National and Regional Economic Update...Avg last 12 months 219.8 0 50 100 150 200 250 300 350 Jan 2012 Jan 2014 Jan 2016 Jan 2018 Change in payroll employment (thousands, SA) Strong

* The views expressed today are my own and not necessarily those of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.

Ryotaro Tashiro*

National and Regional Economic Update

Philadelphia Association for Financial Professionals Webinar

January 16, 2019

Regional Economic Advisor FEDERAL RESERVE BANK OF PHILADELPHIA

• Overview: – The good: Continued economic growth with strong labor market.

– The risks: Uncertainty over policy and tighter labor market with smaller

supply of available workers could lead to slowdown. • Outline:

– GDP (6 slides)

– Employment (7 slides)

– Skills mismatch in the labor market (5 slides) – Migration trends (5 slides)

– Inflation and monetary policy (3 slides)

OVERVIEW AND PRESENTATION OUTLINE

GDP

Date 2018:Q4

Forecast

2019:Q1

2019:Q2

2019:Q3

2019:Q4

2.6%

2.4%

2.7%

2.4%

2.2% -8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Jan 2010 Jan 2015 Jan 2020

GDP SPF Forecast

Annualized quarterly growth rate (SAAR)

Our economic growth remains solid, but signs of a slowdown Gross Domestic Product

Source: BEA via Haver Analytics Quarters plotted (actual): 2008:Q1–2018:Q3 (third estimate) Quarters plotted (forecast): 2018:Q4–2019:Q4 Blue shade represents recession quarters.

2018: Q3=3.4%

2.70% 2.90% 4.40%

5.30% 6.00%

1.70%

-5.0%

0.0%

5.0%

10.0%

15.0%

Real GDP Consumption Investment Exports Imports Government

Annualized quarterly growth (SAAR)

Personal consumption and business investment contributed the most to growth

GDP growth by sector

Source: BEA via Haver Analytics Last quarter included: 2018:Q3 (third estimate) Black lines indicate sector averages from 1980:Q1 to 2018:Q3

9.4 3

-40

-30

-20

-10

0

10

20

30

40

50

60

Jan 2008 Jan 2010 Jan 2012 Jan 2014 Jan 2016 Jan 2018

Manufacturing Non-Manufacturing

Diffusion index (% reporting increase less % reporting decrease)

Sharp decline in business activities toward the end of the year Third District current business outlook

Source: FRB Philadelphia via Haver Analytics Last month plotted: Dec 2018 Blue shade represents recession months.

31.7

37.5

-10

0

10

20

30

40

50

60

70

Jan 2008 Jan 2010 Jan 2012 Jan 2014 Jan 2016 Jan 2018

Diffusion index (% reporting increase less % reporting decrease)

Business owners remain optimistic, but less so than a year ago… Third District future business outlook

Source: FRB Philadelphia via Haver Analytics Last month plotted: Dec 2018 Blue shade represents recession months.

Manufacturing Non-Manufacturing

$0

$1,000

$2,000

$3,000

$4,000

Delaware New Jersey

Pennsylvania

China EU

Canada Mexico

Exports Affected by New Tariffs (Millions of USD)

…as the ongoing trade war could have a significant impact in PA Potential effect of new tariffs on exports, based on total exports in 2017

Source: U.S. Chamber of Commerce, using data from U.S. Dept. of Commerce and official government sources of China, the E.U., Canada, and Mexico.

Impact of tariffs varies depending on specific products sold PA export goods that are most affected by new tariffs based on Pennsylvania’s total exports in 2017, millions of USD

Source: U.S. Chamber of Commerce, using data from U.S. Dept. of Commerce and official government sources of China, the E.U., Canada, and Mexico. Tariff information as of: September 27, 2018.

Canada (Total Affected = 1,164) China (Total Affected = 2,375) Coffee, Roasted, Not Decaffeinated 77.90 Coal 288.11 Zinc-Coated Iron and Steel 75.57 Portable Computers 121.97 Bread, Pastry, Cakes, and Puddings 74.46 Sliced Oak Wood 116.89 Mixed Condiments And Seasonings 49.77 Palladium 76.14 Soaps and Detergents 46.88 Centrifugal Pumps 62.40

E.U. (Total Affected = 368) Mexico (Total Affected = 156) Motorcycles 204.15 Other Alloy Sheets 31.39 Iron and Steel Bars and Rods 29.77 Iron and Steel Coils 30.26 Stainless Steel Bars and Rods 27.68 Plated Alloy Steel 24.88 Stainless Steel Sheets, 0.5-1 mm 17.45 Miscellaneous Food Preparations 10.51 Stainless Steel Sheets, 1-3 mm 11.02 Zinc-Coated Iron and Steel 8.50

Employment

174.2 179.2 191.8

250.4

226

195.3 182.3

219.8

Dec 2018: 312 Avg last 12 months 219.8

0

50

100

150

200

250

300

350

Jan 2012 Jan 2014 Jan 2016 Jan 2018

Change in payroll employment (thousands, SA)

Strong job growth numbers at the national level… Change in monthly U.S. payroll employment

Source: BLS via Haver Analytics Months plotted: Jan 2011 - Dec 2018 Black lines indicate annual averages.

