Economic Outlook: The Short, and Long, of It Kartik B. Athreya November 11, 2015.
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Transcript of Economic Outlook: The Short, and Long, of It Kartik B. Athreya November 11, 2015.
Economic Outlook: The Short, and Long, of ItKartik B. Athreya
November 11, 2015
The views and opinions expressed herein are those of the author. They do not represent an official position of the Federal Reserve Bank of Richmond or the Federal Reserve System.
First, some fine print…
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Q31.5%
Real Gross Domestic Product
Source: Bureau of Economic Analysis via Haver Analytics & Federal Reserve Board
Percent change from previous quarter at annual rate
FOMC Projection
Note: Projection is the median, central tendency, and range from the September 2015 Summary of Economic Projections. Red dots indicate median projections. Projections of change in real gross domestic product (GDP) are from the fourth quarter of the previous year to the fourth quarter of the year indicated.
-30
-25
-20
-15
-10
-5
0
5
10
15
20
-30
-25
-20
-15
-10
-5
0
5
10
15
20
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Percent change from previous quarter at annual rate
Q32.1%
Real Nonresidential Fixed Investment
Source: Bureau of Economic Analysis via Haver Analytics
-4
-3
-2
-1
0
1
2
3
4
5
6
-4
-3
-2
-1
0
1
2
3
4
5
6
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Disposable Personal Income & Expenditures
Source: Bureau of Economic Analysis via Haver Analytics
12 Month % Change
Real Personal Consumption Expenditure
Real Disposable Personal Income
September
Note: Real disposable personal Income was adjusted to remove tax-induced income shifting near end of 2012.
July August SeptemberIncome 0.4 0.4 0.2Expenditures 0.2 0.4 0.2
Month over Month % Change
-800
-700
-600
-500
-400
-300
-200
-100
0
100
200
300
400
-800
-700
-600
-500
-400
-300
-200
-100
0
100
200
300
400
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Quarterly average of monthly changes, thousands of persons
Nonfarm Payroll Employment
Oct. 271Sep. 137Aug. 153Jul. 223Jun. 245
Monthly Change
Source: Bureau of Labor Statistics via Haver Analytics
Q4 Avg.
1
1.5
2
2.5
3
3.5
4
4.5
1
1.5
2
2.5
3
3.5
4
4.5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Percent
August
Labor Market Flows
Source: JOLTS via Haver Analytics
Hires Rate*
Job Openings Rate**
Quits Rate*
Note: *Percent of total employment. **Percent of total employment plus job openings.
Alternative Measures of Unemployment in Virginia
Source: Bureau of Labor Statistics via Haver Analytics
Virginia County Unemployment Rates
Source: Bureau of Labor Statistics via Haver Analytics
China: In the News
Three recent developments
Stock market crash
Devaluation of the Yuan
Widespread signs of slowdown
China: Equities
Dramatic decline in Chinese stock market: 30%
Correction of a bubble (?)
Bank of China intervened massively
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160
1,000
2,000
3,000
4,000
5,000
6,000Shanghai-Shenzhen 300 Stock Price Index
Monthly, Dec 31, 2004=1,000
Source: Shanghai Stock Exchange via Haver Analytics
China: The Big Picture
Most remarkable economic story since the Industrial Revolution
massive amounts of labor move into manufacturing
high returns to capital and investment
Process seems to be slowing
China’s Ouput: Huge Structural Change
0
10
20
30
40
50
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Total Value Added, Percentage of GDP
Industry
Services, etc.
Agriculture
Note: ‘Services, etc.’ includes any statistical discrepancies noted by national compilers.
Source: IMF World Development Indicators
0
2
4
6
8
10
12
14
1980 1985 1990 1995 2000 2005 2010 2015
Share of World Exports
China
United States
Percent of World Exports, Annual
Source: IMF World Development Indicators
GDP Per Capita: A Little Perspective…
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Constant 2005 USD
Source: WB World Development Indicators
United States
China
China and the World: Implications
No first-order effect on the U.S.
Large effect on commodity exporters (BRIs, Australia), East Asian countries and Germany, which can trigger second-round effects on the U.S.
China growth miracle may be coming to an end
Middle-income trap?
17
International growth more generally…
Source: China National Bureau of Statistics and Eurostat via Haver Analytics
US Export Exposure to the World
Source: Census Bureau via Haver Analytics
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
September1.3%
FOMC Projection
Core Personal Consumption Expenditure Price Index
12 Month % Change
Source: Bureau of Economic Analysis & Board of Governors via Haver Analytics
2% Longer-run Target
Notes: FOMC projection is the median, range, and central tendency for Q4/Q4 percent changes, from the September 2015 meeting. Red dots indicate median projections. Core PCE Price Index excludes expenditures on gasoline and food services.
1652
2462
0
250
500
750
1000
1250
1500
1750
2000
2250
2500
2750
3000
3250
3500
3750
4000
4250
4500
4750
9/12/2012 11/4/2015
Federal Reserve System Assets
Source: Board of Governors via Haver Analytics
$, Billions
Treasury Securities:$2,462
AgencyDebt: $34
Agency MBS: $1,744
Note: Numbers may not add up due to rounding.
