Regional President Speech

. 4.J~ lb 1-R J S/!; ., ~ ~ ~ ULtulo/r- ~ ~ . 0-u tJ-/ M ./4u-l- ,_ _ ~, I L0,,.;,1(.,1 tiµ~~'--:~~ ~ ' Economic Outlook ~ ~ . t/)ud.,// -'~1- ~-lu r a ~ ~ ~ ~, 1· L-l l- -~¢ Cathy E. Minehan ~' President and CEO J{). f. Federal Reserve Bank of Boston - ~~ ~~! Ja- Presented to Regional and Community Bankers June 7, 2005 __J Overview of the US Economy • Over the near-term, the expansion appears to be on a nu#~~ -pa,A.Lf4 solid footing N-lu ~ tU_ PU µ.,0f1:1-u:1F • Risks on the downside: - Will hJ/~ · businesses and consumers stay the course? - Is there a housing?b~I 1 - U~- ~ ...... ~,,~~, .f/µj M -k Ut.t,Uh • ~ • • I • • ~F • Inflation risks: · ti ~~ - The effect of oil and other input price increases are likely t9 , ~ _ . ., IL 1 I~~ moderate. - ~ ~ ~~, 'f.L!U/J,~~ ~~~ • New England continues __ to qrow along witH the nation ~U;J~ G.Q~~ . M ~U½"~ 4/4..~~ • In the longer run, national savings needs to mcrease. Jar tLiu. ~ ~ ~ ~~ Much of the recent "Soft Patch" was revised away Percent Annualized Change 5 • Real GDP- Before Revision • Real GDP After Revision Consensus Forecast of Real GDP rt7o Jzu_1_ 6DI ~ 3. I - 3 - LlLlb/- -t g ,-✓ L 4 - ~~OV"1"f ;:IJ I/~ - ~~---., W, · 2 0 04:Q2 04:Q3 04:Q4 05:Q1 05:Q2 05:Q3 05:Q4 06:01 Source: Bureau of Economic Analysis. Consensus Forecast. Looking forward, businesses and consumers will be the key to the ? sluj--;i;_ continued expansion- M ~ llwJ~ ~? ~ ~ ~ ~ ~ Firms' demand for capital equipment rebounded in April after two months of weak numbers, 67000 66000 65000 64000 63000 2005:Q 1 value ~~~ 62000 JtUl. 61000 60000 ~ JS/J1 i (1U# ., I 59 000 - Mfrs' Shipments: Nondefense Capital Goods ex Aircraft (SA, Mil.$) .......,_,,~IA_ U { 58000 a,, lu.J- May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 but the expansion of profits and the buildup of ca.sh should_ support M~ ll/d/~~ investment in the future. ' ~1k.t. - Cash Flow and Near Cash Assets as a Share of Investment as a Percent of Total Assets ~ \ 8 ~---------------...,----------------------. 11 • • H, · \ Cash flow and Near Cash Assets as a Share of Total Assets , Investment as Percent of Cash Flow 7 10~ 6 - 90 5 80 4 - 70 1----------------------------------------' 3 60 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 )o~~±Jk:f/:1- f '1. _;1_A. Increasing housing wealth has helped propel the consumer 3 ,,'J, o/o Lousing and Consumption Growth Percent Change, ,,._,_ ·" .. 3 5 Year-Over-Year l.Pr-~1. 3 2.5 Contribution of Housing to Consumption 2 ■ Personal Consumption 1.5 Expenditures ,10 0.5 /,o -, 2003 2004 Source: OFHEO, Bureau of Economic Analysis and author's calcuations driven, in part, by rising housing prices - ~ Percent Change, Year-0 ver-Year 14 - House Price Index, United States (01-80=100) 13 - 12 - ~~ 11 10 - 9 - 8 - 7 - Annual Growth ate for 6 - the Past 2 0 uarters 5 00:04 01 :02 01 :04 02:02 02:04 03:02 03:04 04:02 04:04 01 :01 01 :03 02:01 02:03 03:01 03:03 04:01 04:03 05:01 Source: 0 ffice of Federal Housing Enterprise Oversight. - 7 ~ Rising real estate prices have decreased affordability, but low interest rates and stroqg employment growth have left overall affordability high. IJru.rt/uWii. ~~ 160 150 140 - 130 - 120 - 110 - 100 - 90 80 70 - Composit~ousing Affordability Index ( edian lnc=Oualifying lnc=100) - 60 1980:01 1983:01 1986:01 1989:01 1992:01 1995:01 1998:01 2001 :01 2004:01 1981:03 1984:03 1987:03 1990:Q3 1993:03 1996:03 1999:Q3 2002:03 Which explains the continued strength in the housing market Thousands of Un its 2500 New Pvt Housing Units Auth r ize d by Building Permits- April 2005 Value: 2148 2000 - 1500 - Housing Sta ts: 1 unit-Ari! 2005 Value: 1640 500 ptf1 f:xJ ~-~ d,<L ~ Improving employment and wage and salary growth should ~ ~ drive consumption ~ ~15 Average Monthly Change, Total N onfarm Payroll Percent