Transcript The National Outlook— From a Forecast Skeptic Federal Reserve Bank of Atlanta LEARN Conference Michael F.

The National Outlook—
From a Forecast Skeptic
Federal Reserve Bank of Atlanta
LEARN Conference
Michael F. Bryan
Vice President and Economist
March 29, 2010
The views in this presentation do not necessarily reflect the views of
the Federal Reserve Bank of Atlanta or the Board of Governors of
the Federal Reserve System, though obviously I think they ought to.
Proprietary and Confidential. Not for disclosure outside Federal Reserve.
GROWTH IN THE FOURTH QUARTER WAS QUITE STRONG—PUSHED
HIGHER PRIMARILY FROM A LEVELING OFF OF INVENTORY
REDUCTIONS.
Blue Chip GDP Forecast
Annualized quarterly percent change
8
Actual
6
4
2
Slowing in inventory liquidation
0
Q4 2009
-2
Total GDP growth
5.9
-4
PCE contribution
1.2
3.9
-6
Inventory
contribution
0.3
-8
Net Exports
contribution
Q1-07
Q3-07
Q1-08
Q3-08
Q1-09
SOURCES: Blue Chip panel of economists, March 10, 2010.
Q3-09
Q1-10
Q3-10
Q1-11
Q3-11
2
INVENTORIES APPEAR TO BE APPROACHING “NORMAL”
LEVELS RELATIVE TO CURRENT SALES—A POSITIVE SIGN
FOR NEAR-TERM GROWTH?
Inventory-to-Sales Ratios, SA
January 2010
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
95
96
97
98
99
00
Total Business
Source: U.S. Census Bureau
01
02
03
04
05
06
07
Manufacturers
*assumes recession ended June 2009
08
09
10
HOWEVER, RETAIL INVENTORIES SEEM UNUSUALLY LEAN,
WHILE MANUFACTURING STOCKS ARE STILL ELEVATED.
Inventory-to-Sales Ratios, SA
January 2010
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
95
96
97
98
99
Total Business
Source: U.S. Census Bureau
00
01
02
03
04
05
06
Manufacturers
*assumes recession ended June 2009
07
08
Retail
09
10
REAL FINAL SALES (GDP LESS INVENTORIES) HAS SHOWED MUCH
MORE MODEST GROWTH. SPENDING IN THE U.S. ACTUALLY
MODERATED LAST QUARTER.
Real GDP and Final Sales
quarterly, annualized % change
8%
Real GDP
6%
Final Sales to Domestic Purchasers
4%
2%
0%
-2%
-4%
-6%
-8%
Q1.2008
Q3.2008
Q1.2009
Q3.2009
Source: Bureau of Economic Analysis, through Q4 09
5
WHAT’S PUSHING US FORWARD?
AND WHAT HAPPENS WHEN IT STOPS?
MODERATE GROWTH IS ANTICIPATED THIS QUARTER AS
THE IMPETUS OF FISCAL POLICY WANES
Blue Chip GDP Forecast
Annualized quarterly percent change
8
Actual
6
4
estimate
2
0
-2
Estimated real GDP growth in the absence of fiscal stimulus
(consensus from CEA)
-4
-6
-8
Q1-07
Q3-07
Q1-08
Q3-08
Q1-09
Q3-09
Q1-10
Q3-10
Q1-11
Q3-11
8
THE 2010-11 ECONOMIC FORECAST
The Fortune Teller (De La Tour)
THE 2010-11 ECONOMIC FORECAST
The Fortune Teller (De La Tour)
YEAR-AHEAD CONSENSUS GDP FORECAST
6
Annual Growth Rate
predicted
5
4
3
2
1
0
-1
-2
92
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
YEAR-AHEAD CONSENSUS GDP FORECAST
6
Annual Growth Rate
predicted
actual
5
RMSE = 1.4 percentage points
4
3
2
1
0
-1
-2
92
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Forecaster Accuracy
(t-stat of the average individual forecasters’ average percentile, n=85)
2.50
Relatively Good at CPI
Relatively Bad at GDP
Relatively Bad at Both
2.00
Average Growth Accuracy
1.50
1.00
0.50
-2.50
-2.00
-1.50
-1.00
0.00
-0.50
0.00
-0.50
0.50
1.00
1.50
2.00
-1.00
-1.50
Relatively Good at Both
-2.00
-2.50
Average Inflation Accuracy
Relatively Good at GDP
Relatively Bad at CPI
2.50
Probability of Repeating as a Good GDP Forecaster
Probability of remaining ABOVE the median after…
observed expected
One success
48.9%
49.5%
Two successes 25.4%
24.5%
Three successes 14.0%
12.1%
Four successes
8.0%
6.0%
Five successes
3.5%
3.0%
WHY BOTHER WITH A FORECAST?
