A View from the FED: The Answer Is Yes and No.

University of Alabama Economic Outlook Conference Montgomery AL, FL January 15, 2015

The long-awaited breakout in growth appears to have finally arrived.

2013 2014 Q1 2014 Q2 2014 Q3 2014 Q4

Annualized Real GDP Growth

3.1

-2.1

4.6

5.0

3.4

Note: As of last Friday, MA tracking projections point to 3.4% annualized 4Q GDP growth for the advance estimate which will be released at the end of this month. Our GDPNow Q4 projection is essentially identical, 3.5%.

Sources: Bureau of Economic Analysis, Macroeconomic Advisers

The November reports have surprised to the upside, though the December retail sales report was soft.

4,0 3,5

Nov 14: Retail sales, (Oct) Business inv. (Sep) Nov 17: Ind. Prod.

(Oct)

The Evolution of Q4 Real GDP Growth Tracking Estimates

quarterly percent change, SAAR Dec 1: ISM Dec 5: Int.

Trade (Oct) Dec 11: Retail sales, (Nov) Business inv. (Oct) Dec 15: Ind. Prod.

(Nov) Dec. 22: Existing Home Sales (Nov) Dec. 23: 3Q GDP, Adv. Dur. Goods, PI & Outlays (Nov) Jan 7: Int.

Trade (Nov) Jan 9: Employment Report (Dec), Wholesale Invent (Nov) 1 Jan 14: Retail Trade (Dec), Busine ss inv. (Nov)

Atlanta Fed GDPNow Model 3,0 Macroeconomic Advisers 2,5 2,0 12-Nov 19-Nov 26-Nov 3-Dec 10-Dec 17-Dec Date of forecast Sources: FRBA, Macroeconomic Advisers 24-Dec 31-Dec 7-Jan

0

14-Jan

In our projections, growth remains around 3% for the next several years.

Real GDP Growth Jan FRBA preliminary forecast 2015: q4/q4 3.2

2016: q4/q4 2.9

a: assumes 3.3% QIV. Source: FRBA forecasts

Next year – the consumer takes over?

Nonresidential Fixed Investment and Personal Consumption

Year-over-Year Percent Change

5% 4% 3% 2% Personal Consumption Expenditures (lhs) 15% 10% 5% 1% Nonresidential Fixed Investment (rhs) 0% 0% -5% -1% -2% 2010 2011 Source: Bureau of Economic Analysis 2012 2013 2014 -10% Actual through Q3 2014, GDPNow forecast for Q4 2014

5

News to nobody: Oil prices are really low.

$/Barrel $160 $140 $120 $100 $80 WTI Brent Spot Oil Prices (weekly)

1

$60 $40 $48.48

$48.27

Wednesday close, February contracts $20 $0 99 00 01 02 03 04 05 06

Source: EIA/Chicago Mercantile Exchange, Financial Times

07 08 09 10 11

0

12 13 14

As of the week of Dec 30, 2014 6

Mining and oil-field investment as a share of business spending has risen dramatically.

Investment shares of mining + oil-field investment 40 35 Share of Structures Investment Share of Structures + Equipment Investment 30 25 20 15 10 5 0 59 64 69 74 79 84 89 94 99 04 09 14

Studies suggest energy production is price-insensitive, but energy-relates investment is sensitive to price. Real Business Fixed Investment (BFI) (percentage point deviation from baseline level) -4 -8 4 0 -12 -16 -20 14 q2 Real BFI excluding mining + oil Real mining + oil investment 15 q2 Real BFI 16 q2 17 q2 Source: Federal Reserve Bank of Atlanta Calculations

Our simple statistical experiments indicate that energy-price declines are a near-term drag, but longer-term boon.

Real GDP and Real Consumption (percentage point deviation from baseline level) Real consumption 1,4 1,2 1,0 0,8 0,6 0,4 0,2 0,0 -0,2 14 q2 15 q2 Real GDP 16 q2 17 q2 Source: Federal Reserve Bank of Atlanta Calculations

3,0 2,0 1,0 0,0 8,0 7,0 6,0 5,0 4,0 World Bank: “… global growth is expected to rise moderately, to 3.0 percent [from 2.6 percent] in 2015.” IMF GDP Projections October 2014 annual percentage change Euro Area Canada Mexico China Advanced Economies Emerging and Deveoping Economies

Source: IMF World Economic Outlook October 2014 2014 2015 10

In our view, the official unemployment rate will hit “normal” by the end of the year.

Real GDP Growth Jan FRBA preliminary forecast Unemployment Rate Jan FRBA preliminary forecast 2015: q4/q4 3.2

5.2

2016: q4/q4 2.9

5.2

*: QIV Source: FRBA forecasts

Unemployment rate projections have been persistently overly pessimistic.

