Regional President Speech

Current Economic Conditions -~dtHU~ _ -~lo~fr'~ ,. Ju,~ ~ - Regional and Community Bankers ~ Conference - w~ w fJ U/Jk May 18, 2004 ~ f7dwJ.I EtlllmJ -~~ ~ Cathy Minehan President & CEO, Federal Reserve Bank of Boston Overview • U.S. recovery is now on a solid footing - Self-generated private growth is substituting for policy-induced growth - Employment growth has picked up, while productivity growth remains strong - Inflation requires watching, but likely to remain well-behaved • New England fared worse than the nation, but the regional outlook is improving 2 The recovery has gained steam • Consumption spending has been strong • Investment in equipment and software has picked up • And recent data point to continued strength in both consumption and investment 3 The recovery has gained steam, and has featured strong private spending 9 ■ GDP growth 8 ■ Consumption, ..~.. 7 - contribution to growth ~ ~ -..=.. □ E&S Investment, a: 6 Forecast 0 contribution to growth ~ ell "'O 5 --~~ -4. I ~= = 4 = ~ 3. I .i.....: 3 O"' I ~ 1 0 2002:Q4 2003:Ql 2003:Q2 2003:Q3 2003:Q4 2004:Ql 2004:Q2 Source: Real Gross Domestic Product, Real Personal Consumption Expenditure: Contribution to Real GDP Change, Real Investment in Nonresidential 4 Equipment & Software: Contribution to Real GDP Change, (SAAR): Bureau of Economic Analysis. 1\:1 Recent indicators of consumer spending suggestv continued strength this year , 15 1 ~ - - 3-mo. growth rate, ~e~ail sales 40 0 e - 6-mo. growth rate, auto sales - 30 '.°.I '-' 20 .Cl 8o/o i:,,t,f!' ~ 10 0 I. -b,.,J, ) - 0 ~ - . ~ . .... -10 00 .s 3 - -20 0 = ~ < ~ -30 o-1----,---,----------,----.----.---,---,----,--------,---.---.----,------.---,,----,--~- -40 2003:Jan 2003May 2003:Sep 2004:Jan Investment spending will likely grow at a solid double-digit pace 44000 ~------------------------------------ - Orders of Nondefense Capital Goods ~ 42000 • • · Shipments ofNondefense Capital Goods .. 40000 ,.,, = .-... 0 38000 ~ 36000 -f-----,---,------,----,--,----,---r----.-----,-------,------,----,----.-------,--1 2003:Jan 2003:May 2003:Sep 2004:Jan Sources: Total Light Weight Vehicle Sales, (SAAR, millions): Bureau of Economic Analysis. Retail Sales & Food Services, New Orders and Shipments 5 for Nondefense Capital Goods ex Aircraft, (SA, millions$): Census Bureau. · --- Consumption is supported by rising income growth • Consumption depends upon ''disposable'' or after-tax income • Earlier, tax cuts were responsible for most of the growth in disposable income • Now, income is growing on its own 6 Earlier tax cuts spurred growth in household income. Now pre-tax income is improving. 6~---------------------------- - After-tax income 5 - Before-tax income 1 - ; 4 ? 0 -1---------,-----..,------r---,-----,----,-----,-----~------l 2001:Ql 2001:Q3 2002:Ql 2002:Q3 2003:Ql 2003:Q3 2004:Ql Source: Real Disposable Personal Income, Real Personal Income, (SAAR, Bil. Chn. 2000$): Bureau of Economic Analysis. 7 Household net worth is also • • ~ improvmg • 1nf rir.9ving financial markets and rising - , home prices have boosted households' net worth • Corporate cash flow is also growing strongly, providing support to business investment 8 Financial markets have provided support . . . ;~ 413!'~ -- 4.0 -Spread of BAA Corp. Bonds over ltl-year Treasury ~zoo '-t-- ~ 3.6 1100 ~ " e 'O -= 3.2 ~ i::I ~ 0 1-, 0 o ~ o. 2.8 - l() ~ "'O ~ i::I 0 2.4 00. ~ 2002:Jan 2002:May 2002:Sep 2003:Jan 2003:May 2003:Sep 2004:Jan 2004:May ... Boosting Household Net Worth and Improving Corporate Cash Flow -- ---,---------------------------------------~- 46000 1050 fA -Corporate Net Cash Flow ell .--.i:.:.I 1000 0 .... -Household Net Worth (FOF) -- ,.t:i 950 - -~ 0 900 - .:= ~ 42000 t: .:= 850 - 0 "1 ue-= ~.... ~ .~... 