The Casualty Actuarial Society is committed to adhering ... · $2.0 $2.5 $3.0 Oct '10 Sep '11 Jul '12 Jan '13 Source: Board of Governors of the Federal Reserve System 8 FEDERAL RESERVE

Antitrust Notice

• The Casualty Actuarial Society is committed to adhering strictly to the letter and spirit of the antitrust laws. Seminars conducted under the auspices of the CAS are designed solely to provide a forum for the expression of various points of view on topics described in the programs or agendas for such meetings.

• Under no circumstances shall CAS seminars be used as a means for competing companies or firms to reach any understanding – expressed or implied – that restricts competition or in any way impairs the ability of members to exercise independent business judgment regarding matters affecting competition.

• It is the responsibility of all seminar participants to be aware of antitrust regulations, to prevent any written or verbal discussions that appear to violate these laws, and to adhere in every respect to the CAS antitrust compliance policy.

Alison Felix Economist & Branch Executive

Federal Reserve Bank of Kansas City Denver Branch

Economic Update

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

2007 2008 2009 2010 Q1 Q2 Q3 Q4 Q1 Q2 2012 2013 2014

2011 2012 Projections

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

U.S. GDP growth slowed slightly in the second quarter and is expected to continue to grow at a modest pace.

2 Source: Bureau of Economic Analysis & Federal Open Market Committee (FOMC)

REAL GROSS DOMESTIC PRODUCT (GDP) Annualized Percent Change from Previous Period

June 2012

FOMC Central

Tendency Projections

-2%

-1%

0%

1%

2%

3%

4%

5%

-2%

-1%

0%

1%

2%

3%

4%

5%

Total GDP Consumer Spending

Residential Investment

Business Investment

Net Exports

Government Spending

Inventories

2011Q3

2011Q4

2012Q1

2012Q2

Consumer spending makes up more than 70% of GDP.

3 Source: Bureau of Economic Analysis

CONTRIBUTIONS TO PERCENT CHANGE IN GDP Annualized Percent Change from Previous Period

5.1%

4.6% 4.6%

5.8%

9.3% 9.6%

9.0%

8.3%

4%

5%

6%

7%

8%

9%

10%

4%

5%

6%

7%

8%

9%

10%

2005 2006 2007 2008 2009 2010 2011 July 2012 2013 2014

2012 Projections

Unemployment rates have fallen over the past year but remain stubbornly high.

4

U.S. UNEMPLOYMENT RATE

Source: Bureau of Labor Statistics & Federal Open Market Committee (FOMC)

June 2012

FOMC Central


0%

1%

2%

3%

4%

5%

0%

1%

2%

3%

4%

5%

2005 2006 2007 2008 2009 2010 Q1 Q2 Q3 Q4 Q1 Q2 2012 2013 2014

2011 2012 Projections

Inflation increased earlier this year but moderated in the second quarter as oil prices fell.

5 Source: Bureau of Economic Analysis & Federal Open Market Committee (FOMC)

U.S. PERSONAL CONSUMPTION EXPENDITURE (PCE) INFLATION Annualized Percent Change from Previous Period

June 2012

FOMC Central


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

6 Source: Board of Governors of the Federal Reserve System

EFFECTIVE FEDERAL FUNDS RATE

“…the Committee decided today to keep the target range for the federal funds rate

at 0 to 1/4 percent and currently anticipates that economic conditions--including

low rates of resource utilization and a subdued outlook for inflation over the

medium run--are likely to warrant exceptionally low levels for the federal funds rate

at least through late 2014.” - FOMC August Statement

-$3

-$2

-$1

$0

$1

$2

$3

-$3

-$2

-$1

$0

$1

$2

$3

2007 2008 2009 2010 2011 2012


FEDERAL RESERVE BALANCE SHEET

“The Committee also decided to continue through the end of the year its program to extend

the average maturity of its holdings of securities as announced in June, and it is maintaining

its existing policy of reinvesting principal payments from its holdings of agency debt and

agency mortgage-backed securities in agency mortgage-backed securities.”

