Economic Update
Economic Update Prepared for
SESBLC February 2015 Augusta, Georgia
Michael J. Chriszt, Vice President & Public Affairs Officer [email protected] The views expressed are mine, and not necessarily those of the Atlanta Fed or the Federal Reserve System.
Summary of the Economic Environment: The January 2015 FOMC Policy Statement 1. Information received since the Federal Open Market Committee last met suggests that economic activity has been expanding at a solid pace.
2. Labor market conditions improved further, with strong job gains and a lower unemployment rate. • On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish.
3. Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. • Measures of longer-term inflation expectations have remained stable. 2
Real GDP Growth: The recovery gains momentum in 2014 quarterly, percent, seasonally adjusted annualized rate 6 4 2 0 -2 -4 -6 -8 -10 2007
2008
2009
Source: Bureau of Economic Analysis
2010
2011
2012
2013
2014 through Q4-14 3
Housing is recovering, although the rebound has decelerated somewhat.
4
Builders reported that construction activity was down slightly compared to the year-earlier level. January 2015 Southeast Construction Activity vs. Year-ago Diffusion index 1.0
0.5
0.0
-0.5
-1.0 2006
2007
2008
Source: Atlanta Fed business contact poll
2009
2010
2011
2012
2013
2014
Residential brokers’ and home builders’ expectations for home sales activity remained positive in January, with most contacts expecting an increase in sales over the next three months. January 2015 Southeast Home Sales Outlook vs. a Year Earlier
Diffusion Index 1.0
0.5
0.0
-0.5
-1.0 2006
2007
2008
2009
2010 Builders
Source: Atlanta Fed business contact poll
2011
2012
Brokers
2013
2014
2015
Southeastern builders and brokers noted that home prices were up in January relative to the year-ago level. January 2015 Home Prices vs. a Year-ago Diffusion Index 1.0
0.5
0.0
-0.5
-1.0 2006
2007
2008
2009
2010 Builders
Source: Atlanta Fed business contact poll
2011
2012
Brokers
2013
2014
2015
The Fed’s Forecast for Economic Growth
Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, December 2014
8
Employment growth accelerated in 2014. seasonally adjusted, thousands of jobs 600 257
Monthly change
400 200
267
0 12-month average -200 -400 -600 -800 -1000 08
09
Source: Bureau of Labor Statistics
10
11
12
13
14 through January 2015 9
Unemployment Rate & Part-Time for Economic Reasons Percent (share of labor force) 11
7
10
6
9
5
8
4 Unemployment Rate (left axis)
7
3 Part-time for Economic Reasons ( right axis)
6
2
5
1
4 2007
0 2008
Source: Bureau of Labor Statistics
2009
2010
2011
2012
2013
2014 through January 2015
10
The Fed’s Forecast for Unemployment
Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, December 2014
11
Despite steady hiring, wage growth remains muted. year-over-year change, seasonally adjusted
4.0%
3.5%
Average Hourly Earnings Employment Cost Index
3.0%
2.5%
2.0%
1.5%
1.0% 07
08
Source: Bureau of Labor Statistics
09
10
11
12
13
14
ECI data through Q4 2014, AHE data through January 2015
12
Substantial progress has been made in the labor market, though there is room for further improvement. • The unemployment rate has come down significantly since the recession began. It doubled from 5 percent at the end of 2007 to 10 percent in October 2009. Today it stands at 5.7 percent. • Monthly job gains averaged 336,000 over the past three months. In 2014, job gains averaged 246,000 per month—the strongest year of job growth in 15 years.
• Broader measures of labor market utilization have shown similar improvement. “Underemployment” is also declining. • Also, we have seen very little upward wage pressure, which suggests that there remains considerable slack in the labor market.
13
The inflation picture is not as encouraging. Inflation has declined further below the FOMC’s longer-run objective, largely reflecting declines in energy prices.