800 - z - 40000 e-= = 1-, 0 750 - = ~ 1-, u0 700 - --------,----r---r----,---,---,---,---r--,----,------,----,----.-----,------~- 38000 1999:Ql 1999:Q3 2000:Ql 2000:Q3 2001:Ql 2001:Q3 2002:Ql 2002:Q3 2003:Ql 2003:Q3 9 Sources: I 0-year Treasury Bond Yield at Constant Maturity, Moody's Yield on Seasoned BAA Corporate Bonds, Nonfinancial Corporate Business Total Internal Funds+ !VA (SAAR, Billions$), Hous-e--h--o---l-d--s- Ne-t Wo-rth (B illions$): Federal Reserve Board. S&P 500 Composite Index, (Monthly Average): Wall Street Journal. More broadly, policy-induced growth is being replaced by private spending 7 GDP growth -- 6 - ..~.... ~ "Private" GDP growth (ex tax cuts, federal spending ~ 5 growth, monetary policy stimulus) """ '"0 .-. ~ N... ~= 4 = = ~ 3 s..: ...... -C-" I ~ 2 - -= ...... ~ 0 1 "e""l l ~ ~ 0 0 -1 - -2 2001:H2 2002:Hl 2002:H2 2003:Hl 2003:H2 2004:Ql Source: Real Gross Domestic Product, (SAAR, Bil. Chn. 2000$): Bureau of Economic Analysis. Federal Reserve Bank of Boston estimates. 10 We expect the recovery to be increasingly priva~ven ~ The effect of tax refunds will wane later this year, and . J-, ~ 1 financial markets see the Fed raising rates soon {)JI:'~ 2.4 ~-------------------, ~j/)~ ~~j Today w,P' - - · Fed Funds Futures, 5/14/04 2.2 - , -Federal Funds Target rate 2 - • I , I 1.4 I , , 1.2 - , I ---------J - I ... 1 ·: ■ ■ ■ ■ ■ ■ ■ ■ ■ 0.8 - 2003:Jan 2003:Apr 2003:Jul 2003:Oct 2004:Jan 2004:Apr 2004:Jul 2004:Oct 2005:Jan 11 Source: Federal Funds Target Rate(%): Federal Reserve Board. Labor Markets are Improving Layoffs have been declining for a while ~ 3.5 0.7 3 ~ CJ ~ i.S ~ 0 ..c - ~ -~= ~ c... 2.5 Total worker flows 0 ~ 0 into U ~ ~ 0 ~ rl'J. ~ rl'J. ~ .. r 5. l'J . . rl'J. 0.3 - -~ ~ 0 u ~ 2 - Initial Claims 1.5 _(___~_ _ ___._,__.___ _ 0.1 .,........L__---,-----,---,----,--------.--~--~-~-~~----~--.--L 1976:II 1982:II 1988:II 1994:II 2000:II Sources: Initial Claims for Unemployment Insurance, State Programs, (Wkly Average, SA): Department of Labor. Employment flows based upon 12 Current Population Survey data along with author's calculations. And Now Hiring Appears to Have Turned the Corner Employment and hours have shown significant improvement ~ ~ d ~ --= ~ 't. !: ..C.,." ' I '-' ;9 ~ -2 - ~ :; _,__ ___,--_ --2: -t i~ -3 0 {~!" f Q 1997:Ql 1998:Ql 1999:Ql 2000:Ql 2001:Ql 2002:Ql 2003:Ql 2004:Ql - L-,,r ~( [?~ As productivity growth has receded to merely spectacular Qtly. ~ rates of growth q.(h~ th 9 grow rates -------------------- ...... - .. -- ,,...- 2 0 - 1997:Ql 1998:Ql 1999:Ql 2000:Ql 2001 :Ql 2002:QI 2003:Ql 2004:Q 13 Source: Nonfarm Business Sector: Output per Hour, Hours of All Persons, Total Nonfarm Employment, (SA): Bureau of Labor Statistics. Is inflation an issue? • Some commodity prices have risen sharply • Core inflation has edged up, although still low • Is this cause for worry? Probably not 14 Trend inflation is probably still well-contai~ 6 /4 _ 6 q/~ 1 5 -Core CPI ~:b s g,. 4 ~ - Core PCE Chain-wt. - .Cl ~ /, t 3 ,,, a-n----,--J.-; ~ 1 i9+1 :-J-an------.---1-9-9,3-- -:-J-an---,---1-9-95,-:J_a_n_-,--1-99---7,-:J-a-n-,------19-9-9,--:J-a-n -,---2-0-0-1,-- -:-J-an--,--2-0-03.--:-J 7' 't Much of the recent rise in core inflation is pass-through of oil price~+~ and other one-time price increases -,, ,_ ..~ ~ 0 ~ ,.o 2.2 ~ ~~·f"lo 3 - 2 - - - - - - - - o ~ j ) 1.8 - .. .. e C , l : ~ ~ - - - - .Cl 1.6 ~ ' > c ~ :, - 1.4 - 44) ' .. - - - - - - .. .. .. 0 Core CPI .. .. >- - 1.2 • - Exel. oil price effects - - 1 - Forecast Forecast 0.8 l----,---,--,-------r-----.-----i-~--,---,--,----.,------r-----.--=--~--,---,--,-------r----.----,-~~ 2003:Mar 2003:Jun 2003:Sep 2003:Dec 2004:Mar 2004:Jun 2004:Sep 2004:Dec -- ~-~-- Sources: CPI-U All Items L~ Food & Energy, (SA, 1982-84= I 00): Bureau of Labor Statistics. PCE Less Food & Energy Chain Price Index, (SA, 2000= I 00): 15 Bureau of Economic Analysis. Restraining forces on inflation: Corporate Profit Growth Has Been Strong 1200 Non farm business profits, after tax, including IV A and CC ADJ 1000 - 800 - r/:; r=,:, - . .