Economic Outlook National Conference of State Legislatures October 4, 2017 Brent H. Meyer Policy Advisor and Economist Federal Reserve Bank of Atlanta *The views herein are my own and do not necessarily reflect those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.
33
Embed
Economic Outlook · 10/4/2017 · Without Hurricanes Harvey and Irma 3.55 2.81 Difference-0.56 0.52 Industrial Production Growth With Hurricanes Harvey and Irma 1.86 4.38 Without
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Economic OutlookNational Conference of State
Legislatures
October 4, 2017
Brent H. Meyer
Policy Advisor and Economist
Federal Reserve Bank of Atlanta
*The views herein are my own and do not necessarily reflect those of the Federal Reserve Bank of Atlanta or
the Federal Reserve System.
2
Summary of economic data and the policy environment
1. Before the recent hurricanes, the incoming economic data pointed to an economy
that was expanding at a 2 percent pace (or maybe a touch above).
2. We think the hurricanes will have a substantial impact on the near-term quarter-to-
quarter swings in output growth, but will dissipate by mid-next year.
3. The economic growth we have enjoyed over the balance of the recovery has been
sufficient to bring the unemployment rate down to levels we saw before the 2007-
09 recession.
4. However, despite significant improvement in labor market conditions, wage growth
has remained muted and inflation has softened since the beginning of the year.
5. Despite uncertainty regarding underlying trend inflation and the amount of slack in
the economy, the median projection from the September FOMC meeting
continued to mark in another rate increase in December.
The available economic data suggest some momentum heading into the second half of
the year. Economists surveyed by the Wall Street Journal see the economy continuing on
around a 2.4 percent trajectory next year (a bit above the median FOMC member’s
forecast (2.1 percent for 2018).
3
-2
-1
0
1
2
3
4
5
2012 2013 2014 2015 2016 2017 2018
Real GDP Growth and Forecastsannualized percent change
Year over year percent change
1-qtr annualizedpercent change
Source: Bureau of Economic Analysis, ; WSJ Forecasting Survey (Sept 2017); Haver Analytics data through Q2-2017
GDPNow
estimate
(2.7%)
WSJ Panel
forecasts
4
0
10
20
30
40
50
60
70
80
2014 2015 2016 2017
Subjective Balance of Risk to Real GDP Growth ProjectionsPercentage of “Upside” Responses Plus Half Percentage of “Balanced” Responses
FOMC SEP Projections
WSJ Forecast Survey (Growth over next 4 quarters)
After the presidential election, the consensus from the Wall Street Journal Forecast Survey changed the balance of risk on
real GDP growth over the next four quarters from “Downside” to “Upside”, likely on expectations of fiscal stimulus and tax
reform. That enthusiasm has since waned, as slightly more panelists view risks tilted to the “Downside”. Over the past
several years, the responses have been highly correlated (r=0.89) with the analogously defined net response on the balance
risk for GDP growth in the SEP.
2016
Presidential
Election
Sources: Federal Reserve Board of Governors Summary of Economic Projections and Wall Street Journal Economic Forecast Survey
Our in-house tracking estimate for Q3 growth was holding up around 3
percent until we started getting data impacted by the recent storms.
5
Evolution of Atlanta Fed GDPNow real
GDP forecast for 2017: Q3quarterly percent change (SAAR)
Note: The top (bottom) 10 forecast is an average of the highest (lowest) 10 forecasts in the Blue Chip survey.
Retail Sales (Aug)
and IP (Aug)
ISM
manu.
(Sept)
GDPNow rebounded to 2.7 percent on the apparent “strength” in the ISM
report, but some of that “strength” likely reflects the impact of the recent
hurricanes.
6Source: Institute for Supply Management; Haver Analytics
40
45
50
55
60
65
70
2007 2009 2011 2013 2015 2017
ISM Manufacturing PMI: Supplier Deliveries Index Diffusion Index (+50 = expansion)
Private forecasters, with a huge degree on uncertainty, have marked a reduction in Q3 growth of roughly ½ - 1
percentage point, offset by a similarly-sized rebound in Q4 due to the recent storms. The table below is an empirical
estimate based on a recent Goldman Sachs study relating monthly changes in economic activity to 43 major natural
disasters. Using 26 of the largest natural disasters since 1980 [excluding droughts] our findings largely resemble their
findings.
7
2017:q3 growth
(SAAR)
2017:q4 growth
(SAAR)
Real GDP Growth
With Hurricanes Harvey and Irma 2.99 3.32
Without Hurricanes Harvey and Irma 3.55 2.81
Difference -0.56 0.52
Industrial Production Growth
With Hurricanes Harvey and Irma 1.86 4.38
Without Hurricanes Harvey and Irma 2.76 2.60
Difference -0.90 1.77
Real PCE Growth (using 5 lags of PCE growth)
With Hurricanes Harvey and Irma 2.45 2.81
Without Hurricanes Harvey and Irma 2.94 2.97
Difference -0.49 -0.17
Sources: Goldman Sachs, Hurricane Handbook: Natural Disasters and Economic Data 9 September 2017 and US Daily: Hurricanes Irma and Harvey to Delay but Not Derail US
Growth 11 September 2017; Bureau of Economic Analysis; Federal Reserve Board and National Oceanic And Atmospheric Administration
In a survey that was in the field shortly after Hurricane Irma showed
that the majority of the district experienced little-to-moderate disruption
of operations and sales.
