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Prefatory Note The attached document represents the most complete and accurate version available based on original files from the FOMC Secretariat at the Board of Governors of the Federal Reserve System. Please note that some material may have been redacted from this document if that material was received on a confidential basis. Redacted material is indicated by occasional gaps in the text or by gray boxes around non-text content. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. Content last modified 01/14/2022. Authorized for Public Release Class II FOMC – Restricted (FR) Report to the FOMC on Economic Conditions and Monetary Policy Book A Economic and Financial Conditions: Current Situation and Outlook December 7, 2016 Prepared for the Federal Open Market Committee by the staff of the Board of Governors of the Federal Reserve System Authorized for Public Release (This page is intentionally blank.) Class II FOMC – Restricted (FR) December 7, 2016 Domestic Economic Developments and Outlook Incoming data indicate that the economy is expanding at a moderate rate. Real GDP growth appears to have picked up from its weak first-half pace, as the drag from inventory investment has ended and growth in private domestic final purchases (PDFP) has remained solid. The estimated rate of GDP growth in the second half—at an annual rate of 2½ percent—is a bit higher than in the October Tealbook, mainly reflecting somewhat stronger incoming data on consumer spending, residential investment, and net exports. Meanwhile, labor market conditions have tightened further: Payrolls have continued to post solid gains, and the unemployment rate is estimated to have fallen to 4.6 percent in November. Overall, we now view the economy as operating a touch above its sustainable level, a slightly stronger assessment than in the previous Tealbook. Over the medium term, the main change to the forecast stems from our assumptions about fiscal policy. While there is substantial uncertainty about the size and composition of any potential fiscal changes that may be enacted in coming years, in our view the modal outlook for fiscal policy has shifted toward a more expansionary stance. As a placeholder pending further details, the forecast assumes a persistent cut in personal income taxes equivalent to 1 percent of GDP beginning in the third quarter of 2017. The assumed fiscal stimulus is partially offset by the reaction of financial markets and monetary policy to that stimulus, resulting in a net boost to the level of real GDP of about ½ percent at the end of 2019. The Risks and Uncertainty section illustrates the consequences of either no additional fiscal stimulus or of a larger fiscal package with a different composition than we have assumed in the baseline. Turning to the trajectory for the economy over the medium term, we continue to project real GDP to increase 2¼ percent in 2017, with solid gains in consumer spending and a pickup in business investment. Growth then slows to 2 percent in 2018 and 1¾ percent in 2019 as monetary policy continues to tighten. With GDP growing faster than potential over most of the medium term, the output gap widens to 1½ percent at the end of 2019, an upward revision of nearly ½ percentage point relative to the October Tealbook. Correspondingly, the unemployment rate is projected to fall to 4.2 percent by 2019—about ¾ percentage point below our estimate of its natural rate and ¼ percentage point lower than in October—and the labor force participation rate is projected to decline somewhat more slowly than its trend. Page 1 of 100 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Comparing the Staff Projection with Other Forecasts The staff’s projection for real GDP growth is the same as the median projection from the Survey of Professional Forecasters (SPF) and the Blue Chip consensus forecast in 2016 and in 2017. The staff’s forecast for the unemployment rate is equal to the forecasts of the SPF and Blue Chip in 2016 and lower in 2017. The staff’s projection for CPI inflation is slightly above the other forecasts in 2016 and at or above them at longer horizons. The staff’s projections for core and total PCE inflation are similar to the SPF forecasts in 2016 but lower than the SPF in 2017 and 2018. Comparison of Tealbook and Outside Forecasts 2016 2017 2018 GDP (Q4/Q4 percent change) December Tealbook Blue Chip (11/10/16) SPF median (11/14/16) 1.8 1.8 1.8 2.2 2.2 2.2 2.0 n.a. n.a. Unemployment rate (Q4 level) December Tealbook Blue Chip (11/10/16) SPF median (11/14/16) 4.8 4.8 4.8 4.5 4.6 4.7 4.3 n.a. n.a. CPI inflation (Q4/Q4 percent change) December Tealbook Blue Chip (11/10/16) SPF median (11/14/16) 1.8 1.7 1.5 2.3 2.3 2.2 2.2 n.a. 2.2 PCE price inflation (Q4/Q4 percent change) December Tealbook 1.5 SPF median (11/14/16) 1.4 1.7 1.9 1.8 2.0 Core PCE price inflation (Q4/Q4 percent change) December Tealbook 1.7 SPF median (11/14/16) 1.8 1.7 1.9 1.8 1.9 Note: SPF is the Survey of Professional Forecasters, CPI is the consumer price index, and PCE is personal consumption expenditures. Blue Chip does not provide results for PCE price inflation. The Blue Chip consensus forecast includes input from about 50 panelists, and the SPF about 40. Roughly 20 panelists contribute to both surveys. n.a. Not available. Source: Blue Chip Economic Indicators; Federal Reserve Bank of Philadelphia. Page 2 of 100 Class II FOMC – Restricted (FR) December 7, 2016 Tealbook Forecast Compared with Blue Chip (Blue Chip survey released November 10, 2016) Real GDP Industrial Production Percent change, annual rate Blue Chip consensus Staff forecast 2009 2011 2013 2015 2017 Note: The shaded area represents the area between the Blue Chip top 10 and bottom 10 averages. Percent change, annual rate 8 12 6 8 4 4 2 0 0 -4 -2 -8 -4 -12 -6 -16 -8 -20 -10 2009 Unemployment Rate 2011 2013 2015 2017 -24 Consumer Price Index Percent Percent change, annual rate 11 8 6 10 4 9 2 8 0 7 -2 6 2009 2011 2013 2015 2017 -4 5 -6 4 -8 3 2009 Treasury Bill Rate 2011 2013 2015 2017 -10 10-Year Treasury Yield Percent Percent 4 5.5 5.0 3 4.5 4.0 2 3.5 3.0 1 2.5 2.0 0 1.5 2009 2011 2013 2015 2017 -1 2009 2011 2013 2015 2017 Note: The yield is for on-the-run Treasury securities. Over the forecast period, the staff’s projected yield is assumed to be 15 basis points below the off-the-run yield. Page 3 of 100 1.0 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC - Restricted (FR) December 7, 2016 Revisions to the Staff Projection since the Previous SEP The FOMC most recently published its Summary of Economic Projections, or SEP, following the September FOMC meeting. The table below compares the staff's current economic projection with the one we presented in the September Tealbook. We have strengthened the projection this round by about the same amount as we weakened it in the October Tealbook, and, on net, the projection is little changed from September. GDP growth is about the same, and the unemployment rate still reaches 4.2 percent at the end of 2019. PCE inflation (both total and core) has come in higher in the second half of this year than we anticipated in September, and we have carried forward a bit of that surprise into the projection for next year. But the inflation forecast is otherwise unrevised, and we continue to project that PCE inflation will move up and reach 1.9 percent by 2019. We have raised our assumed longer-run value of the real equilibrium federal funds rate to 1.0 percent in this forecast, up from 0.75 percent in the September Tealbook. But with the outlook little changed and this higher equilibrium rate phased in gradually, the funds rate path from the intercept-adjusted inertial Taylor (1999) rule that we use in our baseline forecast is about the same as in September through most of the projection period. Staff Economic Projections Compared with the September Tealbook 2016 2016 2017 2018 2019 Longer run 2.4 2.5 1.8 1.8 2.2 2.4 2.0 2.0 1.8 1.7 1.7 1.7 4.9 4.9 4.8 4.9 4.8 4.9 4.5 4.5 4.3 4.3 4.2 4.2 5.0 5.0 PCE inflation1 September Tealbook 1.1 1.1 1.9 1.2 1.5 1.2 1.7 1.6 1.8 1.8 1.9 1.9 2.0 2.0 Core PCE inflation1 September Tealbook 1.9 1.9 1.6 1.3 1.7 1.6 1.7 1.6 1.8 1.8 1.9 1.9 n.a. n.a. Federal funds rate2 September Tealbook .37 .37 .47 .64 .47 .64 1.49 1.50 2.47 2.49 3.30 3.19 3.00 2.75 Memo: Federal funds rate, end of period September Tealbook .38 .38 .54 .71 .54 .71 1.57 1.58 2.55 2.57 3.36 3.24 3.00 2.75 GDP gap2’3 September Tealbook .0 -.1 .3 .2 .3 .2 1.0 1.1 1.4 1.5 1.6 1.5 n.a. n.a. Variable Hl H2 Real GDP1 September Tealbook 1.1 1.1 Unemployment rate2 September Tealbook 1. Percent change from final quarter of preceding period to final quarter of period indicated. 2. Percent, final quarter of period indicated. 3. Percent difference between actual and potential. A negative number indicates that the economy is operating below potential, n.a. Not available. Page 4 of 100 Class II FOMC – Restricted (FR) December 7, 2016 Given how flat the Phillips curve appears to be and our judgment that inflation expectations will remain well anchored, we have barely revised our forecast for inflation from the October Tealbook despite the modestly stronger economic outlook. We continue to project that both total and core PCE price inflation will move up gradually to 1.9 percent in 2019, as the effects of earlier energy and import price declines fade and resource utilization continues to tighten. KEY BACKGROUND FACTORS Fiscal Policy Considerable uncertainty prevails about the size, timing, and composition of any potential fiscal policy changes that may be enacted in coming years. Nonetheless, relative to our October projection, we have assumed an increase in annual federal “primary” budget deficits (that is, the deficit excluding interest costs) of 1 percent of GDP. For now, we have assumed this fiscal expansion takes the form of a cut in personal income taxes that commences in the third quarter of 2017.1 The tax cut is estimated to have essentially no effect on potential output, but it boosts aggregate demand and hence would raise the growth rate of real GDP roughly ¼ percentage point per year in each of 2017, 2018, and 2019 absent any multiplier effects and offsets from higher interest rates and the dollar. We now project that discretionary policy actions at all levels of government, including the aforementioned tax cut, will provide a partial-equilibrium boost to real GDP growth of ½ percentage point in 2017 and more than ¼ percentage point in both 2018 and 2019.2 Monetary Policy In the inertial Taylor (1999) rule that we use to mechanically set the federal funds rate in our projection, we increased the real long-run equilibrium federal funds rate from ¾ percent to 1 percent in response to the persistent fiscal 1 A decrease in personal taxes serves as a useful placeholder partly because some plausible policy actions (such as an increase in government purchases) would likely have larger effects on GDP growth, while other plausible actions (such as corporate tax cuts) would likely have smaller effects. 2 Aside from the tax cut, we have built in no additional changes to our policy assumptions in this projection. Page 5 of 100 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Key Background Factors underlying the Baseline Staff Projection Federal Funds Rate Long-Term Interest Rates Percent Percent 6 Quarterly average 11 Quarterly average 10 Current Tealbook Previous Tealbook 5 9 Conforming mortgage rate 4 8 Triple-B corporate yield 7 3 6 5 2 4 2007 2009 2011 2013 2015 2017 2019 0 3 10-year Treasury yield 1 2007 2009 2 2011 2013 2015 2017 2019 1 House Prices Equity Prices Ratio scale, 2007:Q1 = 100 Quarter-end Dow Jones U.S. Total Stock Market Index Ratio scale, 2007:Q1 = 100 200 185 170 155 140 110 Quarterly 105 100 125 95 110 90 95 CoreLogic Index 85 80 80 75 65 70 50 2007 2009 2011 2013 2015 2017 2019 2007 Crude Oil Prices 2009 2011 2013 2015 2017 2019 65 Broad Real Dollar Dollars per barrel 2007:Q1 = 100 140 Quarterly average 115 Quarterly average 110 120 Imported oil 105 100 100 West Texas Intermediate 80 95 60 90 40 2007 2009 2011 2013 2015 2017 2019 20 85 2007 Page 6 of 100 2009 2011 2013 2015 2017 2019 80 Class II FOMC – Restricted (FR) December 7, 2016 policy changes.3 The path of the rule’s time-varying intercept converges to this new real long-run equilibrium value by the end of 2019.4 The inertial Taylor (1999) rule calls for the federal funds rate to increase a little less than 1 percentage point per year over the projection period and to average 3.3 percent in the fourth quarter of 2019, about 30 basis points higher than in the October Tealbook.5 We continue to assume that the SOMA portfolio will remain at its current level until the third quarter of 2017 and then begin to contract, as the proceeds from maturing assets are no longer reinvested. Other Interest Rates The 10-year Treasury yield is revised markedly higher in this projection, reflecting the upward revisions to the projected path of future short-term interest rates over the valuation window as well as higher projected term premiums. We project the 10-year Treasury yield to rise significantly over the medium term, reaching 3.9 percent by the end of 2019—about 70 basis points higher than in the October projection. We have revised up the projected paths for the triple-B corporate bond yields and 30-year fixed mortgage rates by about as much as those of Treasury securities. Equity Prices and Home Prices Since the previous Tealbook, broad equity indexes have increased about 4 percent. As a result, we nudged up the path of stock prices over the 3 The fiscal assumptions influence the long-run equilibrium federal funds rate because the policy changes are persistent and boost demand in the longer run. We assume that the dual mandate is achieved in the long run via a combination of a higher real federal funds rate and a rise in term premiums. The magnitude of the assumed overall increase in the 10-year Treasury rate is broadly consistent with the empirical evidence regarding the effects of increased government debt on interest rates and is in line with simulations of the revised fiscal assumptions conducted using the FRB/US model. The decomposition of the overall increment to the 10-year rate into its funds rate and term premium components is highly uncertain. 4 One argument for phasing in the adjustment to the long-run equilibrium rate rather than assuming that it prevails immediately is that the boost to consumer spending is likewise assumed to phase in over three years. 5 Compared with its prescription for the October Tealbook, a non-inertial rule would have revised up about 65 basis points at the end of 2019. Page 7 of 100 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 projection period. At the end of the medium term, equity prices are projected to be 1 percent higher relative to the October Tealbook. We continue to project that home values will decelerate from an increase of 5¾ percent in 2016 to an average annual increase of 3¾ percent over the medium term, leaving the level of house prices only marginally above its historical relationship with rents at the end of the forecast period. Foreign Economic Activity and the Dollar Foreign real GDP growth rebounded to an annual rate of 3 percent in the third quarter, ½ percentage point higher than estimated in the October Tealbook. This rebound was driven by stronger growth in Canada, Mexico, and Japan. Growth abroad is projected to average about 2½ percent over the remainder of the forecast period, supported by accommodative monetary policies in the advanced foreign economies (AFEs) and a moderate recovery in South America. This outlook is revised down slightly in the near term as a result of tighter financial conditions and weaker data in the emerging market economies (EMEs) but revised up later in the forecast period in response to stronger U.S. demand. The broad nominal dollar has appreciated about 3 percent since the time of the October Tealbook, with the rise occurring subsequent to the U.S. election and coming more against EME currencies than against AFE currencies. We expect the broad real dollar to appreciate at about a 1¼ percent annual rate through the forecast period, as market expectations for the federal funds rate move up toward the staff forecast. Relative to the October Tealbook, our projection for the broad real dollar by the end of 2019 is 2¼ percent higher. Oil Prices The spot price of Brent crude oil has increased about $3.50 per barrel since the close of the October Tealbook and is now trading at $55 per barrel. This increase is mostly explained by the OPEC agreement reached on November 30 to cut oil production.6 This agreement extends only through the middle of 6 OPEC countries agreed to cut production by 1.2 million barrels per day, and some non-OPEC countries are expected to agree at their December 10 meeting to cut production by 0.6 million barrels per day. Page 8 of 100 Class II FOMC – Restricted (FR) December 7, 2016 2017, leaving it unclear what happens afterward. In fact, December 2019 Brent futures prices are down about $1.25 per barrel since the close of the October Tealbook and currently stand at $58 per barrel. All told, the average price of oil over the forecast period is little changed from the October Tealbook. THE OUTLOOK FOR REAL GDP We estimate that real GDP is increasing at an annual rate of 2½ percent in the second half of the year after rising only 1 percent in the first half. The step-up reflects the stabilization of inventory investment as well as larger gains in government spending against a backdrop of continued solid increases in PDFP. Real GDP is then projected to grow 2½ percent in the first quarter of next year. Our GDP forecast for the second half of this year is slightly stronger than in the October Tealbook. We estimate that consumer spending is rising at an average annual rate of 2½ percent in the second half of this year, and we expect it to rise at the same pace in the first quarter of next year, supported by continued gains in employment and household income as well as earlier increases in household wealth. Our near-term forecast for consumer spending is a little higher than in the October Tealbook, reflecting stronger incoming spending data and an upward revision to the BEA’s estimate of disposable income in the second and third quarters. The BEA reported that investment for equipment and intangibles declined at an annual rate of 2½ percent in the third quarter, well below our projection in the October Tealbook. However, with orders of nondefense capital goods rising recently and business sentiment generally supportive, we expect moderate growth in equipment investment this quarter and the next. In addition, we still expect investment in drilling and mining structures to start to move up this quarter after having declined for the past two years. On net, our near-term forecast for business investment is little changed from the October Tealbook. Single-family housing starts jumped in October and were well above our expectations. Together with upward revisions to other incoming source data, these data suggest that residential investment will show an overall increase in Page 9 of 100 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Federal Reserve System Nowcasts of 2016:Q4 Real GDP Growth (Percent change at annual rate from previous quarter) Federal Reserve entity Type of model Nowcast as of Dec. 6, 2016 Federal Reserve Bank Boston1 Mixed-frequency BVAR 2.5 New York Factor-augmented autoregressive model combination Factor-augmented autoregressive model combination, financial factors only Dynamic factor model 1.5 1.4 Bayesian regressions with stochastic volatility Tracking model 2.1 0.9 Cleveland 2.5 Atlanta Tracking model combined with Bayesian vector autoregressions (VARs), dynamic factor models, and factor-augmented autoregressions (known as GDPNow) 2.6 Chicago Dynamic factor models Bayesian VARs 3.0 1.9 Dynamic factor models News index model Let-the-data-decide regressions 2.5 4.0 2.2 Accounting-based tracking estimate 1.4 Board staff’s forecast (judgmental tracking model)2 Monthly dynamic factor models (DFM-45) Mixed-frequency dynamic factor model (DFM-BM) 1.6 3.1 4.2 St. Louis Kansas City Board of Governors Memo: Median of Federal Reserve System nowcasts 1. 2. 2.4 The Boston Federal Reserve has added a new model based on Frank Schorfheide and Dongho Song (2015), “Real-Time Forecasting with a Mixed-Frequency VAR,” Journal of Business and Economic Statistics, vol. 33 (July), pp. 366–80. The October Tealbook forecast, finalized on December 7, is 1.6 percent. Page 10 of 100 Class II FOMC – Restricted (FR) December 7, 2016 the second half of this year, compared with the roughly 3 percent rate of decline that we projected in the October Tealbook. Given lean inventories of homes for sale and ongoing solid gains in house prices, we expect construction activity to increase further in early 2017, albeit at a modest rate. Very little inventory data are yet available for the fourth quarter, but the staff’s flow-of-goods system shows inventory-to-sales ratios near comfortable levels in most sectors outside of energy (inventories of energy products remain very high). Consequently, we expect inventory investment to change little on net over this quarter and the next, consistent with the projected steady growth in final sales, and to have little effect on GDP growth. Net exports boosted real GDP growth more than ¾ percentage point in the third quarter, largely because of unseasonably strong soybean exports. In the fourth quarter, net exports are projected to subtract ½ percentage point, as exports are projected to decline moderately (reflecting in part a more normal pace of soybean exports). More broadly, we continue to view net exports as being held down by a strong dollar, weak foreign demand, and firming U.S. growth. This drag extends for several years and is a bit larger than in the previous forecast. The level of manufacturing production has changed little, on net, in recent months (indeed, since late 2014), restrained by weak export demand, spillovers from earlier declines in oil and gas drilling, and slow domestic capital investment more generally. We expect factory output to continue on this flat trajectory over the near term despite some modest improvement recently in the readings for new orders from the national and regional manufacturing surveys. Over the medium term, GDP growth is expected to ease gradually from its pace in the second half of this year, eventually slowing to 1¾ percent in 2019, as monetary policy continues to tighten. The projection for real GDP growth has been boosted by our assumption of more expansionary fiscal policy. After taking into account multiplier effects as well as the offset from higher interest rates, these tax cuts raise the level of real GDP ½ percent by the end of 2019. Interest rates have already risen in Page 11 of 100 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Summary of the Near-Term Outlook (Percent change at annual rate except as noted) 2016:Q3 2016:Q4 2017:Q1 Measure Previous Tealbook Current Tealbook Previous Tealbook Current Tealbook Previous Tealbook Current Tealbook Real GDP Private domestic final purchases Personal consumption expenditures Residential investment Nonres. private fixed investment Government purchases Contributions to change in real GDP Inventory investment1 Net exports1 Unemployment rate PCE chain price index Ex. food and energy 2.5 2.2 2.6 -6.3 3.0 .3 3.3 2.1 2.8 -4.1 .3 .8 2.1 2.1 1.8 .3 4.3 2.7 1.6 2.5 2.1 11.5 1.9 2.3 2.2 2.6 2.5 6.2 1.7 1.8 2.4 2.8 2.6 3.1 4.1 1.8 .2 .3 4.9 1.4 1.6 .5 .8 4.9 1.4 1.7 .2 -.3 4.9 2.2 1.5 -.3 -.6 4.8 2.3 1.4 .3 -.6 4.8 1.7 1.8 .4 -.7 4.7 1.8 1.7 1. Percentage points. Recent Nonfinancial Developments (1) Manufacturing IP ex. Motor Vehicles and Parts Real GDP and GDI 4-quarter percent change Gross domestic product Gross domestic income 3-month percent change, annual rate 8 20 15 6 10 4 Q3 Oct. 5 0 2 -5 0 -10 -2 -15 -20 -4 2004 2006 2008 2010 2012 2014 2016 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis. -25 -6 2004 2006 2008 2010 2012 2014 2016 Source: Federal Reserve Board, G.17 Statistical Release, "Industrial Production and Capacity Utilization." Sales and Production of Light Motor Vehicles -30 Real PCE Goods ex. Motor Vehicles Millions of units, annual rate Billions of chained (2009) dollars 22 3800 3600 Nov. Oct. 18 3400 Sales Oct. 14 3200 3000 10 2800 Production 6 2600 2004 2006 2008 2010 2012 2014 2016 Source: Ward’s Communications; Chrysler; General Motors; FRB seasonal adjustments. 