1 FEDERAL RESERVE BANK OF PHILADELPHIA Report on Economic and Financial Developments Loretta J. Mester Executive Vice President and Director of Research July 20, 2012 *The views expressed here are those of the author and do not necessarily reflect those of the Federal Reserve Bank of Philadelphia or of the Federal Reserve System. FEDERAL RESERVE BANK OF PHILADELPHIA Executive summary • Economic growth slowed in the second quarter in both the nation and the district • Downside risks include: – European sovereign debt & banking system problems – U.S. fiscal situation looming at year-end – Slower global growth • Several central banks have taken further steps to try to boost growth • Policy questions: – Has the outlook changed enough to warrant further action? – If so, what action?
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1
FEDERAL RESERVE BANK
OF PHILADELPHIA
Report on Economic and Financial Developments
Loretta J. Mester
Executive Vice President and Director of Research
July 20, 2012
*The views expressed here are those of the author and do not necessarily reflect those of the Federal Reserve Bank of Philadelphia or of the Federal Reserve System.
FEDERAL RESERVE BANKOF PHILADELPHIA
Executive summary
• Economic growth slowed in the second quarter in both the nation and the district
• Downside risks include:
– European sovereign debt & banking system problems
– U.S. fiscal situation looming at year-end
– Slower global growth
• Several central banks have taken further steps to try to boost growth
• Policy questions:
– Has the outlook changed enough to warrant further action?
– If so, what action?
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FEDERAL RESERVE BANKOF PHILADELPHIA
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600Thousands of jobs Monthly change in nonfarm payrolls
2006 2007 2008 2009 2010 2011 2012
80
Last month plotted is June 2012Average monthly gains for each year are indicated by the grey lines
Employment growth has weakened since the start of the year.In June, payrolls rose by 80 thousand jobs.
Average monthly job gains this year are no higher than last year.
FEDERAL RESERVE BANKOF PHILADELPHIA
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800Thousands of jobs Quarterly change in nonfarm payrolls
2009 2010 2011 2012
Last month plotted is 2012 Q2Source: Bureau of Labor Statistics
Quarterly job gains in the second quarter were only 1/3 of what they were in the first quarter
Uncertainty surrounding the European sovereign debt and banking problems continues to cloud the global outlook,
but European countries have taken some positive stepsPercent
Daily: Last point plotted is July 17, 2012
Ireland
Portugal
Greece(right scale)
Spain
Italy
Spread of 10-year government bondover 10-year German government bond
Percent
France
FEDERAL RESERVE BANKOF PHILADELPHIA
Stock prices continue to be volatile on concerns about Europe and the global growth slowdown.
The S&P500 is little changed, on net, over the past month,but is up over 8 percent, on net, year-to-date.
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Dow JonesNASDAQ &S&P 500
Dow Jones Industrials
NASDAQ
Daily data: Last point plotted is July 18, 2012
S&P 500
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FEDERAL RESERVE BANKOF PHILADELPHIA
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Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12
Interest rates are very low across the maturity spectrum.Longer-term interest rates have fallen as investors
seek the safe haven of U.S. Treasury securities.The Fed has kept the fed funds rate at essentially zero for 3-1/2 years.
Percent
Weekly data: Last point plotted is July 12, 2012
10-year Treasury bond yield
30-year mortgage rate
Fed funds effective rate
FEDERAL RESERVE BANKOF PHILADELPHIA
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Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12
Calculation of LIBOR has come under increased scrutiny
Percent
Weekly data: Last point plotted is July 12, 2012
Overnight LIBOR rate
Fed funds effective rate
In September 2008, the Fed announced new and expanded swap lines with other central banks to alleviate pressures in dollar short-term funding markets
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FEDERAL RESERVE BANKOF PHILADELPHIA
What is LIBOR?
• LIBOR = London Interbank Offered Rate
• “At what rate could you borrow funds, were you to do so by askingfor and then accepting interbank offers in a reasonable market size just prior to 11 am London time?”
– Not based on actual transactions
– Rates for 10 currencies and 15 maturities
• British Bankers Association collects responses from 18 banks; Thompson Reuters calculates the trimmed arithmetic mean
– 3 US banks: Bank of America, Citigroup, JP Morgan Chase
• Used as a reference rate in a variety of financial contracts including swaps, commercial loans, mortgages, student loans
– In the US, mortgages tied to LIBOR:
• 6% of number of 1st mortgages = 3 million loans
• 9% of outstanding principle of 1st mortgages = $800 billion
FEDERAL RESERVE BANKOF PHILADELPHIA
Central banks around the world have been easing monetary policy
• Fed
– Extended operation twist to year-end
• China, Brazil, South Korea, Australia, Denmark
– Cut policy rates
• Japan:
– Increased Treasury bill purchases under Asset Purchase Program
• ECB
– Cut central bank lending and deposit rates
• United Kingdom
– Increased asset purchases
– “Funding for Lending Scheme” – low-cost funding to banks that increase lending to households and firms
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FEDERAL RESERVE BANKOF PHILADELPHIA
-6-5-4-3-2-1012345
Euro Area Japan UnitedKingdom
United States
Growth is expected to be modest in many countries over the next two years
China
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Real GDP Growth, SAAR
Percent
Source: OECD Economic Outlook, May 2012 for China and June 2012 for others.Hatched bars are forecasts.