- FOMC August Statement

Traditional Portfolio

Currency in Circulation

Reserves

Other

Federal Agency & Mortgage-Backed

Securities

Foreign Currency Swaps

Short-Term Lending

Assets

Liabilities

Trillions Trillions

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

Oct '10 Sep '11 Jul '12 Jan '13


FEDERAL RESERVE BANK ASSETS Trillions

>10 years 6 to 10 years 3 to 6 years

≤3 years

Federal Agency &

Mortgage Backed Securities

All Other

Treasuries by Duration

QE2

Projected Operation Twist

Operation Twist

“The Committee also decided to continue through the end of the year its program to extend

the average maturity of its holdings of securities as announced in June, and it is maintaining

its existing policy of reinvesting principal payments from its holdings of agency debt and

agency mortgage-backed securities in agency mortgage-backed securities.”

- FOMC August Statement

9 Source: Federal Reserve Bank of Kansas City

Board of Governors

FEDERAL RESERVE BANK DISTRICTS

95

100

105

110

Jul '02 Jul '04 Jul '06 Jul '08 Jul '10 Jul '12

Employment growth slowed in the second quarter but remains well above year ago levels.

10 Source: Bureau of Labor Statistics

U.S. NONFARM EMPLOYMENT GROWTH Index 100 = July 2002, Seasonally Adjusted

United States 1.4%

July 2012

Year-over-Year Change

JULY 2012 NONFARM EMPLOYMENT Seasonally Adjusted, Year-over-Year Change

Most states have experienced employment gains over the past year.


More than 3%

2 to 3%

1 to 2%

0 to 1%

-1 to 0%

-1.6 to -1%

United States

1.4%

0.6%

13.5%

2.5%

10.2%

12.8%

4.2%

3.3%

9.0%

5.8%

4.0%

11.1%

4.1%

0.4%

3.8%

10.6%

2.0%

2.1%

Over the past year, employment gains were widespread across industries.


Percent Change

U.S. NONFARM EMPLOYMENT OVER THE PAST YEAR, JULY 2012 Seasonally Adjusted

5.8%

3.4%

2.8%

2.2%

2.0%

2.0%

1.9%

1.9%

0.8%

0.7%

0.6%

0.1%

0.1%

0.0%

-0.5%

-0.7%

-1.3%

Natural Resources & Mining Professional & Business Services

Educational Services Leisure & Hospitality

Health Care & Social Assistance Wholesale Trade

Transportation & Warehousing Manufacturing

Financial Activities Other Services

Retail Trade Construction

Utilities State Government

Local Government Information

Federal Government

Share of Total Jobs

However, employment is still down more than 10% in information, manufacturing, and construction.


U.S. NONFARM EMPLOYMENT SINCE THE RECESSION STARTED (DEC. 2007 TO JULY 2012) Seasonally Adjusted

0.6%

2.5%

12.8%

2.1%

10.2%

0.4%

13.5%

3.8%

4.0%

10.6%

3.3%

11.1%

5.8%

4.2%

2.0%

9.0%

4.1%

13.6%

11.9%

9.1%

2.1%

0.5%

-0.3%

-0.6%

-1.7%

-2.5%

-2.9%

-3.8%

-5.2%

-5.9%

-6.6%

-12.5%

-12.8%

-26.4%

Natural Resources & Mining Educational Services

Health Care & Social Assistance Federal Government Leisure & Hospitality

Utilities Professional & Business Services

State Government Other Services

Local Government Transportation & Warehousing

Retail Trade Financial Activities

Wholesale Trade Information

Manufacturing Construction

Percent Change Share of Total Jobs

Although unemployment rates have fallen, rates remain high across much of the country.