2 2004 2006 2008 2010 2012 2014 2016 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis. Page 12 of 100 2400 Class II FOMC – Restricted (FR) December 7, 2016 Recent Nonfinancial Developments (2) Single-Family Housing Starts and Permits Millions of units (annual rate) Adjusted permits Starts Home Sales 2.1 1.8 7.5 Millions of units (annual rate) 1.2 Oct. 1.5 Existing homes (left scale) 6.0 Oct. 5.0 4.5 0.6 4.0 0.9 New single-family homes (right scale) 0.6 3.5 2004 2006 2008 2010 2012 2014 2016 0.0 1.2 5.5 0.9 0.3 1.8 7.0 6.5 1.5 Millions of units (annual rate) 0.3 3.0 2.5 2004 2006 2008 2010 2012 2014 2016 0.0 Source: For existing, National Association of Realtors; for new, U.S. Census Bureau. Note: Adjusted permits equal permit issuance plus total starts outside of permit-issuing areas. Source: U.S. Census Bureau. Nondefense Capital Goods ex. Aircraft Nonresidential Construction Put in Place Billions of dollars Orders Billions of chained (2009) dollars 70 65 Oct. Oct. 450 400 60 350 55 300 50 250 Shipments 2004 2006 2008 2010 2012 Note: Data are 3-month moving averages. Source: U.S. Census Bureau. 2014 2016 45 2004 2006 2008 2010 2012 2014 2016 Note: Nominal CPIP deflated by BEA prices through 2016:Q2 and by the staff’s estimated deflator thereafter. Source: U.S. Census Bureau. Inventory Ratios Exports and Non-oil Imports Months Billions of dollars 1.9 200 1.7 Non-oil imports 180 1.6 Staff flow-of-goods system Oct. 140 1.4 120 1.3 100 Exports 1.2 Census book-value data 2008 160 1.5 Sept. 2006 240 220 1.8 Oct. 2004 200 2010 2012 2014 2016 1.1 Note: Flow-of-goods system inventories include manufacturing and mining industries and are relative to consumption. Census data cover manufacturing and trade, and inventories are relative to sales. Source: U.S. Census Bureau; staff calculations. 2004 2006 80 2008 2010 2012 2014 2016 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis; U.S. Census Bureau. Page 13 of 100 60 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 anticipation of a change in fiscal policy, and the associated restraint on activity is relatively front-loaded in our projection. By contrast, the stimulus is relatively back-loaded, as we do not—for example—have households spending any of the additional disposable income associated with the assumed tax cut in advance of its implementation; on the contrary, we have them adjusting the level of their spending upward over a period of three years, consistent with the response from earlier episodes. Other factors affecting the medium-term projection are a slight drag on balance. As in the October Tealbook, we expect potential output growth to pick up gradually from 1½ percent this year to 1¾ percent at the end of the medium term, owing to an acceleration in structural labor productivity. With GDP growth expected to outpace our estimate of potential growth over the medium term, aggregate output moves further above our estimate of its sustainable level. At the end of 2019, we forecast real GDP to be 1½ percent above potential—an output gap that is nearly ½ percentage point higher than in the October Tealbook. THE OUTLOOK FOR THE LABOR MARKET The two employment reports we have received since the October Tealbook indicate that the labor market has continued to tighten. Total nonfarm payroll employment is currently reported to have increased an average of 176,000 per month over the three months through November, which was very close to our forecast in the October Tealbook. This pace is above the range of 80,000 to 110,000 per month that we see as consistent with unchanged labor market conditions—that is, a flat unemployment rate and labor force participation declining in parallel with its trend path. The unemployment rate is estimated to have fallen from 4.9 percent in October to 4.6 percent in November, ¼ percentage point below our expectation in the October Tealbook. We expect that some of last month’s decline will be unwound in the months ahead; the unemployment rate is projected to be 4.7 percent in December and in the first quarter of next year, 0.1 percentage point lower than our previous forecast. Page 14 of 100 Class II FOMC – Restricted (FR) December 7, 2016 The labor force participation rate declined 0.1 percentage point in both October and November; at 62.7 percent, the November level was 0.1 percentage point below the previous forecast. We expect the participation rate to remain at this level through the first quarter of next year, unchanged from our previous projection. The employment-to-population ratio has edged up, on net, in the second half of this year and, relative to its declining trend, has improved 0.3 percentage point. Other indicators of labor market conditions have continued to improve. The share of employed individuals working part time for economic reasons edged down, on balance, this year, as has the share of long-term unemployed. The rate of layoffs, as measured by initial claims and JOLTS data, has remained low, and households’ assessments of job availability have continued to rise. The labor market conditions index, or LMCI, ticked up over the past three months, driven by improvements both in unemployment and hiring indicators and in consumer and business assessments of the jobs situation. We view the labor market as a touch beyond full employment. In the fourth quarter, we expect the unemployment rate to average ¼ percentage point below our estimate of its natural rate and the employment-to-population ratio to be ¼ percentage point above our estimate of its trend. Labor productivity in the business sector is now estimated to have increased 3¾ percent in the third quarter, about ¾ percentage point stronger than in the previous Tealbook, but was unchanged relative to its level four quarters earlier. The medium-term outlook for the labor market is stronger than in the October Tealbook, reflecting the stronger projection for real GDP. The path of monthly job gains is about 20,000 higher than in the October Tealbook, bringing the level of payroll employment at the end of 2019 to about 700,000 above the previous projection. We now expect average monthly total payroll gains to slow from about 180,000 in 2017 to about 160,000 in 2018 and 120,000 in 2019. Page 15 of 100 Domestic Econ Devel & Outlook Authorized for Public Release Authorized for Public Release Domestic Econ Devel & Outlook Class II FOMC – Restricted (FR) December 7, 2016 Alternative Measures of Slack The red line in each panel is the staff’s measure of the unemployment rate gap (right axis). Output Gaps* Manufacturing capacity utilization gap* Percentage points FRB/US EDO*** production function gap FRBNY PRISM** 6 28.8 4 19.2 2 9.6 0 0.0 Percentage points Percentage points 4 Oct. Jobs Hard to Fill Gap* 25.8 Percentage points Percentage points 17.2 8.6 2 0 Nov. Q3 1998 2001 2004 2007 2010 2013 2016 ** PRISM uses a flex-price output gap. *** EDO is Estimated, Dynamic, Optimization-based model. Source: Federal Reserve Board; PRISM: Federal Reserve Board Bank of Philadelphia, PRISM Model Documentation (June 2011); FRBNY: Federal Reserve Bank of New York Staff Report 618 (May 2013, revised April 2014). 6 -2 -9.6 -2 -4 -19.2 -4 -6 -28.8 6 2.22 1998 2001 2004 2007 Source: Federal Reserve Board. Job Openings Gap* 4 1.48 2 0.74 Percentage points 2010 2013 2016 Percentage points Adjusted Help Wanted Private job openings rate -6 6 4 2 Nov. Nov. 0.0 0 0.00 -8.6 -2 -0.74 -17.2 -4 -1.48 0 Oct. -2 -4 Sept. -25.8 -6 1998 2001 2004 2007 2010 2013 2016 Note: Percent of small businesses surveyed with at least one "hard to fill" job opening. Seasonally adjusted by Federal Reserve Board Staff. Source: National Federation of Independent Business, Small Business Economic Trends Survey. Job Availability Gap* 99 Percentage points -2.22 -6 1998 2001 2004 2007 2010 2013 2016 Note: Job openings rate is the number of job openings divided by employment plus job openings. Help Wanted adjusted following Cajner and Ratner (2016). Source: Job Openings and Labor Turnover Survey; U.S. Department of Labor, Bureau of Labor Statistics, Current Employment Statistics; Conference Board, Help Wanted OnLine. Involuntary Part-Time Employment Gap Percentage points Percentage points Percentage points 6 5.4 6 66 4 3.6 33 2 1.8 0 0 -0.0 0 -33 -2 -1.8 -2 -66 -4 -3.6 -4 -6 -5.4 4 Nov. 2 Nov. -99 1998 2001 2004 2007 2010 2013 2016 Note: Percent of households believing jobs are plentiful minus the percent believing jobs are hard to get. Source: Conference Board. 1998 2001 2004 2007 2010 2013 2016 Note: Percent of employment. Source: U.S. Department of Labor, Bureau of Labor Statistics, Current Population Survey. * Plots the negative of the gap to have the same sign as the unemployment rate gap. Note: The shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research. Output gaps are multiplied by negative 0.54 to facilitate comparison with the unemployment rate gap. Manufacturing capacity utilization gap is constructed by subtracting its average rate from 1972 to 2013. Other gaps were constructed by subtracting each series’ average in 2004:Q4 and 2005:Q1. Page 16 of 100 -6 Class II FOMC – Restricted (FR) December 7, 2016 We project that labor productivity growth will move up to an average annual pace of about 1 percent over the projection period, a touch lower than our estimate of its trend. By the end of 2019, the unemployment rate is projected to be 4.2 percent, ¾ percentage point below our estimate of its natural rate and ¼ percentage point below the October Tealbook projection. We project that the labor force participation rate will decline a little more slowly than its trend over the medium term, reflecting the sustained job gains and rising real wages in this projection. Compared with the October Tealbook, we have nudged up the participation rate projection a bit. THE OUTLOOK FOR INFLATION The incoming data on consumer prices have been about in line with our expectations in the October Tealbook, and our inflation forecast is little revised. The 12-month change in total PCE prices, at 1.4 percent in October, is expected to move up, reflecting both recent increases in crude oil prices and the effect of earlier declines in gasoline prices dropping out of the calculation; the 12-month change briefly reaches 2 percent in March 2017 before easing to 1.8 percent in the second quarter. The 12-month change in core PCE prices was 1.7 percent in October and is projected to remain at about that level over the near term. Measured on a quarterly average basis, core PCE price inflation is estimated to be lower in the second half of this year (at 1.6 percent) relative to the first half (1.9 percent), when inflation was boosted by some volatile price categories and by what appears to be residual seasonality. We now project core PCE price inflation to be 1.7 percent in the first quarter of next year, essentially unchanged from the October Tealbook. Headline PCE inflation is estimated to be above core inflation in the second half, as energy prices have risen appreciably in recent months amid increases in gasoline prices driven by supply disruptions and higher crude oil costs. Page 17 of 100 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Inflation Forecasts since the December 2015 Tealbook PCE Price Index 4-quarter percent change Current forecast December 2015 Tealbook January 2016 Tealbook March 2016 Tealbook April 2016 Tealbook June 2016 Tealbook July 2016 Tealbook September 2016 Tealbook October 2016 Tealbook 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 2015 2015 2016 2017 2018 0.0 Core PCE Price Index 4-quarter percent change Current forecast December 2015 Tealbook January 2016 Tealbook March 2016 Tealbook April 2016 Tealbook June 2016 Tealbook July 2016 Tealbook September 2016 Tealbook October 2016 Tealbook 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 2015 2015 2016 2017 2018 0.0 Core CPI 4-quarter percent change Current forecast December 2015 Tealbook January 2016 Tealbook March 2016 Tealbook April 2016 Tealbook June 2016 Tealbook July 2016 Tealbook September 2016 Tealbook October 2016 Tealbook 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 2015 2015 2016 2017 2018 Note: Blue shading represents the 70 percent confidence interval for the December 2015 projection. Confidence intervals are computed using historical errors from December staff forecasts since 1998. See appendix, ‘‘Technical Note on Prediction Intervals Derived from Historical Tealbook Forecast Errors,’’ in the Risks and Uncertainty section. The dotted vertical lines denote the most recent quarter of data. Source: Staff projections and judgmental rules of thumb. Page 18 of 100 0.0 Class II FOMC – Restricted (FR) December 7, 2016 Sources of Inflation Forecast Revisions since the December 2015 Tealbook Total PCE Percentage points 0.7 Revision to projection 0.6 Source of revision: Energy Food Core 0.5 0.4 0.3 0.2 0.1 0.0 -0.1 -0.2 -0.3 -0.4 -0.5 -0.6 2015 2016 2017 2018 Core PCE -0.7 Percentage points 0.7 Revision to projection 0.6 Source of revision: Import pass-through Energy pass-through Resource utilization Underlying inflation/expectations Other 0.5 0.4 0.3 0.2 0.1 0.0 -0.1 -0.2 -0.3 -0.4 -0.5 -0.6 2015 2016 2017 Source: Staff projections and judgmental rules of thumb. Page 19 of 100 2018 -0.7 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Survey Measures of Longer-Term Inflation Expectations CPI Next 10 Years CPI Forward Expectations Percent Percent 3.0 2.5 Oct. June 1.5 1.0 PCE Next 10 Years 2.0 SPF median, 6 to 10 years ahead Blue Chip mean, 7 to 11 years ahead Primary dealers median, 5 to 10 years ahead Consensus Economics mean, 6 to 10 years ahead SPF median Livingston Survey median 2008 2010 2012 2014 2016 Note: SPF is Survey of Professional Forecasters. Source: Federal Reserve Bank of Philadelphia. 2.5 Q4 Oct. Oct. 2.0 Q4 3.0 2008 2010 2012 2014 2016 Source: Federal Reserve Bank of Philadelphia; Blue Chip Economic Indicators; Federal Reserve Bank of New York; Consensus Economics. 1.5 1.0 PCE Forward Expectations Percent Percent 3.0 3.0 SPF median, 6 to 10 years ahead 2.5 2.5 SPF median Q4 2008 2010 2012 2014 Source: Federal Reserve Bank of Philadelphia. Q4 2.0 2.0 1.5 1.5 1.0 2016 Surveys of Consumers 2008 2010 2012 2014 Source: Federal Reserve Bank of Philadelphia. 2016 1.0 Survey of Business Inflation Expectations Percent Percent 4.0 3.5 4.0 3.5 Mean increase in unit costs, next 5 to 10 years 3.0 Oct. 3.0 Q4 Nov. 2.5 2.5 FRBNY median increase in prices, 3 years ahead Michigan median increase in prices, next 5 to 10 years 2010 2008 2012 2014 2016 Note: Federal Reserve Bank of New York (FRBNY) Survey of Consumer Expectations reports expected 12-month inflation rate 3 years from the current survey date. FRBNY data begin in June 2013. Source: University of Michigan Surveys of Consumers; Federal Reserve Bank of New York Survey of Consumer Expectations. 2.0 2016 2008 2010 2012 2014 Note: Survey of businesses in the Sixth Federal Reserve District. Data begin in February 2012. Source: Federal Reserve Bank of Atlanta. Page 20 of 100 2.0 Class II FOMC – Restricted (FR) December 7, 2016 Core import prices are projected to decline slightly in the fourth quarter of 2016, little changed from the October Tealbook, as a boost from higher metals prices offsets the recent dollar appreciation. In the first quarter of 2017, an ongoing drag from the recent appreciation of the dollar is expected to cause core import prices to continue edging down. Thereafter, we expect import price inflation to turn positive and move up to a ¾ percent rate by the end of 2017, consistent with moderate foreign inflation and relatively flat projected trajectories for the dollar and commodity prices. With regard to longer-term inflation expectations, the median of expectations over the next 5 to 10 years from the Michigan survey moved up from its historical low of 2.4 percent in October to 2.6 percent in November. Similarly, the TIPS-based measure of 5-to-10-year-forward inflation compensation has risen to 2 percent, a noticeable increase from its reading of 1.6 percent at the time of the October Tealbook. In contrast, some other survey measures remained unchanged. Expected PCE price inflation over the next 10 years from the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters remained at 2 percent in the fourth quarter, and the 3-year-ahead measure of inflation expectations in the Federal Reserve Bank of New York’s Survey of Consumer Expectation remained at 2.6 percent in October. Both total and core PCE inflation are anticipated to trend up to 1.9 percent by 2019 as resource utilization tightens and the drag from earlier energy and import price declines wanes. As in previous Tealbooks, we have assumed a small pickup (5 basis points in each of 2018 and 2019) in the prevailing level of inflation expectations relevant for wage and price setting. These projections are essentially unchanged from the October Tealbook despite the modestly stronger outlook for resource utilization, as we estimate the Phillips curve to be quite flat. Since the December 2015 Tealbook, our core inflation projection for 2016 has been revised up 0.3 percentage point in response to factors that we consider largely transitory. Our projection for 2017 core inflation is unrevised. (See the exhibit “Sources of Inflation Forecast Revisions since the December 2015 Tealbook” for additional information.) Page 21 of 100 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 The data on labor compensation received since the previous Tealbook have been mixed; taken together, we view these data as broadly consistent with a labor market that is operating close to its sustainable level against a backdrop of very sluggish trend growth in productivity. The box “Measures of Labor Compensation” discusses the primary differences in these measures. Average hourly earnings for all employees edged down in November following a relatively large gain in October. Over the past 12 months, this measure of wages has increased 2½ percent after rising at a relatively steady pace of 2 percent earlier in the recovery period. With an upward revision to wages and salaries in the latest NIPA data, compensation per hour in the business sector is now estimated to have risen 2¾ percent over the four quarters through 2016:Q3, up from our estimate in the October Tealbook but about the same rate as seen, on average, in the past four years. The employment cost index rose about 2¼ percent over the 12 months ending in September, up just slightly from an average pace of 2 percent in recent years. The Wage Growth Tracker from the Federal Reserve Bank of Atlanta suggests the median growth in wages has been 3.9 percent over the past 12 months. This movement continues an upward trend seen over the past year and brings the increases in this measure of wage growth close to pre-recession levels. We continue to project that hourly labor compensation growth in the business sector will pick up gradually as the labor market tightens further; we have revised up the medium-term projection a bit, reflecting the lower unemployment rate in this Tealbook.7 (See the box “Alternative View: The Rise in Real Wages” for an argument that wage pressures are greater than judged by the staff.) 7 Our models find a notably stronger effect of resource utilization on compensation growth (especially compensation per hour in the business sector) than on price inflation. Page 22 of 100 Class II FOMC – Restricted (FR) December 7, 2016 Measures of Labor Compensation The staff closely monitors several measures of labor compensation constructed by the Bureau of Labor Statistics: the employment cost index for private industry workers (ECI), compensation per hour in the business sector (CPH), and average hourly earnings of all employees (AHE). Additional measures of compensation that the staff follows include the Wage Growth Tracker (WGT) constructed by the Federal Reserve Bank of Atlanta and a few indicators derived from other surveys. Although these measures of labor compensation tend to move in a broadly similar manner over longer horizons, they often send different signals over shorter periods, as shown in figures 1 and 2. Since mid‐2014, those focusing on wages and salaries only (the AHE, the WGT, and a component of the ECI) suggest that nominal wage growth has been picking up, with the WGT showing the most pronounced increase; for the broader compensation measures (overall ECI and CPH), the evidence of a pickup is less clear. While the distinction between total compensation and the narrower concept of wages and salaries can account for some of the disparities across the measures, other differences in the concepts and methodologies used to construct these measures are also important. The table on the last page of this box compares the four series across some key dimensions. In particular, the various measures differ in their focus in the following ways: The AHE is designed as a timely monthly measure of wages (no benefits included) and is released as part of the monthly employment report. It is calculated as total wages divided by total hours paid for all employees in private nonfarm establishments. As a result, an increase in wages for high earners moves the measure more than a similarly proportioned increase for lower‐wage workers. The WGT is designed to measure the median change in hourly wages (no benefits included) of individuals, based on self‐reported usual earnings by households in the Current Population Survey (CPS). The index covers only individuals who were earning at a rate of less than $150,000 per year and who were in the sample and employed full time both in the current month of the CPS and one year earlier. It is Figure 2: Measures of wages and salaries only Figure 1: Broader measures of compensation Year-over-year percent change Compensation per Hour - business sector Employment Cost Index - compensation 2000 2005 2004 2008 2010 2012 Year-over-year percent change 8.5 Average Hourly Earnings Employment Cost Index - wages & salaries Atlanta Fed Wage Tracker: median 7.5 2015 2016 8.5 7.5 6.5 6.5 5.5 5.5 4.5 4.5 3.5 3.5 2.5 2.5 1.5 1.5 0.5 0.5 -0.5 -0.5 -1.5 Page 23 of 100 2000 2005 2004 2008 2010 2012 2015 2016 -1.5 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 the only measure constructed from the perspective of the household (as opposed to the employer). Unlike the AHE and CPH, this measure does not give more weight to high earners than low earners. The ECI is designed to measure the change in the cost (both wages and benefits) of hiring labor services. It is calculated as an average change in compensation, holding fixed industry and occupation weights, as well as most changes in overtime hours worked and benefits usage.1 As a result, it captures increases in compensation for particular jobs, but it is designed to exclude the effects of increased overtime use or a faster pace of job promotions during expansions, as well as shifts toward higher‐ productivity, higher‐wage occupations or industries. This is one possible reason why the ECI has had a lower average growth rate than the CPH and the WGT over the past 20 years. The ECI is the only measure that includes detail on the components of benefits (for example, health insurance).2 In recent quarters, relatively muted increases in the growth of these benefits costs have balanced out a modest pickup in wage growth in the ECI. The CPH is a measure of overall compensation received by employees in the business sector, calculated as total compensation (including some components not found in the ECI, such as stock options) divided by hours, based on the quarterly national income and product accounts (NIPA) data. It is the most inclusive of all the different measures of labor compensation, but it is also far more variable at a quarterly frequency than any of the other measures. This variability may occur, in part, both because the CPH is influenced by the changing mix of jobs and because it includes highly volatile components such as stock options and bonuses. Of all the measures discussed here, the CPH co‐varies most strongly with the unemployment gap. Unlike the other series, it is susceptible to large revisions. Each of these measures has strengths and weaknesses, and there is no single preferred measure. The CPH, being the most comprehensive measure of total compensation, is probably the most useful for questions regarding consumption behavior. It is also the only measure with an associated and directly comparable measure of labor productivity, so it is convenient for measuring unit labor costs. The ECI is probably the most relevant measure for gauging wage pressure experienced by firms, and it is the only comprehensive compensation measure that the staff has found to have some explanatory power for price inflation in recent years.3 The AHE is a timely and straightforward measure. The WGT is relatively new and we are still learning about its properties, but bringing in information from the CPS would seem to represent a useful complement to the other measures. 