BERKS COUNTY ESTATE PLANNING COUNCIL The U.S. Economic Outlook *

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1 BERKS COUNTY ESTATE PLANNING COUNCIL The U.S. Economic Outlook * September 17 th, 2015 FEDERAL RESERVE BANK OF PHILADELPHIA * The views expressed today are my own and not necessarily those of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.

2 Painting an Economic Picture Economic Growth Conditions Nationally Regionally Labor Market Conditions Nationally Regionally Inflationary/Price Conditions The Federal Reserve & Current Policy

3 Painting an Economic Picture Economic Growth Conditions Nationally Regionally Labor Market Conditions Nationally Regionally Real GDP = C + I + G + (X M) Inflationary/Price Conditions The Federal Reserve & Current Policy

4 U.S. Real GDP/Economic Growth Q/Q Growth (%, SAAR) 6% Old Avg. 4% 3.1% 15:Q2 3.7% 2% 0% -2% -4% Recovery s Avg. = 2.2% -6% -8% -10% '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 FRB Phila SPF Forecasts Avg 80:Q1-07:Q4 Recovery Avg Source: Bureau of Economic Analysis; FRB Phila SPF, via Haver Analytics Last Point Plotted: 2015:Q2 (GDP growth is for second estimate)

5 Contributions (%) to Real GDP Growth Contributions to Q/Q GDP Growth (%, SAAR) 6% 4% 2% 0% -2% 2015-Q2 s Real GDP Growth = 3.7% -4% -6% -8% -10% Consumption Investment Net Exports Government '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Source: Bureau of Economic Analysis via Haver Analytics Last Point Plotted: 2015:Q2 (second estimate)

6 Contributions (%) to Real GDP Growth Contributions to Q/Q Real GDP Growth (%, SAAR) 5.0% 2.5% 0.0% 1.9% 1.5% 1.2% 2.4% 0.9% 2.6% 2.3% 2.9% 1.2% 2.1% -2.5% Average Recovery Average 2013:Q3 2013:Q4 2014:Q1 2014:Q2 2014:Q3 2014:Q4 2015:Q1 2015:Q2 Consumption Investment Net Exports Government

7 Consumer Spending Grows, Net Home Equity Slows Y/Y % Chg. Net Home Eq. & Net Wealth % PCE Yrly Growth (%) Q2 PCE 3.1% % Net Home Equity Net Wealth PCE '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 ' Source: FRB Flow of Funds Report & Bureau of Economic Analysis via Haver Analytics Last Point Plotted: Net Wealth & Net Home Equity 2015:Q1; PCE data 2015:Q2

8 Savings Rate (% of DPI) Consumers Save Less As Wealth Restores New Avg. Savings 5.7% 4 Old Avg. Savings Rate 3.9% 4.8% 2 0 '02 '04 '05 '07 '08 '10 '11 '13 '15 Source: Bureau of Economic Analysis via Haver Analytics Last Point Plotted: 2015:Q2

9 Financial Obligations Ratio (%) Households Financial Obligations Ratio Low Q1 15.3% 14 '80 '82 '85 '87 '90 '92 '95 '97 '00 '02 '05 '07 '10 '12 '15 Source: Bureau of Economic Analysis via Haver Analytics Last Point Plotted: 2015:Q1

10 Confidence Index (Both indexed 1985 = 100) Consumer Confidence Returning Pre-recession Average Confidence Levels Consumer Sentiment Index University of Michigan (UM) Consumer Confidence Index Conference Board (CB) 20 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Source: Conference Board, University of Michigan, Haver Analytics & author s own index calculations Last point plotted: August 2015

11 Q/Q Contributions rgdp Growth (SAAR %) Investment s Contribution to Growth I s % Contribution to 15-Q2 s GDP growth = 0.88% Nonresidential Investment % Residential Investment % Total Inventory Change % '07 '08 '09 '10 '11 '12 '13 '14 '15 Source: Bureau of Economic Analysis via Haver Analytics Last Point Plotted: 2015:Q2 (second estimate)

12 Billions ($) U.S. Manufacturing Activity Rebounds Nondefense Capital Goods: Excluding Aircrafts New Orders (future activity) Down 3.3% (Y/Y) Shipments (current activity) Grew 0.5% (Y/Y) '02 '04 '06 '08 '10 '12 '15 Source: Census Bureau via Haver Analytics Last Point Plotted: July 2015

13 Housing Starts (millions) U.S. Housing Activity Remains Sluggish 3 Housing Activity PRERECESSION Avgs Existing Home Sales (Housing DEMAND) Housing Starts (Housing SUPPLY) Housing Sales (millions) 0 '02 '04 '06 '08 '10 '12 '15 0 Source: National Association of REALTORS, Census Bureau via Haver Analytics Last Point Plotted: 2015:Q2

