2 2003:Q4 2004:Q2 2004:Q4 2003:Q3 2004:Ql 2004:Q3 ... but we haven't seen it yet 19 Note: Gray shading indicates range between top ten average and bottom ten average forecasts. ---:::::Ja••- Source: Blue Chip Economic Indicators, 7/10/03. Risks: • Pluses - Sentiment, financial market improvements - Federal spending and tax cut stimulus - Ongoing monetary stimulus - Oil prices settled down (although still high) - Lower exchange rate (helps exports) • Minuses - Labor markets remain weak - State and local weakness partially offsets federal strength - Excess capacity remains, inflation slipping down - Not much support from EU, Asia 20 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. 21 Employment Growth Percent change from year earlier 4-,.------------------------------------, 3 New England US June '02 - June '03: -0. 3% 2 NE June '02 - June '03: -0. 7% MA June '02 - June '03: -0.9% 1 -1 Shaded area indicates range -2 of growth rates in US census . Massachusetts regions. -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 22 Source: Bureau of Labor Statistics. Unemployment Rates 10 -.---------------------------------~ Unemployment has risen steeply in New England 9 but remains below the nation. 8 US June '03: 6.4 % NE June '03: 5.1 % 7 6 United States 5 New England 4 3 Low Point: 2. 7% 2 +-------r-----r---...----.--------.-----.----...-------r------r-----r___J Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 23 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. 24 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 10 5 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Boston - - - - - - - - 5 0 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. 25 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 1990 GSP ■ ■ □ 1.5 ~r1:ent and above 1,5 percent and abOYe □ 1 to 1.$ per«mt □ 1 to 1.$ percent ■ .5 to 1 percent ■ .5 to 1 pell:ent ■ less than .5 percent ■ less than .5 percent nodeficlt nodeficlt ... considerably worse this time than in the early l 990s 26 Source: Individual state budget documents and the Bureau of Economic Analysis. And confidence is improving Consumer Confidence Business Confidence ~----------------,---------------------~ 90 140 New England Consumer Confidence New England Consumers' 80 Future Expectations 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 Jul-03 27 Source: Conference Board, Associated Industries of Massachusetts.

Cathy E. Minehan (2003, July 22). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20030723_cathy_e_minehan

@misc{wtfs_regional_speeche_20030723_cathy_e_minehan,
  author = {Cathy E. Minehan},
  title = {Regional President Speech},
  year = {2003},
  month = {Jul},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20030723_cathy_e_minehan},
  note = {Retrieved via When the Fed Speaks corpus}
}