…and almost all states reported positive job growth Total state payroll employment growth

Calculations using data from Haver Analytics

Areas around Philly showed modest job growth Tri-state metro area employment growth

Source: Calculations from BLS data via Haver Analytics.

A = Allentown-Bethlehem-Easton MSA B = Altoona MSA C = Atlantic City-Hammonton MSA D = Bloomsburg-Berwick MSA E = Camden Metro Division F = Chambersburg-Waynesboro MSA G = Dover MSA H = East Stroudsburg MSA I = Erie MSA J = Gettysburg MSA K = Harrisburg-Carlisle MSA L = Johnstown MSA M = Lancaster MSA N = Lebanon MSA O = Montgomery-Bucks-Chester County MD P = Newark Metro Division Q* = New York-New Jersey-White Plains MD R = Ocean City MSA S = Philadelphia-Delaware County MD T = Pittsburgh MSA U = Reading MSA V* = Salisbury MSA W = Scranton-Wilkes-Barre MSA X = State College MSA Y = Trenton-Princeton MSA Z = Vineland-Bridgeton MSA AA = Williamsport MSA AB* = Wilmington Metro Division AC = York-Hanover MSA AD* = Youngstown-Warren MSA * Also includes counties not shown on map.

Government

Leisure & Hospitality

Education & Health Services

Prof & Bus Services

Financial

Information

Trade, Trans & Utilities

Manufacturing

Construction

Mining & Logging

Total Private

Total

0.0% 2.0% 4.0% 6.0% 8.0% 10.0%

US PA

Employment growth in the state is broad-based… Annual employment growth by sector

Source: Calculations from BLS via Haver Analytics. Last month included: US (Dec 2018); PA (Nov 2018)

Government

Leisure & Hospitality

Education & Health Services

Prof & Bus Services

Financial

Information

Trade, Trans & Utilities

Manufacturing

Mining, Logging & Construction

Total Private

Total

-2.00% 0.00% 2.00% 4.00% 6.00%

US Philadelphia MSA

…and the same story applies to areas around Philly Annual employment growth by sector

Source: Calculations from BLS via Haver Analytics. Last month included: US (Dec 2018); Phil MSA (Nov 2018)

3.9 %

4.2 %

4.0 %

0.00%

3.00%

6.00%

9.00%

Jan 1990 Jan 2000 Jan 2010 Jan 2020

US PA Philadelphia MSA

Percent (seasonally adjusted)

Unemployment rates remain low at all levels… U.S., PA, and local unemployment rates

Source: BLS via Haver Analytics Last month plotted: US (Dec 2018): PA and Philadelphia MSA (Nov 2018)

227

659

0

100

200

300

400

500

600

700

Jan 2000 Jan 2005 Jan 2010 Jan 2015

Thousands (seasonally adjusted)

…and so does unemployment insurance application Initial claims for unemployment insurance

Source: Department of Labor via Haver Analytics Months plotted: Jan 2000 to Nov 2018

Skills Mismatch in the Labor Market

4.4 %

3.8 %

2.3 %

1.2 %

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

Jan 2005 Jan 2010 Jan 2015

Openings Hires Quits Layoffs

Job Openings, Hires, and Separations (Seasonally Adjusted)

Substantial evidence of labor shortage as the labor market further tightens Job Openings and Labor Turnover Survey

Source: BLS via Haver Analytics Months plotted: Jan 2001 - Nov 2018

0.9

0.0

0.5

1.0

1.5

Jan 2005 Jan 2010 Jan 2015

Hires/Openings Ratio (Seasonally Adjusted)

More openings than hiring since 2015 Hires per opening (vacancy yield rate)

Source: BLS via Haver Analytics Months plotted: Jan 2001 - Nov 2018

Firms in our District find themselves in a similar situation November 2018: Thinking of positions your firm has filled or attempted to fill, have you had difficulty hiring workers in the last three months?

