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11
Kevin L. KliesenEconomist,
Federal Reserve Bank of St. Louis
Remarks to the Federal Reserve Bank of St. Louis Professors Conference
March 1, 2007
An Update on the U.S. Economy
22
Disclaimer
33
A Review of 2006
How Accurate Were Blue Chip Forecasters in 2006?
2005 (A) Forecast Actual ErrorReal Gross Domestic Product 3.1 3.2 3.1 -0.1
Personal Consumption Expenditures 2.9 3.0 3.6 0.6 Durables 2.5 5.4 7.4 2.0 Nondurables 4.4 2.1 3.7 1.6 Services 2.3 3.0 2.8 -0.2
Nonresidential Fixed Investment 5.6 7.2 6.2 -1.0 Equipment & Software 7.0 7.5 4.4 -3.1 Structures 1.8 6.5 10.7 4.2 Residential 9.0 -4.4 -12.6 -8.2 CBI (billions, $2000, annual avg.) 19.6 34.8 41.9 7.1
Net Exports (billions, $2000, annual avg.) -619.2 -639.9 -618.7 21.2 Exports 6.7 6.3 9.3 3.0 Imports 5.2 4.4 3.4 -1.0
Government Consumption & Gross Investment 1.2 3.2 2.6 -0.6
Real Personal Disposable Income 0.3 3.7 2.9 -0.8Personal Saving Rate (%, Annual Avg.) -0.4 -0.3 -1.1 -0.8
NOTE: Unless otherwise noted, percent changes are fourth quarter-to-fourth quarter. Blue Chip forecasts published in Dec. 10, 2005, Econometric Detail
2006
44
A Review of 2006
How Accurate Were Blue Chip Forecasters in 2006?
2005 (A) Forecast Actual ErrorReal Gross Domestic Product 3.1 3.2 3.1 -0.1
Personal Consumption Expenditures 2.9 3.0 3.6 0.6 Durables 2.5 5.4 7.4 2.0 Nondurables 4.4 2.1 3.7 1.6 Services 2.3 3.0 2.8 -0.2
Nonresidential Fixed Investment 5.6 7.2 6.2 -1.0 Equipment & Software 7.0 7.5 4.4 -3.1 Structures 1.8 6.5 10.7 4.2 Residential 9.0 -4.4 -12.6 -8.2 CBI (billions, $2000, annual avg.) 19.6 34.8 41.9 7.1
Net Exports (billions, $2000, annual avg.) -619.2 -639.9 -618.7 21.2 Exports 6.7 6.3 9.3 3.0 Imports 5.2 4.4 3.4 -1.0
Government Consumption & Gross Investment 1.2 3.2 2.6 -0.6
Real Personal Disposable Income 0.3 3.7 2.9 -0.8Personal Saving Rate (%, Annual Avg.) -0.4 -0.3 -1.1 -0.8
NOTE: Unless otherwise noted, percent changes are fourth quarter-to-fourth quarter. Blue Chip forecasts published in Dec. 10, 2005, Econometric Detail
2006
55
A Review of 2006
How Accurate Were Blue Chip Forecasters in 2006?
2005 (A) Forecast Actual ErrorReal Gross Domestic Product 3.1 3.2 3.1 -0.1
Personal Consumption Expenditures 2.9 3.0 3.6 0.6 Durables 2.5 5.4 7.4 2.0 Nondurables 4.4 2.1 3.7 1.6 Services 2.3 3.0 2.8 -0.2
Nonresidential Fixed Investment 5.6 7.2 6.2 -1.0 Equipment & Software 7.0 7.5 4.4 -3.1 Structures 1.8 6.5 10.7 4.2 Residential 9.0 -4.4 -12.6 -8.2 CBI (billions, $2000, annual avg.) 19.6 34.8 41.9 7.1
Net Exports (billions, $2000, annual avg.) -619.2 -639.9 -618.7 21.2 Exports 6.7 6.3 9.3 3.0 Imports 5.2 4.4 3.4 -1.0
Government Consumption & Gross Investment 1.2 3.2 2.6 -0.6
Real Personal Disposable Income 0.3 3.7 2.9 -0.8Personal Saving Rate (%, Annual Avg.) -0.4 -0.3 -1.1 -0.8
NOTE: Unless otherwise noted, percent changes are fourth quarter-to-fourth quarter. Blue Chip forecasts published in Dec. 10, 2005, Econometric Detail
2006
66
A Review of 2006
How Accurate Were Blue Chip Forecasters in 2006?
