The Economy and the Federal Reserve FPA Central and South Texas

October 22, 2014

Blake Hastings

Vice President in Charge

The views expressed in this presentation are strictly those of the presenter and do not necessarily reflect the positions of the Federal Reserve Bank of Dallas or the Federal Reserve System. Any secondary distribution of this material is strictly prohibited.

The Federal Reserve’s Balance Sheet

Source: FR Board of Governors’ Factors Affecting

Reserve’s Balances H.4.1. Haver Analytics.

TREASURIES TREASURIES TREASURIES

TREASURIES

MBS

MBS

FEDERAL AGENCY

FEDERAL AGENCY

FEDERAL AGENCY

TSLF TSLF

TSLF FX SWAPS

FX SWAPS FX SWAPS SPECIAL CREDIT

FACILITIES

SPECIAL CREDIT FACILITIES SPECIAL CREDIT

FACILITIES

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

4500000

5000000

Sept. 3 2008 Dec. 10 2008 Mar. 25 2009 Oct. 15 2015

$ MILLIONS

$ 1.02 T

$ 2.43 T

$ MILLIONS

SPECIAL CREDIT

$ MILLIONS $ MILLIONS

$ 4.43 T

$ MILLIONS $ MILLIONS $ MILLIONS $ MILLIONS

FX SWAPS

$ 2.14 T

TSLF

EKG of the Financial Sector

Source: Financial Times. Reuters. Haver Analytics

Oct 21 = .15

0

0.5

1

1.5

2

2.5

3PERCENT

LIBOR-OIS SPREAD (THREE MONTH)

TAF ESTABLISHED (Dec. 12, 2007)

BEAR STEARNS

LEHMAN BROTHERS

G-7 ACTION (Oct. 10, 2008)

National Economic Update: Still Growing at a Steady and Modest Pace

• International weakness restraining US exports, uncertainty, debt, increased payroll taxes, unemployment restraining consumer spending.

• Uncertainty includes federal government spending, furloughs, debt ceiling, Affordable Care Act.

• Housing sector, consumer finances, and state and local government improving albeit slow.

• 2013 was another year of moderate growth with some improvement likely in 2014.

Source: Dallas Fed. October 2014.

U.S. Economic Dashboard (October)

1 1 2 . 2

-1

-0.5

0

0.5

1

1.5 2 2.5

3

3.5

4

4.5

5

1.65

Trimmed Mean PCE Inflation

-2.5

-2

-1.5

-1

-0.5

0

0.5

11.5 2

2.5

3

3.5

4

4.5

5

5.5

6

2.59Year-over-year

Real GDP growth

4

4.5

5

5.5

6

6.5 7 7.5

8

8.5

9

9.5

10

5.9

Unemployment rate

Percent of jobs recovered

3

3.5

4

4.5

5

5.56 6.5 7

7.5

8

8.5

9

9.5

10

4.21

Junk-bond spread

Warning

Unemp.jump

Yieldcurve

Oilshock

Enginestall

Confidence is Rising

0

20

40

60

80

100

120

140

160

1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

Consumer Confidence, 6 Month Moving Average 1985 = 100

Sep 2014 = 86.0

The Regional Economy

Texas’ Employment Growth Continuing to Lead Most States

Source: Keith Phillips, Research Officer, September 2014.

-4

-3

-2

-1

0

1

2

3

4

5

6

7

ND NV UT

CO TX FL WA OK RI

WV

ME

DE ID OR US

CA IN MT

TN DC NY

OH

MA

MO SC GA PA SD AZ NJ

KY LA MN

MD NC

WI

MI IA CT N

H KS AR MS

NE

VA VT HI IL AL W

YN

M AK

Annualized Percent Change,Dec. 2013 - June 2014

U.S.

TX

Source: Bureau of Labor Statistics

Job Growth Broad-Based Across Industries

Source: Keith Phillips, Research Officer, September 2014.

Texas Economy Has Grown Above Trend and Stronger than Nation

• In past three years growth in energy, high-tech and exports provided a stimulus to Texas. Housing market better shape than nationally.

• In 2013, manufacturing and federal government weakened. Energy and residential construction grew strongly but moderated somewhat.

• This year, job growth expected to be about 3.4%, faster than 2013 (2.7%).

Source: Keith Phillips, Research Officer, September 2014.

All Texas Metros from Recovery to Expansion Long Before U.S.

Source: Keith Phillips, Research Officer, September 2014.

Region Continues to Outperform Rest of Country

90

100

110

120

130

140

150

160

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Dallas

Kansas City

Atlanta San Francisco

Minneapolis

Richmond

St. Louis

Philadelphia

Chicago

Boston Cleveland

Job Growth Index, 100 = January 1990

U.S.