14 Year-over-year Change (%) Home Price Growth Slow-Down Moderates '02 '04 '06 '08 '10 '12 '15 Source: Standard & Poors, CoreLogic, FHFA via Haver Analytics Last Point Plotted: CoreLogic July 2015; FHFA & Case-Shiller June 2015 Case-Shiller CoreLogic FHFA

15 Qtrly Contribution to Real GDP Growth (%) Government Spending s Contribution 2 1 Federal Defense Federal Nondefense State and Local % 0.01% % -1-2 '07 '08 '09 '10 '11 '12 '13 '14 '15 Source: Bureau of Economic Analysis via Haver Analytics Last Point Plotted: 2015:Q2 (second estimate)

16 $Billions (Chained $2005) Net Exports ($ in U.S. Trade Deficit) Avg. Net Exports In Recovery $ b Largest U.S. Trade Deficit to date $-819 Billion $ '80 '85 '90 '95 '00 '05 '10 '15 Source: Bureau of Economic Analysis via Haver Analytics Last Point Plotted: 2015:Q2

17 Painting an Economic Picture Economic Growth Conditions Nationally Regionally Phila Fed: Eastern PA, South NJ, DE Labor Market Conditions Nationally Regionally Inflationary/Price Conditions The Federal Reserve & Current Policy

18 Philadelphia Fed s State Coincident Index July 2015: Three-month Change

19 Philadelphia Fed s State Leading Index July 2015: Expected 6-month Change in State Coincident Indexes

20 Diffusion Index* Regional Manufacturing Activity (BOS) Month Expected Aug 15 = 43.1 UP + 4% (M/M) Current Activity Aug 15 = 8.3 UP + 46% (M/M) '08 '09 '10 '11 '12 '13 '14 '15 *DIFFUSION INDEX percentage of respondents indicating an increase less those indicating a decrease. Source: Business Outlook Survey Federal Reserve Bank of Philadelphia via Haver Analytics Last Point Plotted: August 2015

21 Regional Home Price Growth (%) Yrly % Chg. in FHFA HPI ('80Q1=100) 20 U.S. PA NJ DE '00 '02 '05 '07 '10 '12 '15 Source: Federal Home Financing Agency (FHFA) via Haver Analytics Last Point Plotted: 2015Q2

22 Painting an Economic Picture Economic Growth Conditions Nationally Regionally Labor Market Conditions Nationally Regionally Unemployment Job Growth Over Great Recession Inflationary/Price Conditions The Federal Reserve s Role & Current Policy

23 Unemployment Rate (SAAR, %) U.S. Unemployment Rates Decline U6 declines exceed & outpace U3 declines % 5.3% '02 '04 '06 '08 '10 '12 '15 U % U-3 5.1% Source: Bureau of Labor Statistics via Haver Analytics; Last Point Plotted: August 2015 *MARGINALLY ATTACHED - persons currently are not working nor looking for work but indicate that they want and are available for a job and have looked in the past 12 months. (i) DISCOURAGED WORKERS A subset of marginally attached, are given a job-market related reason for not currently looking for work. (ii) PERSONS EMPLOYED PART TIME FOR ECONOMIC REASONS are those who want and are available for full-time work but have had to settle for a part-time schedule..

24 Number of Unemployed People (millions) Long-Term Unemployment Remains High Dec % Aug % 8 4 Unemployed 0-26 wks Long-term Unemployed (over 27 wks) 0 02' 04' 06' 08' 10' 12' 15' Source: Bureau of Labor Statistics via Haver Analytics Last Point Plotted: August 2015

25 U.S. Monthly Employment Growth Nonfarm Payroll Jobs (000s, SA) Aug 2015: Avg = Avg = Avg = Avg = Avg = Avg = Source: Bureau of Labor Statistics via Haver Analytics Black lines denote each year's average monthly change Last month plotted: Aug 2015

26 National & Regional Unemployment Unemployment Rate (%) NJ 5.9% PA 5.4% Reading, PA MSA 5.2% U.S. 5.1% DE 4.7% 3 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Source: Bureau of Labor Statistics via Haver Analytics Last Point Plotted: U.S. August 2015; 3-states & Reading MSA July 2015

27 Jobs Lost/Regained Over Recession/Recovery (%) Source: Bureau of Labor Statistics & FRB Philadelphia via Haver Analytics Last Point Plotted: Calculated % changes from 2/10 to 8/15 (U.S.) & July 2015 (3 States/MSA) Jobs Lost/Regained Over Recession 10 U.S. LOST 6.3% OF JOBS (8.7 mill jobs lost) 7.98% = 35,300 jobs lost mill JOBS ABOVE LOSS 145% 4.43% = 260,000 jobs lost 31,100 OVER LOSS 112% RECOVERED 6.33% = 256,600 jobs lost 106,000 JOBS LEFT TO RECOVER 58.9% RECOVERED 2,900 OVER LOSS 108.3% RECOVERED 6.4% = 11,200 jobs lost +500 over loss 104.5% RECOVERED 0 U.S. PA NJ DE Reading MSA