JULY 2012 UNEMPLOYMENT RATE Seasonally Adjusted

United States

8.3%

Over 10%

9 to 10%

8 to 9%

7 to 8%

5 to 7%

Less than 5%

20

30

40

50

60

70

80

90

100

110

120

Aug '02 Aug '04 Aug '06 Aug '08 Aug '10 Aug '12

60.6 August 2012

Consumer confidence has fallen in recent months.

15 Source: The Conference Board, Inc.

CONSUMER CONFIDENCE INDEX Seasonally Adjusted

Slower employment growth and lower confidence have contributed to slower consumer spending growth.

16 Source: Federal Reserve Bank of St. Louis

REAL RETAIL & FOOD SERVICE SALES Index 100 = July 2002, Seasonally Adjusted

United States 2.7%

July 2012 Year-over-Year

95

97

99

101

103

105

107

109

111

113


95

100

105

110

115

120

125

0%

2%

4%

6%

8%

10%


Over the last few months personal income gains have outpaced growth in consumer spending leading to a higher savings rate.

17 Source: Bureau of Economic Analysis

REAL PERSONAL INCOME & SPENDING Seasonally Adjusted Annual Rate

Index 100 = July 2002

Disposable Personal Income (left)

Personal Consumption Expenditures (left)

Savings Rate (right) Seasonally Adjusted

Annual Rate

July 2012 Year-over-Year

2.0% 2.0%

July 2012 4.2%

30

35

40

45

50

55

60

65

Aug '02 Aug '04 Aug '06 Aug '08 Aug '10 Aug '12

The manufacturing sector continues to expand in the Tenth District.

18 Source: Institute for Supply Management & Federal Reserve Banks of Kansas City

MANUFACTURING ACTIVITY Diffusion Index, Seasonally Adjusted, Month-over-Month

Note: Federal Reserve Surveys are computed on an ISM Basis (50 = no change)

Kansas City District 54.2 August United States (ISM) 49.8 July

Expanding

Contracting 50

0

5

10

15

20

25

30

35

Production Volume of new orders

Number of employees

Capital expenditures

New orders for exports

2011Q4

2012Q1

2012Q2

Average July & August 2012

Manufacturers in the Tenth District expect higher levels of activity over the next six months.

19 Source: Institute for Supply Management

TENTH DISTRICT MANUFACTURING EXPECTATIONS Diffusion Index, Seasonally Adjusted, Six Months Ahead

More than 10%

5 to 10%

0 to 5%

-5 to 0%

-10 to -5%

-25 to -10%

Less than -25%

Home prices fell sharply over the last few years in many parts of the country.

20 Source: Federal Housing Finance Agency

CHANGE IN HOME PRICES Peak (2007Q2) to Current (2012Q2) FHFA Purchase-Only Index

United States

-17.6%

However, home prices have stabilized over the past year.

21 Source: Federal Housing Finance Agency

United States

3.0%

CHANGE IN HOME PRICES Year-over-Year, 2012Q2 FHFA Purchase-Only Index

More than 4%

2 to 4%

0 to 2%

-2 to 0%

-4 to -2%

-7.6 to -4%

0

20

40

60

80

100

120

140

160

180


VALUE OF RESIDENTIAL CONSTRUCTION CONTRACTS Index 100 = July 2002, Seasonally Adjusted, Three-Month Moving Average

Residential construction activity is picking up but remains well below pre-recession levels.

22 Source: McGraw Hill/F.W. Dodge

July Year-to-Date over the Same Period Last Year

United States

24.6%

Residential construction activity has increased in almost every state over the

past year.

23 Source: McGraw Hill/F.W.Dodge

More than 40%

30 to 40%

20 to 30%

10 to 20%

0 to 10%

-15 to 0%

VALUE OF RESIDENTIAL CONSTRUCTION Percent Change, Cumulative Year-to-Date January through July 2012

United States

24.6%

$15

$20

$25

$30

$35

$40


Non-residential construction activity has struggled to recover from the recent recession.

