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Chad Wilkerson Oklahoma City Branch Executive and Economist
Federal Reserve Bank of Kansas City www.kansascityfed.org/oklahomacity
OSU Economic Outlook Conference December 5, 2012
• U.S. economic growth has been moderate and is expected to remain sluggish in Q4 • How the fiscal cliff is resolved has bearing on both near-term growth and long-term debt
• The range of views among FOMC members about monetary policy remains relatively wide
• The regional economy reflects the nation, though Oklahoma continues to outperform
Highlights
2.0 2.4
20.5
7.5
4.4
-3.0
1.3 1.5
8.5
3.6 5.3
-0.7
2.7 1.4
14.2
-2.2
1.1
3.5
-5
0
5
10
15
20
25
Total GDP Consumerspending
Residentialinvestment
Businessinvestment
Exports Governmentspending
2012 Q1
2012 Q2
2012 Q3
Growth in Components of Real GDP Actual thru Q3 2012, Projected for Q4 and 2013
Percent change from the previous period, SAAR
Source: U.S. Bureau of Economic Analysis, Macroeconomic Advisors
GDP growth rebounded somewhat in Q3, but business spending weakened
-40
-30
-20
-10
0
10
20
30
30
35
40
45
50
55
60
65
Nov-94 Nov-96 Nov-98 Nov-00 Nov-02 Nov-04 Nov-06 Nov-08 Nov-10 Nov-12
Composite (left axis)
Exports (right axis)
Index
Sources: ISM, FRBKC Manufacturing Survey
ISM Manufacturing Survey Indexes
The national ISM index fell in November, as exports declined and uncertainty remained
-2
-1
0
1
2
3
4
5
6
-2
-1
0
1
2
3
4
5
6
Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12
European Financial Stress Index
U.S. Financial Stress Index
Financial stress in Europe remains higher than a few years ago, but has improved
Eurozone and U.S. Financial Stress
Source: FRBKC
Index
-5.0
-4.5
-4.0
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
Sequestration - $110 bn
Tax extenders - $20 bn
Payroll tax - $120 bn
Bush tax cuts - $180 bn
AMT - $120 bn
Obamacare - $20 bn
Business expensing - $10 bn
Medicare doc fix - $20 bn Other - $40 bn
Initial debt plan - $40 bn
Pending tax increases
Pending expiring programs
Pending spending cuts
Components of the “Fiscal Cliff” In dollars and as a share of GDP
Percent of GDP
Source: Merrill Lynch
The “fiscal cliff” and political uncertainty are weighing on the economy
Extended UI - $40 bn
Economic forecasters generally assume the fiscal cliff will be avoided, without recession
Sources: Blue Chip Economic Indicators, Congressional Budget Office, Haver Analytics
Real GDP Projections
-5
-4
-3
-2
-1
0
1
2
3
4
2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4
Real GDP, under CBO fiscal cliff scenario
Real GDP, Blue Chip forecasts
Percent change, quarter-over-quarter (SAAR)
However, avoiding fiscal changes means further increases in the national debt
Source: Congressional Budget Office
Federal Debt as a Share of GDP
0
20
40
60
80
100
120
0
20
40
60
80
100
120
1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Actual Projected
Alternative Fiscal
Scenario
Percent
CBO’s Baseline
Projection
Fiscal cliff components have varying effects on GDP and the federal deficit
Source: Moody’s Analytics
Implied Multipliers on GDP and the Federal Deficit
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
Emergency UI
Sequestration Bush taxcuts (below
$250K)
Payroll taxholiday
AMT patch Bush tax cuts (above
$250K)
Affordable CareAct
Medicaredoc fix
Bonusdepreciation
Tax extenders
Ratio of GDP to debt decline
Unemployment Rate Seasonally Adjusted
Percent
Source: U.S. Bureau of Labor Statistics, FOMC
0
2
4
6
8
10
12
0
2
4
6
8
10
12
1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015
Sept. FOMC Forecast Ranges in Yellow
At its Sept. meeting, the FOMC expected unemployment to gradually improve
Long Term
PCE Inflation Index
Percent change, year-over-year
Source: U.S. Bureau of Economic Analysis, FOMC
0
1
2
3
4
5
6
7
8
0
1
2
3
4
5
6
7
8
1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015