28 Of Jobs Recovered, What Industry Were They In? % of Jobs Lost/Gained 120% Mining/Construction Manufacturing Trans/Trade/Utils Information Financial Business/Professional Education & Health Leisure & Hospitality Other Svcs Gov't 80% 40% 0% -40% U.S PA NJ DE Reading MSA Source: BLS & Haver Analytics. DATA: % Changes from 2/2010 to 8/2015 (U.S.) & 7/2015 (Others)

29 Yearly Job Sector Growth Comparisons Y/Y Jobs Change (%) 15% U.S PA NJ DE Reading MSA 10% 5% 0% -5% -10% Source: BLS & Haver Analytics Last Point Plotted: U.S. Aug 2015; PA, NJ, & DE & Regional MSA July 2015

30 Painting an Economic Picture Economic Growth Conditions Nationally Regionally Labor Market Conditions Nationally Regionally Inflationary/Price Conditions The Federal Reserve & Current Policy PCE, CPI, PPI Inflation Expected Inflation Wage Inflation

31 Y/Y % Change -PCE Index (SA, 2009=100) PCE & PCE-Core Estimated Inflation '02 '04 '06 '08 '10 '12 '15 Source: Bureau of Economic Analysis via Haver Analytics Last Point Plotted: July 2015

32 Yrly Change in Price Indexes (%) Other Inflation Rates: Consumer & Producer Prices % CPI % PPI % PPI Commod. 02' 04' 06' 08' 10' 12' 15' Source: Bureau of Labor Statistics via Haver Analytics Last Point Plotted: July 2015

33 Yield (%) Bond Market Implied Inflation Expectations yr Implied Inflation Rate 1.61% yr Implied Inflation Rate: 10yr T-Yield (constant mat.) minus the 10yr inflation indexed T-Yield (constant maturity) '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Source: Haver Analytics Using Treasury Constant Maturity Yields Last Point Plotted: August 2015

34 Yearly Wage Growth % (Avg. SA $/hrly. earnings) U.S. Wage Growth Picks Up (Still Slow ) 4 Wage Growth Averaged 3.1% from New Avg. Wage Growth 2.1% 2 1.9% 1 '02 '04 '06 '08 '10 '12 '15 Source: Bureau of Labor Statistics (BLS) via Haver Analytics Last Point Plotted: August 2015 (Avg Hrly Wages of Production/Nonsupervisory Employees)

35 Painting an Economic Picture Economic Growth Conditions Nationally Regionally Labor Market Conditions Nationally Regionally Inflationary/Price Conditions The Federal Reserve & Current Policy FOMC Forecasts

36 Real GDP Growth Projections Source: Federal Open Market Committee (FOMC), Economic Projections from June 17, 2015 Figure 1. Central Tendencies & Ranges of Economics Projections

37 Unemployment Rate Projections Source: Federal Open Market Committee (FOMC), Economic Projections from June 17, 2015 Figure 1. Central Tendencies & Ranges of Economics Projections

38 PCE Inflation Rate Projections Source: Federal Open Market Committee (FOMC), Economic Projections from June 17, 2015 Figure 1. Central Tendencies & Ranges of Economics Projections

39 Summary of FOMC s 6/2015 Forecasts

40 Painting an Economic Picture Economic Growth Conditions Nationally Regionally Labor Market Conditions Nationally Regionally Inflationary/Price Conditions The Federal Reserve & Current Policy Fed Funds Rate & Normalization

41 Federal Funds Rate (%) FOMC Projections of Appropriate Policy FIG. 2 - Midpoint of target range or target level for the federal funds rate The timing & pace of future fed fund increases depends on the labor market s progress towards FULL EMPLOYMENT levels!! Longer Run Source: Overview of FOMC Participants Assessments of Appropriate Monetary Policy As of: FOMC s 6/17/2015 Meeting s Economic Projections, FIGURE 2: Appropriate pace of policy firming

42 Source: Labor Market Dynamics and Monetary Policy. Janet L. Yellen. Remarks at the Federal Reserve Bank of Kansas City Economic Symposium. Jackson Hole, WY. August 22, Yellen s Labor Market Dashboard The timing & pace of future federal funds rate increases depend on the labor market s progress towards a full recovery from recessionary impacts (presence of labor slack means the mkt. has NOT recovered yet). Chair Yellen identified numerous factors that are complicating analysis of labor market slack; estimate slack by analyzing 6 indicators: 1. Labor Force Participation Rate 2. Part-time employment for economic reasons (U LONG-TERM ) 3. Labor market flows (i.e. pace of hires & quits) 4. Aging of the workforce & other demographic trends 5. Polarization of jobs at high & low ends of pay & skill spectrums 6. Changes in labor compensation (nominal/real wage changes)