The PCE price index
Headline
Core
5 4
year-over-year percent change, monthly
3
FOMC Objective
2 1 0 -1 -2 2000
2002
2004
2006
2008
Sources: Bureau of Economic Analysis and Dallas Fed
2010
2012
2014
through December 2014 14
Measures of longer-term inflation expectations have remained stable. FRB Atlanta Business Expectations Survey 3 year-ahead unit cost expectations percent, monthly 2.5
2 1.7 1.5
1
0.5
0 Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Source: Atlanta Fed Business Inflation Expectations Survey For more information, visit: http://www.frbatlanta.org/research/inflationproject/bie/
Apr-14
Oct-14
January 2015 15
The Fed’s Forecast for Inflation
Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, December 2014
16
The Fed’s Dual Mandate: The Fed is pursuing two objectives as given by Congress maximum employment and price stability. • The maximum level of employment is largely determined by nonmonetary factors, although a stronger economy does help with job creation. • NAIRU (non-accelerating inflation rate of unemployment): a level of unemployment below which inflation rises. • Many economists view NAIRU at 5.0-5.5%, which can be interpreted as being largely consistent with maximum level of employment.
• The FOMC has chosen an inflation target of two percent year-over-year growth. • Inflation has continued to run well below this objective; however, longer-term inflation expectations appear to be well anchored in the 2% range. 17
The monetary policy response has been, and remains, accommodative. • At the October meeting, the FOMC concluded its asset purchase program. The decision acknowledged progress made—especially in the employment realm—and improving confidence in the outlook.
• At the most recent meeting in January, the FOMC reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate, and may be warranted even after employment and inflation are near mandate-consistent levels.
• PATIENCE 18
Conclusion: The balance of current economic evidence is encouraging and supports an optimistic outlook. • In terms of the Atlanta Fed’s outlook, we expect the economy to expand at or close to 3 percent over the next two years, predicated on an acceleration of household spending and a continuation of robust business investment.
• We expect employment to continue to grow and both unemployment and underemployment to continue to decline. However, we have yet to see an accompanying pick up in wage growth, and broad wage trends seem to suggest we are not yet on the cusp of full employment. • Inflation has continued to run below the FOMC’s 2 percent objective, most recently reflecting declines in energy prices. We expect inflation to resume a gradual rise to 2 percent over time. 19
Thank You
SESBLC February 2015 Augusta, Georgia
Michael J. Chriszt, Vice President & Public Affairs Officer [email protected] The views expressed are mine, and not necessarily those of the Atlanta Fed or the Federal Reserve System.
Summary of the Economic Environment: The January 2015 FOMC Policy Statement 1. Information received since the Federal Open Market Committee last met suggests that economic activity has been expanding at a solid pace.
2. Labor market conditions improved further, with strong job gains and a lower unemployment rate. • On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish.
3. Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. • Measures of longer-term inflation expectations have remained stable. 2
Real GDP Growth: The recovery gains momentum in 2014 quarterly, percent, seasonally adjusted annualized rate 6 4 2 0 -2 -4 -6 -8 -10 2007
2008
2009
Source: Bureau of Economic Analysis
2010
2011
2012
2013
2014 through Q4-14 3
Housing is recovering, although the rebound has decelerated somewhat.