Sept. FOMC Forecast Ranges in Yellow
And for inflation to remain at or near its long-term target through 2015
Long Term
0
2
4
6
8
10
12
0
2
4
6
8
10
12
1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015
(1)
(3)
(2)
(12)
Federal Funds Rate Year-end target
Percent
Source: U.S. Bureau of Economic Analysis, FOMC
Sept. FOMC Forecast Ranges in Yellow
On monetary policy, over a third of FOMC participants disagree about timing
Long Term
Note – Number of participants who project the initial increase will occur in the specified year in parenthesis
Source: U.S. Bureau of Labor Statistics
Employment Growth, Year-over-Year (percent) October 2012
There remains considerable variation in the rate of job growth across the nation
2.7 U.S. = 1.4
1.8
0.4 1.1
0.6 1.0
(0.7)
Source: U.S. Bureau of Labor Statistics
Unemployment Rates (percent) October 2012
Unemployment is lowest in energy and agriculture states, highest on the coasts
5.3
U.S. = 7.9
7.9
5.2 3.8
5.7 6.9
6.3
Number of rigs
Source: Baker Hughes
U.S. Rig Count Seasonally Adjusted
The rig count is down from summer highs, as natural gas prices remain too low
0
500
1000
1500
2000
2500
0
500
1000
1500
2000
2500
Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12
Oil
Natural Gas
Diffusion Index
Source: ISM, Federal Reserve Banks
Manufacturing Month-over-Month PMI Indexes Seasonally Adjusted
Regional manufacturing activity has also slowed in recent months
30
35
40
45
50
55
60
65
30
35
40
45
50
55
60
65
Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12
KC FedISMNY, Philly, Rich, Dallas Avg.
Diffusion Index
Source: ISM, Federal Reserve Banks
Manufacturing 6-Month Ahead Indexes Seasonally Adjusted
Expectations also eased, especially for hiring
-40
-30
-20
-10
0
10
20
30
40
50
-40
-30
-20
-10
0
10
20
30
40
50
Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12
ProductionEmploymentCapital Spending
3.4 2.3 2.8 2.1 2.2
1.3 1.5 1.7
9.1 9.8 9.3
6.6 4.6
4.9 4.6 3.8
0
2
4
6
8
10
12
14
U.S. NE KS MO CO WY OK NM
Rest of World
Europe
Exports as Share of GDP, 2010 U.S. and Tenth District states
Percent
Sources: U.S. Bureau of Economic Analysis, USDA, WISERTRADE
Exposure to Europe is much less in Oklahoma than in the nation or even region
Federal Expenditures Per Capita, Fiscal Year 2010 U.S. and Tenth District states
Percent
Sources: U.S. Census Bureau, Consolidated Federal Funds Report
Exposure to the “fiscal cliff” is probably about average in Oklahoma as a whole
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
U.S. NM MO WY OK KS CO NE
Salaries & WagesProcurement ContractsGrantsOther Direct PaymentsRetirement & Disability
The ongoing drought has had mixed effects across the region
0
5
10
15
20
25
30
35
40
0
5
10
15
20
25
30
35
40
District NE MO KS Mtn States (CO, NM,
WY)
OK
Q1 2012Q2 2012Q3 2012
Source: FRBKC Agricultural Credit Survey
Tenth District Non-Irrigated Cropland Values Percent Change, Year-over-year
Growth in regional farmland values eased, but prices are still up considerably over last year
Percent
0
1,600
3,200
4,800
6,400
8,000
9,600
11,200
12,800
14,400
16,000
0
16,000
32,000
48,000
64,000
80,000
96,000
112,000
128,000
144,000
160,000
Oct-96 Oct-98 Oct-00 Oct-02 Oct-04 Oct-06 Oct-08 Oct-10 Oct-12
US (left)
Tenth District (right)
Number, 3-month moving avg.
Single-Family Housing Permits Seasonally adjusted
On the positive side, housing activity has grown solidly in the District the past year
Source: U.S. Census Bureau
Source: U.S. Bureau of Labor Statistics
FHFA Purchase-Only Home Price Index Peak to Current (2007Q1 to 2012Q3)
District home prices are still in much better shape, with some above the 2007 peaks
Recent U.S. economic growth has
been moderate, with low inflation, as fiscal concerns remain a focus
Regional activity largely reflects the
nation, though Oklahoma remains stronger, and housing is better
Summary