Expiration of tax provisions and adjustments to AMT 221 1.4% Expiration of employee’s payroll tax reduction 95 0.6% Other expiring provisions 65 0.4% Taxes included in Affordable Care Act 18 0.1%
Changes in Spending Policies
103 0.6%
Automatic sequestration 65 0.4% Expiration of emergency unemployment benefits 26 0.2% Reduction in Medicare payment rates for doctors 11 0.1%
Other Changes in Revenues and Spending
105 0.7%
Total Change in Deficit (without economic feedback effects)
607
3.8%
Source: Congressional Budget Office, May 2012
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FEDERAL RESERVE BANKOF PHILADELPHIA
0.00
0.25
0.50
0.75
1.00
Jan 2012 Jul 2012 Jan 2013 Jul 2013 Jan 2014 Jul 2014 Jan 2015
Percent30-day federal funds futures rates
Jan 19, 2012
July 18, 2012
Market participants continue to price in more accommodative policygiven the weaker economic data
April 26, 2012
June 20, 2012
FEDERAL RESERVE BANKOF PHILADELPHIA
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FEDERAL RESERVE BANKOF PHILADELPHIA
Appendix: Additional Charts
FEDERAL RESERVE BANKOF PHILADELPHIA
Economic activity continues to expand in most states,but at a slower pace than earlier this year
> 4%3% to 4%2% to 3%0.5% to 2%-0.5% to 0.5%-2% to -0.5%-3% to -2%<-3%
Philadelphia Fed Current Economic Activity Indexes, annualized growth over the three months ending in May 2012
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FEDERAL RESERVE BANKOF PHILADELPHIA
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Thousands of jobs Monthly change in private nonfarm payrolls
2006 2007 2008 2009 2010 2011 2012
84
Last month plotted is June 2012.Average monthly gains for each year are indicated by the grey lines.
Private sector payroll growth has slowed in recent months
FEDERAL RESERVE BANKOF PHILADELPHIA
0
1
2
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US PA NJ DE
% oflost jobs regained
Percent
% of jobs lost from employment peak to employment trough and % of lost jobs regained since employment trough
6.4%
43.8%
4.4%
26.9%
6.3%
7.8%
% of jobs lost
56.2% 27.6%
Incorporates June 2012 data for US and May 2012 data for states
Recent modest job growth has retarded progresson recovering lost jobs
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FEDERAL RESERVE BANKOF PHILADELPHIA
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Employment in our three statesdecelerated since the beginning of the year
Long-term unemployedas percent of civilian labor force
Long-term unemployment remains high.Progress has stalled in the past two months.
Job losers as percentof civilian labor force
Monthly data: Last point plotted is June 2012.Job losers are people unemployed for less than 5 weeks.Long-term unemployed are people unemployed for more than 26 weeks.
Percent Civilian Labor Force Participation Rate (SA)
Quarterly data: Last point plotted for participation is 2012Q2Source: Bureau of Labor Statistics.Trend is author’s calculation controlling for the unemployment rate, share of working age population over 65, share of working age population female, time, and time-squared.
63.7
Nonlinear trend
FEDERAL RESERVE BANKOF PHILADELPHIA
Total inflation is down from its peak reflecting the drop in oil prices
Percent of all mortgages outstanding,1-4 residential units
Past due at least 30 days
Delinquencies continue to move down.Still, one in 13 mortgages is seriously delinquent.
Quarterly data: Last point plotted is 2012Q1Source: Mortgage Bankers Association, seasonally adjusted
New foreclosures
Seriously delinquent: Past due at least 90 days or in foreclosure
FEDERAL RESERVE BANKOF PHILADELPHIA
Stock prices abroad have recovered a bit as the European countries have agreed on some initiatives to help with the sovereign debt and banking problems
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Hong Kong Hang Seng& Japan Nikkei
London FTSE&German DAX
Daily data: Last point plotted is July 18, 2012
GermanDAX London
FTSE
Hong KongHang Seng
Japan Nikkei
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FEDERAL RESERVE BANKOF PHILADELPHIA
The value of the dollar continues to rise on safe-haven flows
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2004 2005 2006 2007 2008 2009 2010 2011 2012
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Trade-weighted value of $ against major currenciesand
Euros per $Index, March 1973 = 100
Weekly data: Last point plotted is July 13, 2012
Euros/US $
FEDERAL RESERVE BANKOF PHILADELPHIA
-3.0
-2.5
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The Fed holds nearly $1 trillion in agency mortgage-backed securities and agency debt.
Operation twist continues to lengthen the portfolio’s maturity.By the end of the year, the Fed will hold no short-term Treasury securities.
Trillions $
Weekly data: Last point plotted is July 9, 2012
Treasury securities
Loans
Other assets Agency securities
Trillions $
Assets
Liabilities
Federal Reserve notes in circulation
Reserve BalancesTreasury Supplementary Financing Program