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CBIA and the Metro Hartford Alliance Economic Summit & Outlook 2013 Recent Developments in the US Economy Christine Cumming, First Vice President January 4, 2013 Disclaimer The views expressed are the presenter’s and not those of the Federal Reserve Bank of New York or the Federal Reserve System. 2 Overview Recovery from the Great Recession has been slower than earlier post-war recoveries. Some recent features: Consumer spending on durable goods and housing gaining strength. In contrast, growth of business fixed investment and exports has slowed substantially over the course of 2012. Manufacturing output also declined in the second half of 2012. Unemployment has remained fairly high; much of the fall reflects falling labor force participation, and the ratio of employed workers to working-age population has remained unusually low. Inflationary pressures are quite subdued, but episodes of energy and food price inflation keep inflation concerns alive. Policymakers face unfamiliar and difficult policy choices in both monetary and fiscal policy. Major changes in the global economy create some urgency in addressing the economic problems. 3 Growth of Real Consumer Spending and Income Yr/Yr % Change Yr/Yr % Change 16 16 Real PCE: Durable Goods 12 12 8 8 4 4 0 0 -4 Real PCE: Services -8 Real Disposable Personal Income per Capita -4 -8 -12 -12 -16 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -16 Source: Bureau of Economic Analysis Household Financial Obligation Ratio Ratio Ratio 19.0 19.0 18.5 18.5 Household Financial Obligation Ratio 18.0 18.0 17.5 17.5 17.0 17.0 16.5 16.5 16.0 16.0 15.5 15.5 15.0 1980 15.0 1985 1990 1995 2000 2005 2010 5 Source: Federal Reserve Board Consumer Debt by Credit Score Quintile % Change – 4-Quarter % Change – 4-Quarter 25 25 20 20 15 15 3rd Quintile 10 5 10 5th Quintile 5 0 0 4th Quintile 1st Quintile -5 -5 2nd Quintile -10 -10 -15 2006 -15 2007 2008 2009 2010 2011 2012 6 Source: FRBNY Consumer Credit Panel Housing Starts Units (Thousands) 525 Units (Thousands) 2000 1 Unit (Right Scale) 450 1600 375 1200 300 225 Multifamily (Left Scale) 800 150 400 75 0 2001 2002 2003 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 7 Source: Census Bureau Single Family Housing Market Months’ Supply Index 230 13 200 170 NAR Months’ Supply of Single Family Homes on the Market (Right Axis) 12 CoreLogic Single Family Detached House Price Index (Left Axis) 10 11 9 140 8 110 7 6 80 5 50 4 20 1984 Sellers’ Market 1987 1990 1993 1996 1999 2002 2005 2008 3 2011 8 Source: CoreLogic, National Association of Realtors Household Formations 2 Year Avg. Change 2 Year Avg. Change 2000 2000 Renter Occupied 1500 1500 1000 1000 500 500 Total Occupied 0 0 -500 -500 Owner Occupied -1000 2003 -1000 2005 2007 2009 2011 2013 9 Source: Bureau of the Census Real Business Nonresidential Fixed Investment (Series Set to 1.00 at NBER Peak) Ratio Ratio 1.50 1.50 1.40 1.40 1990 Cycle 1.30 1.20 1.30 1.20 1981 Cycle 1.10 1.10 1973 Cycle 1.00 1.00 0.90 0.90 2001 Cycle 0.80 0.80 Current Cycle 0.70 0.70 -2 0 2 4 6 8 10 12 Quarters Since NBER Peak 14 16 18 20 10 Source: Bureau of Economic Analysis Real Exports of Goods and Services (Series Set to 1.00 at NBER Peak) Ratio Ratio 1.50 1.50 1.40 1.40 1.30 1.30 1.20 1.20 1990 Cycle 1973 Cycle 1.10 1.10 1.00 1.00 1981 Cycle 0.90 2001 Cycle 0.90 Current Cycle 0.80 0.80 0.70 0.70 -2 0 2 4 6 8 10 12 Quarters Since NBER Peak 14 16 18 20 11 Source: Bureau of Economic Analysis Real Government Expenditures & Investment (Series Set to 1.00 at NBER Peak) Ratio Ratio 1.30 1.30 1.25 1.25 1.20 1.20 1981-82 Cycle 1.15 1.10 1.15 1.10 2001 Cycle 1973-75 Cycle 1.05 1.05 Current Cycle 1.00 1.00 1990-91 Cycle 0.95 0.95 -2 0 2 4 6 8 10 12 Quarters Since NBER Peak 14 16 18 20 12 Source: Bureau of Economic Analysis Industrial Production % Change - 6 months AR 125 % Change - 6 months AR 125 100 100 75 75 50 50 High Tech 25 25 0 0 -25 Autos and Parts -50 Excl. High Tech and Autos and Parts -75 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Federal Reserve Board -25 -50 -75 Monthly Change in Private