Source: Federal Reserve Bank of Philadelphia

65.0

20.8

29.2

13.3

13.3

3.3

0 20 40 60

Yes, because of a lack of qualified applicants

Yes, because applicants have failed or refused drugtests

Yes, because candidates have rejected job offers

No, we have been able to hire without difficulty

No, because we have not had any job openings in thepast three months

No, but we have had trouble retaining new hires

Percent

2.00%

3.00%

4.00%

5.00%

4.00% 6.00% 8.00% 10.00% Unemployment Rate

Job

Ope

ning

s Rat

e

Dec 2001 - Dec 2007 (Pre-Recession) Jan 2008 - Jun 2009 (Recession) Jul 2009 - Present (Post-Recession)

BEVERIDGE CURVE Beveridge curve based on BLS' JOLTS

Source: BLS via Haver Analytics Months plotted: Dec 2001 - Nov 2018

Some evidence of wage pressure resulting from tight labor market November 2018: If you had difficulty hiring workers in the last three months, which of the following approaches have you tried?

Source: Federal Reserve Bank of Philadelphia

63.2

55.2

51.7

50.6

43.7

33.3

19.5

6.9

0 10 20 30 40 50 60 70

Raised wages, signing bonuses, or total compensationoffered to new hires

Focused on retaining and promoting existing employees toreduce the need for new hires

Increased advertising of open positions

Hired additional workers through a temporary help agency

Hired less-qualified workers but provided additionaltraining to upgrade their skills

Invested in technology to reduce the need for new hires

Increased non-wage benefits offered to new hires

Made no changes, still hoping to hire

Percent

Migration Trends

TRI-STATE MIGRATION PATTERNS USING IRS DATA Percentage Change in Number of Tax Returns, 2007-2016 (base year = 2007)

Source: Calculations from Internal Revenue Service data.

TRI-STATE AGI LOSSES/GAINS FROM MIGRATION Percentage change in total adjusted gross income, 2007-2016 (base year = 2007)

Source: Calculations from Internal Revenue Service data.

TRI-STATE AGI FROM OUT-OF-STATE MIGRATION Percentage change in AGI, 2007-2016 (base year = 2007)

Source: Calculations from Internal Revenue Service data.

$6,530.38

$9,246.68

$0

$2,000

$4,000

$6,000

$8,000

$10,000

1995 2000 2005 2010 2015

AGI Inflow AGI Outflow

Millions of USD, not seasonally adjusted

STATE AGI CHANGE DUE TO MIGRATION Pennsylvania

Source: Source: Calculation using data from the Internal Revenue Service Years plotted: 1993 - 2016

TOP ORIGINS AND DESTINATIONS BY STATE To/from Pennsylvania, 2007-2016 (base year = 2007)

Total inflow = $49.4

Total outflow = $57.8

Inflation & Monetary Policy

1.8 %

1.9 %

2.0 %

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

Jan 2000 Jan 2005 Jan 2010 Jan 2015

PCE PCE Core FOMC Target

Year-over-year percent change (seasonally adjusted)

Inflation seems to be around the target range U.S. Personal Consumption Expenditure inflation

Source: BEA via Haver Analytics Months plotted: Jan 2000 - Nov 2018

0

1

2

3

4

5

2018 2019 2020 2021 Longer run

Percent

FOMC members signaled a couple of rate hikes in 2019 FOMC projections of appropriate policy

Source: FOMC Projections, December 2018 Brown dashed line indicates the current target range

Market has priced in no rate hike in 2019 Market implied probability of a rate hike based on CME Fed Funds Futures Contracts (as of January 9, 2019)

Source: Bloomberg

FOMC Meeting Date Probability of a rate increase (as of January 9, 2019)

January 29-30, 2019 0.52%

March 19-20, 2019 9.11%

April 30-May 1, 2019 14.74%

June 18-19, 2019 23.34%

July 30-31, 2019 23.28%

September 17-18, 2019 23.07%

October 29-30, 2019 22.43%

December 10-11, 2019 20.18%

• Growth will likely be slower than in 2018, but still will be above trend. Downside risks in 2019 include slowdown in the global economy and uncertainty over trade policy.

• Employment growth continues to be solid in the nation and in our region, with low levels of unemployment.

– As the labor market grows tighter, understanding where and how skills mismatches occur is a likely key concept in the near-term.

• Recent migration trends show slowdown in purchasing power in PA, which could lead to slower growth.

• FOMC members signaled a couple of rate hikes in 2019; however, the market seems to be skeptical so far.

SUMMARY

Ryotaro Tashiro [email protected]

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National and Regional Economic Update