The Outlook for the U.S. Economy John V. Duca Associate Director of Research and Vice President Federal Reserve Bank of Dallas Danforth/Lewis Professor of Economics Oberlin College January 2018 The views expressed are those of the speaker and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System. Thanks to Laton Russell for excellent research assistance.
Outline Economic outlook and policy: the usual suspects: Real activity Labor markets Inflation Important background on income and housing Conclusion
Real Activity
Investment and manufacturing have revived some, service sector growth moderately strong Business investment sagged in 2015 and 2016, mainly owing to the energy bust. Revived some with turnaround in mining activity. Partly aided by fading energy bust, manufacturing growth firming. Manufacturing still subject to currency, trade policy, and foreign growth developments. Service sector firmed in the first half of 2017, still strong more recently. ISM surveys consistent with GDP growth near or above 2 percent in the near term. Nominal consumption (PCE) growth solid.
It took several years for high unemployment to fall from its Great Recession highs SA, Percent Unemployed 12 11 10 9 8 7 6 5 Dec. 17 4.1 4 3 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 Sources: Bureau of Labor Statistics and NBER (shaded areas denote NBER recessions).
GDP growth choppy on a quarterly basis, a little above 2 percent growth is expected in 2017-18 Percent change 6 5 4 3 2 1 0-1 -2-3 Qtr./Qtr. Year/Year 17:Q3 3.2 17:Q4 2.3 2.7 2.6 Blue Chip forecast -4 2013 2014 2015 2016 2017 2018 Sources: Bureau of Economic Analysis and Blue Chip Survey.
Growth in leading economic indicators reviving, suggests moderate near-term growth 6-month Annualized Change 20 15 10 5 0 U.S. fiscal scares Nov. 17 (6.1) -5-10 Euro Debt China Slows -15-20 -25 Credit Controls of 1980 Credit Crunch & Panic of 08-09 -30 '60 '63 '66 '69 '72 '75 '78 '81 '84 '87 '90 '93 '96 '99 '02 '05 '08 '11 '14 '17 Sources: Conference Board, author s calculations, and NBER (shaded areas denote NBER recessions).
Weakness in business investment was largely in mining, mining investment seems to be stabilizing Billions, 2009 US$ Billions, 2009 US$ 2,400 300 2,000 Nonresidential Fixed Investment 250 1,600 200 1,200 Structures & Equipment 150 800 400 Other Sectors Structures & Equipment Mining-related Structures & Equipment 100 50 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 SOURCE: Bureau of Economic Analysis. 0
Rig count leads oil investment by one quarter Percent change, year/year 140 120 100 80 60 40 20 0-20 -40-60 -80-100 -120-140 Petroleum and Natural Gas Structures and Equipment Investment U.S. Rig Count 1-Quarter Lead '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 Percent change, year/year, SAAR NOTES: Shaded areas indicate recession. Petroleum and natural gas equipment series begins after 1999. SOURCES: Baker Hughes; Energy Information Administration; author's calculations; NBER. 100 80 60 40 20 0-20 -40-60 -80-100
ISM surveys consistent with two-quarter GDP growth at or above 2 percent in near term 3 mo. average, 50+ = Econ Expand 70 2-qtr annualized percent change 8 65 60 Dec. 17 58.9 6 4 Rising 55 2 50 0 Falling 45 ISM Manufacturing -2 40-4 35-6 30 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 NOTE: Shaded areas indicate recession. SOURCES: Institute for Supply Management, Bureau of Economic Analysis. -8
ISM surveys consistent with two-quarter GDP growth at or above 2 percent in near term 3 mo. average, 50+ = Econ Expand 70 2-qtr annualized percent change 8 65 60 ISM Non-manufacturing Dec. 17 57.8 6 4 Rising 55 2 50 0 Falling 45 ISM Manufacturing -2 40 Dec. 17 58.9-4 35-6 30 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 NOTE: Shaded areas indicate recession. SOURCES: Institute for Supply Management, Bureau of Economic Analysis. -8
ISM surveys consistent with two-quarter GDP growth at or above 2 percent in near term 3 mo. average, 50+ = Econ Expand 70 2-qtr annualized percent change 8 65 60 Real GDP Growth ISM Non-manufacturing Dec. 17 57.8 6 4 Rising 55 50 Q3 3.2 2 0 Falling 45 ISM Manufacturing -2 40 Dec. 17 58.9-4 35-6 30 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 NOTE: Shaded areas indicate recession. SOURCES: Institute for Supply Management, Bureau of Economic Analysis. -8
Year-over-year growth in consumer spending (PCE) solid - not surging Percent change year/year 12 10 8 6 Nov. 17 4.5 4 2 0-2 -4-6 -8-10 -12-14 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 NOTE: Shaded areas indicate recession. SOURCES: Bureau of Economic Analysis; Census Bureau; NBER.