Total: $4,535
Miscellaneous: $295
Treasury Securities:$1,652
AgencyDebt: $87
Agency MBS: $844
Total: $2,865
Miscellaneous: $282
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Federal Funds Target Rate
November 6thPrimary Credit Rate
Monetary Policy Instruments
Percent
Source: Board of Governors via Haver Analytics
Federal Funds Rate Target Range
Interest Rate Paid on Reserves
-3
-2
-1
0
1
2
3
4
5
6
-3
-2
-1
0
1
2
3
4
5
6
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
October
Real Federal Funds RatePercent, effective Fed funds rate - lagged year over year change in core PCE price index
Source: Bureau of Economic Analysis & Board of Governors via Haver Analytics
0
0.25
0.5
0.75
1
1.25
1.5
1.75
2
2.25
2.5
2.75
3
3.25
3.5
0
0.25
0.5
0.75
1
1.25
1.5
1.75
2
2.25
2.5
2.75
3
3.25
3.5
6 M 2 Yrs 3 Yrs 5 Yrs 7 Yrs 10 Yrs
October 26, 2015 November 6, 2015
Time to Maturity
Treasury Yield Curve
Percent
Source: Board of Governors via Haver Analytics
-1
0
1
2
3
4
5
-1
0
1
2
3
4
5
2015 2016 2017 2018 Longer run
Summary of Economic Projections: Federal Funds RatePercent
Source: Board of Governors
Note: Each dot in the chart represents the value of an FOMC participant’s judgment of the midpoint of the appropriate target range (or the appropriate target level) for the federal funds rate at the end of the calendar year. Projections made for the September 2015 meeting.
FOMC Statement
Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved lower; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
Source: Board of Governors
September 17, 2015
FOMC Statement
Information received since the Federal Open Market Committee met in September suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. The pace of job gains slowed and the unemployment rate held steady. Nonetheless, labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved slightly lower; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring global economic and financial developments. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
Source: Board of Governors
October 28, 2015
And now, the long of it….
I’ve talked about short-run outcomes, especially in the labor market. What about long-run outcomes?
In the long run…
Growth comes solely from better methods of production
But much innovation embedded in new machines and technologies
Where will this leave the labor force?
Fear of Technology
From Time Magazine, February 24th :“The rise in unemployment has raised some new alarms around an old scare word: automation. ...While no one has yet sorted out the jobs lost because of the overall drop in business from those lost through automation and other technological changes, many a labor expert tends to put much of the blame on automation. ...Many of the losses in factory jobs have been countered by an increase in the service industries or in office jobs. But automation is beginning to move in and eliminate office jobs too. ... Today's new industries have comparatively few jobs for the unskilled or semiskilled, just the class of workers whose jobs are being eliminated by automation.”
Fear of Technology
…1961
Long-run unemployment: no trend. We adapt!
Source: Bureau of Labor Statistics, research.stlouisfed.org
1948
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
0.0
2.0
4.0
6.0
8.0
10.0
12.0 Civilian Unemployment Rate
But, while unemployment shows no trend over time…
Trade and smart technologies have made it harder for those with low skills, and easier for those with high skills…
“Skill-biased technological change”
Skills have long inoculated against unemployment…
Source: Bureau of Labor Statistics
0%
2%
4%
6%
8%
10%
12%
14%
16% Less than high schoolHigh schoolSome college or associate's degreeBachelor's degree or higher
Unemployment rate, workers 25 years and over
Payoffs to skills have steadily increased
Source: Bureau of Labor Statistics
Median weekly earnings, workers 25 years and over (2013 constant dollars)
19791981
19831985
19871989
19911993
19951997
19992001
20032005
20072009
20112013
$400
$500
$600
$700
$800
$900
$1,000
$1,100
$1,200
$1,300
$1,400 Bachelor's degree or higherSome college or associate's degreeHigh schoolLess than high school
Why? Since the 1970s, supply response to skill-biased technological change weak. Unprecedented.
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980
Year of Birth
8
9
10
11
12
13
14
15Y
ears
of
Sch
ooli
ng a
t Age
35
Yea
rs
Women
Men
Source: Goldin and Katz (2009)
Non-completion
Expected Attainment Realized No Degree
Student Loan Debt (No Degree)
Certificate 32% 52% $11,160
Associate’s degree 22% 62% $10,758
Bachelor’s degree 52% 38% $14,457
Many who enroll do not complete any degree within 6 years of completing high school.
Source: Avery and Turner (2012)Note: Data reflect survey results from 2004-2009.
Conclusions
Short run: Macroeconomy gathering strength, labor market “slack” diminishing.
Consumption strong
Sustained Employment gains
Core inflation moving in the right direction
International picture : China slowing, but expected, US exposure limited
Long run: Skills are key to “maximum employment.”
Preparedness and good information critical for individual and aggregate outcomes.
But US facing, for the first time, potentially serious barrier to increasing skill acquisition, especially higher ed.
…Something for all of us to worry about.