• Most forecasts can beat a coin flip.
• I can’t beat the consensus (and neither
can anyone else.)
• Forecasts are useful for risk assessment.
• Forecasts are useful as a means for
evaluating policy options.
15
AFTER A STRONG QIV, EVEN THE “OPTIMISTS” THINK THE
ECONOMY WILL FOLLOW A MODERATE GROWTH PATH.
Blue Chip GDP Forecast
Annualized quarterly percent change
8
Actual
Forecast
6
4
2
0
-2
--- top ten
--- bottom ten
-4
-6
-8
Q1-07
Q3-07
Q1-08
Q3-08
Q1-09
SOURCES: Blue Chip panel of economists, March 10, 2010.
Q3-09
Q1-10
Q3-10
Q1-11
Q3-11
AFTER A STRONG QIV, EVEN THE “OPTIMISTS” THINK THE
ECONOMY WILL FOLLOW A MODERATE GROWTH PATH.
Blue Chip GDP Forecast
Annualized quarterly percent change
8
Actual
6
4
2
0
-2
-4
-6
-8
Q1-07
Q3-07
Q1-08
Q3-08
Q1-09
SOURCES: Blue Chip panel of economists, March 10, 2010.
Q3-09
Q1-10
Q3-10
Q1-11
Q3-11
YEAH, OUR MODELS DON’T HANDLE NON-LINEARITIES
WELL…
Blue Chip GDP Forecast
Annualized quarterly percent change
8
Actual
Forecast
6
4
2
0
-2
-4
-6
-8
Q1-07
Q3-07
Q1-08
Q3-08
Q1-09
SOURCES: Blue Chip panel of economists, March 10, 2010.
Q3-09
Q1-10
Q3-10
Q1-11
Q3-11
YEAH, OUR MODELS DON’T HANDLE NON-LINEARITIES
WELL…
Blue Chip GDP Forecast
Annualized quarterly percent change
8
Actual
Forecast
6
4
70%
2
0
-2
-4
-6
-8
Q1-07
Q3-07
Q1-08
Q3-08
Q1-09
SOURCES: Blue Chip panel of economists, March 10, 2010.
Q3-09
Q1-10
Q3-10
Q1-11
Q3-11
YEAH, OUR MODELS DON’T HANDLE NON-LINEARITIES
WELL…
Blue Chip GDP Forecast
Annualized quarterly percent change
8
Actual
Forecast
90%
6
4
70%
2
0
-2
-4
-6
-8
Q1-07
Q3-07
Q1-08
Q3-08
Q1-09
SOURCES: Blue Chip panel of economists, March 10, 2010.
Q3-09
Q1-10
Q3-10
Q1-11
Q3-11
SO WHAT ARE THE RISKS?
• Risk 1: History beats economics (+)
• Risk 2: The housing correction still has a way
to go (-)
• Risk 3: Business Investment languishes (-)
• Risk 4: Foreign economies continue to
struggle.
• Risk 5: Fiscal and other imbalances including
state and local governments(-)
21
“ECONOMIC” MODELS, HOWEVER, POINT TO A BREAK
FROM OUR STATISTICAL HISTORY
Blue Chip GDP Forecast
Annualized quarterly percent change
8
Actual
Forecast
6
4
2
0
-2
-4
-6
-8
Q1-07
Q3-07
Q1-08
Q3-08
Q1-09
SOURCES: Blue Chip panel of economists, March 10, 2010.
Q3-09
Q1-10
Q3-10
Q1-11
Q3-11
22
“ECONOMIC” MODELS, HOWEVER, POINT TO A BREAK
FROM OUR STATISTICAL HISTORY
Blue Chip GDP Forecast
Annualized quarterly percent change
8
Statistical (BVAR) model projection
Actual
Forecast
6
4
2
0
-2
-4
-6
-8
Q1-07
Q3-07
Q1-08
Q3-08
Q1-09
SOURCES: Blue Chip panel of economists, March 10, 2010.
Q3-09
Q1-10
Q3-10
Q1-11
Q3-11
23
AMONG THE MODERATING INFLUENCES, CONSUMER SPENDING IS
EXPECTED TO RECOVER RELATIVELY SLOWLY THROUGH 2010-11
Blue Chip Real PCE Forecast
annualized
7 quarterly percent change
Forecast
Actual
5
3
1
-1
--- top ten
--- bottom ten
-3
-5
Q1-07
Q3-07
Q1-08
Q3-08
SOURCES: Blue Chip panel of economists, January 10, 2010.