Labor Markets
Labor markets near or at full employment Payroll job gains modestly decelerate since 2015 as the jobless pool shrinks. Bounce-back after hurricanes. Headline unemployment dips below natural rate estimates Discouraged worker rate and part-time for economic reasons near pre-recession levels. Headline and broader unemployment rates now below pre-recession averages. Other positive signs: hiring rates and quit rates back to pre-recession levels. layoff rates are below pre-recession norms, job opening rates high consistent with shortages of skilled labor and the long-run need to improve workers skills.
Despite ebbing from 2015 pace, private payroll growth moderately strong enough to lower slack Private nonfarm payrolls, Chg, thousands 600 400 200 0 3-Month Moving Average Dec. 17 146-200 -400 Hurricane related -600-800 -1,000 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 SOURCE: Bureau of Labor Statistics.
Declines in unemployment suggest labor market near full employment Percent 8 7 6 Headline (U3) Unemployment Rate 5 Dec. 17 4.1 Median Policymaker Long-Run Unemployment Rate Natural Rate of Unemployment (NAIRU, Congressional Budget Office) 4 '14 '15 '16 '17 Sources: Bureau of Labor Statistics, Congressional Budget Office, Federal Reserve System.
Broader U6 unemployment rate low Percent 18 16 14 12 10 8 1994-2007:Q3 Average Headline Unemployment Rate U6 Unemployment Rate Dec. '17 8.1 6 4 1994-2007:Q3 Average 4.1 2 0 NOTES: U6 Unemployment rate includes marginally attached and part-time for economic reasons workers. Gray shaded areas indicate NBER recessions. SOURCES: Bureau of Labor Statistics; NBER.
Inflation
Investment and manufacturing have revived some, service sector growth moderately strong Business investment sagged in 2015 and 2016, mainly owing to the energy bust. Revived some with turnaround in mining activity. Partly aided by fading energy bust, manufacturing growth firming. Manufacturing still subject to currency, trade policy, and foreign growth developments. Service sector firmed in the first half of 2017, still strong more recently. ISM surveys consistent with GDP growth near or above 2 percent in the near term. Nominal consumption (PCE) growth solid.
Core, trimmed mean inflation still shy of 2 percent Percent change, Year-over-year 5 4 Headline PCE 3 2 1 0 Trimmed Mean PCE Core PCE Nov. 17 (1.7) (1.8) (1.5) -1-2 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 SOURCES: Bureau of Labor Statistics, Bureau of Economic Analysis, and Federal Reserve Bank of Dallas.
Are any of the disinflationary effects of ACA on health care inflation dissipating? Percent change, Year-over-year 5 4 3 2 1 Health care services price changes Nov. Trimmed (1.7) Mean PCE (1.4) 0-1 -2 ACA sign-ups start Start of ACA cost programs Insurance premium caps '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 SOURCES: Bureau of Labor Statistics, Bureau of Economic Analysis, Federal Reserve Bank of Dallas, and Dolmas (2016).
Slower health care inflation restrains trimmed mean inflation from 2013-16 Percent change, Year-over-year 5 4 3 2 1 Trimmed Mean PCE Trimmed Mean PCE ex. health care Nov. (1.8) (1.7) 0-1 -2 ACA sign-ups start Start of ACA cost programs Insurance prem. caps '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 SOURCES: Bureau of Labor Statistics, Bureau of Economic Analysis, Federal Reserve Bank of Dallas, and Dolmas (2016).
