Cornbelt Economic Prospects for November 7, 2012 Decatur, IL. David Oppedahl Business Economist

Transcription

1 Cornbelt Economic Prospects for 2013 November 7, 2012 Decatur, IL David Oppedahl Business Economist

2 The economy hit bottom in June 2009, with hesitant growth since then Chicago Fed National Activity Index Above Trend Growth Three month average Below Trend Monthly 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

3 In December 2008, the Federal Open Market Committee lowered its Fed Funds rate target to a range from 0 to 0.25% FedTarget FedFunds

4 Quantitative easing was necessary 2,500 Assets of the Federal Reserve Billions of dollars 3,000 Maiden Lane II & III Term Asset-Backed Securities Loan Facility 2,000 1,500 1, AIG Support Central Bank Swaps Commercial Paper Facility Maiden Lane Term Auction Credit Securities Held Outright

5 Food price increases again rising faster than core inflation (less food and energy) (Consumer price index, percent change from year ago) CPI LFE CPI Food

6 Oil prices getting higher again and gas prices hitting consumer spending Real West Texas Intermediate oil price dollars per barrel dollars '75 '80 '85 '90 '95 '00 '05 '10

7 Real natural gas prices remain very low dollars per mmbtu (2011 dollars) Real natural gas price 1994 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

8 Even including the volatile food and energy components, inflation remains contained Consumer price index percent Percent change from a year earlier Quarterly change (saar) Q Blue Chip CPI Forecast Actual Forecast '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

9 Employment fell by over 8.7 million jobs between December 2007 and February 2010, but began to rise and has added over 3 million jobs during the past 2 years Total employment percent Percent change from a year earlier -6-8 Monthly change (saar) 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

10 Regional differences in unemployment rates widened during the recession Pre-recession Post-recession

11 The unemployment rate has fallen just over 2% since peaking in October 2009 percent Unemployment rate 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

12 The unemployment rate is forecast to edge lower Unemployment rate percent 10 Blue Chip Forecast Q '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

13 The Great Recession ended in June 2009, but the economy grew by just 2.3% over the past year Real gross domestic product percent Quarterly change (saar) Percent change from a year earlier 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

14 Contributions to real GDP growth of 2.0% in the 3rd quarter of 2012 Consumption 1.4% Residential Investment 0.3% Government 0.7% Business Investment -0.1% Inventories -0.1% Net Exports -0.2%

15 Gross Domestic Product is forecast to grow just below trend in 2012 and above trend in 2013 Real gross domestic product percent Quarterly change (saar) Percent change from a year earlier Blue Chip GDP Forecast Actual Forecast Q '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

16 The path of this recovery is forecast below past deep recession recovery cycles Business cycle recovery path index - business cycle trough = average annualized growth: 5.3% average annualized growth: 2.4% average annualized growth: 5.4% Blue Chip forecast recovery path quarters before trough quarters after trough

17 Lots of uncertainty affecting confidence Economic Policy Uncertainty Index Consumer Confidence (Conf. Board) '01 '03 '05 '07 '09 ' '01 '03 '05 '07 '09 '11

18 Origins of slow recovery: Wealth Destruction What is your number?

19 Household net worth has edged up from low Households net worth divided by disposable income percent '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10

20 The stock market has improved since March 2009, but remains below previous highs S&P 500 stock index Index: = 10 1,600 1,400 1,200 1, '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

21 Existing home prices fell hard and are up from their low Median sales price - existing single family home 3-month smoothed $250,000 $230,000 $210,000 $190,000 $170,000 $150,000 $130,000 $110,000 $90, '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

22 Impact of housing foreclosures varies

23 Housing market tanked and bounced along bottom Housing starts (thousands of units, 3-month moving average, SAAR) 2.5 Home mortgage rate (percent, effective rate for all loans closed) '01 '03 '05 '07 '09 ' '01 '03 '05 '07 '09 '11

24 Manufacturing growth is slower; orders for capital goods easing ISM purchasing managers index (net percent reporting increase) 65 Nondefense capital goods ex. aircraft (orders in millions of dollars, 3-month moving average) '01 '03 '05 '07 '09 ' '01 '03 '05 '07 '09 '11

25 Manufacturing Share of Jobs in Nonmetro Counties

26 Vehicle sales are expected to improve at a good pace Light vehicle sales millions of units (saar) '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

27 Industrial production is forecast to rise at a pace close to its trend Total industrial production percent Quarterly change (saar) Percent change from a year earlier Q Blue Chip IP Forecast Actual Forecast '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

28 Exports have not dipped as much as imports this year (billions of dollars, SA) Exports Imports

29 International trade faces global headwinds

30 The dollar s exchange value peaked in 2002, before falling below earlier range (Real Broad Trade-Weighted Exchange Value of the US$) {March 1973=100}

31 Euro vs. U.S. Dollar (Euro/$)

32 9.1% of U.S. Exports in 2009 were Food and Agricultural Products Global Trade in Action

