Transcript Slide 1

Thomas Jefferson Institute
2007 Innovations in Government
Conference:
Economic Update
December 2007
Overview
• Elevated uncertainty with national growth
slow through early next year
– Lack of home price appreciation/sub-prime lending
issues = drag on consumer spending
– No recession; further Fed ease is unlikely
• Virginia ranked 16th in the nation (job
growth)
• Northern Virginia not the fastest growing
region but creating the most jobs
2
Real GDP Almost Stalled in 1st Qtr;
4.9% in 3rd Quarter
Real Gross Domestic Product
Quarterly Annualized Percent Change
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
1990
1992
1994
Data through 3rd Quarter 2007.
Recessions are shaded.
1996
1998
2000
2002
2004
2006
Residential Building Impact on
Real GDP
Quarterly Annualized Growth Rate, Real GDP
8
7
6
5
4
3
2
1
0
-1
-2
Residential Investment Contribution to Real GDP
Fed’s Preference? Recession or
Accelerating Inflation?
• “The Federal Reserve sets the nation’s monetary policy to promote
the objectives of maximum employment, stable prices, and
moderate long-term interest rates. The challenge for policy
makers is that tensions among the goals can arise in the short run
and that information about the economy becomes available only with
a lag and may be imperfect.”
• The Federal Reserve has supervisory and regulatory authority over
a wide range of financial institutions and activities. It works with
other federal and state supervisory authorities to ensure the safety
and soundness of financial institutions….
• August 17 action was sector-specific (liquidity in financial markets)
• September 18 action acknowledged spillover to the broader
economy
• October 30/31 cut another 25 bps
• December 11 cut another 25 bps to 4.25%
December 11 FOMC Press
Release
•
•
•
Incoming information suggests that economic growth is slowing,
reflecting the intensification of the housing correction and some softening
in business and consumer spending. Moreover, strains in financial
markets have increased in recent weeks. Today’s action, combined with
the policy actions taken earlier, should help promote moderate growth over
time.
Readings on core inflation have improved modestly this year, but
elevated energy and commodity prices, among other factors, may put
upward pressure on inflation. In this context, the Committee judges that
some inflation risks remain, and it will continue to monitor inflation
developments carefully.
Recent developments, including the deterioration in financial market
conditions, have increased the uncertainty surrounding the outlook for
economic growth and inflation. The Committee will continue to assess
the effects of financial and other developments on economic prospects and
will act as needed to foster price stability and sustainable economic growth.
Probability of Recession = 29%
for May 2008
Probability of Recession Index
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
2000
2002
Data through May 2008.
Source: Chmura Economics & Analytics.
2004
2006
2008
Will the Fed Ease Further?
• Inflation is at the top end of the Fed ‘comfort
zone’ (argues against easing)
– Weaker dollar causes higher import prices
– Oil prices
• Interest rates are accommodative
• Outside of residential market, economy
continues to grow
Consumers are Still Spending
No Inventory Imbalances
Retail Sales and Inventory Growth
Percent Change from Year Ago
12
10
Retail Sales
8
6
4
2
0
Inventories
-2
-4
Nov-95
Nov-97
Data through November 2007.
Nov-99
Nov-01
Nov-03
Nov-05
Nov-07
Industrial Production Slowed
but Still Growing
Industrial Production
Percent Change from Year Ago
10
8
6
4
2
0
-2
-4
-6
-8
Nov-95
Nov-97
Data through November 2007.
Nov-99
Nov-01
Nov-03
Nov-05
Nov-07
IT Output Still Near 20%
Industrial Production
Percent Change from Year Ago
60
Computers, Communication
Equipment, and Semiconductors
50
40
30
20
Total
10
0
-10
-20
Nov-95
Nov-97
Data through November 2007.
Nov-99
Nov-01
Nov-03
Nov-05
Nov-07
Slowdown is Mainly Housing-Related
(Production for Housing Materials is Off)
% Change From Year Ago
15
10
5
0
-5
-10
-15
-20
Nonmetallic mineral mining
and quarrying NAICS=2123
Construction supplies
-25
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Data through August 2007.
Housing Sector is in Recession (Near 14Year Low, Down 46% From January 2006)
Total Housing Starts and Permits
Millions of Units, Annualized Rate
2.3
Permits
2.1
1.9
Starts
1.7
1.5
1.3
1.1
Oct-95
Oct-97
Data through October 2007.