Q1-09
Q3-09
Q1-10
Q3-10
Q1-11
Q3-11
24
THIS WOULD BE A HUGE BREAK FROM HISTORICAL
EXPERIENCE.
Blue Chip Real PCE Forecast
annualized
7 quarterly percent change
Forecast
Actual
Statistical model projection
5
3
1
-1
--- top ten
--- bottom ten
-3
-5
Q1-07
Q3-07
Q1-08
Q3-08
SOURCES: Blue Chip panel of economists, January 10, 2010.
Q1-09
Q3-09
Q1-10
Q3-10
Q1-11
Q3-11
25
REAL INCOMES HAVE BEEN HELD UP BY TRANSFERS, BUT REAL
LABOR INCOME, THOUGH IMPROVING, WAS STILL DOWN YEAR-OVERYEAR IN JANUARY.
Real Personal Income and Real PCE
Year-over-Year % Change
14%
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
2000
2001
2002
2003
2004
Real Disposable Personal Income, Jan 2010 = 0.0%
Source: Bureau of Economic Analysis
2005
2006
2007
2008
2009
2010
Real Labor Income, Jan 2010 = -1.0%
*assumes recession ended in July 2009
26
YET CONSUMER CREDIT EXTENTIONS WERE STILL
DECLINING IN DECEMBER AND WERE SOFT IN JANUARY.
Consumer Credit - Monthly Change
SA, through January 2010
Billions
$25
$15
$5
-$5
Monthly Changes on Left Axis
Nonrevolving
Revolving
-$15
-$25
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Source: Federal Reserve Board
*assumes recession ended in July 2009
27
AFTER RISING ABOVE 6% LAST YEAR, THE HOUSEHOLD SAVING RATE
HAS FALLEN BACK UNDER 4% AS CONSUMER SPENDING HAS
GROWN.
Real Personal Income and Real PCE
Year-over-Year % Change
8%
6%
4%
2%
0%
-2%
-4%
2000
2001
2002
2003
Real PCE, Jan 2010 = 1.4%
Source: Bureau of Economic Analysis
2004
2005
2006
2007
2008
2009
2010
Personal Saving Rate, Jan 2010 = 3.3%
*assumes recession ended in July 2009
28
SO WHAT ARE THE RISKS?
• Risk 1: History beats economics (+)
• Risk 2: The housing correction still has a way
to go (-)
• Risk 3: Business Investment languishes (-)
• Risk 4: Foreign economies continue to
struggle.
• Risk 5: Fiscal and other imbalances including
state and local governments(-)
29
HOME SALES HAVE SLOWED OVER THE PAST THREE MONTHS AND
THE STOCK OF UNSOLD HOMES IS RISING AGAIN.
Sales and Months' Supply of
Existing Single-Family Home Sales
Inventory
12
1,600
9
8
5,000
7
6
4,000
5
4
3,000
3
00
01
02
03
04
05
06
Source: National Association of Realtors
January 2010
07
08
09
10
sales, thousands, SAAR
10
Existing
Sales
6,000
1,400
months, nsa
sales, thousands, SAAR
11
Inventory
New Sales
1,200
14
12
10
1,000
8
800
6
600
4
400
200
2
0
0
00 01 02 03 04 05 06 07 08 09 10
Source: U.S. Census Bureau
months, sa
7,000
Sales and Months' Supply of New
Single-Family Home Sales
THE PENDING HOME SALES CONFIRMS A SHARP SLOWING
IN SALES ACTIVITY OVE THE NEAR-TERM.
January 2010 Pending Home Sales Index
Index, sa
140
an index of 100 is equal to the average level of activity during 2001
120
100
90.4
80
60
01
02
03
04
05
06
07
08
09
10
31
THE “SHADOW” INVENTORY OF UNSOLD HOMES MAY BE UNUSUALLY
LARGE, AND DOWNWARD PRICE PRESSURE COULD BE PERSISTENT.
