Full text of FedViews : October 9, 2014
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Twelfth Federal Reserve District FedViews October 9, 2014 Economic Research Department Federal Reserve Bank of San Francisco 101 Market Street San Francisco, CA 94105 Also available upon release at http://www.frbsf.org/economic-research/publications/fedviews/ Reuven Glick, group vice president at the Federal Reserve Bank of San Francisco, states his views on the current economy and the outlook. Real GDP grew at an annual rate of 4.6% in the second quarter, according to the latest release from the Bureau of Economic Analysis. This represented an upward revision from the prior estimates of 4.2% in late August and 4.0% in July. The second-quarter growth rate indicates a significant rebound from the first-quarter dip of –2.1%, which was attributable to transitory factors, including bad weather, weak exports, and inventory cutbacks. Contributions from greater consumption, stronger exports, and inventory buildups boosted activity in the second quarter. After taking away the inventory bounceback effect, our forecast is for continued moderate growth at a pace of about 3%. The most recent economic data for the third quarter have been largely in line with expectations. Retail sales and consumer spending in August were healthy. The manufacturing sector continues to expand. However, housing data remain somewhat soft. Construction spending and existing home sales eased in August, although new home sales were up. Labor market conditions have continued to improve. Nonfarm payrolls rose by 248,000 in September, and total payroll employment in July and August were revised upward. The recent data are consistent with the view that the relatively weak August figures resulted from temporary factors such as a grocers strike in New England. Over the past six months, the economy has added an average of 245,000 jobs per month, the strongest stretch of gains since before the recession. Employment growth this year has helped lower the unemployment rate, which edged down from 6.1% in August to 5.9% in September. However, after remaining steady in recent months, labor force participation declined in September to 62.7%, the lowest rate in several decades. We expect the unemployment rate to continue to fall. Inflation remains subdued. Overall and core consumer prices, as measured by the price index for personal consumption expenditures, rose just 1.5% in August compared with a year earlier. This is below the Federal Open Market Committee’s long-run objective of 2%. We forecast that inflation will slowly increase toward the 2% objective. There are several risks to the outlook, particularly from abroad. These include the prospect of weaker foreign demand from abroad. Japan is growing more slowly after its consumption sales tax increase in April. Although Japan’s monetary policy has been highly accommodative, concerns exist about its The views expressed are those of the author, with input from the forecasting staff of the Federal Reserve Bank of San Francisco. They are not intended to represent the views of others within the Bank or within the Federal Reserve System. FedViews generally appears around the middle of the month. The next FedViews is scheduled to be released on or before November 17, 2014. ability to achieve its goal of 2% inflation and whether another tax increase scheduled for next year will derail the economy further. Since 2011, China’s growth has been declining due to slower world growth, as well as efforts by Chinese policymakers to rely less on investment and exports and more on domestic consumption as an engine of growth. More recently, falling nationwide property and home sales have become an increasing drag on the economy, raising concerns about whether the country will meet its official target growth rate of 7.5%. The overhang of the massive expansion of credit China created to engineer its recovery from the global recession of 2008–09 has created concerns about credit risk. This is particularly true in local government infrastructure projects and the property sector where much of the money flowed. China now faces the challenge of whether to expand credit again, implement more targeted accommodative policies, or accept lower growth. After emerging from its most recent recession in mid-2013, euro-area GDP growth has stalled. Low growth has been accompanied by extremely low inflation. Headline inflation slowed to 0.3% in September over the 12 months prior. This is well below the European Central Bank’s (ECB) target of “below, but close to,” 2%. The euro area’s disappointing performance has fueled uncertainty about its economic recovery and fears about the threat of deflation. These concerns have prompted efforts by the ECB to further stimulate the economy by cutting its main policy rates further. Since June, it has lowered its refinancing rate by 20 basis points to 0.05% and its deposit rate by 20 basis points to –0.2%. In addition, the ECB announced efforts to expand its balance sheet by extending more credit to commercial banks through targeted long-term refinancing operations and by purchasing asset-backed securities and covered bonds. However, the extent to which these measures will add to the balance sheet and stimulate the economy are unclear. The recent appreciation of the dollar poses another risk to the U.S. outlook. Demand for the dollar has been spurred by weaker conditions abroad, global geopolitical tensions, and by expectations that U.S. interest rates will rise in the next year. The appreciation of the dollar is likely to be a drag on U.S. net exports and growth, as well as dampen import costs and U.S. inflation. Solid job growth this year Economy growing at a moderate pace Nonfarm payroll employment Real GDP % Quarterly percent change at seasonally adjusted annual rate 6 Thousands Monthly change; seasonally adjusted 400 Q2 350 4 Monthly change 2 6-Month moving average Sep. 248 0 FRBSF forecast Actual 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 300 250 -2 200 -4 150 -6 100 -8 50 -10 2011 Source: Bureau of Economic Analysis and FRBSF staff 2012 2013 0 2014 Source: Bureau of Labor Statistics Unemployment gradually declining Inflation gradually returning to target Unemployment rate and forecast Sesaonally adjusted monthly observations, forecast is quarterly average % PCE price inflation % Percent change from 4 quarters earlier 5 12 4 10 Sep. 5.9 8 FRBSF Forecasts Overall PCE price index Target rate 3 2 Q2 6 FRBSF forecasts Core PCE price index 4 1 0 2 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 0 Source: Bureau of Labor Statistics and FRBSF staff -1 2007 2008 2009 2010 2011 2012 2013 2014 2015 -2 2016 Source: Bureau of Economic Analysis and FRBSF staff China hesitant to expand credit China may not meet 7.5% growth target Real GDP growth in China % Percent change from 4 quarters earlier 18 Aggregate credit in China % Percent change from 12 months earlier 40 16 35 14 30 12 25 10 Q2 20 Aug. 8 15 6 10 4 5 2 2007 2008 Source: CEIC 2009 2010 2011 2012 2013 2014 0 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2007 2013 2014 2014 2013 0 Note: Aggregate financing including bank credit and nontraditional credit (off-balance sheet and trust loans). Source: CEIC Euro-area inflation well below target Euro-area GDP growth is stagnant Euro-area real GDP % 4 Quarterly percent change at seasonally adjusted annual rate Q2 Euro-area consumer inflation % 5 Percent change from 12 months earlier 2 4 0 Headline 3 -2 Core -4 2 -6 Sep. 1 -8 0 -10 2007 2008 2009 2010 2011 2012 2013 2014 -12 Source: OECD 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 -1 2014 2014 Source: HICP index, OECD / Haver Analytics ECB cutting monetary policy rates ECB monetary policy rates ECB ready to expand balance sheet % 5 Weekly data European Central Bank assets Monthly data Trillion euros 3500 3.5 3000 3.0 4 3 2500 2.5 Sep. 2000 2.0 Refinancing rate 2 1.5 1500 1 1.0 1000 Deposit rate 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 20132014 2014 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -1 Source: Bloomberg Dollar is appreciating Dollar exchange rate indices Index 125 January 2, 2013 = 100 Dollar stronger 120 Yen 115 110 Broad Dollar 105 100 Euro 95 1/13 4/13 7/13 Source: Bloomberg and FAME 10/13 1/14 4/14 7/14 90 500 0.5 00 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: European 2004 2005 2006 Central 2007 Bank 2008 2009 2010 2011 2012 2013 2014
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