1 There are some features of the ECI that are not fixed. For example, the experience profile of the workforce within particular job categories and the use of incentive pay affect the ECI and are likely to change depending on the economic climate. 2 With the exception of health insurance, the benefits detail is unpublished and confidential. 3 See Ekaterina V. Peneva and Jeremy B. Rudd (2015), “The Passthrough of Labor Costs to Price Inflation,” Finance and Economics Discussion Series 2015‐042 (Washington: Board of Governors of the Federal Reserve System, May), http://dx.doi.org/10.17016/FEDS.2015.042. Page 24 of 100 Class II FOMC – Restricted (FR) December 7, 2016 Summary of labor compensation measures AHE WGT Continuously available from Frequency 20064 19975 Monthly Sample ~146,000 establishments in CES Monthly (primary measure is 3‐month moving average) Responses of ~2,400 individuals from CPS Coverage Compensation concept Omitted types of compensation Industry/classes of worker missed Wages only Payroll earnings Compensation broken out by Invariant to changes arising solely from Additional notes Benefits, tips, and bonuses Self‐employed Industry groups Revised in the two months after release Wages only Usual wages and salaries Benefits, tips, and bonuses Self‐employed and individuals earning >$150,000 (prior to 2003, >$100,000) Some demographic categories; interquartile range ECI 1979 CPH 1947 Third month of each quarter Quarterly Survey of ~6,800 private establishments6 Universe of establishments (after benchmark) Wages/benefits Total labor compensation Entry or exit from employment Wages/benefits Total cost to employer of labor Tips, stock options, severance pay Individuals who participate in setting their own pay. Firm entry/exit. Industry and occupational groups; also by type of benefits Industry‐occupation mix Reported series is the smoothed median growth rate Overtime, paid leave, and bonuses are categorized as benefits. Six broad industry categories Multiple revisions/ benchmarking after release 4 The series for production/nonsupervisory employees dates to 1964, but the Board’s staff focuses on the more recent series covering all employees. 5 Some additional data are available back to 1983. 6 State and local governments are included in the sample, but the Board’s staff focuses on the ECI for the private sector. Page 25 of 100 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Alternative View: The Rise in Real Wages 1 The unemployment rate has fallen considerably over the past several years. However, there has been only a modest pickup in nominal wage growth, which some consider a puzzle. The staff view is that nominal wage growth has not been surprisingly weak over this period but has been consistent with long-run trends for inflation and productivity and with labor market slack. This alternative view questions whether those long-run trends are the right benchmark and notes that nominal wage growth has actually been stronger than one would expect based on the recent behavior of inflation and productivity. Accordingly, recent wage growth may be indicative of more wage pressures than the staff recognizes. Frictionless real business cycle models imply that wages should move one-for-one with inflation and productivity. While these models are clearly counterfactual, they do motivate comparing real wages to productivity as a means of gauging wage pressures in the economy. The labor share, which equals the ratio of real wages per hour to output per hour, provides a convenient means of making that comparison. Figure 1 plots the labor share on a four-quarter moving average basis from 1972:Q2 to 2016:Q3. As the figure indicates, there has been a modest pickup in the share of output accruing to labor over the past several quarters. While this pickup follows an extended decline, it is worth noting that over the past 45 years, there have been only three prior episodes of a rise in the labor share. 1 The extended decline in the labor share over the past 15 years indicates that a stable one-for-one relationship between output and wages may not exist. Indeed, in a simple regression of log real wages per hour on log output per hour, the estimated coefficient on output per hour equals 0.91, which is well below the expected Note: This alternative view was prepared by Missaka Warusawitharana. 1 For a discussion of the changes in the labor share over time, see Michael W. L. Elsby, Bart Hobijn, and Aysegul Sahin (2013), “The Decline of the U.S. Labor Share,” Brookings Papers on Economic Activity, Fall, pp. 1–63, https://www.brookings.edu/wpcontent/uploads/2016/07/2013b_elsby_labor_share.pdf. Page 26 of 100 Class II FOMC – Restricted (FR) December 7, 2016 coefficient of 1.00, consistent with the fact that over the sample period, wage growth has not kept pace with output growth. Figure 2 presents the regression residuals, which are referred to as the wage–productivity gap. A positive (negative) gap implies that wages are elevated (depressed) relative to the relationship implied by the regression model. A potential implication of this residual is that when the wage gap is depressed, wages are not putting a great deal of pressure on firm costs, thus holding down pressures on price inflation. As figure 2 indicates, real wages were depressed relative to productivity in the aftermath of the financial crisis. The wage–productivity gap remained negative for several years and began to turn up in 2014. Since then, it has increased about 3 percentage points. This rise indicates a noticeable improvement in real wages relative to productivity, suggestive of greater wage pressures in the economy. As of 2016:Q3, the gap is close to zero, implying that the level of wages is close to that implied by the estimated relationship between productivity and wages. This perspective differs from the staff view. The staff framework evaluates nominal wage gains relative to judgmental long-run trends for inflation and productivity, both of which exceeded realized values over the past three years, as energy prices fell and productivity growth was especially weak. 2 As shown in the table, according to the staff view, wage growth over the past three years was consistent with these long-run trends. In contrast, relative to recent inflation and productivity, wages rose about 1 percent per year over the past three years, a notable rate of increase. To conclude, the staff view is that wage growth over the past several years has been consistent with slack and long-run trends for inflation and productivity. However, when compared with recent inflation and productivity, wage growth has been quite strong. If firms were to pass these higher wages into prices, inflation would exceed that of the baseline forecast. Wage growth from 2013:Q3 to 2016:Q3 (annualized, percent) Alternative view Staff view 2.8 2.8 Business-sector inflation 1.1 1.6 Output per hour .7 1.3 Real wages less productivity 1.0 -.1 Compensation per hour (data) Contribution of 2 See Deborah Lindner, John Roberts, and William Wascher (2015), “Compensation and Labor Market Slack,” memorandum to the FOMC, Board of Governors of the Federal Reserve System, Division of Research and Statistics (October 16). Page 27 of 100 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 THE LONG-TERM OUTLOOK We continue to assume a natural rate of unemployment in the longer run of 5 percent and a longer-run growth rate of potential GDP of 1.7 percent. In response to the assumption of persistently more stimulative fiscal policy, the long-run value of the real federal funds rate has been revised up from ¾ percent to 1 percent. The fiscal policy assumption also is the reason for a ⅛ percentage point upward revision to the term premium due to the additional supply of Treasury debt that would be forthcoming with a more expansionary fiscal stance. All told, the yield on 10-year Treasury securities is 3½ percent in the long run, ⅜ percentage point higher than in the October Tealbook. We expect that the Federal Reserve’s holdings of securities will continue to put downward pressure on longer-term interest rates, though to a diminishing extent over time. The SOMA portfolio is projected to have returned to a normal size by 2022. With output running above its potential and inflation at the Committee’s 2 percent objective, the nominal federal funds rate is about ¾ percentage point above its long-run value of 3 percent in 2020, increases to nearly 4 percent in 2021, and then moves back toward its long-run value thereafter. As monetary policy continues to tighten, real GDP decelerates further, growing 1.5 percent in 2020 and 1.3 percent in 2021. The unemployment rate is 4.3 percent in 2020 and rises gradually toward its assumed natural rate in subsequent years. PCE price inflation moves up from 1.9 percent in 2019 and slightly overshoots the Committee’s long-run objective in 2020 and 2021 before gradually converging to 2 percent. Page 28 of 100 Authorized for Public Release December 7, 2016 Domestic Econ Devel & Outlook Class II FOMC – Restricted (FR) Projections of Real GDP and Related Components (Percent change at annual rate from final quarter of preceding period except as noted) 2016 Measure 2015 2016 2017 2018 2019 2.4 2.3 1.8 1.7 2.2 2.2 2.0 1.9 1.8 1.7 1.9 1.9 2.3 2.1 2.1 2.0 2.1 2.2 2.0 1.9 1.9 1.7 2.6 2.6 2.9 2.9 2.5 2.2 2.7 2.6 3.0 2.5 2.7 2.4 2.5 2.4 Residential investment Previous Tealbook 13.1 13.1 -.3 -.3 3.4 -3.1 1.5 -1.7 1.7 7.7 5.6 4.8 3.7 2.4 Nonresidential structures Previous Tealbook -8.8 -8.8 -1.0 -1.0 2.7 3.5 .8 1.2 1.7 .9 -.3 -.2 -.7 -1.0 Equipment and intangibles Previous Tealbook 3.8 3.8 -1.3 -1.3 .7 3.7 -.3 1.2 3.7 3.1 3.0 2.8 2.2 1.9 Federal purchases Previous Tealbook 1.7 1.7 -.9 -.9 2.4 2.9 .7 1.0 1.6 1.6 -.5 -.5 -.4 -.4 State and local purchases Previous Tealbook 2.5 2.5 .5 .5 1.0 .7 .7 .6 1.4 1.4 1.2 1.2 1.2 1.2 Exports Previous Tealbook -2.2 -2.2 .5 .5 4.2 4.0 2.4 2.3 .5 1.5 1.9 2.8 2.7 2.7 Imports Previous Tealbook 2.5 2.5 -.2 -.2 2.8 3.5 1.3 1.6 4.7 4.2 4.7 4.2 4.1 4.0 Real GDP Previous Tealbook Final sales Previous Tealbook Personal consumption expenditures Previous Tealbook H1 H2 1.9 1.9 1.1 1.1 2.0 2.0 Contributions to change in real GDP (percentage points) Inventory change Previous Tealbook -.1 -.1 -.8 -.8 .1 .2 -.3 -.3 .1 .0 .0 .0 -.1 .0 Net exports Previous Tealbook -.7 -.7 .1 .1 .1 .0 .1 .0 -.6 -.4 -.5 -.3 -.3 -.3 Real GDP 4-quarter percent change Current Tealbook Previous Tealbook 10 8 6 4 2 0 -2 -4 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research. Source: U.S. Department of Commerce, Bureau of Economic Analysis. Page 29 of 100 2019 -6 Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Components of Final Demand Personal Consumption Expenditures 4-quarter percent change Residential Investment 4-quarter percent change 5 Current Tealbook Previous Tealbook 20 15 4 10 3 5 2 0 1 2012 2013 2014 2015 2016 2017 2018 2019 -5 0 2012 Equipment and Intangibles 2013 2014 2015 2016 2017 2018 2019 -10 Nonresidential Structures 4-quarter percent change 4-quarter percent change 12 25 20 10 15 8 10 6 5 4 0 2 -5 0 2012 2013 2014 2015 2016 2017 2018 2019 -10 -2 2012 Government Consumption and Investment 4-quarter percent change 2013 2014 2015 2016 2017 2018 2019 -15 Exports and Imports 4-quarter percent change 3 15 2 1 10 0 Exports -1 5 -2 -3 0 Imports -4 2012 2013 2014 2015 2016 2017 2018 2019 -5 2012 Source: U.S. Department of Commerce, Bureau of Economic Analysis. Page 30 of 100 2013 2014 2015 2016 2017 2018 2019 -5 Class II FOMC – Restricted (FR) December 7, 2016 Aspects of the Medium-Term Projection Personal Saving Rate Wealth-to-Income Ratio Percent Current Tealbook Previous Tealbook Ratio 10 6.8 9 6.4 8 6.0 7 6 5.6 5 5.2 4 3 4.8 2 1999 2004 2009 2014 2019 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis. 1 1999 2004 2009 2014 2019 Note: Ratio of household net worth to disposable personal income. Source: For net worth, Federal Reserve Board, Financial Accounts of the United States; for income, U.S. Dept. of Commerce, Bureau of Economic Analysis. Single-Family Housing Starts 4.4 Equipment and Intangibles Spending Millions of units Share of nominal GDP 2.00 12 1.75 11 1.50 1.25 10 1.00 9 0.75 0.50 8 0.25 1999 2004 2009 Source: U.S. Census Bureau. 2014 2019 0.00 Federal Surplus/Deficit 1999 2004 2009 2014 2019 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis. 7 Current Account Surplus/Deficit Share of nominal GDP Share of nominal GDP 6 1 4-quarter moving average 4 0 2 -1 0 -2 -2 -3 -4 -4 -6 -5 -8 -6 -10 1999 2004 2009 Source: Monthly Treasury Statement. 2014 2019 -12 1999 2004 2009 2014 2019 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis. Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research. Page 31 of 100 -7 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Decomposition of Potential GDP (Percent change, Q4 to Q4, except as noted) Measure 1974-95 Potential real GDP Previous Tealbook Selected contributions1 Structural labor productivity2 Previous Tealbook Capital deepening Multifactor productivity Structural hours Previous Tealbook Labor force participation Previous Tealbook Memo: GDP gap3 Previous Tealbook 19962000 2001-07 2008-10 2011-15 2016 2017 2018 2019 3.1 3.1 3.4 3.4 2.6 2.6 1.6 1.6 1.1 1.1 1.4 1.5 1.5 1.5 1.6 1.6 1.7 1.7 1.6 1.6 .7 .7 1.6 1.6 .4 .4 2.9 2.9 1.5 1.0 1.2 1.2 -.1 -.1 2.8 2.8 1.0 1.5 .8 .8 -.2 -.2 1.4 1.4 .3 .9 .1 .1 -.5 -.5 .8 .8 .5 .0 .6 .6 -.6 -.6 .9 1.0 .4 .2 .6 .6 -.5 -.5 1.1 1.1 .4 .4 .4 .4 -.5 -.5 1.1 1.1 .4 .5 .3 .3 -.5 -.5 1.2 1.2 .4 .7 .3 .3 -.5 -.5 -1.9 -1.9 2.4 2.4 .8 .8 -4.2 -4.2 .0 .0 .3 .1 1.0 .8 1.4 1.2 1.6 1.2 Note: For multiyear periods, the percent change is the annual average from Q4 of the year preceding the first year shown to Q4 of the last year shown. 1. Percentage points. 2. Total business sector. 3. Percent difference between actual and potential GDP in the final quarter of the period indicated. A negative number indicates that the economy is operating below potential. GDP Gap Unemployment Rate Percent Current Tealbook Previous Tealbook Percent 8 Unemployment rate Previous Tealbook Natural rate of unemployment 6 4 14 12 10 2 8 0 -2 6 -4 4 -6 1999 2004 2009 2014 2019 Note: The GDP gap is the percent difference between actual and potential GDP; a negative number indicates that the economy is operating below potential. Source: U.S. Department of Commerce, Bureau of Economic Analysis; staff assumptions. -8 (Business sector) 90 Chained (2009) dollars per hour Actual Structural 85 Average rate from 1972 to 2015 2 Structural and Actual Labor Productivity Manufacturing Capacity Utilization Rate Percent 1999 2004 2009 2014 2019 Source: U.S. Department of Labor, Bureau of Labor Statistics; staff assumptions. 66 64 62 60 80 58 75 56 54 70 52 50 65 48 1999 2004 2009 2014 2019 Source: Federal Reserve Board, G.17 Statistical Release, "Industrial Production and Capacity Utilization." 60 46 2004 2007 2010 2013 2016 2019 Source: U.S. Department of Labor, Bureau of Labor Statistics; U.S. Department of Commerce, Bureau of Economic Analysis; staff assumptions. Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research. Page 32 of 100 Class II FOMC – Restricted (FR) December 7, 2016 The Outlook for the Labor Market 2016 Measure 2015 2016 H1 Output per hour, business1 Previous Tealbook 2017 2018 2019 H2 .5 .5 -.5 -.5 2.0 1.3 .7 .4 1.0 1.1 .9 1.1 1.1 1.2 229 229 171 171 189 183 180 177 181 168 157 132 121 100 221 221 155 155 168 169 161 162 169 156 145 120 109 88 Labor force participation rate3 Previous Tealbook 62.5 62.5 62.7 62.7 62.7 62.8 62.7 62.8 62.6 62.6 62.3 62.2 62.0 61.9 Civilian unemployment rate3 Previous Tealbook 5.0 5.0 4.9 4.9 4.8 4.9 4.8 4.9 4.5 4.6 4.3 4.4 4.2 4.4 Nonfarm payroll employment2 Previous Tealbook Private employment2 Previous Tealbook 1. Percent change from final quarter of preceding period at annual rate. 2. Thousands, average monthly changes. 3. Percent, average for the final quarter in the period. Source: U.S. Department of Labor, Bureau of Labor Statistics; staff assumptions. Inflation Projections 2016 Measure 2015 2016 2017 2018 2019 1.9 1.8 1.5 1.5 1.7 1.7 1.8 1.8 1.9 1.9 -1.7 -1.7 -1.3 -1.2 -1.5 -1.5 1.7 1.7 2.2 2.2 2.2 2.2 -15.8 -15.8 -10.5 -10.5 15.6 13.2 1.7 .7 2.1 2.2 .4 1.5 .8 1.2 Excluding food and energy Previous Tealbook 1.4 1.4 1.9 1.9 1.6 1.6 1.7 1.7 1.7 1.7 1.8 1.8 1.9 1.9 Prices of core goods imports1 Previous Tealbook -3.3 -3.3 -.9 -.9 1.0 .9 .1 .0 .5 .7 .7 .8 .7 .7 Sept. 2016 Oct. 2016 Nov. 20162 Dec. 20162 Jan. 20172 Feb. 20172 Mar. 20172 1.2 1.2 1.4 1.4 1.4 1.4 1.7 1.6 1.7 1.7 1.9 1.9 2.0 2.0 1.7 1.7 1.7 1.7 1.7 1.7 1.8 1.8 1.7 1.7 1.6 1.6 1.7 1.7 H1 H2 .4 .4 1.1 1.1 Food and beverages Previous Tealbook .3 .3 Energy Previous Tealbook Percent change at annual rate from final quarter of preceding period PCE chain-weighted price index Previous Tealbook 12-month percent change PCE chain-weighted price index Previous Tealbook Excluding food and energy Previous Tealbook 1. Core goods imports exclude computers, semiconductors, oil, and natural gas. 2. Staff forecast. Source: U.S. Department of Commerce, Bureau of Economic Analysis. Page 33 of 100 Domestic Econ Devel & Outlook Authorized for Public Release Authorized for Public Release Domestic Econ Devel & Outlook Class II FOMC – Restricted (FR) December 7, 2016 Labor Market Developments and Outlook (1) Measures of Labor Underutilization Percent U-5* Unemployment rate Part time for economic reasons** Percent 13 Unemployment rate Previous Tealbook Natural unemployment rate with EEB adjustment 12 11 10 10 9 9 8 8 Nov. 11 7 7 6 6 5 5 4 4 3 2002 2004 2006 2008 2010 2012 2014 2016 2 2012 2013 2014 2015 2016 2017 2018 2019 3 * U-5 measures total unemployed persons plus all marginally attached to the labor force, as a percent of the labor force plus persons marginally attached to the labor force. ** Percent of Current Population Survey employment. EEB Extended and emergency unemployment benefits. Source: U.S. Department of Labor, Bureau of Labor Statistics. Level of Payroll Employment* 130 Millions Millions Millions 150 Total (right axis) Private (left axis) Total Previous Tealbook 125 152 150 148 145 Nov. 146 120 140 115 135 144 142 140 138 110 130 105 125 136 134 2002 2004 2006 2008 2010 2012 2014 2016 2012 2013 2014 2015 2016 2017 2018 2019 132 * 3-month moving averages. Source: U.S. Department of Labor, Bureau of Labor Statistics. Change in Payroll Employment* Thousands Thousands 400 Nov. Total Previous Tealbook 200 0 Total Private 2002 2004 2006 2008 2010 2012 2014 2016 350 300 250 -200 200 -400 150 -600 100 -800 50 -1000 2012 2013 2014 2015 2016 2017 * 3-month moving averages. Source: U.S. Department of Labor, Bureau of Labor Statistics. Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research. Page 34 of 100 2018 2019 0 Class II FOMC – Restricted (FR) December 7, 2016 Labor Market Developments and Outlook (2) Labor Force Participation Rate* Percent Labor force participation rate Estimated trend** Nov. 2002 2004 2006 2008 2010 2012 2014 2016 Percent 68.0 67.5 67.0 66.5 66.0 65.5 65.0 64.5 64.0 63.5 63.0 62.5 62.0 Labor force participation rate Previous Tealbook Estimated trend** 65.0 64.5 64.0 63.5 63.0 62.5 62.0 2012 2013 2014 2015 2016 2017 2018 2019 61.5 * Published data adjusted by staff to account for changes in population weights. ** Includes staff estimate of the effect of extended and emergency unemployment benefits. Source: U.S. Department of Labor, Bureau of Labor Statistics; staff assumptions. Initial Unemployment Insurance Claims* Thousands Private Hires, Quits, and Job Openings Percent 700 Hires* Openings** Quits* 650 600 550 4.5 3.5 450 Sept. 3.0 400 2002 2004 2006 2008 2010 2012 2014 2016 * 4-week moving average. Source: U.S. Department of Labor, Employment and Training Administration. 5.0 4.0 500 Nov. 26 5.5 2.5 350 300 2.0 250 1.5 200 2002 2004 2006 2008 2010 2012 2014 2016 * Percent of private nonfarm payroll employment, 3-month moving average. ** Percent of private nonfarm payroll employment plus unfilled jobs, 3-month moving average. Source: Job Openings and Labor Turnover Survey. 1.0 Average Monthly Change in Labor Market Conditions Index Index points 15 10 Q4* 5 0 -5 -10 -15 -20 -25 -30 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 * Value shown for Q4 is an average of November and October data. Source: Labor market conditions index estimated by staff. Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research. Page 35 of 100 2016 -35 Domestic Econ Devel & Outlook Authorized for Public Release Authorized for Public Release Domestic Econ Devel & Outlook Class II FOMC – Restricted (FR) December 7, 2016 Inflation Developments and Outlook (1) (Percent change from year-earlier period) Headline Consumer Price Inflation Percent CPI PCE Percent 6 PCE - Current Tealbook PCE - Previous Tealbook 5 5 4 4 3 3 2 2 1 Oct. 1 0 -1 0 -2 -3 -1 2002 2004 2006 2008 2010 2012 2014 2016 2013 2014 2015 2016 2017 2018 2019 Source: For CPI, U.S. Department of Labor, Bureau of Labor Statistics; for PCE, U.S. Department of Commerce, Bureau of Economic Analysis. Measures of Underlying PCE Price Inflation Percent Trimmed mean PCE Market-based PCE excluding food and energy PCE excluding food and energy Percent 4.0 Core PCE - Current Tealbook Core PCE - Previous Tealbook 3.5 3.5 3.0 3.0 2.5 2.5 2.0 Oct. 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 2013 2014 2015 2016 2017 2018 2019 2002 2004 2006 2008 2010 2012 2014 2016 Source: For trimmed mean PCE, Federal Reserve Bank of Dallas; otherwise, U.S. Department of Commerce, Bureau of Economic Analysis. 0.0 Labor Cost Growth Percent Percent 6 Compensation per hour - Current Tealbook Compensation per hour - Previous Tealbook 5 2004 2006 2008 2010 2012 2014 5 4 4 Nov. 3 3 Q3 Q3 2 2 1 1 0 0 Employment cost index Average hourly earnings Compensation per hour 2002 6 2016 -1 2013 2014 2015 2016 2017 2018 2019 Note: Compensation per hour is for the business sector. Average hourly earnings are for the private nonfarm sector. The employment cost index is for the private sector. Source: U.S. Department of Labor, Bureau of Labor Statistics. Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research. Page 36 of 100 -1 Class II FOMC – Restricted (FR) December 7, 2016 Inflation Developments and Outlook (2) (Percent change from year-earlier period, except as noted) Commodity and Oil Price Levels Dollars per barrel 1967 = 100 220 Brent crude oil history/futures (right axis) 1680 168 CRB spot commodity price index (left axis) 1420 142 1200 120 1000 100 800 80 2200 1000 160 140 800 120 700 100 80 60 600 400 40 500 200 Dollars per barrel Brent crude oil history/futures (right axis) CRB spot commodity price index (left axis) 900 600 Dec. 5 1967 = 100 Dec. 5 60 400 40 20 300 20 2002 2004 2006 2008 2010 2012 2014 2016 2013 2014 2015 2016 2017 2003 2005 2007 2009 2011 2013 2015 2017 Note: Futures prices (dotted lines) are the latest observations on monthly futures contracts. Source: For oil prices, U.S. Department of Energy, Energy Information Agency; for commodity prices, Commodity Research Bureau (CRB). Energy and Import Price Inflation 18 Percent Percent PCE energy prices (right axis) Core import prices (left axis) 15 60 10 Percent Percent PCE energy prices (right axis) Core import prices (left axis) 25 50 8 40 6 9 30 4 6 20 2 3 10 0 0 0 -2 -5 -3 -10 -4 -10 -6 -20 -6 -15 -9 -30 -8 -20 -12 -40 -10 12 Oct. 2002 2004 2006 2008 2010 2012 2014 2016 20 15 10 Oct. 2013 2014 2015 2016 5 0 -25 Source: For core import prices, U.S. Dept. of Labor, Bureau of Labor Statistics; for PCE, U.S. Dept. of Commerce, Bureau of Economic Analysis. Long-Term Inflation Expectations and Compensation Percent 5-to-10-year-ahead TIPS compensation Michigan median next 5 to 10 years SPF PCE median next 10 years 4.0 3.5 Nov. Percent 4.5 5-to-10-year-ahead TIPS compensation Michigan median next 5 to 10 years SPF PCE median next 10 years 4.0 3.5 3.0 3.0 Nov. 2.5 Q4 Nov. 4.5 2.0 1.5 2.5 Q4 Nov. 2.0 1.5 1.0 1.0 2002 2004 2006 2008 2010 2012 2014 2016 2013 2014 2015 2016 Note: Based on a comparison of an estimated TIPS (Treasury Inflation-Protected Securities) yield curve with an estimated nominal off-the-run Treasury yield curve, with an adjustment for the indexation-lag effect. SPF Survey of Professional Forecasters. Source: For Michigan, University of Michigan Surveys of Consumers; for SPF, the Federal Reserve Bank of Philadelphia; for TIPS, Federal Reserve Board staff calculations. Note: The gray shaded bars indicate a period of business recession as defined by the National Bureau of Economic Research. Page 37 of 100 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 The Long-Term Outlook (Percent change, Q4 to Q4, except as noted) Measure 2016 2017 2018 2019 2020 2021 Longer run Real GDP Previous Tealbook 1.8 1.7 2.2 2.2 2.0 1.9 1.8 1.7 1.5 1.5 1.3 1.3 1.7 1.7 Civilian unemployment rate1 Previous Tealbook 4.8 4.9 4.5 4.6 4.3 4.4 4.2 4.4 4.3 4.5 4.4 4.7 5.0 5.0 PCE prices, total Previous Tealbook 1.5 1.5 1.7 1.7 1.8 1.8 1.9 1.9 2.1 2.0 2.1 2.1 2.0 2.0 Core PCE prices Previous Tealbook 1.7 1.7 1.7 1.7 1.8 1.8 1.9 1.9 2.0 2.0 2.1 2.0 2.0 2.0 1.49 1.46 2.47 2.36 3.30 2.99 3.77 3.29 3.91 3.33 3.00 2.75 3.1 2.3 3.5 2.8 3.9 3.2 3.9 3.3 3.9 3.2 3.5 3.2 Federal funds rate1 Previous Tealbook .47 .56 10-year Treasury yield1 Previous Tealbook 2.1 1.8 1. Percent, average for the final quarter of the period. Real GDP Unemployment Rate 4-quarter percent change Potential GDP Real GDP 2004 2007 2010 2013 2016 2019 Percent 5 4 3 2 1 0 −1 −2 −3 −4 −5 2022 10 Unemployment rate 8 Natural rate with EEB adjustment 7 6 5 Natural rate 4 2004 PCE Prices 9 2007 2010 2013 2016 2019 2022 Interest Rates 4-quarter percent change Percent 4 10 9 8 7 6 5 4 3 2 1 0 Total PCE prices 10-year Treasury 3 Triple-B corporate 2 PCE prices excluding food and energy 1 0 Federal funds rate −1 2004 2007 2010 2013 2016 2019 2022 2004 2007 2010 2013 2016 2019 2022 Note: In each panel, shading represents the projection period, and dashed lines are the previous Tealbook. Page 38 of 100 Class II FOMC – Restricted (FR) December 7, 2016 Evolution of the Staff Forecast Change in Real GDP Percent, Q4/Q4 4 2015 3 2016 2017 2 2018 2019 1 9/11 10/23 12/11 1/22 2013 3/12 4/23 6/11 7/23 9/10 10/22 12/10 1/21 2014 3/11 4/22 6/10 7/22 9/9 2015 10/21 12/9 1/20 3/9 4/20 6/8 7/20 9/14 10/26 12/7 0 2016 Tealbook publication date Unemployment Rate Percent, fourth quarter 7.0 6.5 2015 6.0 5.5 5.0 2017 2016 2018 4.5 2019 9/11 10/23 12/11 1/22 2013 3/12 4/23 6/11 7/23 9/10 10/22 12/10 1/21 2014 3/11 4/22 6/10 7/22 9/9 2015 10/21 12/9 1/20 3/9 4/20 6/8 7/20 4.0 9/14 10/26 12/7 3.5 2016 Tealbook publication date Change in PCE Prices excluding Food and Energy Percent, Q4/Q4 2.5 2016 2018 2017 2019 2.0 1.5 2015 1.0 0.5 9/11 10/23 12/11 1/22 2013 2014 3/12 4/23 6/11 7/23 9/10 10/22 12/10 1/21 3/11 4/22 6/10 7/22 9/9 2015 10/21 12/9 1/20 2016 Tealbook publication date Page 39 of 100 3/9 4/20 6/8 7/20 9/14 10/26 12/7 0.0 Domestic Econ Devel & Outlook Authorized for Public Release Domestic Econ Devel & Outlook Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 (This page is intentionally blank.) Page 40 of 100 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 International Economic Developments and Outlook Foreign real GDP growth rebounded to 3 percent in the third quarter from an unusually subdued 1¼ percent pace in the second quarter. This bounceback, which was ½ percentage point greater than we had expected, was primarily driven by stronger growth in Canada and Mexico, where the second-quarter pothole was concentrated. We see foreign growth slowing to 2¼ percent in the current quarter. 2½ percent, supported by accommodative monetary policies in the advanced foreign economies (AFEs) and a moderate recovery in South America. An important development affecting the foreign outlook has been the prospect of U.S. fiscal expansion, which has several distinct and offsetting effects in our baseline. First, higher U.S. GDP growth boosts U.S. imports and thus economic activity abroad, although, as discussed in the Domestic Economic Developments and Outlook section, it will take a couple of years for the benefits to materialize. Second, anticipation of looser U.S. fiscal policy has likely already contributed to strengthening the dollar, which should raise foreign competitiveness and growth. But such anticipation has also pushed up interest rates here and abroad, which should restrain foreign growth, especially in some vulnerable emerging market economies (EMEs) where higher interest rates have increased financial stresses. All told, relative to the October Tealbook, the foreign outlook is down slightly in the near term as the tighter financial conditions are felt, but up later in the forecast period as the effect of tax cuts on U.S. spending and imports more fully shows through. As usual, considerable uncertainty attends the foreign outlook. Much of this uncertainty is now about the course of U.S. policy. A stronger fiscal expansion than we are assuming would likely boost foreign growth, while less expansion would lower it. As there is a wide range of possible trade policy actions that the new U.S. government could take, we are not assuming any changes in trade policy in this forecast, but actions that raise barriers to international trade would likely lower foreign growth. Moreover, the higher interest rates and stronger dollar built into our current outlook may lead to greater financial stress in EMEs—and, thus, greater shortfalls in their growth—than we are assuming in our baseline projection; see the “Stronger Dollar and EME Financial Turbulence” scenario in the Risks and Uncertainty section. In addition, a number of risks to European growth remain salient, including negotiations over Brexit, possible gains by Page 41 of 100 Int’l Econ Devel & Outlook Over the remainder of the forecast period, we project foreign growth to edge up to Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 anti-EU parties in upcoming elections, and difficulties in recapitalizing the banking system (particularly following the failed constitutional referendum in Italy). Finally, risks associated with the vulnerable Chinese financial sector are never far from our minds. Inflation in most AFEs has increased in recent months but remains significantly below central bank targets. In line with still-muted core inflation readings and sluggish elimination of slack, we see AFE inflation rising only gradually, reaching 1½ percent in Int’l Econ Devel & Outlook the euro area and 1¼ percent in Japan in 2019. By contrast, in the United Kingdom, where the substantial depreciation of the pound since the summer is pushing up consumer prices, we expect inflation will be well above the Bank of England’s (BOE) 2 percent target in 2017. In the EMEs, as food prices stabilize in China and as exchange rate depreciation in some countries passes through to prices, inflation is expected to increase to 2¾ percent in the fourth quarter and stay slightly above this rate thereafter. All told, our outlook for inflation abroad is little changed despite the recent OPEC agreement to cut oil production. Although this agreement led to an increase in spot oil prices, this increase merely reversed declines that had taken place earlier in the intermeeting period, and the overall projected path of oil prices is little changed from the previous Tealbook. Given the subdued outlook for inflation, we continue to assume that monetary policy in the AFEs will stay highly accommodative through 2019. We expect that the BOE will raise the Bank Rate 25 basis points in late 2017 in response to above-target inflation, but only to ½ percent. In the EMEs, the central banks of Turkey and Mexico raised policy rates to counteract inflationary pressures from recent exchange rate depreciation, while the central banks of Brazil and Argentina, with some improvement in their inflation situation, cut their policy rates to support growth. ADVANCED FOREIGN ECONOMIES • Canada. Real GDP grew 3.5 percent in the third quarter after contracting 1.3 percent in the second quarter. The expansion was led by private consumption and a strong rebound in energy exports following disruptive wildfires in May. More-recent indicators, such as manufacturing PMIs through November, suggest a moderation in growth in the current quarter. We expect GDP growth to average 2 percent in 2017, supported by a weak Canadian dollar and accommodative monetary and fiscal policies, before settling a bit below 2 percent by mid-2018. Relative to the October Tealbook, this projection is a touch weaker through Page 42 of 100 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 mid-2017, reflecting somewhat tighter financial conditions, and slightly stronger in 2019 on the markup in U.S. growth. • Euro Area. Real GDP grew 1.4 percent in the third quarter. More-recent indicators, such as rising composite PMIs and strong retail sales, suggest that growth picked up to 1¾ percent in the current quarter. Moving forward, we expect growing political backlash against fiscal austerity to lead to slightly more expansionary fiscal policies, such as in France and Italy. Accordingly, with monetary policy remaining this projection is slightly higher than in the October Tealbook, reflecting better-thanexpected indicators and more-expansionary fiscal policy both in the United States and the euro area. That said, our growth projections for Italy and other vulnerable economies are slightly weaker than in the previous Tealbook, reflecting tighter financial conditions. With anti-EU sentiment prevalent across the euro area and with national elections in France, Germany, and possibly Italy looming next year, elevated political uncertainty is likely to trigger bouts of volatility and financial stress. Moreover, deep-seated weaknesses in the banking sector persist. In particular, Italian banks have been struggling to raise capital, and their efforts will likely be complicated by political uncertainty following the Italian referendum. Our projection assumes that these headwinds will weigh on the euro-area recovery but not derail it. However, more-dire outcomes for European banks remain a significant risk, as discussed in the “Banking Crisis in Europe” scenario in the Risks and Uncertainty section. As core inflation and inflation expectations remain persistently low, inflation is projected to rise only slowly, from just above 1 percent in the third quarter to 1½ percent in late 2018. Accordingly, we expect that this week the European Central Bank (ECB) will commit to purchasing assets at least through September 2017. We assume that the ECB will wait until late 2017 to begin tapering purchases and until early 2018 to cease them entirely. • Japan. Real GDP growth rebounded to 2.2 percent in the third quarter, 1¼ percentage points higher than estimated in the October Tealbook. However, this rebound largely reflects a plunge in imports and payback from earlier earthquakerelated disruptions, while domestic demand was disappointing. Indeed, more-recent data, such as industrial production for October, point to only moderate underlying Page 43 of 100 Int’l Econ Devel & Outlook accommodative, we see GDP growth edging up close to 2 percent by 2019. Overall, Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 momentum. Accordingly, we expect growth to slow to about 1 percent through the end of 2018 before decelerating to zero in 2019 as a result of a planned consumption tax hike. This projection is slightly higher than in the October Tealbook, primarily owing to a weaker yen. • United Kingdom. Real GDP growth slowed to 2 percent in the third quarter from 2.7 percent in the second quarter because of somewhat weaker domestic demand. Stronger-than-expected indicators suggest growth edged down just a little in the current quarter, but we still see it falling to 1¼ percent early next year. Thereafter, Int’l Econ Devel & Outlook growth recovers to 1¾ percent by 2019. Our medium-term growth projection is a touch weaker than in the October Tealbook: A recent U.K. government fiscal plan that is more contractionary than we previously anticipated as well as lessaccommodative monetary policy are only partially offset by spillovers from expected U.S. fiscal expansion and news that a “hard” Brexit may be less likely. 1 Although inflation is projected to slow to 1¾ percent in the fourth quarter, given weak incoming data, we still expect quarterly inflation to peak at 3½ percent in the first quarter of 2017 because of past pound depreciation and to remain above the BOE’s 2 percent target through the end of the year. Accordingly, we now expect that the BOE will increase the Bank Rate 25 basis points in the second half of 2017. We also assume the BOE will complete its sovereign bond purchase program early next year and continue purchasing corporate bonds through the first quarter of 2018. EMERGING MARKET ECONOMIES • Mexico. Mexican real GDP growth bounced back from its earlier pothole much more sharply than we anticipated, surging to 4 percent in the third quarter from just 1 percent in the first half of the year, almost 2 percentage points above our October Tealbook estimate. Household demand was robust, supported by rapid credit growth amid low unemployment. However, we see Mexican GDP growth moderating to 2 percent in the current quarter, consistent with recent declines in consumer and business confidence as well as manufacturing PMI. Growth should remain at this pace over most of 2017 before picking up to 2¾ percent by 2019, supported by the 1 The lower likelihood of a hard Brexit partly results from a ruling in early November by the U.K. High Court that the U.K. parliament must consent before the government begins the exit process from the European Union by triggering Article 50 of the Lisbon Treaty. The government appealed the decision, and the U.K. Supreme Court is expected to unveil its final decision early next year. Page 44 of 100 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 peso’s depreciation, a pickup in U.S. manufacturing, and energy-sector reforms. Relative to the October Tealbook, we have lowered growth a bit in the near term as a result of tightened financial conditions. Inflation should edge up to almost 4 percent in the current quarter, pressured by pass-through from the peso’s depreciation. To keep inflationary pressures in check, the Bank of Mexico raised its policy rate in midNovember and is expected to tighten its stance further at its next meeting in midDecember. With medium- and long-term inflation expectations well-anchored, we • Brazil. Brazil’s deepest recession on record continued in the third quarter, with real GDP declining 3.3 percent. Investment plunged at a double-digit rate amid a cutback in access to subsidized credit and resurfacing worries about the political situation, while household demand continued its decline amid rising unemployment. The disappointing tone of incoming data—especially the step-down in industrial production in October and in consumer confidence in November—prompted us to factor in a further GDP decline in the current quarter. We expect Brazil’s recovery to begin in 2017 but to be very gradual, with restrictive monetary and fiscal policies weighing on demand. In late November, the central bank cut its policy rate 25 basis points to 13.75 percent in response to the weak economy and some signs that inflationary pressures are abating. We expect inflation to ease to the 4.5 percent inflation target by 2019. • China. After slowing to 6.8 percent in the third quarter, real GDP growth is expected to ease further to 6¼ percent in the current quarter. Most of this slowdown reflects continued decline in investment as fiscal and monetary stimulus tapers off. Macroprudential measures introduced in October are starting to reduce house sales, and we also expect real estate investment to slow. Meanwhile, growth of both exports and imports has been sluggish in recent months. All told, growth for 2016 is projected to be 6¾ percent, within the authorities’ target range of 6½ to 7 percent. Growth should slow to 5¾ percent by the end of the forecast period, in line with declining potential growth. Falling food prices pushed down inflation to an estimated 1½ percent in the third quarter. We expect inflation to rebound as food prices stabilize before settling at around 2½ percent by early next year. • Other Emerging Asia. Growth in the region held at 3½ percent in the third quarter, as the payback in Hong Kong from outsized second-quarter growth was offset by a Page 45 of 100 Int’l Econ Devel & Outlook see inflation settling down to about 3¼ percent by early 2018. Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 surge in India linked to strong private consumption. In line with recent indicators pointing to a slowdown in economic activity, especially in India and South Korea, we expect growth in the region to moderate to 3 percent in the current quarter. Going forward, growth should rise to 3½ percent by mid-2017 as both domestic and external demand firm. o During the intermeeting period, the Indian government, in an effort to combat corruption and tax evasion, demonetized overnight the two highest Int’l Econ Devel & Outlook denomination bank notes, equivalent to $7.50 and $15, which accounted for almost 90 percent of the value of currency in circulation. 2 Since this move, we have received November PMI indicators, which have led us to revise down growth in the current and next quarters. o In South Korea, a scandal involving President Park, combined with the ongoing crisis in the shipping industry related to the bankruptcy of one of Korea’s largest shipping firms, has contributed to a plunge in consumer confidence. These developments have led us to revise down a touch Korean growth in the current quarter. 2 Under this demonetization program, holders of the bank notes have until December 30 to trade in their old bank notes at any bank branch. However, if holders cannot justify how they accumulated the bank notes, they have to pay a penalty of around 60 percent of their value. As of early December, around 55 percent of the estimated bank notes in circulation, representing $130 billion, have been traded in. Page 46 of 100 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Int’l Econ Devel & Outlook (This page is intentionally blank.) Page 47 of 100 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 The Foreign GDP Outlook Int’l Econ Devel & Outlook Real GDP* Percent change, annual rate H1 2016 Q3 Q4 1. Total Foreign Previous Tealbook 1.8 1.7 2.9 2.5 2. Advanced Foreign Economies Previous Tealbook Canada Euro Area Japan United Kingdom 1.3 1.2 0.7 1.6 1.4 2.2 Emerging Market Economies Previous Tealbook China Emerging Asia ex. China Mexico Brazil 2.4 2.2 6.8 3.2 1.1 -1.8 3. 4. 5. 6. 7. 8. 9. 10. 11. Q1 2017 Q2 2018 2019 H2 2.2 2.3 2.4 2.5 2.5 2.6 2.5 2.6 2.6 2.6 2.6 2.6 2.4 2.3 3.5 1.4 2.2 2.0 1.8 1.7 2.1 1.7 0.9 1.7 1.8 1.8 2.3 1.6 1.0 1.2 1.8 1.9 2.2 1.6 1.0 1.2 1.8 1.8 2.0 1.7 0.9 1.4 1.7 1.8 1.8 1.8 0.8 1.4 1.7 1.6 1.9 1.9 0.1 1.6 3.5 2.8 6.8 3.5 4.0 -3.3 2.7 2.9 6.3 3.0 2.0 -1.0 3.0 3.0 6.2 3.3 2.0 0.5 3.1 3.2 6.1 3.6 2.0 1.0 3.3 3.3 6.0 3.7 2.2 1.7 3.4 3.4 5.8 3.6 2.4 2.1 3.5 3.5 5.7 3.5 2.8 2.2 * GDP aggregates weighted by shares of U.S. merchandise exports. Total Foreign GDP Foreign GDP Percent change, annual rate Percent change, annual rate 6 Current Previous Tealbook 8 Current Previous Tealbook 7 5 6 Emerging market economies 4 5 4 3 3 2 2 1 1 0 Advanced foreign economies 0 2011 2013 2015 2017 2019 -1 2011 Page 48 of 100 2013 2015 2017 2019 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 The Foreign Inflation Outlook Consumer Prices* Percent change, annual rate 2016 Q3 Q4 Q1 2017 Q2 H2 1. Total Foreign Previous Tealbook 1.8 1.8 1.7 1.7 2.2 2.5 2.4 2.5 2.4 2.4 2. Advanced Foreign Economies Previous Tealbook Canada Euro Area Japan United Kingdom 0.5 0.4 1.6 0.0 -0.5 0.5 0.7 0.8 0.9 1.1 -0.9 1.9 1.4 1.6 2.2 1.3 0.3 1.7 1.6 1.6 2.2 1.3 0.6 3.5 Emerging Market Economies Previous Tealbook China Emerging Asia ex. China Mexico Brazil 2.8 2.8 2.7 1.6 2.5 9.6 2.3 2.3 1.4 1.1 3.8 6.5 2.7 3.1 1.8 2.4 3.9 3.6 3.0 3.1 2.4 2.4 3.5 5.3 3. 4. 5. 6. 7. 8. 9. 10. 11. 2018 2019 2.5 2.4 2.5 2.5 2.6 2.6 1.6 1.6 2.2 1.3 0.8 2.9 1.5 1.5 1.9 1.4 1.0 2.3 1.6 1.6 1.9 1.5 1.1 2.0 1.8 1.9 2.0 1.5 2.4 1.9 3.1 3.0 2.5 2.7 3.4 5.4 3.1 3.1 2.5 3.0 3.4 5.2 3.1 3.1 2.5 3.2 3.2 4.9 3.1 3.1 2.5 3.4 3.2 4.5 Int’l Econ Devel & Outlook H1 * CPI aggregates weighted by shares of U.S. non-oil imports. Foreign Monetary Policy AFE Policy Rates AFE Central Bank Balance Sheets Percent Percent of GDP 2.5 EME Policy Rates Percent 100 14 Brazil 2.0 80 12 1.5 10 60 8 Canada 1.0 Japan China* 40 0.5 United Kingdom Euro area Japan 6 Mexico 4 Korea 2 20 0.0 United Kingdom Euro area Canada -0.5 2011 2013 2015 2017 2019 0 2010 2012 2014 Page 49 of 100 2016 0 2011 2013 2015 2017 2019 * 1-year benchmark lending rate. Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Recent Foreign Indicators Nominal Exports Industrial Production Jan. 2011 = 100 Jan. 2011 = 100 125 Foreign AFE* EME** Foreign AFE* EME** 120 115 115 110 110 105 105 100 95 100 Int’l Econ Devel & Outlook 90 85 80 2011 2012 2013 2014 2015 2016 * Includes Australia, Canada, euro area, Japan, Sweden, Switzerland, U.K. ** Includes Argentina, Brazil, Chile, Colombia, Hong Kong, India, Indonesia, Israel, Korea, Malaysia, Mexico, Philippines, Russia, Singapore, Taiwan, Thailand. Retail Sales 95 2011 2012 2013 2014 2015 2016 * Includes Canada, euro area, Japan, Sweden, U.K. ** Includes Argentina, Brazil, Chile, China, Colombia, India, Indonesia, Israel, Korea, Malaysia, Mexico, Philippines, Russia, Singapore, Taiwan, Thailand. Employment 12-month percent change 4-quarter percent change 12 Foreign AFE* EME** Foreign AFE* EME** 10 5 4 8 6 3 4 2 2 1 0 -2 2011 2012 2013 2014 2015 2016 * Includes Canada, euro area, Japan, Sweden, Switzerland, U.K. ** Includes Brazil, Chile, China, Korea, Mexico, Taiwan. Headline Core* 2012 2013 2014 2015 2016 * Includes Australia, Canada, euro area, Japan, Sweden, Switzerland, U.K. ** Includes Brazil, Chile, Colombia, Hong Kong, Israel, Korea, Mexico, Philippines, Russia, Singapore, Taiwan, Thailand, Turkey. Consumer Prices: Advanced Foreign Economies 12-month percent change 0 2011 Consumer Prices: Emerging Market Economies 12-month percent change 7 Headline* Ex. food--Emerging Asia** 6 Ex. food--Latin America** 3.0 2.5 5 2.0 4 1.5 3 2 1.0 1 0.5 0 0.0 2011 2012 2013 2014 2015 Note: Includes Canada, euro area, Japan, U.K. * Excludes all food and energy; staff calculation. Source: Haver Analytics. 