Las Vegas, NV
Listings
REO Listings
13,021
11,646
Auction
Listings
2,360
Total
Inventory %
Notice of
Shadow
Total
Actual
Defaults
Inventory
Inventory
Listings
18,008
32,014
45,035
346%
San Diego, CA
11,059
4,372
2,857
5,707
12,936
23,995
217%
Los Angeles, CA
41,523
14,213
10,624
22,189
47,026
88,549
213%
4,047
1,725
742
1,782
4,249
8,296
205%
Phoenix, AZ
28,773
12,645
19,587
-
32,232
61,005
212%
Detroit, MI
19,027
9,171
3,973
275
13,419
32,446
171%
Chicago, IL
40,349
6,195
5,750
23,591
35,536
75,885
188%
Miami, FL
33,409
3,747
1,894
13,332
18,973
52,382
157%
Cleveland, OH
13,127
2,704
110
2,636
5,450
18,577
142%
Denver, CO
21,242
2,571
8,106
-
10,677
31,919
150%
Tampa, FL
29,727
1,485
561
9,308
11,354
41,081
138%
9,004
1,342
2,087
-
3,429
12,433
138%
Portland, OR
12,275
1,971
1,924
-
3,895
16,170
132%
Washington, DC
13,755
1,274
1,538
335
3,147
16,902
123%
Atlanta, GA
32,590
4,682
4,895
-
9,577
42,167
129%
Seattle, WA
10,579
1,640
659
-
2,299
12,878
122%
Boston, MA
12,115
745
-
-
745
12,860
106%
Dallas, TX
30,684
4,234
2,287
-
6,521
37,205
121%
New York, NY
67,837
993
1,158
11,623
13,774
81,611
120%
Charlotte, NC
23,540
2,318
1,672
102
4,092
27,632
117%
467,683
89,673
72,784
108,888
271,345
739,028
158%
San Francisco, CA
Minneapolis, MN
Total
March 2010
HOME PRICES, WHICH STABILIZED EARLY LAST YEAR, HAVE
RECENTLY TILTED DOWNWARD AGAIN.
Radar Logic 28-Day Home Price Indexes
through January 19, 2010
$300
price per square foot
$250
$200
$150
$100
$50
$0
00
01
02
25-MSA Composite
03
04
Atlanta
05
Jacksonville
06
07
Miami
08
Tampa
09
SO WHAT ARE THE RISKS?
• Risk 1: History beats economics (+)
• Risk 2: The housing correction still has a way
to go (-)
• Risk 3: Business Investment languishes (-)
• Risk 4: Foreign economies continue to
struggle.
• Risk 5: Fiscal and other imbalances including
state and local governments(-)
34
OUR “ECONOMIC” MODEL, ALSO POINTS TO A BREAK FROM
STATISTICAL HISTORY, WITH WEAK INVESTMENT (RELATIVE TO
HISTORY)
Blue Chip GDP Forecast
Annualized quarterly percent change
8
Statistical model projection
Actual
Forecast
6
4
DSGE model
2
0
-2
-4
-6
-8
Q1-07
Q3-07
Q1-08
Q3-08
Q1-09
SOURCES: Blue Chip panel of economists, March 10, 2010.
Q3-09
Q1-10
Q3-10
Q1-11
Q3-11
35
BUSINESS SPENDING ON CAPITAL GOODS, WHICH HAD BEEN
SHOWING SIGNS OF IMPROVEMENT HAS BEEN FLAT OVER THE
PAST TWO MONTHS.
Core* Capital Goods Orders, SA
*nondefense, ex aircraft and parts, January 2010
15
10
5
0
-5
-10
-15
-20
-25
year-over-year (lhs)
Source: U.S. Census Bureau
3-month annual rate (lhs)
36
BUT PURCHASING MANAGERS AT MANUFACTURING ESTABLISHMENTS
ARE REPORTING GOOD ACTIVITY—AND ORDERS—FOR FEBRUARY.
ISM Manufacturing Index
Diffusion Index
50+ = expansion, February 2010
80
February Component Values
Total Index: 56.5
New orders: 59.5
Production: 58.4
Employment: 56.1
70
60
50
40
30
20
2000
2001
2002
Source: Institute for Supply Management
2003
2004
2005
2006
2007
2008
2009
*assumes recession ended in July 2009
2010
37
SO WHAT ARE THE RISKS?
• Risk 1: History beats economics (+)
• Risk 2: The housing correction still has a way
to go (-)
• Risk 3: Business Investment languishes (-)
• Risk 4: Foreign economies continue to
struggle.
• Risk 5: Fiscal and other imbalances including
state and local governments(-)
38
GROWTH IS EXPECTED ABROAD AS WELL, BUT AT AN EVEN MORE
SUBDUED PACE THAN WHAT IS EXPECTED FOR THE U.S. AND LIKELY
WITH A MORE FRAGILE BANKING SECTOR.
Global GDP Growth Forecast
year/year % change
4
FORECAST
2
0
-2
-4
-6
2008
Euro Area
2009
Japan
Source: Blue Chip Consensus , March 10, 2009
2010
United Kingdom
2011
United States
SO WHAT ARE THE RISKS?