-. . 0 . . . . 600 - ~ 400 - 200 - 0 I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I ljf 1990·Ql 1992:Ql 1994:Ql 1996:Ql 1998:Ql 2000:Ql 2002:Ql 2004:Q P~ And Profit Margins are High 0.14 Unit profit, nonfinan. corporate business, including IVA and CCADJ ,µ.J 0.13 - I ·u 0.12 - 0.11 r/:; - -l ~ r, - : , , 0.10 ~ 0 0.09 ~ 0.08 - 0.07 - I 0.06 I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I 1990:Ql 1992:Ql 1994:Ql 1996:Ql 1998:Ql 2000:Ql 2002:Ql 2004:Q 16 Source: Corporate Profits After Tax with IVA and CCAdj (SAAR, Billions$), Corporate Profits with IVA and CCAdj per Unit of Real Gross Value Added of Nonfinancial Corporate Business (SA): Bureau of Economic Analysis. Restraining forces on inflation: Economic slack is likely to persist for another year or so, whether measured by employment 4 • -- ~ 139000 116000 = ; -0 9 137000 Estimates ,,,.,,..-:::: -. , = 0. ; . , = of full ~ • 114000 . . . . d . 135000 - ~ e_:iployment / • = 8 ~ s 112000 133000 8... . -a - 0 8 131000 ~ 110000 ~ 8 ! ~ 129000 ~= 127000 z0 3 ,---------------:-;~'::-11:;-;--j:,H'fv'--'-----------,rt-11;:;Jr::,,:-hd-H7----~-----------, .q)di:Ji!J "~ J I Forecast D~,I ~ 2 - ~/ftJ_µ;{~ ~l r ... o-~,--,--,--,--,--.,--.,--.,----r----r----r----r---,--:---r---r-~-r---,----,---r-+---,----,----,---,--4;n---,----,----,--....,-,..-,--,--,--,--,-~ = ~ ~ -1 ~ Estimate of "output gap" ~ -2 (Actual GDP less potential) -3 -4 --'-----------~--------------------;____ _,J 1997:Ql 1998:Ql 1999:Ql 2000:Ql 2001:Ql 2002:Ql 2003:Ql 2004:Ql 2005:Ql Sources: Total Nonfarm and Total Private Nonfarm Employment (SA, Thousands): Bureau of Labor Statistics. Real Gross Domestic Product (SAAR, Chained 2000$): 1 7 Bureau of Economic Analysis. Real Potential Gross Domestic Product, (Chained 2000$): Congressional Budget Office. Forecast: Blue Chip Economic Indicators. Risks • Inflation - likely to remain low; risks fairly balanced - Recent increases largely due to one-time factors - Significant economic slack remains • Real growth - likely to remain solid; risks fairly balanced - As tax cuts fade, we expect strong employment growth to create income, support spending - Some uncertainty about employment forecast - Some uncertainty about geopolitical situation 18 What About Deficits? Federal budget deficit/surplus as% of GDP, with 0MB projections 3~------------------::--------, 2 0MB Forecast 1 Deficits are a long run concern, not a near term problem • Will deficits cause inflation? - Still have some economic slack despite growth < in federal spending ~ - Our forecasts for next few years indicate solid - growth, fairly stable jjrflation, and a declining) deficit/GDP ratio ~ - .._. • Will deficits crowd out investment? -~ - Long term interest rates should already reflect what we know about the path of deficits - Near-term outlook for investment is positive 20 How is New England faring? • Suffered greater employment losses than the nation in the recession; losses continued in the ''recovery'' • Turnaround is beginning - slower than nationally • Within the region, some states are doing much better than others 21 Employment has fallen more in New England than the Nation Index, Pre-Recession Peak = l 1.01 -r---------------------------------------, 1.00 0.99 United States 0.98 New England 0.97 0.96 NBER Dated Recession 0.95 -4----...-----,r----r------.--.----.------,----,---,---,----~---,----,----,-----,--' 2000-Jul 2001-Jan 2001-Jul . 