4
Builders reported that construction activity was down slightly compared to the year-earlier level. January 2015 Southeast Construction Activity vs. Year-ago Diffusion index 1.0
0.5
0.0
-0.5
-1.0 2006
2007
2008
Source: Atlanta Fed business contact poll
2009
2010
2011
2012
2013
2014
Residential brokers’ and home builders’ expectations for home sales activity remained positive in January, with most contacts expecting an increase in sales over the next three months. January 2015 Southeast Home Sales Outlook vs. a Year Earlier
Diffusion Index 1.0
0.5
0.0
-0.5
-1.0 2006
2007
2008
2009
2010 Builders
Source: Atlanta Fed business contact poll
2011
2012
Brokers
2013
2014
2015
Southeastern builders and brokers noted that home prices were up in January relative to the year-ago level. January 2015 Home Prices vs. a Year-ago Diffusion Index 1.0
0.5
0.0
-0.5
-1.0 2006
2007
2008
2009
2010 Builders
Source: Atlanta Fed business contact poll
2011
2012
Brokers
2013
2014
2015
The Fed’s Forecast for Economic Growth
Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, December 2014
8
Employment growth accelerated in 2014. seasonally adjusted, thousands of jobs 600 257
Monthly change
400 200
267
0 12-month average -200 -400 -600 -800 -1000 08
09
Source: Bureau of Labor Statistics
10
11
12
13
14 through January 2015 9
Unemployment Rate & Part-Time for Economic Reasons Percent (share of labor force) 11
7
10
6
9
5
8
4 Unemployment Rate (left axis)
7
3 Part-time for Economic Reasons ( right axis)
6
2
5
1
4 2007
0 2008
Source: Bureau of Labor Statistics
2009
2010
2011
2012
2013
2014 through January 2015
10
The Fed’s Forecast for Unemployment
Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, December 2014
11
Despite steady hiring, wage growth remains muted. year-over-year change, seasonally adjusted
4.0%
3.5%
Average Hourly Earnings Employment Cost Index
3.0%
2.5%
2.0%
1.5%
1.0% 07
08
Source: Bureau of Labor Statistics
09
10
11
12
13
14
ECI data through Q4 2014, AHE data through January 2015
12
Substantial progress has been made in the labor market, though there is room for further improvement. • The unemployment rate has come down significantly since the recession began. It doubled from 5 percent at the end of 2007 to 10 percent in October 2009. Today it stands at 5.7 percent. • Monthly job gains averaged 336,000 over the past three months. In 2014, job gains averaged 246,000 per month—the strongest year of job growth in 15 years.
• Broader measures of labor market utilization have shown similar improvement. “Underemployment” is also declining. • Also, we have seen very little upward wage pressure, which suggests that there remains considerable slack in the labor market.
13
The inflation picture is not as encouraging. Inflation has declined further below the FOMC’s longer-run objective, largely reflecting declines in energy prices.
The PCE price index
Headline
Core
5 4
year-over-year percent change, monthly
3
FOMC Objective
2 1 0 -1 -2 2000
2002
2004
2006
2008
Sources: Bureau of Economic Analysis and Dallas Fed
2010
2012
2014
through December 2014 14
Measures of longer-term inflation expectations have remained stable. FRB Atlanta Business Expectations Survey 3 year-ahead unit cost expectations percent, monthly 2.5
2 1.7 1.5
1
0.5
0 Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Source: Atlanta Fed Business Inflation Expectations Survey For more information, visit: http://www.frbatlanta.org/research/inflationproject/bie/
Apr-14
Oct-14
January 2015 15
The Fed’s Forecast for Inflation
Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, December 2014
16
The Fed’s Dual Mandate: The Fed is pursuing two objectives as given by Congress maximum employment and price stability. • The maximum level of employment is largely determined by nonmonetary factors, although a stronger economy does help with job creation. • NAIRU (non-accelerating inflation rate of unemployment): a level of unemployment below which inflation rises. • Many economists view NAIRU at 5.0-5.5%, which can be interpreted as being largely consistent with maximum level of employment.
• The FOMC has chosen an inflation target of two percent year-over-year growth. • Inflation has continued to run well below this objective; however, longer-term inflation expectations appear to be well anchored in the 2% range. 17
The monetary policy response has been, and remains, accommodative. • At the October meeting, the FOMC concluded its asset purchase program. The decision acknowledged progress made—especially in the employment realm—and improving confidence in the outlook.
• At the most recent meeting in January, the FOMC reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate, and may be warranted even after employment and inflation are near mandate-consistent levels.
• PATIENCE 18
Conclusion: The balance of current economic evidence is encouraging and supports an optimistic outlook. • In terms of the Atlanta Fed’s outlook, we expect the economy to expand at or close to 3 percent over the next two years, predicated on an acceleration of household spending and a continuation of robust business investment.
• We expect employment to continue to grow and both unemployment and underemployment to continue to decline. However, we have yet to see an accompanying pick up in wage growth, and broad wage trends seem to suggest we are not yet on the cusp of full employment. • Inflation has continued to run below the FOMC’s 2 percent objective, most recently reflecting declines in energy prices. We expect inflation to resume a gradual rise to 2 percent over time. 19
Thank You