8Source: FRBA Business Inflation Expectations Survey, September 2017
9Source: FRBA Business Inflation Expectations Survey, September 2017
Perhaps a sign of resilience, nearly 60 percent of our panel members
expect normal operations to resume within a week, while just over 10
percent expect operations to be impacted for longer than a quarter.
Consumer attitudes appear to be unfazed by the
recent storms (or anything else for that matter).
10
20
40
60
80
100
120
140
2007 2009 2011 2013 2015 2017
Consumer AttitudesIndex (Nov. 2016 = 100)
Consumer confidence (Conf. Board) Consumer Sentiment (U of M)
Sources: University of Michigan Survey of Consumers; Conference Board; Haver Analytics data through September 2017
Rising household net worth, typically associated with declines in the
saving rate, should provide ongoing support for consumer spending.
Nominal Wage Growth, Inflation, and Productivitypercent change, annual rate over past three years
Productivity + Inflation
Compensation per hour
Notes: Productivity is nonfarm business sector output per hour worked. Inflation is the PCE price index. Compensation per hour (from BLS) includes wages and salaries of
employees plus employers’ contributions for social insurance and private benefit plans.
Sources: Bureau of Labor Statistics; Bureau of Economic Analysis
18Sources: Bureau of Economic Analysis; FRB Dallas; Haver Analytics data through August 2017
This measure of underlying inflation minimizes distortions from large price
swings by “trimming-out” the largest price increases and decreases each month.
12-month
6-month (a.r.)
5-year (a.r.)
-2
-1
0
1
2
3
4
5
6
2005 2007 2009 2011 2013 2015 2017
Global Core InflationYear-over-year percent change
Euro Area Germany Canada UK Japan MA: Broad foreign CPI
A potential explanation is that some sort of global
phenomenon is driving domestic inflation rates lower.
22
Note: MA’s Core CPI series is a weighted average of these countries: Canada, Germany, France, Italy, Netherlands, Belgium, Spain, Ireland, Austria, Finland, Portugal, Greece, Japan, Mexico, China,
UK, Taiwan, Korea, Singapore, Hong Kong, Malaysia, Brazil, Switzerland, Thailand, Australia, Indonesia, Philippines, Russia, India, Sweden, Saudi Arabia, Israel, Argentina, Venezuela, Chile, and
Colombia.
Sources: Macroeconomic Advisers; Haver Analytics’ G10 databases
Using a Phillips curve framework similar to what Chair Yellen put forth, I find that the influence of the
domestic output gap on inflation has diminished relative to the 1975-95 period. However, the trade-
weighted foreign GDP gap is not significant. What is interesting is that domestic inflation appears to
have become more sensitive to the relative price of imports since the early 1990s.
23
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
10-year Rolling Window Coefficient Estimates
Coefficient on relative nonoil import prices
95 low
95 high
Sensitivity of Inflation to
Slack and Relative Import Prices
Coefficient
estimates
Domestic
Slack
Foreign
Slack
Relative
Import Prices
Full Sample
(1975-2017) 0.08** -0.04 0.35***
1975-1995 0.14*** 0.34 0.27
1995-2017 0.05 0.03 0.39***
Notes: Estimated from simple Phillips curve (similar to Yellen (2015))
where quarterly core PCE inflation depends on inflation expectations
(the Board’s PTR measure), 2 lags of quarterly core inflation, the
relative price of nonoil imports (index – q4/q4 core inflation), and
activity measures. Domestic slack is the CBO’s output gap. Foreign
slack is the cyclical series from HP filtering Macroadviser’s trade-
weighted foreign GDP index
24Sources: Bureau of Labor Statistics; Bureau of Economic Analysis data through July 2017
-16
-12
-8
-4
0
4
8
12
16
-6
-4
-2
0
2
4
6
12 13 14 15 16 17
Relative Nonoil Import Prices and the Trade weighted $ exchange value year-over-year percent change, monthly
Nonoil import prices - core PCE inflation
Nominal Broad Trade-Weighted ExchangeValue of the US$
Over the past few years, we could point to some downward pressure on
domestic inflation stemming from lower import prices. That no longer
appears to be the case.
An often discussed explanation for the low inflation readings we’ve seen over
the past 5 years is that we’re seeing an increase in competition. However, the
available evidence seems to run counter to this argument.
25
Sources: Federal Reserve Bank of Atlanta, Business Inflation Expectations Survey; Bureau of Labor Statistics; Producer Price Index program staff, “Wholesale and retail Producer
Price Indexes: margin prices,” Beyond the Numbers: Prices & Spending, vol. 1, no. 8 (U.S. Bureau of Labor Statistics, August 2012), https://www.bls.gov/opub/btn/volume-
1/wholesale-and-retail-producer-price-indexes-margin-prices.htm *Mathematically, a “margin price” is the current selling price minus the current acquisition price.
-45
-40
-35
-30
-25
-20
-15
-10
100
102
104
106
108
110
112
114
116
118
2011 2012 2013 2014 2015 2016 2017
PPI: Retail trade margins index* vs the BIE margins indexIndexes
PPI: Retail trade margins (NSA, Jun-09=100)
Current Profit Margins Compared with Normal Times:Diffusion Index (0+=Greater) (RIGHT AXIS)