Annualized{c ange, Real Wages and Salary Income 400 ~--------------, --------------------------, 10 300 200 - • 100 - 0 Total N onfarm Payroll Average Monthly Change 2005:Q 2 through May -300 Growth in Real Wage and -~ry lnco~e -400 -10 1999:01 1999:04 2000:03 2001 :02 2002:01 2002:04 2003:03 2004:02 2005:01 Source: Bureau of Labor Statistics . Bureau of Economic Analysis. Inflation risks have risen along with oil prices Percent Change, Year-O ver-Year 4 CPI-U: All Items (SA, 1982-84=100} CPI-U: All Items Less Food and Energy (SA, 1982-84=100) 3.5 3 2.5 2 1.5 1 01:01 01:03 02:01 02:03 03:01 03:03 04:01 04:03 05:01 01:02 01:04 02:02 02:04 03:02 03:04 04:02 04:04 Source: Bureau of Labor Statistics. .J Yet oil price increases have not had a lasting effect.o~i'A ~:Jit,.UDI.VIJll9. survey expectations of inflation. Percent J. Spot O ii Price, Percent Change Year-Over-Y;na).l ' 7 -------------.--,~-----------------~ 15~..., 1 Expected Annual Inflation Rate during next 5 to 10 years: Median (%) :ts Spot Oil Price: West Texas lntermedia e [Prior'82=Posted Price] ($/Barrel) 6 SPF: CPI Inflation Rate Over he Next 10 Years: Median(%) ~ 5 ~ 4 0 3 -50 2 ~=------------------=~---------------------=='-----------' -100 1981 :01 1986:01 1988:03 1991 :01 1993:03 1996:01 1998:03 2001 :01 2003:03 1983:03 1987:02 1989:04 1992:02 1994:04 1997:02 1999:04 2002:02 2004:04 Source: Survey of Consumers (University of Michigan). SPF: FRB Philadelphia. Wall Street .b ur nal. ClA-/ t · -f.111/J..lhhMA ~~~ As most forecasters anticipate moderation in inflation Percent Annualized Change 4 3.5 - 3 2.5 - 2 05:02 05:03 05:04 06:01 06:02 06:03 06:04 Source: Consensus Forecast. And most measures of labor costs have yet to accelerate. Percent Change, Year-Over-Year 9 8 - 7 - 6 - 5 - 4 - - Employment Cost Index: Compen~ation:.fivilian Workers (SA, Jun-89=100) 2 - - Nonfarm Business Sector: ~nsation Per Hpur (SA, 1992=100)1 NJY- - Average Hourly Earnings: Total Pris te Industries (SA, $/Hour) ~ ~ 1997:01 1998:01 1999:01 2000:01 2001 :01 2002:01 2003:01 2004:01 2005:01 fuurce: Bureau of Labor S:atistics. New England Economy Business Cycle Update • New England's economic growth caught up with the nation's in 2004. • Job counts remain below peak in the two largest New England states, Massachusetts and Connecticut. • Indicators for early 2005 signal continued expansion. • ... and their homes appreciate more moderately than those in certain other regions of the country. After a slow pickup, the New England economy grew at the same rate as the nation in 2004. Total Real Personal Income, Percent Change From Year Earlier 8 6 4 0 -2 -4 1988 1990 1992 1994 1996 1998 2000 2002 2004 1989 1991 1993 1995 1997 1999 2001 2003 ■ ■ United States New England Source: Bureau of Economic Analysis. The regional job count remains below its pre-recession peak . -==-------------><--,f-o-T--~~•j,j- r Employment Index, Each Area's A-e-Recession Pea<= 1 . 1.03 - 1.02 1.01 -- RI Slortfals from 1 Peak (numbers of 0.99 - jobs) 0.98 - 0.97 CT: 31,000 0.96 - NE 0.95 MA 0.94 - 0.93 Jan-00 Aug-00 Mar-01 Oct-01 May-02 Dec-02 Jul-03 Feb-04 Sep-04 Apr-05 8:)urce: Bureau of Labor S:atistics. The New England economy is continuing to grow; job gains strengthened in April. Number of Net New Payroll .bbs, Quarterly (Thousands) Number of Net New Payroll .bbs, Quarterly (Thousands) 60 1000 - - 40 A) 500 - rD/1 20 1fiJ - I - I - I 0 p-1- ■ 0 .. - .. - - - ·~' - 2005:02 to date (April) - 2005:Q2 to date (April) -20 - -500 -40 - - -60 -1000 O1-00 01-01 Q1-02 Q1-03 01-04 01-05 O1-00 01-01 01-02 01-03 Q1-04 Q1-05 ■ ■ New England United States Source: Bureau of Labor Statistics. Most forward-looking regional economic indicators continue to look positive. Initial CI aims for U nem plo ym ent lnsu r ance, Monster Employment Index, Index, 1995= 1 0 cto ber 2003 - September 2004 = 100 2 200 Indexes of New England U IC laims and O nlibe .b b Recruitment. 