2016 -1 2011 2012 2013 2014 2015 2016 * Includes Brazil, Chile, China, Colombia, Hong Kong, India, Indonesia, Korea, Malaysia, Mexico, Philippines, Singapore, Taiwan, Thailand. ** Excludes all food; staff calculation. Excludes Argentina and Venezuela. Page 50 of 100 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Evolution of Staff’s International Forecast Total Foreign GDP Percent change, Q4/Q4 4 2018 3 2017 2019 2 12/11 1/22 3/12 4/23 2014 6/11 7/23 9/10 10/22 12/10 1/21 3/11 4/22 2015 6/10 7/22 9/9 10/21 12/9 1/20 2016 3/9 4/20 6/8 7/20 9/14 10/26 12/7 1 Tealbook publication date Total Foreign CPI Percent change, Q4/Q4 3.0 2019 2018 2017 2016 2.5 2.0 12/11 1/22 3/12 4/23 2014 6/11 7/23 9/10 10/22 12/10 1/21 3/11 4/22 2015 6/10 7/22 9/9 10/21 12/9 1/20 2016 3/9 4/20 6/8 7/20 9/14 10/26 12/7 1.5 Tealbook publication date U.S. Current Account Balance Percent of GDP 2016 -2 -3 -4 2019 2017 -5 2018 12/11 1/22 3/12 4/23 2014 6/11 7/23 9/10 10/22 12/10 1/21 3/11 4/22 2015 6/10 7/22 Tealbook publication date Page 51 of 100 9/9 10/21 12/9 1/20 2016 3/9 4/20 6/8 7/20 9/14 10/26 12/7 -6 Int’l Econ Devel & Outlook 2016 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Int’l Econ Devel & Outlook (This page is intentionally blank.) Page 52 of 100 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Financial Developments The U.S. election results were the primary catalyst for developments in financial markets during the intermeeting period. Overall, asset price movements and the policy path in the United States appeared to be driven largely by expectations of more expansive fiscal policy, as well as potential changes to trade, regulatory, and other policies. In addition, prices of some risky assets may have reflected an improvement in risk sentiment. Global markets also responded strongly to U.S. developments. Meanwhile, incoming U.S. economic data and Federal Reserve communications reinforced market participants’ expectations for a policy rate increase at the December meeting. Based on a straight read of market quotes, the probability of a rate hike in December increased to about 90 percent from around 60 percent just prior to the November FOMC meeting. Further out, the market-implied path of the policy rate moved up 55 basis points at the end of 2018, to its highest level since early January. Yields on 2-, 5-, and 10-year nominal Treasury securities increased 30, 55, 67 basis points, amid higher uncertainty for longer-dated interest rates. Both the 5-year and the 5-to-10-year TIPS-based measures of inflation compensation continued to move up, climbing 24 basis points and 34 basis points, respectively. The S&P 500 stock price index increased 5 percent, on net, and measures of stock price volatility declined. Credit spreads on corporate bonds narrowed. The broad dollar index appreciated 2¾ percent, with the dollar strengthening against nearly all major and emerging market currencies. Most private borrowing rates also rose, but available indicators suggest that financing conditions for nonfinancial firms and households remained broadly accommodative. Page 53 of 100 Financial Developments and 60 basis points, respectively, and the 5-to-10-year forward rate rose Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Policy Expectations and Treasury Yields Selected Interest Rates Percent Percent 1.60 1.55 1.50 1.45 1.40 1.35 Nov. FOMC statement Oct. employment report Election results Nov. FOMC minutes Oct. retail sales 2.7 Nov. OPEC employment report agreement 2.6 2.5 2.4 2.3 1.30 2.2 10-year Treasury yield (right scale) 1.25 1.20 2.1 2.0 Dec. 2017 Eurodollar (left scale) 1.15 1.10 1.05 1.9 1.8 1.00 1.7 Nov. 3 Nov. 7 Nov. 9 Nov. 11 Nov. 15 Nov. 17 Nov. 21 Nov. 23 Nov. 25 Nov. 29 Dec. 1 Dec. 5 Dec. 7 Note: 5−minute intervals, 8:00 a.m. to 4:00 p.m. Data shown are for 2016. Source: Bloomberg. Probability Distribution of the Timing of Next Rate Increase Implied by Federal Funds Futures Implied Federal Funds Rate Percent Most recent: December 6, 2016 Nov. FOMC: November 1, 2016 Percent 2.0 Most recent: December 6, 2016 Nov. FOMC: November 1, 2016 100 90 1.5 80 70 60 1.0 50 Financial Developments 40 30 0.5 20 10 0 Dec. 14 >= Feb. 1 2016 2017 Note: Probabilities implied by a binominal tree model fitted to settlement prices on federal funds futures contracts taken at 2 p.m. CST under the assumption that the effective federal funds rate before the next FOMC meeting is equal to its 30−day moving average. Source: CME Group; Federal Reserve Board staff estimates. Note: Path is estimated using overnight index swap quotes with a spline approach and a term premium of zero basis points. Source: Bloomberg; Federal Reserve Board staff estimates. Treasury Yield Curve Inflation Compensation Nov. 2 Percent 2016 2017 2018 2019 Percent 4.0 Daily Most recent: December 6, 2016 Nov. FOMC: November 1, 2016 2020 Nov. FOMC 3.5 0.0 3.5 3.0 3.0 2.5 5 to 10 years ahead 2.5 Dec. 6 2.0 2.0 1.5 1.5 Next 5 years* 1.0 1.0 2 5 10 20 30 0.5 Maturity in years Note: Smoothed yield curve estimated from off-the-run Treasury coupon securities. Yields shown are those on notional par Treasury securities with semiannual coupons. Source: Federal Reserve Bank of New York; Federal Reserve Board staff estimates. 2015 2016 Note: Estimates based on smoothed nominal and inflation-indexed Treasury yield curves. * Adjusted for lagged indexation of Treasury Inflation-Protected Securities (carry effect). Source: Federal Reserve Bank of New York; Federal Reserve Board staff estimates. Page 54 of 100 0.5 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 POLICY EXPECTATIONS AND ASSET MARKET DEVELOPMENTS Domestic Developments Federal Reserve communications over the intermeeting period and domestic economic data releases reportedly reinforced investors’ expectations of an increase in the target range for the federal funds rate at the December meeting, with a straight read of federal funds futures contracts suggesting a 90 percent probability of a rate hike in December. Looking further ahead, investors marked up considerably their expected path for the policy rate over the intermeeting period, with the federal funds rate implied by OIS quotes at the end of 2017 and 2018 moving up 26 basis points and 55 basis points, respectively. Most of the steepening of the market-implied policy path occurred following the election, apparently reflecting investors’ perception of greater-thanexpected fiscal stimulus. Market-based measures of uncertainty regarding monetary policy at horizons beyond one year moved up, suggesting that some of the firming in OIS rates could reflect a rise in term premiums. Indeed, after adjusting for term premiums using the staff’s preferred model, the expected policy rate by the end of 2017 and 2018 rose 13 basis points and 36 basis points, respectively.1 Nominal Treasury yields moved up, on net, since the November FOMC meeting, and longer-term yields were boosted by roughly equal increases in real yields and inflation compensation. In particular, 5-year and 5-to-10-year TIPS-based measures of inflation compensation rose 24 basis points and 34 basis points, respectively, continuing their upward trajectory over the second half of this year. Market-based measures of inflation compensation based on inflation swaps posted similar gains. Quotes on inflation caps and floors suggest that the rise in inflation compensation reflects in part higher costs of protection against above-target inflation outcomes. In addition, some of the rise in inflation compensation appears related to the recent climb in oil prices, with a notable boost after OPEC’s agreement at its November 30 meeting to cut production. Staff models suggest that a sizable portion of the run-up in medium- and longterm nominal yields reflected increases in real term premiums and inflation risk premiums, which jumped immediately following the election. Part of the increase in term premiums may stem from the upward pressure on yields arising from the expected 1 These model-based increases are somewhat larger than the revisions to the staff’s projection for the federal funds rate based on the inertial Taylor (1999) rule at these horizons. Page 55 of 100 Financial Developments with 2-, 5- and 10-year yields rising 30, 55, and 60 basis points, respectively. Medium- Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Domestic Asset Markets S&P 500 Stock Price Index S&P 500 Sectors Log scale; Nov. 1, 2016 = 100 Percent; Nov. 1, 2016 = 100 120 140 Nov. FOMC Daily Weekly S&P 500 Bank Index S&P 500 S&P 500 Real Estate Index S&P 500 Utilities Index 110 Dec. 6 Nov. FOMC 130 120 100 110 Dec. 2 90 100 90 80 2015 80 2016 Feb. Apr. Source: Bloomberg. Source: Bloomberg. Implied Volatility on S&P 500 (VIX) June Aug. 2016 Oct. Equity Risk Premium Log scale, percent Historical average Percent 70 60 50 Nov. FOMC Daily Dec. Monthly Expected real yield on 10-year Treasury* Expected 10-year real equity return 40 Nov. FOMC 9 6 20 +Dec. Financial Developments Dec. 6 + 1992 10-Year Corporate Bond Spreads Basis points 300 280 700 Nov. FOMC Daily Triple-B (left scale) High-yield (right scale) 650 600 260 550 240 500 220 450 200 Dec. 6 180 160 400 350 300 2015 2000 2008 2016 * Off-the-run 10-year Treasury yield less Philadelphia Fed 10-year expected inflation. + Denotes latest observation using daily interest rates and stock prices as well as staff forecast of corporate profits. Source: Staff projections. Note: Historical average is taken from 1990 onward. Source: Chicago Board Options Exchange. 0 -3 2016 Basis points 3 6 10 320 15 12 30 2015 18 2016 Note: Spreads over 10-year Treasury yield. Source: Staff estimates of smoothed yield curves based on Merrill Lynch bond data and smoothed Treasury yield curve. Page 56 of 100 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 expansion in Treasury debt associated with deficit-financed fiscal stimulus, as well from the increase in uncertainty about the future level of long-term rates, as evidenced by the rise in implied volatilities from swaptions. Respondents to the Desk’s December surveys of primary dealers and market participants assigned a probability of near 90 percent to a rate hike in December , up from 55 percent in the November surveys. The most likely path of the target federal funds rate was unchanged through the end of 2017 but shifted up about 25 basis points in 2018 for both the median dealer and the median investor relative to the November surveys. Survey respondents were also asked to rate the importance of a range of factors that potentially contributed to the recent increase in the 10-year Treasury yield. The median respondent in each survey rated changes in the outlook for U.S. growth and inflation as the most important factors driving the rise in the 10-year yield, which were primarily linked to changes in the outlook for federal government expenditures and for tax policy. Broad U.S. equity price indexes appreciated about 5 percent since the November FOMC meeting, boosted by expectations of stronger growth and by improved risk sentiment, with much of the rise coming after the election.2 Share prices for the financial sector outperformed the broader market. Bank equities, in particular, surged about profitability. These expectations likely reflect in part the steepening of the yield curve and the possibility of a less stringent future regulatory environment. Meanwhile, stock prices of sectors that typically benefit from lower interest rates, such as utilities, decreased somewhat. One-month-ahead option-implied volatility on the S&P 500—the VIX—declined since the election and ended the period close to its lowest level this year. Implied volatilities at longer horizons also fell, though by less. In addition, spreads on yields of nonfinancial corporate bonds over those of comparable-maturity Treasury securities narrowed for both investment- and speculative-grade firms. 2 Immediately following the close of the polls, global stock prices moved down sharply; however, these moves reversed within hours for U.S. equity prices. And despite notable price volatility, overall market functioning was characterized as generally “orderly.” Page 57 of 100 Financial Developments 21 percent, reportedly in response to investors’ expectations of greater future bank Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Foreign Developments Policy Expectations 10-Year Sovereign Yields Percent Daily Daily Nov. FOMC United States Percent 3.0 Nov. FOMC 2.5 1.0 Dec. 6 1.5 United Kingdom Dec. 6 Germany 1.0 United Kingdom 0.5 Japan 0.0 June Aug. Oct. 0.5 0.0 -0.5 Euro area Japan Apr. 1.5 United States 2.0 2.0 -0.5 Dec. Apr. June Aug. Oct. -1.0 Dec. 2016 2016 Source: Bloomberg. Note: 3-day moving average of 1-month OIS rates, 24 months ahead. Source: Bloomberg. AFE Exchange Rates Equities Nov. 1, 2016 = 100 Daily Dollar appreciation Euro AFE Yen Pound Nov. 1, 2016 = 100 130 Nov. FOMC Nov. FOMC Daily S&P Eurostoxx Nikkei MSCI EME* 120 110 120 110 100 Financial Developments 100 Dec. 6 Dec. 6 90 80 Apr. June Aug. Oct. Dec. Apr. 2016 Emerging Market Flows and Spreads Billions of dollars Daily 450 Brazilian real Korean won Mexican peso EME 400 10 350 Dec. 6 EMBI+ Dollar appreciation Nov. FOMC 250 -5 200 -10 150 -15 Dec. 6 2016 Aug. Oct. 100 90 Dec. Apr. June Aug. 2016 Note: Flows exclude intra-China flows. Spreads are emerging market bond spreads over zero-coupon Treasury securities. Source: Emerging Portfolio Fund Research. 120 110 100 June 140 130 300 0 Apr. 80 Dec. Nov. 1, 2016 = 100 500 15 5 Oct. EME Exchange Rates Basis points Bond flows (left scale) Equity flows (left scale) 20 2016 Aug. * MSCI EME local currency index. Source: Bloomberg. Source: Bloomberg. 25 June 90 Source: Bloomberg. Page 58 of 100 Oct. 80 Dec. Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Foreign Developments Since the November FOMC meeting, movements in foreign financial markets have been largely driven by U.S. developments, as investors assessed potential policy changes resulting from the U.S. presidential election. Spillovers from U.S. markets lifted yields and equity prices in most advanced foreign economies (AFEs). However, the U.S. election weighed on investor sentiment toward the emerging market economies (EMEs), where currencies depreciated and asset prices declined. Following the U.S. election, AFE sovereign yields moved up along with U.S. yields, albeit by less. On net, 10-year yields ended the intermeeting period 42 basis points higher in Canada, nearly 20 basis points higher in Germany, and about 10 basis points higher in Japan and the United Kingdom. In Italy, the “No” vote at the constitutional referendum and expectations of the Italian prime minister’s resignation raised concerns that the recapitalization of the Italian banking sector would become more difficult. In the event, Italian bond and bank equity prices quickly reversed some initial declines, and markets outside of Italy were largely unaffected. The dollar appreciated notably against most AFE currencies as increases in U.S. yields and policy expectations outpaced the corresponding movements abroad. In by expectations for additional U.S. policy changes, such as a tax holiday on profits earned abroad, which could increase U.S. firms’ repatriation of foreign cash reserves. On net, the dollar is about 3 percent stronger against the euro and about 9 percent stronger against the yen. In contrast, the dollar depreciated against the pound following a statement by the Bank of England that suggested less accommodative monetary policy and following other political developments that were interpreted by investors as suggesting a softer Brexit. In the emerging market economies, markets turned down following the U.S. election. Market participants attributed EME currency depreciation and asset price declines to a number of factors, including higher global interest rates and the possibility of more protectionist U.S. trade policy. EME bond and equity mutual funds (as measured by Emerging Portfolio Fund Research) saw very large outflows as sovereign spreads widened and equity price indexes declined. In addition, EME currencies depreciated sharply, with the Mexican peso and Brazilian real falling by about 6 percent on net. The Chinese renminbi also weakened against the dollar but by less than 2 percent. Capital Page 59 of 100 Financial Developments addition to expectations for greater policy divergence, the dollar may have been boosted Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Banking Developments and Short−Term Funding Markets CP and CDs: Totals and Amounts Held by MMFs Prime and Government MMF Assets under Management Billions of dollars Reform Nov. implementation FOMC Weekly 3000 Billions of dollars Weekly 2500 2000 Ex. conversions Prime Nov. 30 Nov. FOMC Total CP outstanding Total CDs outstanding CP held by MMFs CDs held by MMFs 1500 1250 1000 1500 Nov. 29 1000 Government 1750 500 Ex. conversions 500 July Nov. 2014 Mar. July 2015 Nov. Mar. July 2016 0 Nov. 250 Feb. Change in Large Time Deposits Billions of dollars Monthly rate, s.a. Large banks Small banks Foreign banks 50 40 30 20 H1 Q1 H2 Nov. (e) Q2 Q3 Oct. 10 0 Financial Developments −10 −20 −30 −40 −50 2005 2007 2009 2011 2013 2015 May 2015 Aug. Nov. Feb. May Aug. 2016 Nov. Note: Commercial paper (CP) includes asset−backed commercial paper. CD is certificate of deposit; MMF is money market fund. Source: Depository Trust & Clearing Corporation; iMoneyNet. Note: Conversions include fund closures. Source: Calculations by the Federal Reserve Board based on data from the Investment Company Institute. 750 2016 Note: Yearly rates are Q4 to Q4, half−years are based on Q4 and Q2 average levels, and quarterly and monthly annual rates use corresponding average levels. Large banks are defined as the largest 25 banks by assets. e Estimate. Source: Federal Reserve Board, Form FR 2644, Weekly Report of Selected Assets and Liabilities of Domestically Chartered Commercial Banks and U.S. Branches and Agencies of Foreign Banks. Page 60 of 100 0 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 outflows from China have picked up again in the past few months, leading Chinese authorities to tighten capital controls. Currency weakness prompted the Bank of Mexico and the Central Bank of Turkey to raise their key interest rates 50 basis points, and Asian central banks reportedly intervened in foreign exchange markets. Investor sentiment toward oil producers improved somewhat later in the period following OPEC’s decision to reduce supply. SHORT-TERM FUNDING MARKETS, BANKING-SECTOR DEVELOPMENTS, AND FEDERAL RESERVE OPERATIONS Money market flows continued to stabilize over the intermeeting period after experiencing outsized movements in the lead-up to the money market fund (MMF) reforms in mid-October. Government MMFs had modest inflows, while assets under management at prime MMFs were little changed. In addition, outstanding levels of commercial paper (CP) and negotiable certificates of deposit (CDs) were stable, and holdings of CP and CDs by prime MMFs changed little. Outflows of large time deposits from banks reversed modestly in November. Moreover, ON RRP take-up declined substantially to an average of about $135 billion.3 rates traded within the target range.4 Overnight Treasury repo rates declined in midNovember but generally stayed above the ON RRP offering rate. The volume of triparty repo trades at rates below 25 basis points stayed small, and some evidence suggests these trades mostly reflected lenders without access to the ON RRP facility. Rates on term money market instruments appear consistent with firming expectations for a December rate hike. In particular, the term structure of CP and other term money market instruments rotated up over the intermeeting period (see the box “Expectations for Money Market Rates in Coming Weeks” for a broader discussion). 3 The Desk reinvested $24 billion of maturing Treasury securities, purchased $42 billion of 15- and 30-year MBS under the reinvestment program, and has rolled $0.1 billion of expected MBS settlements over the intermeeting period. To test operational readiness, the Desk successfully conducted two small-value agency MBS sales operations on November 29 and December 1 and a small-value Treasury sales operation on December 6. 4 Both the effective federal funds and Eurodollar rates averaged 41 basis points over the intermeeting period. Page 61 of 100 Financial Developments Over the intermeeting period, the effective federal funds and overnight Eurodollar Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Expectations for Money Market Rates in Coming Weeks Term money market rates can be used to calculate implied forward short-term interest rates that will prevail following the December 2016 FOMC meeting as well as around year-end. As reported in the following tables, term money market rates seem to embed an increase in the target range for the federal funds rate at the December FOMC meeting. Most forward rates point to only modest yearend pressures in U.S. money markets, but there are some signs of year-end pressures evident in global dollar funding markets based on FX basis swaps. Financial Developments Table 1 calculates expected money market rates for the week after the December FOMC meeting. Implied one-week forward rates, as shown in column 1, are derived from the difference in spot money market rates with three- and twoweek maturities. As shown in column 2, assuming 90 percent probability of a policy tightening and adjusting for term premiums, investors appear to anticipate that money market rates will rise about 25 basis points after the FOMC meeting. 1 Around year-end, money market rates typically deviate from their normal levels, as market participants try to make their balance sheets appear safer than usual. Consistent with past years, as shown in the top panel of table 2, the OIS and Treasury bill rates are expected to decline at year-end, while the commercial paper rate is expected to increase. However, these anticipated moves are fairly modest. In contrast, there have been clear signs of year-end pressures in global funding markets. As shown in the bottom panel of table 2, one-month FX swapimplied basis spreads moved up sharply when their maturity dates crossed yearend, comparable in magnitude to what was observed last year. 1 Assuming a higher probability of a policy rate hike or a more negative term premium adjustment would decrease the expected one-week interest rates that would prevail after the FOMC meeting. Page 62 of 100 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Table 1: Selected Money Market Rates after the December 2016 FOMC Meeting (Percent) (1) (2) (3) Implied one-week Expected rate in the Current one-week forward rate a event of tighteningb rate a OIS .67 .69 .39 Treasury bill .35 .34 .12 Note: OIS i s overni ght i ndex s wa p. a . The one-week forwa rd ra te i s ba s ed on the di fference between three- a nd two-week ra tes on December 1, 2016. Current ra te i s a s of December 5, 2016. b. The expected ra te i s determi ned s o tha t 0.9 * (expected ra te) + 0.1 * (current one-week ra te) equa l s the ra te i n col umn 1 a djus ted by the a vera ge term premi um over 2016. Source: Bl oomberg. (1) Right after the FOMC meeting (Column 2, table 1) .69 (2) (3) = (2) - (1) Across year-enda Year-end pressure 1.62 -.07 .34 1.24 -.10 .98 1.04 -.06 (1) On November 28 (Maturity on December 30) (2) On November 29 (Maturity on January 3) (3) = (2) - (1) One-month FX swapimplied basis spread (basis points) Euro–Dollar 47 124 77 Dollar–Yen 80 175 95 OIS Treasury bill A2P2 Nonfinancial CP b Year-end pressure Note: CP i s commerci a l pa per a nd OIS i s overni ght i ndex s wa p. a . Ba s ed on the di fference between one-month a nd three-week ra tes on December 5, 2016. Ca l cul a ti ons a re s i mi l a r to thos e for ta bl e 1. b. CP ra tes a re ca l cul a ted ba s ed on 7-, 15-, a nd 30-da y ma turi ti es . Sources : For OIS a nd Trea s ury bi l l s , Bl oomberg; for CP, Depos i tory Trus t & Cl ea ri ng Corpora ti on. Swa p s prea ds ba s ed on da ta from Bl oomberg, Reuters , a nd Tul l ett. Page 63 of 100 Financial Developments Table 2: 2016 Year-End Pressures on Selected Money Market Rates (Percent, except for the swap spreads in basis points) Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Federal Reserve Operations and Short-Term Funding Markets ON RRP Take-Up, by Type Selected Overnight Money Market Rates Basis points Billions of dollars Daily 550 Gov't MMFs Prime MMFs Other 120 Daily 1-month Treasury bill ON RRP Federal funds Triparty Treasury repo IOER rate 500 450 400 350 90 Dec. 7 300 60 250 200 30 150 100 50 0 0 Nov. Jan. 2015 Mar. May July 2016 Sept. Nov. Note: ON RRP is overnight reverse repurchase agreement; MMFs are money market funds. Source: Federal Reserve Bank of New York. Nov. Jan. Mar. May July Sept. Nov. 2015 2016 Note: ON RRP is overnight reverse repurchase agreement; IOER is interest on excess reserves; Repo is repurchase agreement. Source: Depository Trust & Clearing Corporation; Federal Reserve Bank of New York; Federal Reserve Board. Selected Money Market Volumes Triparty Volume Distribution Billions of dollars Daily Triparty Treasury repo GCF Treasury repo 100 Dec. 5, 2016 Nov. 22, 2016 Nov. 3, 2016 450 Federal funds Eurodollar 400 Dec. 6 Financial Developments Percent 500 90 80 350 70 300 60 250 50 200 40 150 30 100 20 50 10 0 Nov. 2015 Jan. Mar. May July 2016 Sept. Nov. 0 0 20 25 30 35 40 45 50 Rate (basis points) Note: November 22, 2016 is the date on which the triparty rate was the lowest. Source: Federal Reserve Bank of New York. Note: GCF is General Collateral Finance; repo is repurchase agreement; CD is certificate. Source: For federal funds and Eurodollar, Federal Reserve Board, Form FR 2420, Report of Selected Money Market Rates; for triparty Treasury repo and GCF Treasury repo, Federal Reserve Bank of New York. Term Structure of Double-A Nonfinancial CP 5 10 15 Term Structure of CDs Basis points Basis points 100 Dec. 6, 2016 Nov. 2, 2016 (FOMC) 80 Dec. 14, 2015 (day before liftoff) Oct. 28, 2015 (FOMC) 150 Dec. 6, 2016 Nov. 2, 2016 (FOMC) Jan. - June 2016 Average 100 60 40 50 20 0 0 10 20 30 40 50 60 70 Days to maturity Note: CP is commercial paper. Source: Depository Trust & Clearing Corporation. 