Cornbelt Economic Prospects for 2013 November 7, 2012 Decatur, IL David Oppedahl Business Economist 312-322-6122 david.oppedahl@chi.frb.org
The economy hit bottom in June 2009, with hesitant growth since then Chicago Fed National Activity Index 2.0 1.0 Above Trend Growth 0.0-1.0-2.0-3.0 Three month average Below Trend -4.0-5.0 Monthly 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
In December 2008, the Federal Open Market Committee lowered its Fed Funds rate target to a range from 0 to 0.25% 8 6 4 2 0 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 FedTarget FedFunds
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 1,000 500 AIG Support Central Bank Swaps Commercial Paper Facility Maiden Lane Term Auction Credit Securities Held Outright 0 2007 2008 2009 2010 2011 2012
Food price increases again rising faster than core inflation (less food and energy) 8 6 4 2 0-2 (Consumer price index, percent change from year ago) 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 CPI LFE CPI Food
120 100 80 60 40 20 0 Oil prices getting higher again and gas prices hitting consumer spending Real West Texas Intermediate oil price dollars per barrel. 2011 dollars 140 1970 '75 '80 '85 '90 '95 '00 '05 '10
Real natural gas prices remain very low dollars per mmbtu (2011 dollars) 16 14 12 10 8 6 4 2 0 Real natural gas price 1994 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Even including the volatile food and energy components, inflation remains contained 8 6 4 2 0-2 -4-6 -8-10 Consumer price index percent Percent change from a year earlier Quarterly change (saar) Q3-2011 Blue Chip CPI Forecast Actual Forecast 2011 2012 2013 3.3 1.9 2.1 2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
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 6 4 2 0-2 -4 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
Regional differences in unemployment rates widened during the recession Pre-recession Post-recession
The unemployment rate has fallen just over 2% since peaking in October 2009 percent 11 10 9 8 7 6 5 4 3 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
The unemployment rate is forecast to edge lower Unemployment rate percent 10 Blue Chip Forecast Q3-2012 8 6 4 2 0 2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
The Great Recession ended in June 2009, but the economy grew by just 2.3% over the past year 10 8 6 4 2 0-2 -4-6 -8-10 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
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%
10 8 6 4 2 0-2 -4-6 -8-10 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 2011 2012 2013 2.0 1.7 2.3 Q3-2012 2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
The path of this recovery is forecast below past deep recession recovery cycles Business cycle recovery path index - business cycle trough = 100 122 120 118 116 114 112 110 108 106 2008-09 104 102 100 98 average annualized growth: 5.3% average annualized growth: 2.4% average annualized growth: 5.4% 1981-82 1974-75 Blue Chip forecast recovery path -8-7 -6-5 -4-3 -2-1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 quarters before trough quarters after trough
Lots of uncertainty affecting confidence Economic Policy Uncertainty Index Consumer Confidence (Conf. Board) 250 150 200 100 150 50 100 50 1999 '01 '03 '05 '07 '09 '11 0 1999 '01 '03 '05 '07 '09 '11
Origins of slow recovery: Wealth Destruction What is your number?