Oct-99
Oct-01
Oct-03
Oct-05
Oct-07
National Forecast
2006-2007 Actual
2007-2008 Forecast
Qtr 4
Qtr 1
Qtr 2
Qtr 3*
Qtr 4
Qtr 1
Qtr 2
Qtr 3
Quarterly Annualized Rates
2.1
0.6
3.8
3.9
2.0
2.4
2.7
2.6
Real Gross Domestic Product
Consumptions
Expenditures
3.9
Residential Investment
-17.2
Nonresidential Investment
-1.4
Equipment and Software -4.9
Government Expenditure
3.5
Net Exports, Goods &
Services
-597.6
(Billions of 2000 Dollars)
Consumer Price Index
2.0
3.7
-16.3
2.1
0.3
-0.5
1.4
-11.9
11.0
4.7
4.1
3.0
-20.1
8.0
5.9
3.7
1.5
-10.0
1.8
2.2
3.4
2.2
-3.5
2.3
2.3
-1.1
3.0
-0.3
2.8
2.3
-0.3
2.8
4.2
2.2
2.0
2.2
-612.4
-574.1
-546.4
-510.4
-497.5
-486.0
-477.9
Percentage Change from a Year Ago (%)
2.4
2.6
2.4
2.8
2.8
2.7
2.6
Yields (%)
Federal Funds
Rate
Prime Rate
10-Year Treasury
30-Year Conventional Mortgage
Source: Chmura Economics & Analytics
Note: Yields reported for the average of the quarter
5.2
8.2
4.6
6.2
5.3
8.3
4.7
6.2
5.3
8.3
4.8
6.4
5.1
5.1
4.7
6.6
4.5
7.5
4.5
6.3
4.25
7.25
4.7
6.3
4.25
7.25
4.7
6.4
4.25
7.25
4.9
6.6
Summary of US Growth
• Housing contribution to GDP turns slightly
positive in 3rd quarter but housing starts remain
flat through 2008
• No more Fed ease
• Overall GDP at 1.9% in 2007 (2.9% in 2006)
• Risks:
– Oil rises further
– International investors pull out of bond market
– Subprime mortgage leads to broader credit crunch
State Rankings, Employment
Year-over-Year October 2007
5
4
VA 1.5%, 56,000 jobs
# 16
3
2
1
0
-1
-2
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51
Utah +4.2%, 51,400
Wyoming +3.4%, 14600
Ohio -0.02%, -11,500
Michigan -1.5%, -75,000
Employment in VA Back Above
National Pace
Employment Growth
Percentage Change From a Year Ago
5.0
Virginia
4.0
3.0
2.0
1.0
0.0
-1.0
United States
-2.0
-3.0
Jan-95
Jan-97
Data through October 2007.
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07
Employment Growth by Sector
Percent Change, Year Ending October 2007
4.0
3.2
2.0
1.9
1.5
1.2
0.6
1.2
0.6
3.3
Virginia
US
2.1
2.1
1.8
1.8
1.1
3.2
1.5
1.8
0.9
0.5
0.4
0.4
1.5
1.0
0.6
0.0
-0.3
Government
Other Services
Leisure
Educ/Health
PBS
FIRE
Information
Retail
Wholesale
TWU
-1.4
Manufacturing
Total
Construction
-1.4
-2.0
Employment Growth by Sector
Percent Change, Year Ending October 2007
4.0
3.2
2.0
1.9
1.5
1.2
0.6
1.2
0.6
3.3
Virginia
US
2.1
2.1
1.8
1.8
1.1
3.2
1.5
1.8
0.9
0.5
0.4
0.4
1.5
1.0
0.6
0.0
-0.3
Government
Other Services
Leisure
Educ/Health
PBS
FIRE
Information
Retail
Wholesale
TWU
-1.4
Manufacturing
Total
Construction
-1.4
-2.0
Initial Claims are Flat in Virginia
Virginia: Initial Unemployment Claims
Six-Month Moving Average
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
Jan-95
Jan-97
Data through October 2007.
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07
Northern Virginia Slows to State
Average (20,000 jobs)
Percentage Change From a Year Ago
8.0
Northern
Virginia
6.0
4.0
2.0
0.0
Virginia
-2.0
-4.0
Mar-91
Mar-93
Mar-95
Data through October 2007.