80 90 0 0 40 50 60 70 Days to maturity Note: CD is certificate of deposit. Source: Depository Trust & Clearing Corporation. Page 64 of 100 10 20 30 80 90 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 FINANCING CONDITIONS FOR BUSINESSES, MUNICIPALITIES, AND HOUSEHOLDS Business and Municipal Finance Since the November FOMC meeting, financing conditions for nonfinancial firms remained generally accommodative. Although gross issuance of corporate bonds slowed notably in October and November from the brisk pace in the third quarter, the decrease in corporate bond spreads after the election, which was larger for speculative-grade bonds, suggests that the lower issuance likely does not reflect a tightening of financial conditions. In addition, over the past two months, growth in commercial and industrial borrowing from banks picked up after having dipped some during the third quarter, issuance of leveraged loans from nonbanks was robust, and CP outstanding at nonfinancial firms increased on balance. Third-quarter earnings for firms in the S&P 500 index are estimated to have increased about 8 percent from the previous quarter on a seasonally adjusted basis. The improvement in earnings was generally broad based across sectors. The outlook for corporate earnings continued to show signs of stabilization over the intermeeting period, as projections by Wall Street analysts for year-ahead earnings for S&P 500 companies Overall, the credit quality of nonfinancial corporations remained solid. The volume of corporate bond rating downgrades in October and November outpaced that of upgrades but was moderate compared with levels seen in the first half of the year. The six-month trailing bond default rate edged down in October, and the KMV expected yearahead default measure also declined modestly over the intermeeting period; however, both indicators remained somewhat elevated compared with their ranges in recent years. Credit conditions in municipal bond markets remained accommodative on balance. Gross issuance remained solid in October, and yields on general obligation bonds rose somewhat more than those on comparable-maturity Treasury securities over the intermeeting period, reportedly reflecting expected reductions in the tax benefit of municipal bonds. The credit quality of state and local governments remained stable as the number of ratings downgrades has only moderately outpaced the number of upgrades thus far in the fourth quarter. Page 65 of 100 Financial Developments were revised down only slightly. Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Business and Municipal Finance Selected Components of Net Debt Financing, Nonfinancial Firms Nonfinancial Rating Changes, by Sector Billions of dollars Percent of outstanding* 120 Monthly rate 60 Annual rate 100 Commercial paper C&I loans* Institutional leveraged loans Bonds Total Upgrades 80 H1 60 Q3 Oct. Nov. e 40 Energy Ex. energy H1 Q3 Nov. Oct. 40 20 Downgrades -20 Ex. energy Energy -40 -40 2014 2016 -60 2001 2004 2007 2010 2013 2016 Note: C&I is commercial and industrial. * Period-end basis, seasonally adjusted. e Estimate for C&I loans and Institutional Leveraged Loans. Source: Depository Trust & Clearing Corporation; Mergent Fixed Income Securities Database; Federal Reserve Board; Thomson Reuters LPC. * Computed as a percent of nonfinancial bonds outstanding. Source: Staff calculations using Moody's ratings from Mergent Fixed Income Securities Database. Expected Nonfinancial Year-Ahead Defaults Municipal Bond Ratio Percent Ratio 7 Monthly Nov. FOMC Weekly 6 All firms Oil firms Non-oil firms 5 4 Dec. 1 3 2 Dec.p Financial Developments 1 0 1996 2000 2004 2008 2012 2016 2011 2012 2013 2014 2015 Note: Bond Buyer general obligation 20-year index over 20-year Treasury yields. Source: Bond Buyer; Merrill Lynch. Commercial Real Estate Loans CMBS Issuance Billions of dollars Construction and land development Multifamily Nonfarm nonresidential H1 2006 2008 2010 2012 2014 Billions of dollars 40 35 30 25 20 15 10 5 0 -5 -10 -15 -20 Oct. Q1 Q3 Nov. H2 Q2 (e) 2016 320 Annual rate Page 66 of 100 280 Multifamily Nonresidential 240 200 Nov. 160 120 Q3 H1 Oct. 80 40 0 2007 Note: Data are seasonally adjusted. e Estimate. Source: Federal Reserve Board, Form FR 2644, Weekly Report of Selected Assets and Liabilities of Domestically Chartered Commercial Banks and U.S. Branches and Agencies of Foreign Banks. 2.0 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 2016 Note: Firm-level estimates of default weighted by firm liabilities as a percent of total liabilities, excluding defaulted firms. p Preliminary. Source: Calculated using firm-level data from Moody's KMV. Monthly rate 0 -20 0 2012 20 2009 2011 2013 2015 Note: Multifamily excludes agency issuance. Source: Consumer Mortgage Alert. 2016 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Available indicators suggest that financing conditions in commercial real estate (CRE) also remained largely accommodative. The average rate of growth of CRE loans at banks continued to be strong in October and November. Over the intermeeting period, spreads on CMBS narrowed a little and CMBS issuance continued to outpace the low levels seen in the first half of 2016. The CMBS delinquency rate continued to move up but remained low. Overall, small business credit supply conditions were generally stable over the past quarter. Small businesses’ credit demand was little changed but remained weak, and anecdotal reports indicate that demand will continue to be subdued in coming quarters. Household Finance The interest rate on 30-year fixed mortgages moved up in line with comparablematurity Treasury yields to its highest level since the summer of last year, although the rate remained at a low level by historical standards and mortgage availability appeared little changed. Partly owing to the increase in interest rates, indicators and staff models suggest that refinance originations decreased in November and are likely to fall further in December. Purchase originations, which are typically less sensitive to changes in interest Financing conditions in consumer credit markets remained accommodative, on balance, through the third quarter. Consumer loan balances increased at a year-over-year rate of about 6 percent through September. Consumer credit continued to be broadly available, although credit card loan growth at banks moderated over October and November. Moreover, extensions of new credit to subprime auto loan borrowers edged down in the third quarter, and credit card lending standards appeared to remain tight for subprime borrowers. Consumer ABS spreads were little changed over the intermeeting period, and ABS issuance so far in the fourth quarter has roughly matched its thirdquarter pace. Meanwhile, measures of consumer credit quality were little changed in the third quarter. Page 67 of 100 Financial Developments rates, are likely to be little changed through December. Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Household Finance Mortgage Rate and MBS Yield Summary Frontiers, by FICO Score Percent Daily Nov. FOMC 30-year conforming fixed mortgage rate Dec. 6 MBS yield 2013 2014 2015 Debt-to-income ratio 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 FICO <= 620 o 70 60 50 2016:Q3 o 20 10 0 2016 2001 2004 2007 2010 2013 2016 Note: The MBS yield is the Fannie Mae 30-year current-coupon rate. Source: For MBS yield, Barclays; for mortgage rate, Loansifter. Note: Summary frontier is a weighted average of the individual frontiers associated with each loan-to-value ratio, property location, and FICO group. Source: For frontiers shown with circles, McDash and CoreLogic; for frontiers shown with solid lines, Optimal Blue. Purchase and Refinance Activity Consumer Credit Percent change from a year earlier 2500 Monthly 600 40 30 o o o Thousands of originations 700 80 o o o o o o o o FICO >= 720 o o o o o o o oo o o o o Monthly 2000 24 18 Student loans 500 Home purchase (left scale) 400 300 Refinance (right scale) 200 12 1500 .. Sept. 1000 0 Dec. .. 100 Auto loans -6 500 -12 Financial Developments Credit cards 0 6 0 2001 2004 2007 2010 2013 2016 2008 Note: The data are seasonally adjusted by Federal Reserve Board staff. Points represent staff projections. Source: For values prior to 2016, data reported under the Home Mortgage Disclosure Act of 1975; for values in 2016, staff estimates. 2010 2012 2014 2016 Note: The data are not seasonally adjusted. Source: Federal Reserve Board. New Credit Extensions to Subprime Borrowers Selected ABS Spreads (3-Year Triple-A) Basis points Billions of dollars (real) 120 Weekly Auto Credit card Quarterly 650 100 550 FFELP student loans Fixed credit card Fixed prime auto 80 450 350 60 Q3 250 40 150 Dec. 1 20 -50 0 2001 2004 2007 2010 2013 2016 Note: New credit extensions for borrowers with credit scores of less than 620. Data are seasonally adjusted. Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax. 50 2008 2010 2012 2014 2016 Note: Spreads are to swap rate for credit card and auto asset-backed securities (ABS) and to 3-month LIBOR for student loans. FFELP is Federal Family Education Loan Program. Source: J.P. Morgan. Page 68 of 100 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Risks and Uncertainty ASSESSMENT OF RISKS We continue to view the uncertainty around our projections for real GDP growth and the unemployment rate as broadly in line with the average over the past 20 years (the benchmark used by the FOMC). One new source of uncertainty pertains to the question of what policy changes may follow from the recent U.S. election outcomes. Uncertainty about policy is evident in the options-implied expected volatility associated with longerterm Treasury securities, which has moved up since the election. The Baker, Bloom, and Davis index of economic policy uncertainty has fluctuated widely since the election and, as of this writing, is substantially higher than before the election. This heightened uncertainty about policy does not appear to have spilled over to the main private-sector measures: Options-based indexes of expected stock market volatility remain at subdued levels, as do corporate bond spreads. Moreover, in the staff’s October quarterly quantitative surveillance assessment, the vulnerabilities in the U.S. financial system continued to be judged as moderate. We have maintained our assumption that the risks to our GDP projection are tilted to the downside, importantly because monetary policy appears better positioned to offset large positive shocks than substantial adverse ones. Foreign developments and prospects also pose net downside risks to the U.S. economy. For example, the Chinese economy continues to face the possibility of a hard landing, and Europe remains rife with political and economic risk. Moreover, in the event of an economic downturn, foreign authorities would likely face similar constraints in providing policy stimulus as in the United States. We view the risks around our unemployment rate projection as aligned with those for GDP and, therefore, as skewed to the upside. unusually high. We see important risks to inflation on both the upside and the downside, and we view those risks as roughly balanced. To the downside, some survey-based measures of longer-term inflation expectations are near historically low levels. In addition, as shown in one of the alternative scenarios, the projected divergence between domestic and foreign monetary policies could generate greater appreciation of the dollar than we have anticipated in the baseline forecast. To the upside, with the economy Page 69 of 100 Risks & Uncertainty With regard to inflation, we do not view the current level of uncertainty as Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Alternative Scenarios (Percent change, annual rate, from end of preceding period except as noted) 2016 Measure and scenario Risks & Uncertainty H2 2017 2018 2019 202021 Real GDP Extended Tealbook baseline Weaker Productivity Weaker Productivity and Faster Wage Growth Larger Fiscal Stimulus No Fiscal Stimulus Financial-Sector Expansion Stronger Dollar and EME Financial Turbulence Banking Crisis in Europe 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.2 1.8 1.9 2.4 1.9 2.9 1.6 1.4 2.0 1.4 1.3 2.4 1.9 1.7 1.4 1.4 1.8 1.3 1.2 2.1 1.8 1.5 1.9 2.0 1.4 1.5 1.3 1.5 1.4 1.4 1.7 1.7 Unemployment rate1 Extended Tealbook baseline Weaker Productivity Weaker Productivity and Faster Wage Growth Larger Fiscal Stimulus No Fiscal Stimulus Financial-Sector Expansion Stronger Dollar and EME Financial Turbulence Banking Crisis in Europe 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.5 4.6 4.6 4.4 4.7 4.2 4.7 4.8 4.3 4.4 4.5 4.0 4.5 4.1 4.8 4.9 4.2 4.3 4.5 3.7 4.4 4.2 4.7 4.8 4.4 4.5 4.9 3.8 4.7 4.5 4.9 4.8 Total PCE prices Extended Tealbook baseline Weaker Productivity Weaker Productivity and Faster Wage Growth Larger Fiscal Stimulus No Fiscal Stimulus Financial-Sector Expansion Stronger Dollar and EME Financial Turbulence Banking Crisis in Europe 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.7 1.8 2.2 1.8 1.7 1.7 1.0 .9 1.8 1.9 2.5 2.1 1.7 1.7 1.3 1.2 1.9 2.0 2.7 2.2 1.8 1.8 1.8 1.7 2.1 2.1 2.8 2.4 1.9 2.0 2.0 2.1 Core PCE prices Extended Tealbook baseline Weaker Productivity Weaker Productivity and Faster Wage Growth Larger Fiscal Stimulus No Fiscal Stimulus Financial-Sector Expansion Stronger Dollar and EME Financial Turbulence Banking Crisis in Europe 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.7 1.7 2.1 1.7 1.7 1.6 1.2 1.3 1.8 2.0 2.6 2.1 1.7 1.8 1.4 1.4 1.9 2.1 2.8 2.3 1.8 1.8 1.7 1.7 2.0 2.0 2.8 2.4 1.9 2.0 1.9 1.9 Federal funds rate1 Extended Tealbook baseline Weaker Productivity Weaker Productivity and Faster Wage Growth Larger Fiscal Stimulus No Fiscal Stimulus Financial-Sector Expansion Stronger Dollar and EME Financial Turbulence Banking Crisis in Europe .5 .5 .5 .5 .5 .5 .5 .5 1.5 1.5 1.7 1.5 1.4 1.7 1.2 1.2 2.5 2.5 3.0 2.8 2.2 2.7 1.6 1.6 3.3 3.3 3.9 4.0 2.9 3.4 2.4 2.2 3.9 3.8 4.4 5.3 3.2 3.8 3.3 3.0 1. Percent, average for the final quarter of the period. Page 70 of 100 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 projected to be operating above its long-run potential, inflation may increase more than the staff expects, consistent with the predictions of models that emphasize nonlinear effects of economic slack on inflation. ALTERNATIVE SCENARIOS To illustrate some of the risks to the outlook, we construct alternatives to the baseline projection using simulations of staff models. The first scenario explores the consequences of continued subdued labor productivity growth, while the second scenario couples this low productivity growth with faster increases in wages. The third scenario considers the effects of a future fiscal stimulus that is larger and that has a different composition than in the staff baseline. By contrast, in the fourth scenario, the tax cut assumed by the staff in the baseline does not materialize. In the fifth scenario, we analyze the effects of an expansion of credit supply by the U.S. financial sector. In the sixth scenario, we consider the possibility that U.S. policy normalization leads to a much stronger appreciation of the dollar and to financial turbulence in the EMEs. The final scenario analyzes the effect of a banking crisis in Europe. The first four scenarios are simulated in the FRB/US model. The fifth scenario uses a version of the Gertler–Karadi DSGE model, which attempts to describe explicitly the behavior of leveraged financial intermediaries.1 The sixth and seventh scenarios are run in the multicountry SIGMA model. For the two fiscal scenarios, we assume different adjustments to the intercept in the inertial policy rule used in the baseline, as we will describe in further detail. In the other five scenarios, the federal funds rate is governed by the same rule as in the baseline. In all cases, we assume that the size and composition of the SOMA portfolio follow the baseline paths. Weaker Productivity Labor productivity growth has averaged only about ½ percent per year over the past six years. In the baseline projection, productivity is assumed to rise at an average gains may persist longer than we envision in the baseline. In this scenario, lower trend 1 Specifically, this scenario is performed using an estimated DSGE model that includes financial frictions in the banking sector as described in Mark Gertler and Peter Karadi (2011), “A Model of Unconventional Monetary Policy,” Journal of Monetary Economics, vol. 58 (January), pp. 17–34. Page 71 of 100 Risks & Uncertainty annual rate of 1 percent in 2017 and 2018. However, the recent sluggish productivity Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Forecast Confidence Intervals and Alternative Scenarios Confidence Intervals Based on FRB/US Stochastic Simulations Extended Tealbook baseline Weaker Productivity Weaker Productivity and Faster Wage Growth Larger Fiscal Stimulus No Fiscal Stimulus Financial−Sector Expansion Real GDP Stronger Dollar and EME Financial Turbulence Banking Crisis in Europe Unemployment Rate 4-quarter percent change Percent 5 8.5 8.0 4 7.5 7.0 3 6.5 6.0 2 5.5 5.0 1 70 percent interval 4.5 4.0 0 3.5 3.0 −1 90 percent interval 2.5 −2 2014 2016 2018 2.0 2020 2014 PCE Prices excluding Food and Energy 2016 2018 2020 Federal Funds Rate 4-quarter percent change Percent 4.0 8 3.5 7 3.0 6 2.5 5 2.0 4 Risks & Uncertainty 1.5 3 1.0 2 0.5 1 0.0 0 −0.5 2014 2016 2018 2020 2014 Page 72 of 100 2016 2018 2020 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 total factor productivity growth is assumed to cause labor productivity growth to remain at only ½ percent per year over the next two years before moving up to the baseline pace. The slower growth rate of productivity results in real GDP growth that is ½ percentage point lower than in the baseline. The revised expectations about future productivity depress aggregate demand by a little more than aggregate supply over the intermediate term as households recognize the reduction in their permanent income; as a result, labor market conditions deteriorate, yielding an unemployment trajectory that is a bit higher than the baseline path.2 Inflation reaches 2 percent by 2019, reflecting the increase in firms’ marginal costs from weaker productivity. The path for the federal funds rate is essentially unchanged from the baseline, as the effect of a slightly higher path for the unemployment rate is offset by mildly higher inflation. Weaker Productivity and Faster Wage Growth In the baseline, although the unemployment rate is persistently below the natural rate of unemployment, inflation remains subdued, consistent with the modest response of prices to economic activity seen in recent years. However, there is considerable uncertainty about the relationship between resource slack and wage setting, and it is possible that wages may prove more sensitive to a tight labor market than we have assumed and that the resulting higher wages may pass through into higher prices. In this scenario, wage inflation responds more to economic slack than assumed in the baseline, resulting in larger gains in labor compensation. Additionally, as in the previous scenario, we assume that the pickup in labor productivity growth projected by the staff in 2017 and 2018 does not materialize.3 Higher wages and lower productivity imply higher marginal costs of production, and in the FRB/US model, these higher costs pass through to price inflation. Accordingly, PCE prices accelerate more than in the baseline and more than in the preceding scenario, rising 2.7 percent in 2019. Similar to the preceding scenario, the 2 A different version of this scenario, in which lower labor productivity is associated with tighter labor market conditions, can be found in the April 2016 Tealbook scenario “Weaker Labor Productivity, Stronger Labor Market.” 3 Another perspective on the possible increase in wage pressures in the economy can be found in the Domestic Economic Developments and Outlook box “Alternative View: The Rise in Real Wages.” Page 73 of 100 Risks & Uncertainty weaker path of labor productivity holds down real GDP growth. The steeper path of Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Selected Tealbook Projections and 70 Percent Confidence Intervals Derived from Historical Tealbook Forecast Errors and FRB/US Simulations Measure Real GDP (percent change, Q4 to Q4) Projection Confidence interval Tealbook forecast errors FRB/US stochastic simulations Civilian unemployment rate (percent, Q4) Projection Confidence interval Tealbook forecast errors FRB/US stochastic simulations PCE prices, total (percent change, Q4 to Q4) Projection Confidence interval Tealbook forecast errors FRB/US stochastic simulations PCE prices excluding food and energy (percent change, Q4 to Q4) Projection Confidence interval Tealbook forecast errors FRB/US stochastic simulations Risks & Uncertainty Federal funds rate (percent, Q4) Projection Confidence interval FRB/US stochastic simulations 2016 2017 2018 2019 2020 2021 1.8 2.2 2.0 1.8 1.5 1.3 1.0–2.8 1.5–2.1 .6–4.0 .9–3.5 -.4–3.9 .4–3.5 -.8–3.4 .2–3.4 ... -.2–3.2 ... -.4–3.1 4.8 4.5 4.3 4.2 4.3 4.4 4.6–4.9 4.6–4.9 3.7–5.0 3.9–5.2 3.3–5.4 3.4–5.3 2.8–5.8 3.1–5.4 ... 3.0–5.6 ... 3.1–5.8 1.5 1.7 1.8 1.9 2.1 2.1 1.4–1.8 1.4–1.6 1.2–3.3 .8–2.5 .9–3.3 .9–2.7 1.0–3.2 .9–3.0 ... 1.0–3.1 ... .9–3.2 1.7 1.7 1.8 1.9 2.0 2.1 1.5–2.1 1.6–1.8 1.3–2.4 .9–2.4 1.2–2.6 1.0–2.7 ... 1.0–2.9 ... 1.0–3.0 ... 1.0–3.1 .5 1.5 2.5 3.3 3.8 3.9 .5–.5 .9–2.0 1.3–3.6 1.5–5.0 1.6–5.9 1.5–6.3 Note: Shocks underlying FRB/US stochastic simulations are randomly drawn from the 1969–2015 set of model equation residuals. Intervals derived from Tealbook forecast errors are based on projections made from 1980 to 2015 for real GDP and unemployment and from 1998 to 2015 for PCE prices. The intervals for real GDP, unemployment, and total PCE prices are extended into 2019 using information from the Blue Chip survey and forecasts from the CBO and CEA. . . . Not applicable. Page 74 of 100 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Prediction Intervals Derived from Historical Tealbook Forecast Errors Historical Distributions Forecast Error Percentiles Q4 Level, Percent Unemployment Rate Historical revisions Tealbook forecasts Augmented Tealbook 1 median 15% to 85% 5% to 95% data/forecast range Q4/Q4, Percent PCE Inflation 13 4 11 3 9 2 7 1 5 0 3 2013 2014 2015 2016 2017 2018 2019 1 2013 1980 to 2015 Q4/Q4, Percent Real GDP Growth 2014 2015 2016 2017 2018 2019 -1 1998 to 2015 Q4/Q4, Percent Core PCE Inflation 8 4 6 3 4 2 2 1 0 0 -2 2013 2014 2015 2016 2017 2018 2019 -4 2013 1980 to 2015 2014 2015 2016 2017 2018 2019 -1 1998 to 2015 Historical Distributions PCE Inflation Real GDP Growth Annual, Percent 25 median 15% to 85% 5% to 95% 20 2.5% to 97.5% range Annual, Percent Annual, Percent 20 16 12 12 12 8 8 4 4 0 0 -4 -4 -8 -8 -8 -12 -12 -12 0 -4 5 0 1980 to 2015 Annual, Percent 4 10 1930 to 1947 to 2015 2015 16 16 8 15 Core PCE Inflation -16 1930 to 1947 to 1980 to 2015 2015 2015 -16 1930 to 1947 to 1998 to 2015 2015 2015 -16 1930 to 1947 to 1998 to 2015 2015 2015 Note: See the technical note in the appendix for more information on this exhibit. 