Percent, quarterly average

10 9,5 9 8,5 8 Actual 7,5 7 “Tapering” announced Dec-13 6,5 6 5,5 5 Dashed lines represent midpoint of FOMC Summary of Economic Projections as of the indicated date.

4,5 4Q2010 4Q2011 4Q2012 4Q2013 Source: U.S. Bureau of Labor Statistics, Federal Reserve Board 4Q2014 4Q2015 Dec-14 4Q2016 4Q2017

12

17 15 13 11 19

The standard measure of unemployment is near normal, but we still think there is work to be done.

Civilian Unemployment Rate (U-3) vs. Broad Unemployment (U-6)

percent, SA

U-6 7.3 ppts 6.4 ppts 5.6 ppts

9 7 5 3 00 02

Source: Bureau of Labor Statistics

04

3.8 ppts U-3

Conventional Unemployment Rate (U-3) 06 08 10 12 14

Note: Figures cited are as of Jan. 2007, Sep. 2011, Dec. 2013 and Dec. 2014

By gender, part time work hasn’t changed much.

Share of Part-time Workers 70,00% 60,00% 50,00% 40,00% 30,00% 20,00% 10,00% 0,00% Men 2007 2014

Source: Author’s calculations from Census Bureau’s

Current Population Survey

microdata files

Women

By gender, part-time for economic reasons has shifted toward women.

Share of Part-time for Economic Reasons 53,00% 52,00% 51,00% 50,00% 49,00% 48,00% 47,00% 46,00% 45,00% Men Women 2007 2014

Source: Author’s calculations from Census Bureau’s

Current Population Survey

microdata files

Wage growth remains quite subdued, with only scant evidence in the data that real wages are rising.

Wage Measures

year-over-year change, SA

4,0% 3,5% 3,0% 2,5% 2,0% 1,5% 1,0% 07 08 Source: Bureau of Labor Statistics 09 10 Average Hourly Earnings Employment Cost Index 11 12 13 14 ECI data through Q3 2014, AHE data through December 2014

Another look: Wage growth (through November) from detailed Census data. New data, same story.

0 -1 -2 3 2 1 6 Percent change**, Full-year over previous full-year 5 4

U.S. hourly wages

2008 2009 2010 2011 2012 2013 2014 Source: Author’s calculations from Census Bureau’s

Current Population Survey

microdata files **Note: Percent change measured by logarithmic change. 2014 uses 12 months ending November 2014 relative to 12 months ending November 2013 17

The drag on wage growth? It looks like the part-time for economic reasons to us.

6 Percent change**, Full-year over previous full-year 5 4

U.S. hourly wages

3 2 1 0 “Other” factors -1 Short-term unemployment rate (< 27 weeks) -2 2008 2009 2010 U5 minus U3 (Proxy for marginally attached workers) 2011 U6 minus U5 (Proxy for part-time for economic reasons) 2012 2013 Long-term unemployment rate (>27 weeks) 2014 Source: Author’s calculations from Census Bureau’s

Current Population Survey

microdata files **Note: Percent change measured by logarithmic change. 2014 uses 12 months ending November 2014 relative to 12 months ending November 2013 18

Inflation will move toward 2%: That’s our story and we are sticking to it.

Real GDP Growth Jan FRBA preliminary forecast Unemployment Rate * Jan FRBA preliminary forecast Inflation Jan FRBA preliminary forecast *: QIV Source: FRBA forecasts 2015: q4/q4 3.2

5.2

1.8

2016: q4/q4 2.9

5.2

2.0

The trend in inflation hasn’t budged much off of 1.5 percent for a couple of years

PCE Price Index

year-over-year percent change, monthly

4,5 4,0 3,5 3,0 2,5 2,0 PCE Core PCE 1,5 1,0 0,5 0,0 10 11 Sources: Bureau of Economic Analysis 12 13

FOMC’s inflation objective

14 through November 2014

3,5 Some measures of longer-term inflation expectations are showing signs of weakness. 5-Year,5-Year Forward Inflation Expectation

percent

3,0 Inflation Expectations Measures

percent, year-ahead Atlanta Fed Business Inflation Expectations

3,0 2,5 2,5 2,0 2,0 1,5 1,5 01-12 07-12 01-13 Source: St. Louis Fed, Kitsul and Wright (2012) 07-13 01-14 07-14 01-15

t

hrough January 12, 2015 1,0 11-12 05-13 11-13 Source: Philadelphia Fed, Atlanta Fed 05-14 11-14 SPF data through Q4 2014, BIE data through January 2015