24 Source: McGraw Hill/F.W. Dodge

VALUE OF NON-RESIDENTIAL & NON-BUILDING CONSTRUCTION Seasonally Adjusted, Three-Month Moving Average

United States, Billions

United States

-5.4%

July Year-to-Date over the Same Period Last Year

Improvements in non-residential construction activity have varied across

the country.

25 Source: McGraw Hill/F.W.Dodge

More than 50%

25 to 50%

0 to 25%

-25 to 0%

-50 to -25%

-71.9 to -50%

VALUE OF NON-RESIDENTIAL & NON-BUILDING CONSTRUCTION Percent Change, Cumulative Year-to-Date January through July 2012

United States

-5.4%

0

200

400

600

800

1000

1200

1400

1600

1800

Aug '90 Aug '95 Aug '00 Aug '05 Aug '10

Drilling activity is responding to prices with oil drilling up and natural gas drilling down.

26 Source: U.S. Department of Energy, Energy Information Administration & Baker Hughes

Crude Oil

Natural Gas

U.S. ACTIVE DRILLING RIG COUNT

-2%

0%

2%

4%

6%

Advanced Economies

Euro Area Germany France Italy Spain UK

2010

2011

2012 Forecast

2013 Forecast

27 Source: International Monetary Fund (IMF)

Growth has slowed sharply in Europe this year and is expected to remain slow in 2013.

WORLD ECONOMIC OUTLOOK PROJECTIONS Percent Change

'11 '12

Exports to Europe make up about 18% of total U.S. exports.

28

U.S. EXPORTS BY TRADE PARTNER Billions

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Total Trade 7.0% SHARE* All Other 8.2 38.1% Japan 7.0 4.5 Mexico 11.3 13.3 Canada 5.9 19.0 China 6.7 7.0 Eurozone 2.9 18.1

Source: International Trade Administration & WiserTrade *2011 Shares Note: The Eurozone includes the 27 European Union member countries

JUNE 2012

YEAR-TO-DATE Percent Change

YTD through June

-2%

0%

2%

4%

6%

8%

10%

12%

World Emerging & Developing Countries

China India Brazil Mexico Russia

2010 2011 2012 Forecast 2013 Forecast

29 Source: International Monetary Fund (IMF)

WORLD ECONOMIC OUTLOOK PROJECTIONS Percent Change

Growth has also slowed somewhat among emerging and developing countries, but growth is expected to pick up next year.

0%

20%

40%

60%

80%

100%

120%

0%

20%

40%

60%

80%

100%

120%

1940 1950 1960 1970 1980 1990 2000 2010 2020

U.S. DEBT TO GDP RATIO

U.S. Federal government debt levels have increased significantly over the last few years.

30 Source: Bureau of Economic Analysis & Congressional Budget Office (August 2012 Projections)

Alternative Scenario

Baseline (Current Law)

Under current law, U.S. deficits are expected to fall sharply over the next

several years.

31

U.S. DEFICIT TO GDP RATIO

Source: Congressional Budget Office (August 2012 Projections)

0%

1%

2%

3%

4%

5%

6%

7%

8%

2012 2013 2014 2015 2016 2017 2018 2019 2020

Debt Service Payments

Spending Cuts

Extended Tax Policies


CBO Projections

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

2007 2008 2009 2010 2011 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2012 2013

32 Source: Bureau of Economic Analysis & Congressional Budget Office (August 2012 Projections)

GDP & THE “FISCAL CLIFF” Percent Change (Annualized Quarterly Rates)


CBO Projections 2012Q2 to 2013Q4

Under current law, several tax increases and spending cuts could lead to a slowdown in economic growth next year.

Alison Felix [email protected]

United States Economic Update

This presentation will be available at

http://www.kc.frb.org/denver/

Documents

The Casualty Actuarial Society is committed to adhering ... · $2.0 $2.5 $3.0 Oct '10 Sep '11 Jul '12 Jan '13 Source: Board of Governors of the Federal Reserve System 8 FEDERAL RESERVE