Household net worth has edged up from low Households net worth divided by disposable income percent 650 600 550 500 450 400 1955 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10
The stock market has improved since March 2009, but remains below previous highs S&P 500 stock index Index: 1941-43 = 10 1,600 1,400 1,200 1,000 800 600 400 200 0 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
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 $90,000 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Impact of housing foreclosures varies
Housing market tanked and bounced along bottom Housing starts (thousands of units, 3-month moving average, SAAR) 2.5 Home mortgage rate (percent, effective rate for all loans closed) 9 8 2.0 7 1.5 6 5 1.0 4 0.5 1999 '01 '03 '05 '07 '09 '11 3 1999 '01 '03 '05 '07 '09 '11
Manufacturing growth is slower; orders for capital goods easing ISM purchasing managers index (net percent reporting increase) 65 Nondefense capital goods ex. aircraft (orders in millions of dollars, 3-month moving average) 70 60 65 55 50 60 45 55 40 35 50 30 1999 '01 '03 '05 '07 '09 '11 45 1999 '01 '03 '05 '07 '09 '11
Manufacturing Share of Jobs in Nonmetro Counties 1969 2009
Vehicle sales are expected to improve at a good pace Light vehicle sales millions of units (saar) 22 21 20 19 18 17 16 15 14 13 12 11 10 9 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Industrial production is forecast to rise at a pace close to its trend Total industrial production percent 10 5 0 Quarterly change (saar) -5-10 -15-20 Percent change from a year earlier Q3-2012 Blue Chip IP Forecast Actual Forecast 2011 2012 2013 4.0 3.0 3.0 2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Exports have not dipped as much as imports this year (billions of dollars, SA) 250 200 150 100 50 0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Exports Imports
International trade faces global headwinds
120 110 100 The dollar s exchange value peaked in 2002, before falling below earlier range 90 80 (Real Broad Trade-Weighted Exchange Value of the US$) {March 1973=100} 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Euro vs. U.S. Dollar (Euro/$) 1.4 1.2 1.0 0.8 0.6 0.4 1999 2001 2003 2005 2007 2009 2011
9.1% of U.S. Exports in 2009 were Food and Agricultural Products Global Trade in Action
billion $ Value of agricultural exports expected to rise in 2013 160 140 120 100 80 60 40 20 0 Surplus Exports Imports FY1970 1975 1980 1985 1990 1995 2000 2005 2010 2013* (*projected)
billion $ High-value exports are the star performers, with bulk exports more variable 80 60 40 High-value 20 Bulk 0 FY1980 1985 1990 1995 2000 2005 2010
million bu. Trade agreements won t repeal the variability of bulk exports 3000 2500 2000 1500 1000 500 Corn Wheat Soybeans 0 1976 1981 1986 1991 1996 2001 2006 2011
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)
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 $10 per day, demand for processed food greater than demand for raw commodities World food demand may double by 2050 as people escape from poverty
Resource Constraints Drive Trade At most 12% more arable land available worldwide for agriculture (without destruction) Inferior quality or degraded land in many areas Agriculture uses 70% of world s fresh water Water is a scarce resource in much of the world, but it s not priced that way To meet world food demand sustainably there will need to be huge increases in food system productivity around the world Larger fraction of food to move via trade due to distribution of arable land
U.S. agricultural output, inputs, and total factor productivity (TFP) (1948=100) 300 250 200 Output TFP 150 100 Inputs 50 1948 1956 1964 1972 1980 1988 1996 2004
7th District Crop Yield Indexes (1964=100) 250 200 Corn 150 100 Soybeans 1964 1970 1976 1982 1988 1994 2000 2006 2012*
Real Crop Prices ($/bushel, adjusted by CPI-U for January 2010) 40 35 30 25 20 15 10 5 0 1976 1981 1986 1991 1996 2001 2006 2011 Corn Soybeans
Hog and Dairy Profitability Measures Hog-corn price ratio Milk-feed price ratio 30 5 25 4 20 3 15 10 2 5 1999 '01 '03 '05 '07 '09 '11 1 1999 '01 '03 '05 '07 '09 '11
billion 2005$ Real net farm income boosted by direct government payments to farmers, but the regional impact varies 120 100 2012* 80 60 40 20 0 1980 1985 1990 1995 2000 2005 2010 gov't payments *forecast
Participating Banks Banks in 7th District Land Value and Credit Conditions Survey
Percent Year over year changes by quarter in farmland values in the Seventh Federal Reserve District 30 25 20 15 10 5 0-5 1995 1997 1999 2001 2003 2005 2007 2009 2011
Index of Seventh District farmland values (1981=100) 400 350 300 250 200 150 100 50 0 Nominal Inflation Adjusted 1970 1975 1980 1985 1990 1995 2000 2005 2010
Index of Seventh District Cash Rents Nominal vs. Inflation Adjusted (1981=100) 250 200 Nominal 150 100 50 Inflation Adjusted 0 1980 1984 1988 1992 1996 2000 2004 2008 2012
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
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?
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
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 0 2007 2008 2009 2010 2011 2012
The FOMC anticipates that PCE inflation will remain below 2% through 2015 Personal consumption expenditure - chain price index percent change from a year earlier 6 5 4 3 2 1 FOMC 0-1 1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14
The FOMC expects GDP to grow somewhat above trend over the next three years 6 5 4 3 2 1 0-1 -2-3 -4-5 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
The FOMC forecasts unemployment rates remaining above the natural rate through the end of 2015 Unemployment rate percent 11 10 9 8 7 FOMC 6 5 4 3 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
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
The Federal Funds Rate is anticipated to remain very low over the forecast horizon percent 9 8 7 6 5 4 3 2 1 0 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
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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