• Risk 1: History beats economics (+)
• Risk 2: The housing correction still has a way
to go (-)
• Risk 3: Business Investment languishes (-)
• Risk 4: Foreign economies continue to
struggle.
• Risk 5: Fiscal and other imbalances including
state and local governments(-)
40
STATE BUDGET PROBLEMS REMAIN A MAJOR RISK TO THE ECONOMIC
OUTLOOK IN 2010-2011.
State & Local Government Spending
year-over-year % change, through Q4 2009
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09
Source: Bureau of Economic Analysis
BUT THIS IS A VERY FRAGILE SOURCE OF SPENDING
• To date state budgets which tend to rely on income and sales
taxes have suffered collapsing revenue and (to a lesser extent)
increasing service demands (especially Medicaid).
• Local property taxes have held up better because of
assessments lags and more flexible millage rates but local
governments have greater service demands, less state aid and
shrinking property digests.
–
-Rockefeller Institute of Government
• States had to close a collective $145 billion gap in the 2009-10
budgets. States budget officers currently project an
additional shortfall of $28.2 billion for 2010-11.
–
-National Conference of State Legislatures
BUT THIS IS A VERY FRAGILE SOURCE OF SPENDING
•Despite this, budget cuts and tax increases have been mitigate by
the ARRA (stimulus) which provided $60B and $73B in 2009 and
2010 but falls to $30B for 2011 on.
-CEA, CBO.
•California, which has the lowest credit score of any US state
(BBB,Baa1,A-), pays a risk premium on its debt between that of
Spain and Greece.
-FRBA calculation
•State reserves are largely depleted and public employee pension
are heavily underfunded suggesting that state and local budgets will
be especially lean in coming years as these balances are re-built.
THE OUTLOOK FOR UNEMPLOYMENT
JOBS REDUCTIONS HAVE IMPROVED, BUT “GROWTH”
IS STILL NOT IN THE PICTURE.
Month to Month Change in Payroll Employment
thousands, February 2010
300
200
100
0
-36
-100
-200
Industry
Jan
Feb
Mfg
20
1
Const.
-400
-77
-64
Retail
41.8
-0.4
-500
Prof & bus
(Incl. temps)
30
51
-600
Edu & Health
-300
-700
23
32
Leisure &
Hosp
0
7
Gov
7
-18
-800
Oct07
Feb08
Source: U.S. Bureau of Labor Statistics
Jun08
Oct08
Feb09
Jun09
Oct09
Feb10
THERE HAS BEEN A NOTABLE RISE IN THE HIRING OF TEMPORARY
WORKERS—PERHAPS A SIGN OF IMPROVING LABOR DEMAND AMID
UNCERTAINTY ABOUT THE SUSTAINABILITY OF THE EXPANSION
Employment in Temporary Help Services
thousands
index=100 on
2900
120
2700
110
ASA Staffing Index (right axis)
2500
100
2300
90
2100
80
1900
70
BLS (left axis)
1700
1500
60
through February 2010
Aug-06 Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10
50
Source: Bureau of Labor Statistics (BLS), American Staffing Association (ASA)
46
WHAT KIND OF JOB GROWTH IS NECESSARY TO BRING
DOWN UNEMPLOYMENT?
Month to Month Change in Payroll Employment
thousands, February 2010
300
200
Threshold to materially reduce unemployment under “ordinary” assumptions`
100
0
-36
-100
-200
Industry
Jan
Feb
Mfg
20
1
Const.
-400
-77
-64
Retail
41.8
-0.4
-500
Prof & bus
(Incl. temps)
30
51
-600
Edu & Health
-300
-700
23
32
Leisure &
Hosp
0
7
Gov
7
-18
-800
Oct07
Feb08
Source: U.S. Bureau of Labor Statistics
Jun08
Oct08
Feb09
Jun09
Oct09
Feb10
ADDING THE INVOLUNTARY PART-TIMERS AND DISCOURAGED
WORKERS TO OFFICIALLY UNEMPLOYED WORKERS RAISES THE
RATE OF JOBLESSNESS TO NEAR 17 PERCENT.
Unemployment Rates
February 2010
percent
18
16.8%
16
14
12
Unemployed+Marginally Attached + Part-time
for Economic Reasons Rate
10
9.7%
8
6
Civilian Unemployment Rate
4
2
00
01
02
03
04
05
06
07
08
09
*Note: Marginally attached workers currently want a job and have looked for work within the last 12 months. This primarily
includes discouraged workers (those not currently looking for work because they believe no work is available given their
circumstance), and persons not now working due to family responsibilities, ill-health, or are in school.