43 Federal Reserve s Balance Sheet Trillions $ ASSETS Other Assets Agency Securities LOANS Treasury Securities Federal Reserve Notes in Circulation Treasury Supplementary Financing Program LIABILITIES Other liabilities Reserve Balances -5 1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 1/15 7/15 Source: Federal Reserve Board Table H.41 Last Point Plotted: Week of September 2 nd, 2015

44 Interest Rate (%) NEW [Potential] Monetary Policy Tools? Suggested tools involve using a corridor system, where the federal funds rate is targeted between upper-& lower-bound - set by other rates - such as: 1. The RATE OF INTEREST ON EXCESS RESERVES (IOER) 2. The FIXED-RATE OVERNIGHT REVERSE REPURCHASE FACILITY (ON RRP) At the July 2014 FOMC meeting [m]ost participants anticipated that, at least initially, the IOER rate would be set at the top of the target range for the federal funds rate and the ON RRP rate would be set at the bottom of the federal funds rate range HYPOTHETICAL CORRIDOR SYSTEM Period Source: FOMC Minutes from July 30 th, 2014 Meeting, Produced by: Luke A. Tilley Upper Bound Lower Bound Fed Funds Rate

45 Questions? Ardy L. Wurtzel, M.A. Research Associate Request a Fed Speaker: Follow us Like us on Facebook * NEW TRI-STATE TRACKING * FEDERAL RESERVE BANK OF PHILADELPHIA

46 APPENDIX

47 EMPLOYMENT RECOVERY IN THE STATES State Labels Are Rankings Out of 50 (1 = most jobs recovered) Source: FRB Philadelphia calculations from BLS via Haver Analytics. Note: Each state s peak and trough determined individually.

48 TRI-STATE MSA EMPLOYMENT RECOVERY Metropolitan Statistical Area boundaries are denoted in red 1 = Allentown-Bethlehem-Easton, PA-NJ MSA 2 = Altoona, PA MSA 3 = Atlantic City-Hammonton, NJ MSA 4 = Bloomsburg-Berwick, PA MSA 5 = Chambersburg-Waynesboro, PA MSA 6 = Dover, DE MSA 7 = East Stroudsburg, PA MSA Source: FRB Philadelphia calculations from BLS via Haver Analytics Each MSA s peak and trough determined individually 8 = Erie, PA MSA 9 = Gettysburg, PA MSA 10 = Harrisburg-Carlisle, PA MSA 11 = Johnstown, PA MSA 12 = Lancaster, PA MSA 13 = Lebanon, PA MSA 14 = NY-Newark-Jersey City, NY-NJ-PA MSA 15 = Ocean City, NJ MSA 16 = Phila-Camd.-Wilmgtn, PA-NJ-DE-MD MSA 17 = Pittsburgh, PA 18 = Reading, PA 19 = Salisbury, MD-DE MSA 20 = Scranton-Wilkes-Barre-Hazelton, PA MSA 21 = State College, PA MSA 22 = Trenton, NJ MSA 23 = Vineland-Bridgeton, NJ MSA 24 = Williamsport, PA MSA 25 = York-Hanover, PA MSA 26 = Youngstown-Warren-Boardman, OH-PA MSA

49 SERIOUSLY DELINQUENT MORTGAGES Seriously Delinquent Mortgages (Seasonally adjusted) 15% 10% 10.2% US PA NJ DE Avg. ' % 3.2% 2.0% 2.1% 5% 5.1% 4.9% 4.0% U.S. PA NJ DE 0% '00 '02 '04 '06 '08 '10 '12 '14 Source: Mortgage Bankers Association (MBA) via Haver Analyt Last quarter plotted: 2015:Q2

50 MARKET-IMPLIED FEDERAL FUNDS RATE PATH Using Federal Funds Rate futures contracts Percent /8/2015 8/28/ Jan '15 Jul '15 Jan '16 Jul '16 Jan '17 Jul '17 Jan '18 Jul '18 Source: Bloomberg

51 MARKET-IMPLIED PROBABILITY OF A RATE HIKE Using Federal Funds Rate futures contracts 100% 75% Sep Meeting Oct Meeting Dec Meeting 60% 50% 47% 25% 32% Mar Apr Jun Jul % Mar '15 Apr '15 May '15 Jun '15 Jul '15 Aug '15 Source: Bloomberg Last day plotted: 09/01/2015 Vertical shading represents scheduled FOMC meeting dates