Mar-97
Mar-99
Mar-01
Mar-03
Mar-05
Mar-07
Employment by Sector
5.0
Percent Change, Year Ending October 2007
3.2
3.0
3.0
3.2
2.5
1.61.5
1.0
1.9
1.8
1.8
1.8
1.5 1.6
1.2
0.6
2.6
1.61.5
1.0 0.9
0.70.6
0.6
0.1
-0.3
-1.0
Northern Virginia
Virginia
-1.4
-3.0
Government
Other Services
Leisure
Educ/Health
PBS
FIRE
Information
Retail
Wholesale
TWU
Manufacturing
Construction
Total
-2.6
4th Quarter 2006 -7.0% (Benchmark)
Covered Employment and Wages = -0.1%
Labor Market to Remain Weak
in NVA
Northern Virginia: Monthly Initial Unemployment Claims
Six-Month Moving Average
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Jan-95
Jan-97
Data through October 2007.
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07
Housing Permits Off 46% From
Peak
Virginia: Single-Family Building Permits
Six-Month Moving Average
4,000
3,500
3,000
2,500
2,000
1,500
Jan-95
Jan-97
Jan-99
Jan-01
Data through October 2007.
Source: Chmura Economics & Analytics, U.S. Census.
Jan-03
Jan-05
Jan-07
NVA Housing Activity; Off 58%
From Peak
Virginia: Single-Family Building Permits
Six-Month Moving Average
4,000
3,500
3,000
2,500
2,000
1,500
Jan-95
Jan-97
Jan-99
Jan-01
Data through October 2007.
Source: Chmura Economics & Analytics, U.S. Census.
Jan-03
Jan-05
Jan-07
Permits Fell 72% in the Early
1990s
Northern Virginia: Single-Family Permits
Six-Month Moving Average
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
Jun-88 Jun-90 Jun-92 Jun-94 Jun-96 Jun-98 Jun-00 Jun-02 Jun-04 Jun-06
Data through May 2007.
Source: Chmura Economics & Analytics, U.S. Census.
Home Prices Have Risen
Appreciation Rate
30%
25%
20%
15%
10%
Washington MSA
5%
U.S.
0%
2000
2001
2002
2003
2004
2005
Data through 2nd Quarter 2007.
Source: Chmura Economics & Analytics, Office of Federal Housing Enterprise Oversight
2006
2007
…Making Homes Less
Affordable
Washington MSA
Appreciation Rate
Affordability
60%
50%
45%
U.S.
50%
40%
Affordability
Washington MSA
35%
40%
30%
30%
25%
20%
20%
Appreciation Rate
Washington MSA
15%
10%
10%
U.S.
5%
0%
0%
2000
2001
2002
2003
2004
2005
Data through 2nd Quarter 2007.
Source: Chmura Economics & Analytics, Office of Federal Housing Enterprise Oversight
2006
2007
Imbalances Still Exist…13
Month Supply
Northern Virginia Home Sales vs. Inventory
30,000
Active Inventory
25,000
20,000
15,000
10,000
5,000
Home Sales
0
Jan-99
Jan-00
Jan-01
Jan-02
Source: MLS
Data through September 2007.C
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Retail Sales Have Slowed
Considerably
Retail Sales: Percent Change
Year-Over-Year, Six-Month Moving Average
20
Northern Virginia
16
12
8
4
0
-4
Virginia
-8
Jan-95
Jan-97
Jan-99
Data through October 2007
Jan-01
Jan-03
Jan-05
Jan-07
Employment
Annual Percentage Change
Actual
Northern Virginia
Hampton Roads
Richmond Petersburg
Roanoke
Lynchburg
Charlottesville
Danville
Bristol
Blacksburg
Harrisonburg
Winchester
Non-MSAs
VA-Totals
Chmura Economics & Analytics.
Forecast
2004
2005
2006
2007
2008
4.5%
3.2%
2.6%
-0.5%
1.5%
2.5%
-3.3%
-1.0%
0.6%
2.1%
3.3%
-2.8%
2.5%
3.7%
1.5%
2.0%
1.5%
2.5%
3.2%
-1.2%
1.1%
-0.1%
0.1%
1.9%
0.9%
2.3%
2.4%
0.4%
1.8%
1.9%
2.5%
2.7%
-4.3%
0.8%
1.2%
3.8%
5.6%
1.4%
1.7%
1.9%
1.6%
1.9%
1.8%
0.6%
2.2%
0.9%
-0.7%
0.7%
1.9%
1.4%
1.0%
1.6%
2.7%
1.6%
1.5%
1.3%
0.6%
1.9%
0.2%
0.7%
1.0%
1.7%
2.9%
0.5%
1.8%
Take Aways
• U.S. growth remains sluggish through first
half of 2008
• No more Fed ease… accelerating inflation
is an issue
• Virginia continues at national average
• Construction employment dragging down
Northern Virginia employment growth
• Recession not in forecast for early 2008
40