Employment by Sector 3MMA Change, Thousands 3MMA Change, Thousands 400 400 Service-Providing Industries 200 200 0 0 Goods-Producing Industries -200 -200 -400 -400 -600 2000 -600 2002 2004 2006 2008 2010 2012 14 Source: Bureau of Labor Statistics Measures of the Employment Situation Percent Percent 12 68 67 10 66 Labor Force Participation Rate (Right Axis) 8 65 64 63 6 4 62 Employment to Population Ratio (Right Axis) Unemployment Rate (Left Axis) 2 61 60 59 58 57 0 2000 56 2002 2004 2006 2008 2010 2012 15 Source: Bureau of Labor Statistics Consumer Price Inflation 12-Month % Change 12-Month % Change 10 60 50 5 Total CPI (Left Axis) CPI- Food (14.2%) (Left Axis) 40 30 20 10 0 0 -10 CPI- Energy (10.2%) (Right Axis) -5 2000 -20 -30 2002 2004 2006 2008 2010 2012 16 Source: Bureau of Labor Statistics Note: Numbers in Parentheses Denote Latest Monthly Weights Core CPI Percent Percent 4.0 4.0 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 12-Month Change 1.0 1.0 3-Month Change Annual Rate 0.5 0.5 0.0 -0.5 2001 0.0 -0.5 2003 2005 2007 2009 2011 2013 17 Source: Bureau of Labor Statistics TIPS Based Inflation Expectations Percent Percent 4 4 5-10 Years December 28: 2.74 3 3 2 2 1 1 December 28: 2.68 4-5 Years 0 0 2-3 Years -1 2006 December 28: 2.50 -1 2007 2008 2009 2010 2011 2012 2013 18 Source: Federal Reserve Board Note: Carry-adjusted. Policy Responses to the Slow Recovery The Great Recession involved both a deep recession and deep financial distress. Well-documented that generating robust recovery in such circumstances is difficult. Also well-documented that risk exists that premature policy tightening can stall out the recovery. Tools for generating the robust recovery: Monetary Policy Fiscal Policy Trade policy/Regulatory policy 19 Monetary Policy From the Federal Open Market Committee’s December 12, 2012 statement: The FOMC’s intention is to support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate. The Federal Funds rate target range is from 0 to ¼ point. The FOMC announced plans to purchase agency mortgage-backed securities at a pace of $40 billion per month and start purchasing longer-term Treasury securities, initially at a pace of $45 billion per month. It expects the purchases to maintain downward pressure on longer-term interest rates, support mortgage markets, and make broader financial conditions more accommodative. The program of securities purchases is open-ended. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved The FOMC currently anticipates that the “exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longerterm inflation expectations continue to be well anchored. 20 Actual and Expected Fed Funds Target Percent Percent 5.50 5.50 5.00 5.00 4.50 4.50 4.00 4.00 3.50 3.50 3.00 3.00 2.50 2.50 2.00 2.00 1.50 January 1, 2013 Actual 1.00 1.50 1.00 December 12, 2012 0.50 0.50 0.00 2004 2005 0.00 2006 2007 2008 2009 2010 2011 Source: Federal Reserve Board and staff estimates. 2012 2013 2014 2015 2016 Table 1: Tax and Spending Provisions of the “Fiscal Cliff” Impact on Calendar 2013 Deficit Baseline Provisions Payroll Tax Cut Affordable Care Act Taxes Emergency Unemployment Benefits Partial Expensing Discretionary Spending Budget Control Act caps Overseas defense drawdown Billions of Dollars -127 -24 -35 -87 % of GDP 0.8 0.1 0.2 0.5 -29 -15 0.2 0.1 Subtotal -317 1.9 Additional Provisions of Full Fiscal Cliff 2001-2003 tax cuts and AMT Medicare "Doc fix" Regular Tax extenders (ie, R&D credit) Full Sequester (additional amount) -295 -15 -47 -87 1.8 0.1 0.3 0.5 Subtotal -444 2.7 Total -761 4.7 Source: Congressional Budget Office. Provisions incorporated in consensus baseline from National Association for Business Economics, October 2012. 