New York

Small Business Owners Still Lack Optimism

80

85

90

95

100

105

110

NFIB Small Business Optimism Index, 3-month moving

What Keeps Small Business Owners Up at Night?

0

5

10

15

20

25

30

35

2008

2014

Percent Responding

Fiscal

Policy

Competition

Monetary

Policy

For More Information, Visit

www.dallasfed.org

The views expressed in this presentation are strictly those of the presenter and do not necessarily reflect the positions of the Federal Reserve Bank of Dallas or the Federal Reserve System. Any secondary distribution of this material is strictly prohibited.

Newly Created Money Mostly Sitting Fallow as Excess Reserves

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

Excess reserves

Required reserves

Non-bank currency

Trillions of dollars

SOURCES: Federal Reserve Board; Federal Reserve

Bank of Dallas.

54% 4% 42%

9/26/12 QE3

$2.56T

31%

65%

4%

$3.73T

$2.45T in excess

reserves

Lehman failure

5% Required Reserves

Non-bank Currency

Share of Monetary Base 9/10/08

0%

95%

Excess Reserves

$0.85T

Jan. 2014

Monetary Base

RETURN ON ASSETS

U.S.

11th District

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

2006 2007 2008 2009 2010 2011 2012 2013 2014*

Percent

*Through March 31st, annualized.

LOAN GROWTH, 3/31/13 – 3/31/14

0

2

4

6

8

Business Loans Small Business Loans

Percent

U.S. 11th District

LOAN GROWTH

U.S.

11th District

-10

-5

0

5

10

15

2008 2009 2010 2011 2012 2013 2014

Year-over-Year Growth (%)

NOTE: 11th District figures exclude WFSC.

NONCURRENT LOANS BY TYPE

0

1

2

3

4

5

6

'06

'08

'10

'12

'14

*

'06

'08

'10

'12

'14

*

OtherConsumerCommercial & IndustrialCommercial REResidential RE

U.S. 11th District

Percent of Loans

*As of March 31st.

Questions & Discussion

• Financial Risk

• Inflation

Dallas Fed 2013 Annual Report Essay

John Duca, housing expert

and associate director of

research, shares insights on

the national and regional

markets and the outlook for

housing.

Declining Texas Office Vacancy Rate

5

10

15

20

25

30

35

0

50

100

150

200

250

300

350

400

450

'89 '96 '03 '10

Real, Millions $, 5MMA Percent

Office Vacancy Rate

Office and Bank Buildings

Contract Value

U.S. Home Construction Picking Up

0

50

100

150

200

250

300

350

400

450

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

Millions, units Billions, $2000

Source: Bureau of Economic Analysis, U.S. Census Bureau and author’s calculations.

Real single-family

construction

Single-family building permits

U.S. Home Prices Increasing

90

110

130

150

170

190

210

230

250

270

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

U.S.

Texas

California

Florida

Nevada

FHFA House Price Index, 2000=100

Lower Prices and Interest Rates Helping Housing Affordability – No Bubble Now

Source: NAHB - Wells Fargo Housing Opportunity Index

(Percent of homes sold for which the median family income could qualify)

1999:Q4 2013:Q3 Low Point

Date of Low

Point

United States 64 65 40 2006 : Q3

Los Angeles 43 21 2

2006 :

Q1/Q2/Q3

New York 55 23 5 2006 : Q3/Q4

Miami 59 55 10 2007 : Q1

Austin 56 63 50 2000 : Q4

Dallas 64 60 54 2007 : Q3

Houston 66 62 47 2007 : Q3

San Antonio 64 66 47 2006 : Q3

U.S. Household Balance Sheets in Better Shape

1.19

0.92

1.35

1.00

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

1.4

2000 2002 2004 2006 2008 2010 2012

Ratio, personal debt per

capita/personal income per

capita

U.S.

Texas

Mortgage

70.1%

HE revolving

5%

Auto loan

7%

Credit card

6%

Student loan

9%

Other

3% U.S.

Mortgage

62.6%

HE revolving

1%

Auto loan

14%

Credit card

7%

Student loan

11%

Other

4%Texas

Note: Data are through third quarter, 2013.

Texas Construction Contract Values Picking Up

0

1000

2000

3000

4000

5000

6000

7000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Real $, Mil5MMA, SA

Residential

Non Residential

Non Building

Total

Texas Home Inventories Tick Up but Still at Historically Low Levels

0

2

4

6

8

10

12

14

16

18

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Texas

U.S.

Months

4.2

5.3

Nov. 2013

Mortgage Market Conditions Improving, Texas Better than U.S.

2.3

0.45

0.60

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

TX Delinquencies TX Foreclosures Started

US Delinquencies US Foreclosures Started

.35

2.6

Texas Mortgage Less at Risk of Default

32.2

22.5

28.8

17.7

13.3

9.9

3.9

13

0

10

20

30

40

50

60

Nevada Arizona Florida Michigan California Idaho Texas U.S.