33 billion $ Value of agricultural exports expected to rise in Surplus Exports Imports FY * (*projected)

34 billion $ High-value exports are the star performers, with bulk exports more variable High-value 20 Bulk 0 FY

35 million bu. Trade agreements won t repeal the variability of bulk exports Corn Wheat Soybeans

36 Growth Potential for Ag Exports Exports are key to profitability of Midwest ag In 2008 exported 1/3 of corn value and 2/3 of soybean value Only large potential growth markets are in low income countries Midwestern comparative advantage in producing products desired by people as they move up the income ladder (animal products and feed, edible oils)

37 Growth in Food Demand Projected population growth: 45% increase in low income countries, 7% in high income countries 1.4 billion live on less than $1.25/day (most hungry or under-nourished) 3.1 billion live on less than $2.50/day (calorie problems solved for most) As income increases from $2 to $10 per day, demand rises for meat, dairy, oils, and fruits After $10 per day, demand for processed food greater than demand for raw commodities World food demand may double by 2050 as people escape from poverty

38 Resource Constraints Drive Trade At most 12% more arable land available worldwide for agriculture (without destruction) Inferior quality or degraded land in many areas Agriculture uses 70% of world s fresh water Water is a scarce resource in much of the world, but it s not priced that way To meet world food demand sustainably there will need to be huge increases in food system productivity around the world Larger fraction of food to move via trade due to distribution of arable land

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40 U.S. agricultural output, inputs, and total factor productivity (TFP) (1948=100) Output TFP Inputs

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42 7th District Crop Yield Indexes (1964=100) Corn Soybeans *

43 Real Crop Prices ($/bushel, adjusted by CPI-U for January 2010) Corn Soybeans

44 Hog and Dairy Profitability Measures Hog-corn price ratio Milk-feed price ratio '01 '03 '05 '07 '09 ' '01 '03 '05 '07 '09 '11

45 billion 2005$ Real net farm income boosted by direct government payments to farmers, but the regional impact varies * gov't payments *forecast

46 Participating Banks Banks in 7th District Land Value and Credit Conditions Survey

47 Percent Year over year changes by quarter in farmland values in the Seventh Federal Reserve District

48 Index of Seventh District farmland values (1981=100) Nominal Inflation Adjusted

49 Index of Seventh District Cash Rents Nominal vs. Inflation Adjusted (1981=100) Nominal Inflation Adjusted

50 Where do farmland values go next? Supply of farmland (limited) Demand for farmland (strong) Farmland values increasing rapidly Uncertain future, but it s not the 1980 s Fundamentals favor further increases in farmland values, although not as rapidly

51 Current issues in food and agriculture Trade negotiations WTO and bilateral / regional negotiations and agreements Foreign competition Farm subsidy reductions Genetically modified crops U.S. as a residual supplier in the export market Farm safety net / government farm policy Expired farm bill started new programs WTO violations Future changes?

52 Fiscal Cliff According to current law, significant changes to taxes and spending are scheduled for January 1, 2013 Substantial uncertainty about what will happen and the impact on the economy Many analysts expect cuts that imply reduction in 2013 growth from 0.5 to 1.0 percentage points of GDP If all possible tax and spending changes occurred CBO s midpoint estimates show an additional 2.0 percentage points of reduction in GDP growth for 2013

53 The liabilities side of the Fed s balance sheet shows a large amount of excess reserves Liabilities of the Federal Reserve Billions of dollars 3,000 2,500 2,000 1,500 Deposits of Depository Institutions 1,000 Treasury Balance 500 Currency in Circulation

54 The FOMC anticipates that PCE inflation will remain below 2% through 2015 Personal consumption expenditure - chain price index percent change from a year earlier FOMC '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14

55 The FOMC expects GDP to grow somewhat above trend over the next three years Real gross domestic product percent change from a year earlier FOMC 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

56 The FOMC forecasts unemployment rates remaining above the natural rate through the end of 2015 Unemployment rate percent FOMC '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

57 September FOMC Actions Begin open-ended purchases of Agency MBS at a pace of $40 billion per month Continue Maturity Extension Program through the end of the year and reinvest principal payments into Agency MBS Pledge Resolve: If labor market outlook does not improve substantially, continue accommodation until outlook is better Expect highly accommodative policy to be appropriate for a considerable period after economic recovery strengthens

58 The Federal Funds Rate is anticipated to remain very low over the forecast horizon percent Target Federal Funds Rate FOMC 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

59 Summary The outlook is for the U.S. economy to expand at a pace below trend this year and slightly above trend in 2013 Employment is expected to rise moderately with the unemployment rate edging lower Slackness in the economy will lead to a relatively contained inflation rate Growth in manufacturing output may slow but be about trend Housing has turned the corner in some areas, but not all Agriculture should be healthy, but drought hits livestock most World trade is a key, especially for agriculture

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