Source: U.S. Bureau of Labor Statistics
48
RISING PRODUCTIVITY AND LABOR FORCE GROWTH IMPLY THAT THE
MODEST GROWTH SCENARIO WILL BE INSUFFICIENT TO
SIGNIFICANTLY CUT INTO THE RATE OF JOBLESSNESS
Blue Chip Unemployment Rate Forecast
ACTUAL UNEMPLOYMENT RATE
FORECAST
Quarter Average
12
2.2% growth
10
3% growth
8
4.1% growth
6
4
Q1-07
Q3-07
Q1-08
Q3-08
Q1-09
SOURCES: Blue Chip panel of economists, March 10, 2010.
Q3-09
Q1-10
Q3-10
Q1-11
Q3-11
49
FORECASTING INFLATION
The conventional approach to forecasting inflation is called, variously,
a Phillips curve forecast, an expectations augmented Phillips curve,
and the New Keynesian Phillips curve.
While there may be significant theoretical motivations that distinguish
these approaches, they all tend to share three common elements that,
with varying degrees of weight, determine the inflation prediction:
π = f (slack in the economy, inflation expectations, commodity prices)
Lagged Survey
inflation data
GDP
GAP
Capacity
Utilization
Unemployment
relative to NAIRU
(“Phillips curve”)
Oil
prices
Import
prices
Raw materials
FORECASTING INFLATION
π = f (slack in the economy, inflation expectations, commodity prices)
Gordon Triangle Model
pt = a(L)pt-1 + b(L)Dt + c(L)zt + et
Greenbook Approach
Input prices
and wages
Productivity
Unit Costs
Markups
The rate of
price
increase
THOUGHTS ON INFLATION FROM THE FOMC
Most participants anticipated that substantial
slack in labor and product markets, along with
well-anchored inflation expectations, would keep
inflation subdued in the near term, although they
had differing views as to the relative importance
of those two factors.
Minutes of the FOMC
December 15-16, 2009
ECONOMISTS SEE LONGER-TERM INFLATION IN THE 1% to 3%
RANGE—BUT THERE ARE SKEPTICS ON EITHER SIDE OF THIS RANGE.
Blue Chip Inflation Forecast
ACTUAL CPI
FORECAST
annualized quarterly percent change
8
6
--- Top 10 forecasts
4
2
0
-2
-4
-6
--- Bottom 10 forecasts
FOMC Objective
-8
-10
Q1-07
Q1-08
Q1-09
SOURCE: Blue Chip panel of economists, March 10, 2010.
Q1-10
Q1-11
53
ESTIMATES OF THE UNEMPLOYMENT RATE
GAP
Percent
11.0
10.0
9.0
8.0
7.0
6.0
CBO NAIRU
5.0
4.0
3.0
2.0
1.0
0.0
1970Q1
1976Q1
1982Q1
1988Q1
1994Q1
2000Q1
2006Q1
ESTIMATES OF THE UNEMPLOYMENT RATE
GAP
Percent
11.0
10.0
9.0
8.0
3)
7.0
2)
6.0
1)
CBO NAIRU
5.0
4.0
3.0
ALTERNATIVE NAIRU BASED ON:
1) Job vacancies
2) Surveys of Job Perceptions
3) “Core-based” dynamic Phillips curve
2.0
1.0
0.0
1970Q1
1976Q1
1982Q1
1988Q1
1994Q1
2000Q1
2006Q1
ESTIMATES OF THE PHILLIPS CURVE VARY WIDELY AND, ARGUABLY,
HAVE NOT GIVEN MUCH INSIGHT INTO FUTURE INFLATION IN THE
POST-82 PERIOD.
CPI Phillips Curve: ‘83-09
9
12-month percent change
6
3
0
-3
-6
-2
-1
0
1
2
Unemployment GAP
Source: Bureau of Labor Statistics; CBO; authors’ calculations
3
4
5
6
HOWEVER, UNUSUALLY HIGH LEVELS OF JOBLESSNESS MAY STILL
BE INFORMATIVE ABOUT THE OUTLOOK FOR INFLATION.
CPI Phillips Curve: ‘83-09
9
12-month percent change
6
3
0
-3
-6
-2
-1
0
1
2
Unemployment GAP
Source: Bureau of Labor Statistics; CBO; authors’ calculations
3
4
5
6
MODEST DISINFLATIONARY PRESSURE IS STILL SEEN IN
THE RETAIL PRICE DATA.