1. Augmented Tealbook prediction intervals use 2- and 3-year-ahead forecast errors from Blue Chip, CBO, and CEA to extend the Tealbook prediction intervals through 2019. Page 75 of 100 Risks & Uncertainty Unemployment Rate Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 inflation turns out to be the stronger influence on the federal funds rate, which moves up ½ percentage point more than in the baseline. Larger Fiscal Stimulus In the baseline projection, the staff is assuming a cut in personal income taxes equal to 1 percent of GDP debuting in 2017:Q3. In this scenario, we study the effect of a fiscal stimulus that is larger and that has a different composition: In addition to the tax cut considered in the baseline, we assume an increase in government purchases equal to 1 percent of GDP, phased in from 2017:Q3 onward.4 We assume that half of the additional government spending is directed to public infrastructure.5 In the long run, the intercept of the policy rule converges to a level that is 25 basis points higher than in the baseline, and the 10-year Treasury rate is revised up about twice as much as in the baseline. Real GDP growth is 0.3 percentage point higher than in the baseline, on average, in 2018 and 2019, reflecting the effect on aggregate demand of the additional government spending. The unemployment rate follows a lower path, bottoming out at 3.7 percent in 2019. The tighter resource utilization puts upward pressure on inflation, which reaches 2.4 percent by the end of 2021.6 As a result, the federal funds rate follows a steeper path than in the baseline, passing 5 percent in 2021. No Fiscal Stimulus There is substantial uncertainty regarding the degree of possible additional fiscal stimulus. This scenario posits that the tax cut assumed in the baseline does not materialize. As a consequence, we also unwind the adjustments to the rule for setting the Risks & Uncertainty 4 In particular, we assume that the additional government spending is phased in over a four-year period. Spending returns gradually to the baseline thereafter. 5 To capture possible supply-side effects of additional government spending, we assume that government investment in physical capital has an annual rate of return of 7 percent, consistent with the estimate in Congressional Budget Office (2016), The Macroeconomic and Budgetary Effects of Federal Investment (Washington: CBO, June), www.cbo.gov/publication/51628. This rate of return, together with the size and gradual implementation of government spending on infrastructure assumed in this scenario, implies only a negligible additional effect on output. 6 In this scenario and the next one, the responses of inflation are likely larger than the revisions that the staff would implement using its judgmental apparatus, as inflation in FRB/US generally moves more with demand than it does in the staff judgmental projection. Page 76 of 100 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 federal funds rate and to the long-term interest rate term premium made in the baseline projection.7 Without the tax cut, real GDP growth is slightly weaker than in the baseline and unemployment is higher; by 2020, the difference in the unemployment rate relative to the baseline reaches ¼ percentage point. In addition, inflation follows a lower trajectory.8 These developments—as well as the adjustment to the policy rule—imply a lower path of the federal funds rate, which is 0.7 percentage point below the baseline at the end of 2021. Financial-Sector Expansion In the third quarter of 2016 U.S. banks reported strong profits relative to the recent past, and share prices for U.S. financial intermediaries have increased more than 30 percent in the second half of the year, turning what had been a year-to-date decline into a gain of more than 20 percent.9 In this scenario, we consider the possibility that investor sentiment toward the financial sector continues to improve. In particular, we calibrate positive financial shocks that induce a 20 percent increase in the market capitalization of the financial sector, compared with the baseline, over the first two quarters of 2017. In the model used to generate this scenario, the net worth of financial-sector firms is a key determinant of their ability to provide funds to nonfinancial firms, so that a higher value increases credit supply and leads, in turn, to higher investment. As a consequence, GDP rises 2¾ percent over the next four quarters, compared with 2¼ percent in the baseline, and the unemployment rate decreases to 4.1 percent by 2018. In this scenario, the movement of inflation is limited in part because of a flat Phillips curve estimated in the model, but also because higher investment causes downward pressure on marginal costs by increasing the marginal product of labor. Consequently, the path of the federal funds rate is only a touch higher than in the 7 See the discussion on key background factors in the Domestic Economic Developments and Outlook section. 8 The delta in the unemployment rate relative to the baseline comes very close to unwinding the effect that was built into the baseline; for inflation, the Phillips curve in the model is a bit steeper than in the staff judgmental apparatus so the inflation effect is a little larger. 9 These numbers refer to the performance of the S&P 500 bank index. 10 This scenario may represent a “best case,” as we only consider a short-lived expansion of the financial sector and abstract from the possible adverse effects for financial stability arising from a prolonged credit boom. Page 77 of 100 Risks & Uncertainty baseline.10 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Stronger Dollar and EME Financial Turbulence The staff baseline projects that the dollar will appreciate about 5 percent over the forecast period as the federal funds rate rises somewhat faster than markets currently appear to expect. The normalization of U.S. monetary policy, however, could well cause a more pronounced and persistent appreciation of the dollar, especially if higher U.S. interest rates generate financial turbulence in vulnerable EMEs. In this scenario, we assume that the broad real dollar appreciates an additional 10 percent by the end of next year and that EME corporate borrowing spreads rise substantially in the face of persistent capital outflows from EMEs. Despite weakening macroeconomic conditions in EMEs, EME central banks are assumed to tighten monetary policy to mitigate upward pressure on inflation arising from the depreciation of their currencies. All told, foreign GDP growth runs, on average, about ¾ percentage point below the baseline over the next two years. The stronger dollar and weaker foreign growth depress U.S. real net exports. Consequently, U.S. real GDP growth moderates to just 1.5 percent in the second half of 2017, about ¾ percentage point less than in the baseline. Lower import prices and weaker economic activity cause core PCE inflation to be, on average, only 1¼ percent in 2017. The federal funds rate follows a shallower path than in the baseline, rising to about 2½ percent by the end of 2019. Banking Crisis in Europe Europe’s banking sector has many underlying vulnerabilities, including tepid earnings prospects, weak capital positions, and high levels of nonperforming loans. Accordingly, we think there is some chance that a major European bank will experience a severe deterioration in its liquidity and capital conditions, requiring the bank to be resolved and restructured. The need to resolve a systemically important European bank, especially if the process is messy, could well precipitate a loss in confidence in Europe’s banking system more generally and in the authorities’ abilities to address these problems. Risks & Uncertainty In this scenario, we consider the possibility that a resolution of a major European bank leads to a banking crisis that produces sizable adverse financial spillovers to both the United States and the rest of the world. Specifically, this scenario assumes that financial conditions in Europe tighten significantly and that household and business confidence decline amid rising unemployment and heightened disinflationary pressures. European corporate borrowing Page 78 of 100 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 spreads rise more than 100 basis points, and household borrowing spreads also rise noticeably. With little scope for the ECB to reduce long-term sovereign yields, Europe falls into recession, with GDP bottoming out about 4 percent below the baseline by the end of 2018. The crisis has adverse spillovers to the United States: U.S. corporate bond spreads rise about 50 basis points, while flight-to-safety flows cause the broad real dollar to appreciate 5 percent. Weaker foreign activity and the stronger dollar cause U.S. net exports to fall relative to the baseline. U.S. domestic demand also declines relative to the baseline as a result of lower confidence and weaker financial conditions. All told, U.S. real GDP growth moderates to just under 1.5 percent in 2017 and 2018. The U.S. unemployment rate runs at nearly 5 percent in 2018, ½ percentage point higher than in the baseline. Lower resource utilization and falling import prices reduce U.S. core inflation to 1 percent in the second half of 2017. The federal funds rate follows a shallower path, Risks & Uncertainty reaching only 2¼ percent at the end of 2019, compared with 3¼ percent in the baseline. Page 79 of 100 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Risks & Uncertainty (This page is intentionally blank.) Page 80 of 100 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Alternative Model Forecasts (Percent change, Q4 to Q4, except as noted) 2016 Measure and projection September Tealbook 2017 2018 Current Tealbook September Tealbook Current Tealbook September Tealbook Current Tealbook Real GDP Staff FRB/US EDO 1.8 2.1 2.0 1.8 1.8 1.8 2.4 2.5 2.6 2.2 2.2 2.3 2.0 2.4 2.6 2.0 1.7 2.4 Unemployment rate1 Staff FRB/US EDO 4.9 4.6 4.8 4.8 4.8 4.8 4.5 4.1 4.8 4.5 4.5 4.8 4.3 3.9 4.9 4.3 4.6 4.9 Total PCE prices Staff FRB/US EDO 1.2 1.2 1.3 1.5 1.5 1.5 1.6 1.9 2.1 1.7 1.8 2.1 1.8 2.0 2.3 1.8 1.8 2.3 Core PCE prices Staff FRB/US EDO 1.6 1.7 1.7 1.7 1.7 1.7 1.6 1.9 2.1 1.7 1.8 2.1 1.8 1.9 2.3 1.8 1.9 2.3 .6 .6 .8 .5 .7 .5 1.5 1.3 2.3 1.5 1.6 2.0 2.5 2.2 3.1 2.5 2.5 3.0 Federal funds rate1 Staff FRB/US EDO 1. Percent, average for Q4. Percent, annual rate .... Median Range across models 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Note: Estimates are based on the three models from the System DSGE project; for more information, see the box "Estimates of the Short-Run Real Natural Rate of Interest" in the March 2016 Tealbook. The gray shaded bar indicates a period of recession as defined by the National Bureau of Economic Research. Page 81 of 100 12 10 8 6 4 2 0 -2 -4 -6 -8 -10 -12 Risks & Uncertainty Estimates of the Short-Run Real Natural Rate of Interest Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Assessment of Key Macroeconomic Risks (1) Probability of Infation Events (4 quarters ahead) Probability that the 4-quarter change in total PCE prices will be . . . Staff FRB/US EDO BVAR Greater than 3 percent Current Tealbook Previous Tealbook .06 .08 .08 .12 .06 .08 .06 .01 Less than 1 percent Current Tealbook Previous Tealbook .18 .13 .14 .09 .04 .04 .18 .42 Probability of Unemployment Events (4 quarters ahead) Probability that the unemployment rate will . . . Staff FRB/US EDO BVAR Increase by 1 percentage point Current Tealbook Previous Tealbook .03 .04 .03 .02 .18 .16 .02 .02 Decrease by 1 percentage point Current Tealbook Previous Tealbook .07 .07 .08 .15 .10 .13 .12 .13 Probability of Near-Term Recession Risks & Uncertainty Probability that real GDP declines in the next two quarters Current Tealbook Previous Tealbook Staff FRB/US EDO BVAR Factor Model .02 .02 .02 .01 .06 .05 .06 .03 .00 .07 Note: “Staff” represents stochastic simulations in FRB/US around the staff baseline; baselines for FRB/US, BVAR, EDO, and the factor model are generated by those models themselves, up to the current-quarter estimate. Data for the current quarter are taken from the staff estimate for the second Tealbook in each quarter; if the second Tealbook for the current quarter has not yet been published, the preceding quarter is taken as the latest historical observation. Page 82 of 100 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Assessment of Key Macroeconomic Risks (2) Probability that Total PCE Inflation Is above 3 Percent Probability that Total PCE Inflation Is below 1 Percent (4 quarters ahead) (4 quarters ahead) Probability FRB/US BVAR Probability 1 1 .8 .8 .6 .6 .4 .4 .2 .2 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 0 1998 Probability that the Unemployment Rate Increases 1 ppt 2000 2002 2004 2006 2008 2010 2012 2014 2016 Probability that the Unemployment Rate Decreases 1 ppt (4 quarters ahead) (4 quarters ahead) Probability Probability 1 1 .8 .8 .6 .6 .4 .4 .2 .2 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Probability that Real GDP Declines in Each of the Next Two Quarters Probability 1 .8 .4 .2 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Note: See notes on facing page. Recession and inflation probabilities for FRB/US and the BVAR are real-time estimates. See Robert J. Tetlow and Brian Ironside (2007), "Real−Time Model Uncertainty in the United States: The Fed, 1996−2003," Journal of Money, Credit and Banking , vol. 39 (October), pp. 1533−61. Page 83 of 100 Risks & Uncertainty .6 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Risks & Uncertainty (This page is intentionally blank.) Page 84 of 100 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Appendix Technical Note on “Prediction Intervals Derived from Historical Tealbook Forecast Errors” This technical note provides additional details about the exhibit “Prediction Intervals Derived from Historical Tealbook Forecast Errors.” In the four large fan charts, the black dotted lines show staff projections and current estimates of recent values of four key economic variables: average unemployment rate in the fourth quarter of each year and the Q4/Q4 percent change for real GDP, total PCE prices, and core PCE prices. (The GDP series is adjusted to use GNP for those years when the staff forecast GNP and to strip out software and intellectual property products from the currently published data for years preceding their introduction. Similarly, the core PCE inflation series is adjusted to strip out the “food away from home” component for years before it was included in core.) The prediction intervals around the current and one-year-ahead forecasts are derived from historical staff forecast errors, comparing staff forecasts with the latest published data. For the unemployment rate and real GDP growth, errors were calculated for 1980 through 2014, yielding percentiles of the sizes of the forecast errors. For PCE and core PCE inflation, errors for 1998 through 2014 were used. This shorter range reflects both more limited data on staff forecasts of PCE inflation and the staff judgment that the distribution of inflation since the mid1990s is more appropriate for the projection period than distributions of inflation reaching further back. In all cases, the prediction intervals are computed by adding the percentile bands of the errors onto the forecast. The blue bands encompass 70 percent prediction-interval ranges; adding the green bands expands this range to 90 percent. The dark blue line plots the median of the prediction intervals. There is not enough historical forecast data to calculate meaningful 90 percent ranges for the two inflation series. A median line above the staff forecast means that forecast errors were positive more than half of the time. Stanley Lebergott (1957), “Annual Estimates of Unemployment in the United States, 1900–1954,” in National Bureau of Economic Research, The Measurement and Behavior of Unemployment (Princeton, N.J.: Princeton University Press), pp. 213 –41. 1 Page 85 of 100 Risks & Uncertainty The historical distributions of the corresponding series (with the adjustments described above) are plotted immediately to the right of each of the fan charts. The thin black lines show the highest and lowest values of the series during the indicated time period. At the bottom of the page, the distributions over three different time periods are plotted for each series. To enable the use of data for years prior to 1947, we report annual-average data in this section. The annual data going back to 1930 for GDP growth, PCE inflation, and core PCE inflation are available in the conventional national accounts; we used estimates from Lebergott (1957) for the unemployment rate from 1930 to 1946.1 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Because the staff has produced two-year-ahead forecasts for only a few years, the intervals around the two-year-ahead forecasts are constructed by augmenting the staff projection errors with information from outside forecasters: the Blue Chip consensus, the Council of Economic Advisers, and the Congressional Budget Office. Specifically, we calculate prediction intervals for outside forecasts in the same manner as for the staff forecasts. We then calculate the change in the error bands from outside forecasts from one year ahead to two years ahead and apply the average change to the staff’s one-year-ahead error bands. That is, we assume that any deterioration in the performance between the one- and two-year-ahead projections of the outside forecasters would also apply to the Tealbook projections. Limitations on the availability of data mean that a slightly shorter sample is used for GDP and unemployment, and the outside projections may only be for a similar series, such as total CPI instead of total PCE prices or annual growth rates of GDP instead of four-quarter changes. In particular, because data on forecasts for core inflation by these outside forecasters are much more limited, we did not extrapolate the staff’s errors for core PCE inflation two years ahead. Risks & Uncertainty The intervals around the historical data in the four fan charts are based on the history of data revisions for each series. The previous-year, two-year-back, and three-year-back values as of the current Tealbook forecast are subtracted from the corresponding currently published estimates (adjusted as described earlier) to produce revisions, which are then combined into distributions and revision intervals in the same way that the prediction intervals are created. Page 86 of 100 1.3 3.7 3.8 4.3 4.1 4.1 4.1 4.0 4.2 3.9 3.8 3.8 2.5 4.1 4.1 4.0 4.1 3.8 3.0 3.3 4.1 3.9 3.7 Quarterly 2016:Q1 Q2 Q3 Q4 2017:Q1 Q2 Q3 Q4 2018:Q1 Q2 Q3 Q4 Two-quarter2 2016:Q2 Q4 2017:Q2 Q4 2018:Q2 Q4 Four-quarter3 2015:Q4 2016:Q4 2017:Q4 2018:Q4 2019:Q4 Page 87 of 100 3.0 3.5 4.1 4.0 3.9 2.5 4.5 4.1 4.2 4.0 3.9 1.3 3.7 4.8 4.3 4.4 3.7 4.4 3.9 4.0 4.1 3.9 3.9 12/06/16 1.9 1.7 2.2 1.9 1.7 1.1 2.3 2.2 2.2 2.0 1.8 .8 1.4 2.5 2.1 2.2 2.2 2.2 2.2 2.2 1.9 1.8 1.8 10/26/16 1.9 1.8 2.2 2.0 1.8 1.1 2.4 2.1 2.3 2.0 2.0 .8 1.4 3.3 1.6 2.4 1.7 2.6 2.1 1.9 2.0 2.0 2.0 12/06/16 Real GDP .4 1.5 1.7 1.8 1.9 1.1 1.8 1.7 1.6 1.9 1.8 .3 2.0 1.4 2.2 1.7 1.8 1.7 1.6 1.9 1.9 1.8 1.8 10/26/16 .4 1.5 1.7 1.8 1.9 1.1 1.9 1.8 1.6 1.9 1.7 .3 2.0 1.4 2.3 1.8 1.7 1.6 1.6 1.9 1.8 1.7 1.8 12/06/16 PCE price index 1.4 1.7 1.7 1.8 1.9 1.9 1.6 1.8 1.6 1.9 1.8 2.1 1.8 1.6 1.5 1.8 1.8 1.6 1.6 1.9 1.9 1.8 1.8 10/26/16 Greensheets 1.4 1.7 1.7 1.8 1.9 1.4 1.7 1.7 1.8 1.9 1.9 1.6 1.7 1.6 1.9 1.8 2.1 1.8 1.7 1.4 1.7 1.7 1.6 1.6 1.9 1.9 1.8 1.8 12/06/16 5.3 4.9 4.8 4.5 4.4 -.7 -.1 -.3 -.2 .0 -.1 .0 -.1 -.2 -.1 -.1 4.9 4.9 4.9 4.9 4.8 4.8 4.7 4.6 4.6 4.5 4.5 4.4 10/26/16 5.3 4.9 4.6 4.4 4.2 -.7 -.2 -.3 -.2 -.1 -.1 -.1 -.1 -.2 -.1 -.1 4.9 4.9 4.9 4.8 4.7 4.7 4.6 4.5 4.5 4.4 4.4 4.3 12/06/16 Core PCE price index Unemployment rate1 Class II FOMC – Restricted (FR) Annual 2015 3.7 3.7 2.6 2.6 .3 .3 1.4 2016 2.8 2.9 1.5 1.6 1.1 1.1 1.7 2017 4.1 4.2 2.2 2.2 1.8 1.8 1.7 2018 4.0 4.0 2.1 2.1 1.8 1.7 1.8 2019 3.8 3.9 1.8 1.9 1.9 1.9 1.9 1. Level, except for two-quarter and four-quarter intervals. 2. Percent change from two quarters earlier; for unemployment rate, change is in percentage points. 3. Percent change from four quarters earlier; for unemployment rate, change is in percentage points. 10/26/16 Interval Nominal GDP Changes in GDP, Prices, and Unemployment (Percent, annual rate except as noted) Authorized for Public Release December 7, 2016 Page 88 of 100 -9 -9 Change in priv. inventories2 Previous Tealbook2 8 -4 .8 .3 2.5 2.1 3.0 -.2 -523 -548 10.0 2.3 .3 3.0 -2.5 2.5 11.6 5.0 -4.1 -6.3 2.8 2.6 11.6 -.6 2.5 2.8 2.2 2.1 2.2 3.3 2.5 Q3 -4 3 2.3 2.7 2.4 2.0 3.0 2.2 -551 -563 -1.2 3.2 1.9 4.3 4.0 4.9 -5.5 2.1 11.5 .3 2.1 1.8 8.8 4.5 .4 1.9 1.9 2.5 2.1 1.6 2.1 Q4 14 18 1.8 1.8 2.4 2.1 2.8 1.4 -585 -590 .0 5.2 4.1 1.7 4.4 2.0 3.0 .5 3.1 6.2 2.6 2.5 .6 3.2 2.7 1.9 1.9 2.8 2.6 2.4 2.2 Q1 15 23 1.6 1.6 1.9 1.8 2.1 1.3 -618 -616 .1 4.9 2.4 2.2 2.7 2.4 1.3 1.6 2.3 9.1 2.6 2.6 4.9 2.2 2.3 1.7 2.1 2.5 2.8 1.7 2.2 Q2 14 20 1.3 1.3 1.3 1.0 1.8 1.3 -647 -634 .7 4.9 3.4 3.3 3.7 4.0 2.3 1.2 1.5 8.3 3.7 2.5 5.8 3.3 3.5 2.6 2.3 3.5 2.9 2.6 2.2 Q3 2017 7 10 1.2 1.1 .9 .8 .9 1.3 -667 -643 1.3 3.8 3.1 3.4 3.9 4.3 .1 .2 .1 7.3 3.0 2.5 5.8 2.9 2.6 2.3 2.5 2.9 2.9 2.1 2.2 Q4 8 17 .9 .9 .4 .2 .7 1.1 -698 -663 1.7 5.7 2.8 2.7 3.5 3.4 .4 .2 3.2 5.9 2.8 2.5 5.0 3.0 2.4 1.9 2.0 2.8 2.7 1.9 2.2 Q1 9 15 .6 .6 -.4 -.3 -.5 1.2 -724 -680 1.8 5.1 2.6 2.7 3.4 3.4 -.5 .0 6.5 4.8 2.7 2.4 4.8 2.9 2.4 2.0 1.9 2.9 2.6 2.0 1.9 Q2 9 12 .5 .5 -.6 -.6 -.7 1.2 -746 -694 2.1 4.6 2.1 1.8 2.8 2.4 -.3 -.4 6.6 4.8 2.6 2.4 4.3 2.8 2.3 2.0 1.9 2.7 2.4 2.0 1.8 Q3 2018 8 9 .2 .2 -1.3 -1.5 -1.1 1.2 -758 -700 2.2 3.4 1.5 1.5 2.2 2.1 -.7 -.5 6.1 3.7 2.6 2.4 3.9 2.8 2.3 2.0 1.9 2.6 2.3 2.0 1.8 Q4 9 8 .7 .7 .7 -.6 2.7 .7 -550 -559 2.4 1.3 -.1 1.2 -.3 1.2 .8 1.2 1.5 -1.7 2.7 2.6 7.3 2.9 1.9 2.1 2.0 2.2 2.2 1.8 1.7 20161 13 18 1.5 1.4 1.6 1.4 1.9 1.4 -629 -621 .5 4.7 3.3 2.6 3.7 3.1 1.7 .9 1.7 7.7 3.0 2.5 4.2 2.9 2.8 2.1 2.2 2.9 2.8 2.2 2.2 20171 9 13 .5 .5 -.5 -.5 -.4 1.2 -731 -684 1.9 4.7 2.3 2.2 3.0 2.8 -.3 -.2 5.6 4.8 2.7 2.4 4.5 2.9 2.3 2.0 1.9 2.8 2.5 2.0 1.9 20181 2 6 .6 .6 -.4 -.3 -.6 1.2 -796 -734 2.7 4.1 1.6 1.3 2.2 1.9 -.7 -1.0 3.7 2.4 2.5 2.4 2.0 2.6 2.6 1.9 1.7 2.4 2.2 1.8 1.7 20191 Class II FOMC – Restricted (FR) 1. Change from fourth quarter of previous year to fourth quarter of year indicated. 