22 American Taxpayer Relief Act of 2012 Major Individual Income Tax Provisions 2 percentage point reduction of payroll tax in effect in 2011 and 2012 is allowed to expire. Extends permanently the Bush individual income tax rate schedule except as follows: ▫ ▫ ▫ Permanently establishes the estate tax rate at 40% with a $5 million exemption per spouse, indexed for inflation. ( up from 35% in 2012). Permanent Alternative Minimum Tax (AMT) fix. ▫ Creates a new 39.6% marginal tax rate on taxable income greater than $450,000 for a joint return, $400,000 for a single return. Reintroduces the phasing out of personal exemptions and itemized deductions at the rate of 3% of the amount of AGI above $300,000 (joint return), $250,000 (single return). Raises the tax rate on long-term capital gains and qualified dividends for those subject to the 39.6% marginal tax rate to 20% (from 15%). Additional ACA tax raises the rate to 23.8%. Raise the AMT exemption amount for 2012 to $78,750 (joint) and index exemption, exemption phaseout threshold, and income bracket for inflation. One year extension of deduction of state and local sales taxes. Major Business Tax Provisions One year extension of 50% bonus depreciation for qualified investment. One year extension of research and experimentation tax credit. One year increase in Section 179 expensing amount and threshold. One year extension of tax credit for renewable electricity production. Major Spending Provisions Extend Emergency Unemployment Benefits for one year. Postpones for one year deep cuts in reimbursements for doctors seeing Medicare beneficiaries. ▫ (This is paid for by $25 billion over 10 years in reduced reimbursement rates for hospitals and other providers.) Postpones the sequester for 2 months. ▫ (This is paid for with $24 billion of additional revenue and spending cuts?) 23 1003 Stance of Fiscal Policy Change in Full Employment Budget Balance as a Percent of Potential GDP Percent of Potential GDP Percent of Potential GDP 6 Full Fiscal Cliff 4 Budget Agreement 2 6 4 2 0 0 -2 -2 -4 -4 -6 -6 1962 1968 1974 1980 1986 1992 1998 Source: Congressional Budget Office and staff estimate. 2004 2010 24 State & Local Government Receipts Year/Year % Change Year/Year % Change 30 30 25 25 20 20 Federal Grants in Aid 15 15 Total Receipts 10 10 5 5 0 0 Tax Receipts -5 -5 -10 -10 -15 -15 -20 1990 -20 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 25 Source: Bureau of Economic Analysis Private and Public Balances Percent of GDP Percent of GDP 10 10 Households Business 5 5 0 0 -5 -5 Government -10 -15 1970 Current Account -10 -15 1975 1980 1985 1990 1995 2000 2005 2010 26 Source: Bureau of Economic Analysis Note: Shading represents NBER recessions. The US in the Global Economy Resolving our issues and resuming strong, sustainable growth is key to our economic leadership. The emerging market countries are beginning to achieve the income levels and wealth the US hoped for and worked toward in the early years after World War II. The growth in emerging market economies greatly outpaces growth in the advanced economies, but emerging market growth is slowing as standards of living start catching up to advanced country levels, demographic trends slowly converge to those of the advanced countries, and emerging markets’ customers in the advanced economies have cyclically slowed. 27 The Advanced Economies: The U.S., Europe and Japan While the details differ across the advanced economies, all have a similar dilemma: All three major regions are experiencing slow growth and seeking more of a “break-out” recovery. All have had substantial financial sector dislocations. All have similar significant fiscal problems: high debt to GDP ratios, large deficits, high contingent liabilities such as public pensions and medical insurance. All are exploring unconventional monetary measures given the zero bound on interest rates and wrestling with fiscal choices. 28 Real GDP Growth Percent, Y/Y Percent 16 16 14 14 12 12 China 10 10 8 8 6 6 Other EMEs 4 4 2 2 0 0 Advanced Economies -2 -2 -4 -4 -6 2007 -6 2008 2009 2010 2011 2012 Other EMEs include India, Indonesia, Hong Kong, Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand, Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela, Hungary, Russia, South Africa, Poland, Turkey, Ukraine (from 2002) Source: National authorities Percentage Distribution of Global GDP Percent Percent 60 60 50 Other Advanced EMEs 50 40 40 30 30 US 20 20 10 10 0 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: IMF