Important background on income and housing
Important background on income and housing Consumer spending growth looks solid Wealth likely to support further consumer spending growth Mortgage crisis behind us, overall credit quality is good Housing demand finally kicking in may shift spending patterns toward housing-related consumer goods, sources of growth shifting away from autos. Labor markets back to near full employment Real income slower to recover, differs by age and education Consumer confidence high
Percent change year/year 12 10 8 6 4 2 0-2 -4-6 -8-10 -12-14 Year-over-year growth in retail control and PCE consumer spending solid Total Retail Sales Retail Control Nominal PCE '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 NOTE: Shaded areas indicate recession. SOURCES: Bureau of Economic Analysis; Census Bureau; NBER. Nov. 6.3 4.3 4.5
Single-family housing permits boom, then bust, and slowly recover picking up a little in late 2017 Millions, units Billions, $2009 2.00 500 1.75 1.50 1.25 Real single-family construction 450 400 350 300 1.00 (Q3) 250 200 0.75 Single-family building permits 150 0.50 (Nov.) 100 50 0.25 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 Sources: Bureau of Economic Analysis, U.S. Census and author s calculations. 0 27
Single-family housing recovering slowly, while multi-family has already recovered Units, thousands SAAR 2000 1600 1200 Single-Unit Permits 800 400 0 Multi-Unit Permits (3 mo. avg.) -400 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 NOTE: Shaded areas indicate recession. SOURCES: Census Bureau; NBER.
U.S. light vehicle sales recovered by 2015, not much scope for future growth ex. hurricane effects Millions of Units, SAAR 19 Annual Sales 17 Pace 15 13 Tax Credit Nov. 17 (17.3) Hurricane related 11 9 7 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Source: Bureau of Economic Analysis.
Median household income by age of head of household Index, 2006 = 100 125 120 115 110 105 15 to 24 Years 35 to 44 Years 45 to 54 Years 55 to 64 Years 65 Years and Over 100 95 90 85 80 1991 1994 1997 2000 2003 2006 2009 2012 2015 NOTES: Grey shaded areas indicate NBER recessions. SOURCE: Census Bureau; NBER.
Median household income by age of head of household Index, 1970 = 100 225 15 to 24 Years 35 to 44 Years 200 45 to 54 Years 55 to 64 Years 175 65 Years and Over 150 125 100 75 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 NOTES: Grey shaded areas indicate NBER recessions. SOURCE: Census Bureau; NBER.
Median household income by education Index, 1991 = 100 140 No Diploma 130 120 High School Graduate Some College (no degree) Bachelor's Degree or More 110 100 90 80 1992 1995 1998 2001 2004 2007 2010 2013 2016 NOTES: Grey shaded areas indicate NBER recessions. SOURCE: Census Bureau; NBER.
Consumer sentiment and confidence recover from U.S. fiscal policy and euro debt scares Index Conference Board: Consumer Confidence (1985=100) Dec. 17 122.1 120 University of Michigan: Consumer Sentiment (Q1-66=100) 100 Debt Ceiling and Euro Crisis II Scares Euro- Crisis III Dec. 17 95.9 Euro- Crisis I 80 60 40 Fiscal Cliff Gov t shutdown 20 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 SOURCES: U. of Michigan Survey Research Council, Conference Board and NBER.
Concluding Comments GDP growth moderate as full employment roughly restored. Likely to overshoot full employment in 2017/18. Short-run factors delay return to 2 percent overall PCE inflation, medium-run outlook still points to 2 percent. U.S. economy ending 2017 with some momentum. Fiscal policy changes could firm medium-run outlook, but details and prospects unclear. Household spending patterns starting to shift away from autos to other items and housing. Some signs of asset price pressures. Against a good cyclical backdrop, the issue and ramifications of sluggish long-run growth remain.
Back-Up Slides: Regional Economies
Total Nonagricultural Employment by District Indexed to Advent of Great Recession Index, Jan. 2008=100 120 Oil price peak June 2014 Nov. 2017 115 110 105 100 Dallas San Francisco Minneapolis Atlanta Sum of States New York U.S. Richmond Kansas City Boston St. Louis Chicago Philadelphia Cleveland 95 90 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 SOURCES: Bureau of Labor Statistics; Texas Workforce Commission; seasonal and other adjustments by Federal Reserve Bank of Dallas.
Index, Jun. 2014=100 110 108 106 104 102 100 98 96 94 92 90 Total Nonagricultural Employment by District Since Last Oil Price Peak Oil price peak June 2014 Nov. 2017 San Francisco Atlanta Dallas Richmond St. Louis Sum of States New York U.S. Boston Kansas City Chicago Philadelphia Minneapolis Cleveland 88 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 SOURCES: Bureau of Labor Statistics; Texas Workforce Commission; seasonal and other adjustments by Federal Reserve Bank of Dallas.