Percent of Mortgages "Under Water"Q3 2012 - Q3 2013

Percent

High Public Debt Could Lower Growth Due to Higher Taxes

Source: Ken Rogoff and Carmen Reinhard. Forthcoming

article in American Economic Review Papers and

Proceedings. Source: Congressional Budget Office.

0

1

2

3

4

5

6

Below 30 Percent 30 to 60 Percent 60 to 90 Percent 90 Percent andAbove

Advanced economies (1946 - 2009)

Emerging markets (1946 - 2009)

GDP growth

rate, Percent

Debt-GDP Ratio

Growth is negatively correlated with debt-GDP ratio

Estimated U.S. Debt/GDP ratio = <90

by 2020 (CBO May 2010 Eco and

Budget Outlook)

Current U.S. Debt/GDP ratio = 50+

(CBO May 2010 Eco and Budget

Outlook)

Expected U.S. Debt/GDP ratio = 70

by the end of Fiscal Yr. 2012

Federal Reserve Bank of Dallas, FIRM - Financial Institution Relationship Management

The National Debt Continues to Grow…

14%

16%

18%

20%

22%

24%

26%

'52 '56 '60 '64 '68 '72 '76 '80 '84 '88 '92 '96 '00 '04 '08 '12

Can Government Close the Gap?

Percentage of GDP

Federal Government Expenditures

Federal Government Receipts

The Federal Budget Crisis

Source: Tom Siems. June 2012.

14%

16%

18%

20%

22%

24%

26%

'52 '56 '60 '64 '68 '72 '76 '80 '84 '88 '92 '96 '00 '04 '08 '12

Federal Government Receipts and Expenditures as a Percentage of GDP

Receipts

Expenditures

At this Rate, Another Seven Years Until Output Shortfall Eliminated

12000

13000

14000

15000

16000

17000

18000

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

Potential, CBO estimate

Real GDP

Bil. 2005$

-9.4% -7.4%

-5.4%

Continue to close gap at current page

Q2 '19

-10.0%

-6.2%

Linear trend (2001-2007)

Source: Evan Koenig, Principal Advisor, May 2012.

Without Faster Job Gains, Another Seven+ Years to Full Employment

128,000

133,000

138,000

143,000

148,000

153,000

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

Thousands

-6.8% -6.1%

Non-farm payroll

-7.6% -7.4%

Feb '10

Oct '19

Continue expansion at current page

Full employment

-4.5% Linear trend

(Mar 2001 - Dec 2007)

Source: Evan Koenig, VP of Dallas Fed Macro Research Dept., May 2012.

Swedish GDP per Capita

11

11.5

12

12.5

13

13.5

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Natural log of GDP, 2000Kronor

1950-1973 Trend

1973-1990 Trend 1990: Sweden experiences a major

banking crisis. Living standards do not return to trend until 2000

Source: Mark Wynne, VP and Director of the Dallas Fed Globalization and Monetary Policy Institute. August 2010.

Japanese Real GDP per Capita

6

6.5

7

7.5

8

8.5

9

9.5

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Natural log of GDP, 2005 Yen

1955-1973 Trend

1973-1990 Trend

1990- present Trend

Source: Mark Wynne, VP and Director of the Dallas Fed Globalization and Monetary Policy Institute. August 2010.

Average Path of GDP After Banking Crises

-16

-14

-12

-10

-8

-6

-4

-2

0

-1 0 1 2 3 4 5 6 7

Pe

rce

nt

of

pre

-cri

sis

tre

nd

Years after banking crisis; First year of crisis = year 0

US

Mean of countries experiencing banking crises

(Selecting 2008 as the first year of the crisis in the US)

Source: “The Sluggish Recovery From the Great Recession: Why

There is No “V” Rebound This Time. Economic Letter by Mark

Wynne, VP and Director of the Globalization and Monetary Policy Institute. September 2011.

U.S. Financial Panics, 1873-1914

• Financial panics in 1873, 1884, 1890, 1893, and 1907 led to bank closings, losses by depositors and investors, and often to broader economic slowdowns.

• The 1907 financial panic led Congress to consider the creation of a central bank.

• Before the Federal Reserve was fully established, the country was hit by another serious financial panic in 1914.

Challenges of Gold Standard – Economic Stability

• Cannot be adjusted in response to changing economic conditions.

• All countries on the gold standard are forced to maintain fixed exchange rates.

• Effects of bad policies in one country can be transmitted to other countries if both are on the gold standard

• A gold standard is subject to speculative attack and ultimate collapse as people try to exchange paper money for gold

• Did not prevent frequent financial panics (arguably exacerbated them)

• Promotes price stability in the long run, but can cause inflation and deflation in the short to medium term (money supply determined by gold mined)