Core Consumer Price Index
percent change, through February 2010
4%
3%
2%
1%
0%
1995
1997
1999
2001
year-over-year
2003
2005
2007
2009
3-month annual rate
Source: U.S. Bureau of Labor Statistics
*assumes recession ended in July 2009
58
Trimmed-Mean Estimates of the CPI
3.5
3.3
3.0
2.8
2.5
2.3
2.0
1.8
1.5
1.3
1.0
0.8
0.5
0.3
0.0
Annualized monthly percent change
Jan. – Apr.
Headline
CPI
Ignoring the highest and lowest 3% of the marketbasket
CPI
5
10
15
20
25
30
35
40
Percent “trimmed” from each tail of the CPI
45
Median
CPI
Trimmed-Mean Estimates of the CPI
3.5
3.3
3.0
2.8
2.5
2.3
2.0
1.8
1.5
1.3
1.0
0.8
0.5
0.3
0.0
Annualized monthly percent change
Jan. – Apr.
Headline
CPI
Ignoring the highest and lowest 3% of the marketbasket
CPI
5
10
15
20
25
30
35
40
Percent “trimmed” from each tail of the CPI
45
Median
CPI
Trimmed-Mean Estimates of the CPI
3.5
3.3
3.0
2.8
2.5
2.3
2.0
1.8
1.5
1.3
1.0
0.8
0.5
0.3
0.0
Annualized monthly percent change
Jan. – Apr.
May – Aug.
CPI
5
10
15
20
25
30
35
40
Percent “trimmed” from each tail of the CPI
45
Median
CPI
Trimmed-Mean Estimates of the CPI
3.5
3.3
3.0
2.8
2.5
2.3
2.0
1.8
1.5
1.3
1.0
0.8
0.5
0.3
0.0
Annualized monthly percent change
Jan. – Apr.
May – Aug.
Sep.-Dec.
CPI
5
10
15
20
25
30
35
40
Percent “trimmed” from each tail of the CPI
45
Median
CPI
CAN WE GET ANY INFLATION INFORMATION OUT OF
PARTICULAR PRICES?
The CPI Marketbasket
(by degree of price stickiness)
Flexible-price Items
Freq. of
adjust.
Motor fuel
Car and truck rental
Fresh fruits and vegetables
Fuel oil and other fuels
Gas (piped) and electricity
Meats, poultry, fish, and eggs
Used cars and trucks***
Leased cars and trucks*
New vehicles
Women's and girls' apparel
Dairy and related products
Nonalcoholic beverages and beverage materials
Lodging away from home
Processed fruits and vegetables
Men's and boys' apparel
Cereals and bakery products
Footwear
Other food at home
Jewelry and watches
Motor vehicle parts and equipment
Tobacco and smoking products
Total flexible price
Core flexible price items
0.7
1.2
1.3
1.5
1.6
1.9
2.0
2.0
2.0
2.3
2.6
2.7
3.1
3.2
3.2
3.3
3.4
3.6
3.9
4.1
4.2
Rel.
Imp.
3.2
0.1
0.9
0.3
4.2
1.9
1.6
0.6
4.5
1.5
0.9
1.0
2.5
0.3
0.9
1.2
0.7
2.0
0.4
0.4
0.8
29.8
14.0
Sticky-price Items
Freq. of
adjust.
Rel.
Imp.
Infants' and toddlers' apparel
5.3
0.2
Household furnishings and operations
5.3
4.8
Motor vehicle maintenance and repair
5.8
1.2
Motor vehicle insurance
5.9
2.0
Medical care commodities
6.2
1.6
Personal care products
6.7
0.7
Alcoholic beverages
7.3
1.1
Recreation
7.9
5.7
Miscellaneous personal goods
8.1
0.2
Communication
8.4
3.2
Public transportation
9.4
1.1
Tenants' and household insurance
10.1
0.3
Food away from home
10.7
6.5
Rent of primary residence**
11.0
6.0
OER, Northeast **
11.0
5.3
OER, Midwest **
11.0
4.5
OER, South**
11.0
7.7
OER, West**
11.0
6.9
Education
11.1
3.1
Medical care services
14.0
4.8
Water and sewer and trash collection services
14.3
1.0
Motor vehicle fees
16.4
0.5
Personal care services
23.7
0.6
Miscellaneous personal services
25.9
1.1
Total sticky-price
Non-OER sticky-price
70.1
45.7
WHILE FLEXIBLE PRICES RESPOND RATHER SHARPLY TO ECONOMIC
CONDITIONS, THE STICKY PRICE MEASURES APPEAR TO BE, WELL,
STICKY
Disaggregated CPI Phillips Curves: ‘83-09
12
12-month percent change
9
6
3
0
-3
-6
Flexible CPI
Sticky CPI
CPI
-9
-12
-2
-1
0
1
2
Unemployment GAP
Source: Bureau of Labor Statistics; CBO; authors’ calculations
3
4
5
6
“STICKY” PRICES HAVE BEEN MORE STICKY IN THE POST1982 PERIOD.