2. Billions of chained (2009) dollars. -1.7 -1.7 -.4 -3.2 3.8 -2.5 Gov’t. cons. & invest. Previous Tealbook Federal Defense Nondefense State & local 1.0 1.0 1.8 1.8 -2.1 -2.1 Nonres. priv. fixed invest. Previous Tealbook Equipment & intangibles Previous Tealbook Nonres. structures Previous Tealbook -558 -558 1.8 .2 -7.7 -7.7 Residential investment Previous Tealbook Net exports2 Previous Tealbook2 Exports Imports 4.3 4.3 9.8 5.7 3.0 2.6 2.6 3.2 3.2 Final sales Previous Tealbook Priv. dom. final purch. Previous Tealbook Personal cons. expend. Previous Tealbook Durables Nondurables Services 1.4 1.4 Q2 Real GDP Previous Tealbook Item 2016 Greensheets Changes in Real Gross Domestic Product and Related Items (Percent, annual rate except as noted) Authorized for Public Release December 7, 2016 Page 89 of 100 -1.1 -1.1 3.2 2.0 5.5 -4.0 58 58 Gov’t. cons. & invest. Previous Tealbook Federal Defense Nondefense State & local Change in priv. inventories1 Previous Tealbook1 38 38 -3.0 -3.0 -4.0 -4.1 -3.9 -2.3 -459 -459 4.2 3.5 9.0 9.0 9.2 9.2 8.0 8.0 6.0 6.0 1.5 1.5 4.8 .4 1.4 1.5 1.5 2.6 2.6 1.7 1.7 2011 55 55 -2.2 -2.2 -2.1 -3.9 1.0 -2.3 -447 -447 2.2 .3 5.2 5.2 5.5 5.5 4.1 4.1 15.7 15.7 1.3 1.3 7.2 .8 .6 1.7 1.7 2.3 2.3 1.3 1.3 2012 Greensheets 79 79 -2.8 -2.8 -6.7 -7.1 -6.0 -.1 -405 -405 5.9 2.5 4.8 4.8 4.5 4.5 5.8 5.8 6.8 6.8 2.0 2.0 5.2 2.6 1.3 2.0 2.0 2.6 2.6 2.7 2.7 2013 58 58 .3 .3 -1.3 -4.1 3.4 1.3 -426 -426 3.1 6.1 5.0 5.0 4.1 4.1 8.0 8.0 6.2 6.2 3.5 3.5 8.6 2.8 2.9 2.7 2.7 3.8 3.8 2.5 2.5 2014 84 84 2.2 2.2 1.7 .6 3.4 2.5 -540 -540 -2.2 2.5 .8 .8 3.8 3.8 -8.8 -8.8 13.1 13.1 2.6 2.6 5.5 2.3 2.2 2.0 2.0 2.7 2.7 1.9 1.9 2015 9 8 .7 .7 .7 -.6 2.7 .7 -550 -559 2.4 1.3 -.1 1.2 -.3 1.2 .8 1.2 1.5 -1.7 2.7 2.6 7.3 2.9 1.9 2.1 2.0 2.2 2.2 1.8 1.7 2016 13 18 1.5 1.4 1.6 1.4 1.9 1.4 -629 -621 .5 4.7 3.3 2.6 3.7 3.1 1.7 .9 1.7 7.7 3.0 2.5 4.2 2.9 2.8 2.1 2.2 2.9 2.8 2.2 2.2 2017 9 13 .5 .5 -.5 -.5 -.4 1.2 -731 -684 1.9 4.7 2.3 2.2 3.0 2.8 -.3 -.2 5.6 4.8 2.7 2.4 4.5 2.9 2.3 2.0 1.9 2.8 2.5 2.0 1.9 2018 2 6 .6 .6 -.4 -.3 -.6 1.2 -796 -734 2.7 4.1 1.6 1.3 2.2 1.9 -.7 -1.0 3.7 2.4 2.5 2.4 2.0 2.6 2.6 1.9 1.7 2.4 2.2 1.8 1.7 2019 Class II FOMC – Restricted (FR) 1. Billions of chained (2009) dollars. -459 -459 10.1 12.0 Net exports1 Previous Tealbook1 Exports Imports 8.1 8.1 12.0 12.0 -4.0 -4.0 -5.2 -5.2 Residential investment Previous Tealbook Nonres. priv. fixed invest. Previous Tealbook Equipment & intangibles Previous Tealbook Nonres. structures Previous Tealbook 3.1 3.1 9.3 3.3 2.0 2.0 2.0 3.5 3.5 Final sales Previous Tealbook Priv. dom. final purch. Previous Tealbook Personal cons. expend. Previous Tealbook Durables Nondurables Services 2.7 2.7 2010 Real GDP Previous Tealbook Item Changes in Real Gross Domestic Product and Related Items (Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted) Authorized for Public Release December 7, 2016 Page 90 of 100 -1.2 -1.2 Change in priv. inventories Previous Tealbook .5 .2 .1 .1 .2 .1 .1 .0 .8 .3 1.2 -.3 .0 .4 -.2 .2 .3 .1 -.2 -.2 1.9 1.8 .8 -.1 1.2 2.8 2.2 1.8 1.9 3.3 2.5 Q3 -.3 .2 .4 .5 .2 .1 .1 .2 -.6 -.3 -.1 -.5 .2 .5 .4 .5 -.2 .1 .4 .0 1.5 1.2 .6 .6 .2 1.9 1.9 2.1 1.8 1.6 2.1 Q4 .4 .3 .3 .3 .2 .1 .1 .2 -.7 -.6 .0 -.7 .5 .2 .4 .2 .1 .0 .1 .2 1.8 1.7 .0 .5 1.3 1.9 1.9 2.4 2.2 2.4 2.2 Q1 .0 .1 .3 .3 .1 .1 .1 .1 -.7 -.5 .0 -.7 .3 .3 .3 .2 .0 .0 .1 .3 1.7 1.8 .4 .3 1.1 1.7 2.1 2.1 2.4 1.7 2.2 Q2 .0 -.1 .2 .2 .1 .0 .0 .1 -.6 -.4 .1 -.7 .4 .4 .4 .4 .1 .0 .1 .3 2.5 1.7 .4 .5 1.6 2.6 2.3 3.0 2.5 2.6 2.2 Q3 2017 -.2 -.2 .2 .2 .1 .0 .0 .1 -.4 -.2 .2 -.6 .4 .4 .4 .4 .0 .0 .0 .3 2.1 1.7 .4 .4 1.2 2.3 2.5 2.5 2.4 2.1 2.2 Q4 .0 .2 .2 .2 .0 .0 .0 .1 -.6 -.4 .2 -.8 .3 .3 .3 .3 .0 .0 .1 .2 1.9 1.7 .4 .4 1.1 1.9 2.0 2.4 2.3 1.9 2.2 Q1 .0 -.1 .1 .1 .0 .0 .0 .1 -.5 -.3 .2 -.8 .3 .3 .3 .3 .0 .0 .2 .2 1.9 1.7 .4 .4 1.1 2.0 1.9 2.4 2.2 2.0 1.9 Q2 .0 -.1 .1 .1 .0 .0 .0 .1 -.4 -.3 .2 -.7 .3 .2 .3 .2 .0 .0 .3 .2 1.8 1.6 .3 .4 1.1 2.0 1.9 2.3 2.1 2.0 1.8 Q3 2018 .0 -.1 .0 .0 -.1 -.1 .0 .1 -.2 -.1 .3 -.5 .2 .2 .2 .2 .0 .0 .2 .1 1.8 1.6 .3 .4 1.1 2.0 1.9 2.2 2.0 2.0 1.8 Q4 -.3 -.3 .1 .1 .0 .0 .1 .1 .1 .0 .3 -.2 .0 .1 .0 .1 .0 .0 .1 -.1 1.8 1.7 .5 .4 .9 2.1 2.0 1.9 1.8 1.8 1.7 20161 .1 .0 .3 .3 .1 .1 .1 .1 -.6 -.4 .1 -.7 .4 .3 .4 .3 .0 .0 .1 .3 2.0 1.8 .3 .4 1.3 2.1 2.2 2.5 2.4 2.2 2.2 20171 .0 .0 .1 .1 .0 .0 .0 .1 -.5 -.3 .2 -.7 .3 .3 .3 .3 .0 .0 .2 .2 1.9 1.7 .3 .4 1.1 2.0 1.9 2.4 2.1 2.0 1.9 20181 -.1 .0 .1 .1 .0 .0 .0 .1 -.3 -.3 .3 -.6 .2 .2 .2 .2 .0 .0 .1 .1 1.7 1.6 .1 .4 1.2 1.9 1.7 2.1 1.9 1.8 1.7 20191 Class II FOMC – Restricted (FR) 1. Change from fourth quarter of previous year to fourth quarter of year indicated. -.3 -.3 .0 -.1 .1 -.3 Gov’t. cons. & invest. Previous Tealbook Federal Defense Nondefense State & local .1 .1 .2 .2 -.1 -.1 Nonres. priv. fixed invest. Previous Tealbook Equipment & intangibles Previous Tealbook Nonres. structures Previous Tealbook .2 .2 .2 .0 -.3 -.3 Residential investment Previous Tealbook Net exports Previous Tealbook Exports Imports 2.9 2.9 .7 .8 1.4 2.6 2.6 2.7 2.7 Final sales Previous Tealbook Priv. dom. final purch. Previous Tealbook Personal cons. expend. Previous Tealbook Durables Nondurables Services 1.4 1.4 Q2 Real GDP Previous Tealbook Item 2016 Contributions to Changes in Real Gross Domestic Product (Percentage points, annual rate except as noted) Greensheets Authorized for Public Release December 7, 2016 Page 91 of 100 2.3 2.3 -.4 -.4 5.6 3.4 6.0 3.8 Previous Tealbook Ex. food & energy Previous Tealbook ECI, hourly compensation2 Previous Tealbook2 Business sector Output per hour Previous Tealbook Compensation per hour Previous Tealbook Unit labor costs Previous Tealbook 2.1 1.7 3.7 3.0 4.1 4.1 .4 1.1 1.9 2.1 1.6 1.6 1.9 1.9 -.1 .1 .2 -.4 2.9 3.1 2.7 3.5 2.2 2.2 3.4 3.2 1.9 2.1 2.3 2.2 30.9 25.4 -.5 -.2 1.4 1.5 1.3 1.3 2.6 2.2 Q4 -.4 .4 1.3 1.2 2.9 2.9 1.5 1.7 2.3 2.3 2.5 2.2 2.3 2.4 1.8 1.7 5.6 1.4 1.2 1.2 1.7 1.8 1.6 1.6 2.0 1.8 Q1 .5 .8 .3 1.1 2.9 2.8 2.6 1.6 2.3 2.3 2.2 2.3 2.3 2.3 1.7 1.8 1.4 3.1 1.4 1.4 1.7 1.8 1.6 1.7 2.0 1.8 Q2 1.0 .8 1.4 1.1 3.0 2.8 1.6 1.7 2.3 2.3 2.2 2.3 2.3 2.3 1.6 1.7 .8 2.3 1.9 1.9 1.6 1.6 1.5 1.5 1.8 1.8 Q3 .8 .8 .8 1.1 3.0 2.8 2.2 1.6 2.3 2.3 2.2 2.2 2.3 2.2 1.6 1.6 .7 1.9 2.1 2.1 1.6 1.6 1.5 1.5 1.8 1.7 Q4 Greensheets 1. Change from fourth quarter of previous year to fourth quarter of year indicated. 2. Private-industry workers. 3. Core goods imports exclude computers, semiconductors, oil, and natural gas. .5 .5 2.5 2.5 2.1 2.1 CPI 1.4 1.4 2.1 2.3 -2.1 -2.1 1.7 1.6 1.6 1.5 1.4 1.3 Q3 2017 .7 .8 .7 1.3 3.1 3.1 2.4 1.8 2.4 2.4 2.3 2.3 2.3 2.3 1.9 1.9 .9 2.0 2.2 2.2 1.9 1.9 1.8 1.8 2.0 2.0 Q1 .7 .8 .9 .9 3.1 3.0 2.2 2.0 2.4 2.4 2.2 2.3 2.3 2.3 1.8 1.9 .4 1.6 2.2 2.2 1.9 1.9 1.8 1.8 2.0 2.0 Q2 .7 .8 .9 1.1 3.2 3.0 2.2 1.9 2.5 2.3 2.2 2.3 2.3 2.3 1.7 1.8 .2 1.2 2.2 2.2 1.8 1.8 1.7 1.7 1.9 1.9 Q3 2018 .7 .8 1.1 1.3 3.2 3.0 2.1 1.7 2.5 2.3 2.2 2.3 2.3 2.3 1.8 1.8 .3 1.3 2.2 2.2 1.8 1.8 1.7 1.7 1.9 1.9 Q4 .1 .0 .7 .4 2.9 2.4 2.1 2.0 2.2 2.3 1.8 1.7 2.2 2.2 1.5 1.5 1.7 .7 -1.5 -1.5 1.7 1.7 1.5 1.5 1.7 1.6 20161 .5 .7 1.0 1.1 3.0 2.8 2.0 1.7 2.3 2.3 2.3 2.3 2.3 2.3 1.7 1.7 2.1 2.2 1.7 1.7 1.7 1.7 1.6 1.6 1.9 1.8 20171 .7 .8 .9 1.1 3.2 3.0 2.2 1.9 2.4 2.4 2.2 2.3 2.3 2.3 1.8 1.8 .4 1.5 2.2 2.2 1.8 1.8 1.8 1.8 1.9 2.0 20181 .7 .7 1.1 1.2 3.4 3.2 2.2 1.9 2.5 2.4 2.3 2.3 2.4 2.4 1.9 1.9 .8 1.2 2.2 2.2 1.9 1.9 1.9 1.9 2.0 2.0 20191 Class II FOMC – Restricted (FR) Core goods imports chain-wt. price index3 Previous Tealbook3 2.0 2.0 15.5 15.5 -1.8 -1.8 1.8 1.8 1.6 1.6 2.3 2.3 Q2 PCE chain-wt. price index Previous Tealbook Energy Previous Tealbook Food Previous Tealbook Ex. food & energy Previous Tealbook Ex. food & energy, market based Previous Tealbook GDP chain-wt. price index Previous Tealbook Item 2016 Changes in Prices and Costs (Percent, annual rate except as noted) Authorized for Public Release December 7, 2016 1.3 1.3 6.4 6.4 1.3 1.3 1.0 1.0 .7 .7 1.2 1.2 .6 .6 2.1 2.1 1.6 1.6 1.2 1.2 -.4 -.4 2.3 2.3 PCE chain-wt. price index Previous Tealbook Energy Previous Tealbook Food Previous Tealbook Ex. food & energy Previous Tealbook Ex. food & energy, market based Previous Tealbook CPI Previous Tealbook Ex. food & energy Previous Tealbook ECI, hourly compensation1 Previous Tealbook1 Business sector Output per hour Previous Tealbook Compensation per hour Previous Tealbook Unit labor costs Previous Tealbook Page 92 of 100 Core goods imports chain-wt. price index2 Previous Tealbook2 4.3 4.3 .0 .0 .5 .5 .6 .6 2.2 2.2 3.3 3.3 2.2 2.2 2.7 2.7 12.0 12.0 5.1 5.1 1.9 1.9 1.9 1.9 1.9 1.9 2011 .1 .1 -.2 -.2 5.8 5.8 6.0 6.0 1.8 1.8 1.9 1.9 1.9 1.9 1.8 1.8 2.3 2.3 1.2 1.2 1.8 1.8 1.5 1.5 1.9 1.9 2012 -1.5 -1.5 2.0 2.0 .0 .0 -2.0 -2.0 2.0 2.0 1.2 1.2 1.7 1.7 1.2 1.2 -2.5 -2.5 .7 .7 1.5 1.5 1.1 1.1 1.6 1.6 2013 .5 .5 -.1 -.1 2.7 2.7 2.8 2.8 2.3 2.3 1.2 1.2 1.7 1.7 1.2 1.2 -6.2 -6.2 2.7 2.7 1.6 1.6 1.2 1.2 1.5 1.5 2014 -3.3 -3.3 .5 .5 3.1 3.1 2.6 2.6 1.9 1.9 .4 .4 2.0 2.0 .4 .4 -15.8 -15.8 .3 .3 1.4 1.4 1.1 1.1 1.1 1.1 2015 .1 .0 .7 .4 2.9 2.4 2.1 2.0 2.2 2.3 1.8 1.7 2.2 2.2 1.5 1.5 1.7 .7 -1.5 -1.5 1.7 1.7 1.5 1.5 1.7 1.6 2016 .5 .7 1.0 1.1 3.0 2.8 2.0 1.7 2.3 2.3 2.3 2.3 2.3 2.3 1.7 1.7 2.1 2.2 1.7 1.7 1.7 1.7 1.6 1.6 1.9 1.8 2017 .7 .8 .9 1.1 3.2 3.0 2.2 1.9 2.4 2.4 2.2 2.3 2.3 2.3 1.8 1.8 .4 1.5 2.2 2.2 1.8 1.8 1.8 1.8 1.9 2.0 2018 .7 .7 1.1 1.2 3.4 3.2 2.2 1.9 2.5 2.4 2.3 2.3 2.4 2.4 1.9 1.9 .8 1.2 2.2 2.2 1.9 1.9 1.9 1.9 2.0 2.0 2019 Class II FOMC – Restricted (FR) 1. Private-industry workers. 2. Core goods imports exclude computers, semiconductors, oil, and natural gas. 1.8 1.8 2010 GDP chain-wt. price index Previous Tealbook Item Greensheets Changes in Prices and Costs (Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted) Authorized for Public Release December 7, 2016 59.7 59.7 Employment-to-Population Ratio3 Employment-to-Population Trend3 Page 93 of 100 -2.4 10.8 18.2 3.1 Corporate profits7 Profit share of GNP3 Gross national saving rate3 Net national saving rate3 18.7 3.9 31.4 11.5 4.8 2.7 2.8 5.9 5.7 1.1 17.5 2.0 1.8 .5 .9 74.9 75.0 .2 .0 59.8 59.6 .6 4.9 4.9 5.0 5.0 Q3 18.8 4.1 5.5 11.5 4.3 1.8 1.7 5.8 5.8 1.2 17.7 -1.2 -1.0 .7 .2 74.9 74.8 .3 .1 59.8 59.6 .5 4.8 4.9 5.0 5.0 Q4 18.7 4.0 8.1 11.6 4.4 2.9 3.2 5.9 5.9 1.2 17.3 1.4 .3 .3 -.4 74.8 74.6 .5 .3 59.8 59.5 .5 4.7 4.8 5.0 5.0 Q1 18.9 4.2 5.1 11.6 3.7 2.3 2.2 5.9 5.8 1.2 17.1 .5 .9 .1 .8 74.7 74.6 .6 .5 59.8 59.4 .5 4.7 4.8 5.0 5.0 Q2 2017 18.6 3.8 -.2 11.5 4.4 7.9 2.2 6.8 5.7 1.2 17.0 .5 1.1 .4 1.0 74.6 74.6 .8 .6 59.8 59.4 .6 4.6 4.7 5.0 5.0 Q3 18.4 3.7 -.1 11.4 3.9 2.2 1.9 6.6 5.5 1.3 17.0 .6 1.4 .3 1.1 74.5 74.7 1.0 .8 59.7 59.3 .5 4.5 4.6 5.0 5.0 Q4 18.2 3.5 2.5 11.4 4.0 2.8 2.4 6.5 5.5 1.3 16.9 .9 1.3 .6 1.0 74.4 74.7 1.1 .9 59.7 59.2 .5 4.5 4.6 5.0 5.0 Q1 18.2 3.5 3.1 11.4 4.1 2.2 2.0 6.4 5.4 1.3 16.9 .9 1.1 .8 1.0 74.4 74.8 1.2 1.0 59.7 59.1 .5 4.4 4.5 5.0 5.0 Q2 2018 18.1 3.4 2.0 11.3 3.9 2.1 1.9 6.3 5.3 1.3 16.8 1.1 1.1 1.0 1.0 74.4 74.8 1.3 1.1 59.7 59.1 .5 4.4 4.5 5.0 5.0 Q3 18.1 3.3 1.0 11.2 3.9 2.7 2.4 6.3 5.3 1.4 16.8 1.1 1.0 1.0 .9 74.5 74.8 1.4 1.2 59.6 59.0 .4 4.3 4.4 5.0 5.0 Q4 Greensheets 18.8 4.1 11.5 11.5 3.5 2.4 2.2 5.8 5.8 1.2 17.4 -.4 -.4 .1 .1 74.9 74.8 .3 .1 59.8 59.6 2.3 4.8 4.9 5.0 5.0 20161 18.4 3.7 3.2 11.4 4.1 3.8 2.4 6.6 5.5 1.2 17.1 .8 .9 .3 .6 74.5 74.7 1.0 .8 59.7 59.3 2.2 4.5 4.6 5.0 5.0 20171 18.1 3.3 2.1 11.2 4.0 2.4 2.2 6.3 5.3 1.3 16.9 1.0 1.1 .8 1.0 74.5 74.8 1.4 1.2 59.6 59.0 1.9 4.3 4.4 5.0 5.0 20181 17.7 2.8 2.4 11.1 3.9 2.4 2.4 6.2 5.3 1.4 16.7 1.1 .9 1.0 .9 74.8 75.0 1.6 1.2 59.4 58.7 1.5 4.2 4.4 5.0 5.0 20191 Class II FOMC – Restricted (FR) 1. Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise indicated. 2. Change, millions. 3. Percent; annual values are for the fourth quarter of the year indicated. 4. Percent difference between actual and potential GDP; a negative number indicates that the economy is operating below potential. Annual values are for the fourth quarter of the year indicated. 5. Percent change, annual rate. 6. Level, millions; annual values are annual averages. 7. Percent change, annual rate, with inventory valuation and capital consumption adjustments. 3.7 2.9 2.1 5.9 5.7 1.2 17.1 Housing starts6 Light motor vehicle sales6 Income and saving Nominal GDP5 Real disposable pers. income5 Previous Tealbook5 Personal saving rate3 Previous Tealbook3 -.8 -.8 -1.1 -1.2 74.9 74.9 Industrial production5 Previous Tealbook5 Manufacturing industr. prod.5 Previous Tealbook5 Capacity utilization rate - mfg.3 Previous Tealbook3 .0 -.1 .5 4.9 4.9 5.0 5.0 Employment and production Nonfarm payroll employment2 Unemployment rate3 Previous Tealbook3 Natural rate of unemployment3 Previous Tealbook3 GDP gap4 Previous Tealbook4 Q2 Item 2016 Other Macroeconomic Indicators Authorized for Public Release December 7, 2016 58.3 61.1 -4.2 -4.2 5.9 5.9 5.9 5.9 72.4 72.4 .6 11.6 4.6 2.6 2.6 5.5 5.5 18.0 12.0 15.2 -.3 Employment-to-Population Ratio2 Employment-to-Population Trend2 GDP gap3 Previous Tealbook3 Industrial production4 Previous Tealbook4 Manufacturing industr. prod.4 Previous Tealbook4 Capacity utilization rate - mfg.2 Previous Tealbook2 Housing starts5 Light motor vehicle sales5 Income and saving Nominal GDP4 Real disposable pers. income4 Previous Tealbook4 Personal saving rate2 Previous Tealbook2 Page 94 of 100 Corporate profits6 Profit share of GNP2 Gross national saving rate2 Net national saving rate2 16.1 .8 6.8 12.3 3.6 1.7 1.7 5.8 5.8 .6 12.7 2.6 2.6 2.5 2.5 74.4 74.4 -3.7 -3.7 58.5 60.7 2.0 8.7 8.7 5.9 5.9 2011 18.0 2.9 .6 12.0 3.2 5.1 5.1 9.2 9.2 .8 14.4 2.3 2.3 1.7 1.7 74.3 74.3 -3.7 -3.7 58.7 60.3 2.1 7.8 7.8 5.6 5.6 2012 18.2 3.1 4.7 12.0 4.3 -2.8 -2.8 4.7 4.7 .9 15.5 2.0 2.0 .8 .8 74.6 74.6 -2.5 -2.5 58.5 60.2 2.4 7.0 7.0 5.4 5.4 2013 19.2 4.3 6.6 12.4 4.1 4.5 4.5 5.6 5.6 1.0 16.5 3.5 3.5 2.0 2.0 76.0 76.0 -.9 -.9 59.2 60.1 2.8 5.7 5.7 5.1 5.1 2014 18.8 3.9 -11.2 10.7 3.0 3.0 3.0 6.0 6.0 1.1 17.4 -1.6 -1.6 .0 .0 75.4 75.4 .0 .0 59.4 59.9 2.8 5.0 5.0 5.0 5.0 2015 18.8 4.1 11.5 11.5 3.5 2.4 2.2 5.8 5.8 1.2 17.4 -.4 -.4 .1 .1 74.9 74.8 .3 .1 59.8 59.6 2.3 4.8 4.9 5.0 5.0 2016 18.4 3.7 3.2 11.4 4.1 3.8 2.4 6.6 5.5 1.2 17.1 .8 .9 .3 .6 74.5 74.7 1.0 .8 59.7 59.3 2.2 4.5 4.6 5.0 5.0 2017 18.1 3.3 2.1 11.2 4.0 2.4 2.2 6.3 5.3 1.3 16.9 1.0 1.1 .8 1.0 74.5 74.8 1.4 1.2 59.6 59.0 1.9 4.3 4.4 5.0 5.0 2018 17.7 2.8 2.4 11.1 3.9 2.4 2.4 6.2 5.3 1.4 16.7 1.1 .9 1.0 .9 74.8 75.0 1.6 1.2 59.4 58.7 1.5 4.2 4.4 5.0 5.0 2019 Class II FOMC – Restricted (FR) 1. Change, millions. 2. Percent; values are for the fourth quarter of the year indicated. 3. Percent difference between actual and potential GDP; a negative number indicates that the economy is operating below potential. Values are for the fourth quarter of the year indicated. 4. Percent change. 5. Level, millions; values are annual averages. 6. Percent change, with inventory valuation and capital consumption adjustments. .8 9.5 9.5 5.9 5.9 2010 Employment and production Nonfarm payroll employment1 Unemployment rate2 Previous Tealbook2 Natural rate of unemployment2 Previous Tealbook2 Item Greensheets Other Macroeconomic Indicators (Change from fourth quarter of previous year to fourth quarter of year indicated, unless otherwise noted) Authorized for Public Release December 7, 2016 Page 95 of 100 -781.8 .6 .5 .3 .1 .1 .3 .4 .3 .3 .0 .1 .2 -738 -623 -636.2 3,566 4,301 1,011 602 408 3,290 -735 275 3,495 4,124 974 589 385 3,149 -629 266 405 779 -51 -136 3,398 3,990 -591 -589 -991 3,779 4,760 1,043 615 428 3,717 -981 285 406 952 1 -120 3,595 4,427 -832 -637 2019 .3 .1 .0 .1 .2 .9 .3 .1 .0 .1 .2 .4 -995.2 -1,106.3 -910 3,612 4,514 1,035 612 423 3,478 -902 282 407 838 -2 -120 3,430 4,146 -716 -536 2018 Fiscal year 2017 -658.5 -.1 -.1 -.1 .0 -.3 .2 .7 .5 .5 -.1 .4 .2 -646 -662 -670.6 3,485 4,137 975 586 389 3,163 -652 265 364 8 -50 -18 993 932 61 61 354 241 10 -65 798 984 -186 -187 Q3a .3 .2 .2 .0 .2 .0 -668.4 -646 3,537 4,188 985 591 394 3,203 -650 267 2016 Q2a 3,442 4,111 969 587 382 3,142 -668 265 314 251 20 -25 711 956 -245 -245 Q1a .6 .7 .2 .2 .2 .1 -688.0 -657 3,557 4,216 994 595 398 3,222 -659 270 489 368 -135 -46 778 964 -187 -210 Q4 2017 Q3 396 -40 -17 -30 1,078 991 87 81 405 213 -8 -30 803 978 -175 -131 Q4 417 303 -13 -30 764 1,025 -261 -220 Not seasonally adjusted Q2 .4 .4 .2 .2 .1 .2 -740.3 -703 .4 .4 .1 .1 .1 .0 -742.6 -694 .9 .3 .1 .1 .7 1.1 -956.3 -897 .5 .3 .1 .1 .3 .0 -962.7 -890 Seasonally adjusted annual rates 3,590 3,632 3,483 3,520 4,292 4,322 4,374 4,403 1,009 1,017 1,023 1,028 602 605 607 609 407 412 416 420 3,282 3,305 3,351 3,375 -701 -690 -891 -883 274 277 279 280 380 238 109 -30 739 1,056 -317 -329 Q1 -915 3,644 4,550 1,038 614 424 3,512 -906 283 405 -4 -5 -30 1,087 1,049 38 96 407 159 -2 -30 844 970 -127 -78 Q3 -915 3,685 4,591 1,040 614 426 3,551 -906 283 2018 Q2 Greensheets -927 3,723 4,642 1,040 613 426 3,602 -919 283 407 336 -0 -30 817 1,123 -306 -265 Q4 .4 .2 .0 .1 .2 .1 .3 .1 .0 .1 .2 .0 .3 .1 .0 .1 .2 .0 .3 .1 -.1 .1 .2 .1 -998.9 -1,004.7 -1,014.3 -1,036.4 -921 3,599 4,511 1,035 613 422 3,476 -913 282 400 379 18 -30 735 1,102 -367 -334 Q1 Class II FOMC – Restricted (FR) 1. Other means of financing include checks issued less checks paid, accrued items, and changes in other financial assets and liabilities. 2. Gross saving is the current account surplus plus consumption of fixed capital of the general government as well as government enterprises. 3. HEB is gross saving less gross investment (NIPA) of the federal government in current dollars, with cyclically sensitive receipts and outlays adjusted to the staff’s measure of potential output and the natural rate of unemployment. The sign on Change in HEB, as a percent of nominal potential GDP, is reversed. Quarterly figures for change in HEB are not at annual rates. 4. Fiscal impetus measures the contribution to growth of real GDP from fiscal policy actions at the general government level (excluding multiplier effects). It equals the sum of the direct contributions to real GDP growth from changes in federal purchases and state and local purchases, plus the estimated contribution from real consumption and investment that is induced by discretionary policy changes in transfers and taxes. a Actual. Fiscal indicators High-employment (HEB) surplus/deficit3 Change in HEB, percent of potential GDP Fiscal impetus (FI), percent of GDP4 Previous Tealbook Federal purchases State and local purchases Taxes and transfers NIPA federal sector Receipts Expenditures Consumption expenditures Defense Nondefense Other spending Current account surplus Gross investment Gross saving less gross investment2 354 1,052 -155 -310 Means of financing: Borrowing Cash decrease Other1 Cash operating balance, end of period 3,267 3,854 -587 -587 2016 Unified budget Receipts Outlays Surplus/deficit Previous Tealbook Item Staff Projections of Federal Sector Accounts and Related Items (Billions of dollars except as noted) Authorized for Public Release December 7, 2016 1.6 1.5 -.3 .9 -.5 .0 -1.1 -1.1 2.9 2.3 .0 3.1 4.4 2.9 11.8 Consumer prices 2 Total foreign Previous Tealbook Advanced foreign economies Canada Japan United Kingdom Euro area Germany Emerging market economies Asia Korea China Latin America Mexico Brazil Page 96 of 100 2 1.7 1.7 .7 .9 -.9 1.9 1.1 1.2 2.3 1.3 .7 1.4 4.7 3.8 6.5 2.9 2.5 2.4 3.5 2.2 2.0 1.4 .8 3.5 4.8 2.5 6.8 2.5 4.0 -3.3 GDP aggregates calculated using shares of U.S. exports. Foreign CPI aggregates calculated using shares of U.S. non-oil imports. 2.0 2.0 1.2 2.3 -.5 .9 1.2 1.3 2.6 2.3 .8 2.3 3.6 2.1 7.5 1.2 .9 .2 -1.3 .7 2.7 1.2 1.7 2.1 5.0 3.2 7.1 -.6 .2 -1.7 Q2 2.2 2.5 1.4 2.2 .3 1.7 1.3 1.3 2.7 2.0 3.5 1.8 4.4 3.9 3.6 2.2 2.3 1.8 2.1 .9 1.7 1.7 2.8 2.7 4.3 2.3 6.3 1.4 2.0 -1.0 2.4 2.5 1.6 2.2 .6 3.5 1.3 1.4 3.0 2.4 1.8 2.4 4.3 3.5 5.3 2.4 2.5 1.8 2.3 1.0 1.2 1.6 2.0 3.0 4.4 2.5 6.2 1.8 2.0 .5 2.4 2.4 1.6 2.2 .8 2.9 1.3 1.5 3.1 2.6 2.4 2.5 4.2 3.4 5.4 2.5 2.6 1.8 2.2 1.0 1.2 1.6 1.8 3.1 4.6 2.9 6.1 1.9 2.0 1.0 2.5 2.4 1.5 2.0 .9 2.5 1.3 1.6 3.1 2.7 2.4 2.5 4.2 3.4 5.2 2.5 2.5 1.7 2.0 .9 1.4 1.7 1.7 3.3 4.6 3.1 6.1 2.1 2.1 1.5 2.5 2.4 1.5 1.9 1.0 2.2 1.4 1.7 3.2 2.7 2.4 2.5 4.1 3.4 5.2 2.6 2.6 1.8 2.0 .9 1.5 1.7 1.7 3.3 4.6 3.0 6.0 2.3 2.3 2.0 2.5 2.4 1.6 1.9 1.0 2.0 1.4 1.8 3.1 2.8 2.8 2.5 4.0 3.2 5.0 2.6 2.6 1.8 2.0 .8 1.4 1.7 1.6 3.4 4.5 3.0 5.9 2.5 2.4 2.1 2.5 2.5 1.6 1.9 1.1 2.0 1.4 1.8 3.1 2.8 3.0 2.5 3.9 3.2 4.9 2.6 2.6 1.8 2.0 .8 1.4 1.8 1.6 3.4 4.5 3.0 5.9 2.5 2.4 2.1 2.5 2.5 1.6 1.9 1.2 2.0 1.5 1.9 3.1 2.8 3.0 2.5 3.9 3.2 4.9 2.5 2.6 1.7 1.7 .8 1.4 1.8 1.6 3.4 4.5 3.0 5.8 2.5 2.4 2.1 2.5 2.5 1.6 1.9 1.3 2.0 1.5 1.9 3.1 2.8 3.0 2.5 3.8 3.2 4.7 2.5 2.6 1.7 1.7 .8 1.4 1.8 1.6 3.4 4.4 3.0 5.8 2.4 2.4 2.1 -----------------------------------------------Projected----------------------------------------------2017 2018 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Class II FOMC – Restricted (FR) 1 Foreign 2.5 2.5 2.4 2.7 2.1 1.7 2.0 2.9 2.7 4.1 2.1 6.5 1.0 1.9 -1.8 Q1 Real Total foreign Previous Tealbook Advanced foreign economies Canada Japan United Kingdom Euro area Germany Emerging market economies Asia Korea China Latin America Mexico Brazil GDP 1 Measure and country 2016 Foreign Real GDP and Consumer Prices: Selected Countries (Quarterly percent changes at an annual rate) Greensheets Authorized for Public Release December 7, 2016 Page 97 of 100 3.4 3.4 2.2 2.7 -.3 4.6 2.9 2.6 4.3 4.4 3.9 4.6 4.1 3.5 6.7 Consumer prices 2 Total foreign Previous Tealbook Advanced foreign economies Canada Japan United Kingdom Euro area Germany Emerging market economies Asia Korea China Latin America Mexico Brazil 2.3 2.3 1.3 1.0 -.2 2.6 2.3 1.9 3.1 2.6 1.7 2.0 4.4 4.1 5.6 2.3 2.3 .2 .7 .0 1.3 -1.1 .2 4.3 5.7 2.1 8.0 3.4 3.4 2.5 2.4 2.4 1.0 1.0 1.4 2.1 .8 1.4 3.4 3.1 1.1 2.9 4.1 3.6 5.8 2.9 2.8 2.4 3.6 2.1 2.4 .7 1.6 3.4 5.3 3.5 7.6 1.6 1.1 2.6 2013 2 Foreign 2.0 2.0 1.1 1.9 2.5 .9 .1 .4 2.7 1.8 1.0 1.5 4.9 4.2 6.5 2.5 2.5 1.7 2.2 -.9 3.5 1.3 1.6 3.3 5.0 2.7 7.1 1.9 2.7 -.3 2014 Greensheets Foreign GDP aggregates calculated using shares of U.S. exports. CPI aggregates calculated using shares of U.S. non-oil imports. 3.2 3.2 1.8 3.1 .3 1.3 .5 2.4 4.6 5.1 2.9 8.7 4.1 4.2 2.6 Real GDP 1 Total foreign Previous Tealbook Advanced foreign economies Canada Japan United Kingdom Euro area Germany Emerging market economies Asia Korea China Latin America Mexico Brazil 2012 1.4 1.4 .5 1.3 .3 .1 .2 .2 2.1 1.5 1.1 1.5 3.4 2.3 10.4 1.9 1.9 1.1 .4 .9 1.7 2.0 1.3 2.7 4.4 3.1 6.8 1.3 2.5 -5.8 2015 1.9 1.9 .8 1.6 -.4 1.1 .6 .7 2.6 2.0 1.3 2.2 4.3 3.2 7.3 2.2 2.0 1.7 1.7 1.5 2.0 1.6 2.0 2.7 4.5 2.5 6.7 1.0 2.0 -2.0 2.4 2.4 1.6 2.0 .9 2.8 1.3 1.5 3.1 2.6 2.3 2.5 4.2 3.4 5.3 2.5 2.5 1.8 2.1 .9 1.3 1.6 1.8 3.2 4.5 2.9 6.1 2.0 2.1 1.2 2.5 2.5 1.6 1.9 1.1 2.0 1.5 1.8 3.1 2.8 3.0 2.5 3.9 3.2 4.9 2.6 2.6 1.7 1.8 .8 1.4 1.8 1.6 3.4 4.5 3.0 5.8 2.4 2.4 2.1 2.6 2.6 1.8 2.0 2.4 1.9 1.5 1.9 3.1 2.9 3.0 2.5 3.6 3.2 4.5 2.6 2.6 1.7 1.9 .1 1.6 1.9 1.6 3.5 4.4 2.9 5.7 2.7 2.8 2.2 --------------------Projected--------------------2016 2017 2018 2019 Class II FOMC – Restricted (FR) 1 2011 Measure and country Foreign Real GDP and Consumer Prices: Selected Countries (Percent change, Q4 to Q4) Authorized for Public Release December 7, 2016 Page 98 of 100 -460.4 -460.4 -3.0 -3.0 -548.6 229.0 298.6 -69.5 -140.8 2011 -527.4 -527.4 -2.9 -2.9 -500.9 147.0 219.6 -72.6 -173.5 Q3 2012 -452.2 -441.2 -2.4 -2.4 -465.7 183.0 257.3 -74.3 -169.4 -446.5 -446.5 -2.8 -2.8 -536.8 224.4 293.8 -69.4 -134.2 -477.5 -479.5 -2.6 -2.6 -499.0 183.1 253.0 -69.8 -161.7 Q2 -366.4 -366.4 -2.2 -2.2 -461.9 228.4 296.3 -67.9 -132.9 2013 Q2 Q3 -392.1 -392.1 -2.3 -2.3 -490.2 234.3 289.0 -54.8 -136.1 2014 2015 -589.1 -561.3 -3.0 -2.9 -578.3 159.6 277.8 -118.2 -170.4 -463.0 -463.0 -2.6 -2.6 -500.4 193.4 265.4 -72.0 -156.0 -688.0 -629.6 -3.5 -3.2 -644.7 132.0 286.3 -154.3 -175.3 Q1 -698.7 -628.5 -3.5 -3.1 -656.6 122.3 295.4 -173.1 -164.3 Q2 -728.8 -648.9 -3.6 -3.2 -674.7 116.3 309.4 -193.0 -170.4 Q3 -758.1 -671.5 -3.7 -3.3 -693.9 102.3 316.4 -214.1 -166.4 Q4 -576.1 -554.1 -3.0 -2.9 -568.0 161.1 271.9 -110.8 -169.1 -718.4 -644.6 -3.6 -3.2 -667.5 118.3 301.9 -183.6 -169.1 -825.3 -738.1 -3.9 -3.5 -727.9 71.8 340.5 -268.7 -169.1 --------------------Projected--------------------2016 2017 2018 2019 -626.1 -582.3 -3.2 -3.0 -606.0 146.4 282.2 -135.8 -166.4 Q4 -484.5 -484.0 -2.6 -2.6 -488.1 171.4 243.4 -72.0 -167.8 Billions of dollars -545.4 -535.1 -2.8 -2.8 -551.6 170.6 272.1 -101.4 -164.3 Billions of dollars, s.a.a.r. Q1 -543.8 -537.8 -2.9 -2.8 -536.1 167.7 255.4 -87.7 -175.3 Annual Data -480.9 -487.9 -2.5 -2.6 -486.8 172.4 243.6 -71.3 -166.4 Q4 -----------------------------------------------Projected----------------------------------------------2017 2018 Class II FOMC – Restricted (FR) U.S. current account balance Previous Tealbook Current account as percent of GDP Previous Tealbook Net goods & services Investment income, net Direct, net Portfolio, net Other income and transfers, net U.S. current account balance Previous Tealbook Current account as percent of GDP Previous Tealbook Net goods & services Investment income, net Direct, net Portfolio, net Other income and transfers, net Q1 2016 Quarterly Data U.S. Current Account Greensheets Authorized for Public Release December 7, 2016 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 Abbreviations ABS asset-backed securities AFE advanced foreign economy BEA Bureau of Economic Analysis BOE Bank of England CD certificate of deposit CMBS commercial mortgage-backed securities CP commercial paper CRE commercial real estate Desk Open Market Desk DSGE dynamic stochastic general equilibrium ECB European Central Bank EME emerging market economy EU European Union FOMC Federal Open Market Committee; also, the Committee GDP gross domestic product JOLTS Job Openings and Labor Turnover Survey LMCI labor market conditions index Michigan survey University of Michigan Surveys of Consumers MMF money market fund NIPA national income and product accounts OIS overnight index swap ON RRP overnight reverse repurchase agreement OPEC Organization of the Petroleum Exporting Countries PCE personal consumption expenditures PDFP private domestic final purchases Page 99 of 100 Authorized for Public Release Class II FOMC – Restricted (FR) December 7, 2016 PMI purchasing managers index repo repurchase agreement SOMA System Open Market Account S&P Standard & Poor’s TIPS Treasury Inflation-Protected Securities Page 100 of 100
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