2002-Jan 2002-Jul 2003-Jan 2003-Jul 2004-Jan Source: U.S. Bureau of Labor Statistics, seasonally adjusted data. 22 But weakness is much less severe than early 1990s ( dotted lines) Index, Pre-Recession Peak = 1 1.02 ~--------------,-------------------------- - United States * Nov '89-Aug '93 ~ - - - - 1.00 - - - - - - - - - - - - - - - - ... - - - 0.98 • .. • United States .. - Jul '00-Jan '04 ' New England 0.96 Jul '00-Jan '04 ' 0.94 • • .. \ .. .. 0.92 . - ,,. * - New England ______ , - .. .. - Nov '89-Aug '93 - - - - - - - - - 0.90 ◄ months prior recession months after ► -9 -7 -5 -3 -1 2 4 6 8 10 12 14 16 18 20 22 24 27 29 23 Source: U.S. Bureau of Labor Statistics. Considerable variation among the New England states - Massachusetts hit hardest, Rhode Island showing minimal job losses Index, Pre-Recession Peak = 1 1.02 ~--------------------------------, 1.01 1.00 0.99 0.98 0.97 0.96 0.95 MA 0.94 NBER Dated Recession 0.93 +----r------,------,------,------,----,----,----,--.-----,------,----r------,----.---~ 2000-Jul 2001-Jan 2001-Jul 2002-Jan 2002-Jul 2003-Jan 2003-Jul 2004-Jan 24 Source: U.S. Bureau of Labor Statistics. Why is New England faring worse? • Steeper losses in recession attributable to national weakness in key regional industries: - software and other technology services - communications - computers and other capital goods • Steadier sectors important in New England, such as private education and health services, not strong enough to offset 25 In past year, manufacturing, information and professional services lost jobs; Gains in construction and hospitality Percent Change, March 2003 - March 2004 Construction Manufacturing Retail Trade Wholesale Trade Trans., Warehousing, & Utilities Info rma tio n Financial Activities Professional & Business Services ■ United States Private Education & Health Services New England Leisure and Hospitality Other Services Government -8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 26 Source: U.S. Bureau of Labor Statistics. For all New England, job losses have moderated Thousands of Jobs 30 20 10 - I • I ■ II 0 I I I I l;:I I I I I '■ • I' I' -10 - -20 -30 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 27 Source: U.S. Bureau of Labor Statistics. Unemployment is coming down in the region Percent, Seasonally Adjusted 8-.------------------------------~---------, 7 6 5 4 3 New England 2 1 NBER Dated Recession 0 -1--~~---,---,---r---,---r-.--y-------r--r---,--.----.---,-.--r--,r--,---,--,----,--.----,---,--.,r--,-----,---,----,---,---r-.--r--,---r--,------.----,--,-' 1994-Jan 1995-Jan 1996-Jan 1997-Jan 1998-Jan 1999-Jan 2000-Jan 2001-Jan 2002-Jan 2003-Jan 2004-Jan Source: U.S. Bureau of Labor Statistics. 28 Confidence is rising in New England Index of leading indicators for Massachusetts points to growth 8~----------------------------~74 - U Mass Leading Index (Left Axis) 6 68 - AIM Business Confidence (Right Axis) 62 4 2 56 -2 44 -4 __J__---------------------------------'-- 38 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Source: Associated Industries of Massachusetts and the University of Massachusetts. 29 Key factor in regional outlook continues to be national economy, but New England lags • Regional recovery will continue, following nation • Pace of region's recovery is contingent on ➔ national ( and global) economy hence regional pace likely to speed up 30 Boston Fed Experience • According to our own HR department, - recent falloff in job applicants - less desperation, more negotiation - counter-offers and tumdowns • ''The tide is turning'' 31

Cathy E. Minehan (2004, May 17). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20040518_cathy_e_minehan

@misc{wtfs_regional_speeche_20040518_cathy_e_minehan,
  author = {Cathy E. Minehan},
  title = {Regional President Speech},
  year = {2004},
  month = {May},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20040518_cathy_e_minehan},
  note = {Retrieved via When the Fed Speaks corpus}
}