Differing Variances of Alternative CPI Components
Core
Flexible
Flexible CPI
CPI
total
sample
1983forward
Sticky Core Sticky Sticky CPI ex Core Sticky CPI ex
Shelter
Shelter
CPI
CPI
67.29
19.90
10.63
11.56
6.89
7.62
71.46
15.79
1.70
1.90
2.10
2.58
*The variance was calculated from the 1-month annualized percent changes in
each variable.
THESE PRICES SEEM TO BE A BETTER GAUGE OF
MEDIUM-TERM INFLATION.
RMSEs from Phillip’s Curves
Out-of-Sample Forecast period: 2000:01 to 2007:12
(Estimated over 1983:01 to 1999:12 )
Core Sticky Core CPI
Flexible
Core Flexible
Sticky
1 month ahead
1.002
1.025
1.007
1.025
1.010
3 months ahead
1.049
1.006
0.988
0.996
0.994
12 months ahead
1.116
1.052
0.955
0.969
0.953
24 months ahead
1.355
1.165
0.858
0.869
0.987
*The RMSEs are reported relative to the forecasts obtained from the CPI Phillips
Curve benchmark
COMMODITY PRICES HAVE BEEN RISING, PERHAPS A
REFLECTION OF STRONGER WORLD INDUSTRIAL ACTIVITY
Commodity Spot Indexes
Average, Monthly through February 2010, 1967=100
1000
All Commodities
Metals
Textiles and fibers
Raw Industrial Materials
Foodstuffs
900
800
700
600
500
400
300
200
100
0
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
Source: Commodity Research Bureau (CRB)
67
TIPS-BASED MEASURES OF LONG-TERM INFLATION EXPECTATIONS
HAVE BEEN STEADY (AND RECENTLY MOVING LOWER).
Tools of Fed policy
These are in your
macroeconomics textbook
These things aren’t
WE’RE NOT A SLEEPY LITTLE $900 BILLION
CENTRAL BANK ANYMORE
Federal Reserve Assets (Uses of Funds)
$ billions
$2,500
$2,000
Agency Debt & MBS
Lending to Nonbank Credit Markets
Short-Term lending to Financials
Other
Treasuries
$1,500
$1,000
$500
$0
Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10
Through Mar 10
AND WE GOT BIG THE OLD FASHIONED WAY—WE
PRINTED MORE MONEY.
Federal Reserve Liabilities (Sources of Funds)
$ billions
$2,500
$2,000
Treasury SFP
Other
Banks Reserve Balances
Currency in Circulation
$1,500
$1,000
$500
$0
Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10
SFP = Supplementary Financing Program
Through Mar 10
FUTURES MARKETS DON’T SEE THE FOMC RAISING THE
FUNDS RATE UNTIL LATE THIS SUMMER
Fed Funds Futures Rates
percent
0.90
On 11/13
0.80
0.70
On 12/14
0.60
On 1/13
0.50
0.40
On 2/12
0.30
0.20
0.10
0.00
Feb 10
Mar 10
April 10
May 10
June '10
July '10
Aug '10
Sept '10
Oct '10
Nov '10
Contract Month
Source: Wall Street Journal/Haver Analytics
72
SUMMARY OF THE OUTLOOK
1. The national growth outlook is for a modest
recovery—unusual following a recession of such
great magnitude.
2. Many downside risks exist but balanced against a
notable large upside risk—history.
3. The inflation outlook is exceptionally varied and
seems to depend upon whether you think economic
slack, or lack of central bank credibility is the
dominant influence.
4. As of today, markets see little chance of a rate hike
from the Fed before the fourth quarter.
THE PROPORTION OF WORKERS WHO HAVE EXHAUSTED THEIR UNEMPLOYMENT
COMPENSATION, AND ARE NOW ON EXTENDED BENEFITS, HAS GROWN SHARPLY.
Unemployment Rate
(by status of unemployment compensation)
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2000
2001
2002
Not Collecting Insurance
Source: BLS
2003
2004
Continuing Claims
2005
2006
2007
Extended Benefits
2008
2009
2010
Unemployment Rate
74