1.8 1.6 150 Monster Employment, 1.4 Right Axis 1.2 Int ial CI aims, 1 100 Left Axis 0.8 0.6 50 0.4 0.2 0 0 Jan-98 Nov-98 Sep-99 Jul-00 May-01 Mar-02 Jan-03 Nov-03 Sep-04 Jun-98 Apr-99 Feb-00 Dec-00 Oct-01 Aug-02 Jun-03 Apr-04 Feb-05 Source: U.S. Bureau of Labor Statistics and Federal Reserve Bank of Boston; Monster Worldwide. ~~ New England homeowners continue to see their properties increase in value, but several of r ions are now fi experiencing greater rates of home price appreciation. Percent Chai~, Conventiona Mortg:ge Herre A-ice Index, Fer-cent Cha193 From Yea- Ea-lier 2003 Q4 - 2004 Q4 25 ~------------------------, - New England- United States New Englan 12.6 Mid Atlantic 13.5 E. N. Central 14.1 W.N. Central 5.6 S. Atlantic 4.3 E.S. Centra 6.2 W.S.Central 5.8 Mountain 9.8 Pacific 17.7 01--------------------- 01-98 01-99 01-00 01-01 01-02 01-03 01-04 0 5 10 15 20 S J Note: Sla::loo .aea indicaes ra193 of vaues arong the nine U.S Censu 4 s di ' vi sio h n .- s , . ._ ~ / ~ , _ _ /) I) ,1 1 / fl-1,M- ~- · · ~ S>urre Freddie Moc- ~-~)ltdµ~ . ~~~k~J~'/_Pt.t,~, -~~~ {' Tta <A 'iu W Longer-run Concerns <;,~ t>IJ/1 Nationa/..savinas has deteriorated. . . ~ A.1 I Federal Deficit as a% of G'"f> P ./l .. .11..,., ,IJJ, ~~A C or po rate Pro fits as a % of G D P M',_.,,._,, -V ~ A..#'-A. I 6 2 0 -2 -4 - -6 -8 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 - Federal Deficit as a % of GDP - Corporate Profits as a % of GDP -- Savings Rate Which requires that we imporl savings from abroad 4 2 - 0 -2 -4 - =Net capital inflows from abroad -6 Current Account Balance a % of GDP -8 1960:01 1964:03 1969:01 1973:03 1978:01 1982:03 1987:01 1991 :03 1996:01 2000:03 1962:02 1966:04 1971:02 1975:04 1980:02 1984:04 1989:02 1993:04 1998:02 2002:04 If FIAJrlJ'.AL, Source: Federal Surplus/Deficit as a % of GDP (FY): Office of Management and Budget. Personal Savings as a % of Disposable Personal Income, Balance Current Account as a % of GDP (SAAR): Bureau of Economic Analysis. Corporate Profits as % of GDP: Bureau of Economic Analysis. ~ ~' . . i -rL , . j,AAA~,/IA~/L~ ~~~~ And our indebtedness relative to the rest of the ~ world limits how long this can continue. rua»: Billions of Dollars 1000 0.2 tt~· 500 U.S. International Investment : Assets - Liabilities 0.1 0 -500 -1000 - -0.1 U.S. International Investment Relative to GDP -1500 -2000 -0.2 -2500 ~I.~ ~ -~\ ~ -3000 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 ~ /Op 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 , ~ f) 1) - U.S.: lnternation~vestment eosition: Assets (Bil.US$)- Liabilities (Bil.US$) - (U.S.: Intern-a- tional Inv-e-s-t ment Position: Assets (Bil.US$)- Liabilities (Bil.US$))/ Nominal GDP (Jn Source: International Monetary Fund/ Haver Analytics. Investment/Savings Imbalances • How to re-balance? - Depreciating currency, which could result in rising interest rates and financial market instability Increased government or private savings • Problems with those solutions: - We may not like it in the short run • Increased govt. savings means less stimulus • Weakens recovery in short run • Does not yield 1-for-1 decline in trade deficit - The rest of the world might not like it • Depreciating currency makes their goods more . expensive • If we save more (spend less), the "engine of world growth" slows down-so do they 0 • Economic lo

Cathy E. Minehan (2005, June 6). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20050607_cathy_e_minehan

@misc{wtfs_regional_speeche_20050607_cathy_e_minehan,
  author = {Cathy E. Minehan},
  title = {Regional President Speech},
  year = {2005},
  month = {Jun},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20050607_cathy_e_minehan},
  note = {Retrieved via When the Fed Speaks corpus}
}