2005 (A) Forecast Actual ErrorReal Gross Domestic Product 3.1 3.2 3.1 -0.1
Personal Consumption Expenditures 2.9 3.0 3.6 0.6 Durables 2.5 5.4 7.4 2.0 Nondurables 4.4 2.1 3.7 1.6 Services 2.3 3.0 2.8 -0.2
Nonresidential Fixed Investment 5.6 7.2 6.2 -1.0 Equipment & Software 7.0 7.5 4.4 -3.1 Structures 1.8 6.5 10.7 4.2 Residential 9.0 -4.4 -12.6 -8.2 CBI (billions, $2000, annual avg.) 19.6 34.8 41.9 7.1
Net Exports (billions, $2000, annual avg.) -619.2 -639.9 -618.7 21.2 Exports 6.7 6.3 9.3 3.0 Imports 5.2 4.4 3.4 -1.0
Government Consumption & Gross Investment 1.2 3.2 2.6 -0.6
Real Personal Disposable Income 0.3 3.7 2.9 -0.8Personal Saving Rate (%, Annual Avg.) -0.4 -0.3 -1.1 -0.8
NOTE: Unless otherwise noted, percent changes are fourth quarter-to-fourth quarter. Blue Chip forecasts published in Dec. 10, 2005, Econometric Detail
2006
77
A Review of 2006
How Accurate Were Blue Chip Forecasters in 2006?
2005 (A) Forecast Actual ErrorReal Gross Domestic Product 3.1 3.2 3.1 -0.1
Personal Consumption Expenditures 2.9 3.0 3.6 0.6 Durables 2.5 5.4 7.4 2.0 Nondurables 4.4 2.1 3.7 1.6 Services 2.3 3.0 2.8 -0.2
Nonresidential Fixed Investment 5.6 7.2 6.2 -1.0 Equipment & Software 7.0 7.5 4.4 -3.1 Structures 1.8 6.5 10.7 4.2 Residential 9.0 -4.4 -12.6 -8.2 CBI (billions, $2000, annual avg.) 19.6 34.8 41.9 7.1
Net Exports (billions, $2000, annual avg.) -619.2 -639.9 -618.7 21.2 Exports 6.7 6.3 9.3 3.0 Imports 5.2 4.4 3.4 -1.0
Government Consumption & Gross Investment 1.2 3.2 2.6 -0.6
Real Personal Disposable Income 0.3 3.7 2.9 -0.8Personal Saving Rate (%, Annual Avg.) -0.4 -0.3 -1.1 -0.8
NOTE: Unless otherwise noted, percent changes are fourth quarter-to-fourth quarter. Blue Chip forecasts published in Dec. 10, 2005, Econometric Detail
2006
88
A Review of 2006
How Accurate Were Blue Chip Forecasters in 2006?
2005 (A) Forecast Actual ErrorReal Gross Domestic Product 3.1 3.2 3.1 -0.1
Personal Consumption Expenditures 2.9 3.0 3.6 0.6 Durables 2.5 5.4 7.4 2.0 Nondurables 4.4 2.1 3.7 1.6 Services 2.3 3.0 2.8 -0.2
Nonresidential Fixed Investment 5.6 7.2 6.2 -1.0 Equipment & Software 7.0 7.5 4.4 -3.1 Structures 1.8 6.5 10.7 4.2 Residential 9.0 -4.4 -12.6 -8.2 CBI (billions, $2000, annual avg.) 19.6 34.8 41.9 7.1
Net Exports (billions, $2000, annual avg.) -619.2 -639.9 -618.7 21.2 Exports 6.7 6.3 9.3 3.0 Imports 5.2 4.4 3.4 -1.0
Government Consumption & Gross Investment 1.2 3.2 2.6 -0.6
Real Personal Disposable Income 0.3 3.7 2.9 -0.8Personal Saving Rate (%, Annual Avg.) -0.4 -0.3 -1.1 -0.8
NOTE: Unless otherwise noted, percent changes are fourth quarter-to-fourth quarter. Blue Chip forecasts published in Dec. 10, 2005, Econometric Detail
2006
99
A Review of 2006
How Accurate Were Blue Chip Forecasters in 2006?
2005 (A) Forecast Actual ErrorCompensation Per Hour 4.1 4.6 4.9 0.3Productivity 2.5 2.2 2.1 -0.1Unit Labor Cost 1.6 2.2 2.8 0.6
Chain-Type GDP Price Index 3.1 2.3 2.5 0.2Consumer Price Index 3.7 2.3 1.9 -0.4Producer Price Index 5.2 1.4 0.2 -1.2
Employment, Civilian 1.9 1.3 2.1 0.8Unemployment Rate (%) 5.0 5.0 4.5 -0.5
NOTE: Percent changes from annual average data. Blue Chip forecasts published in Dec. 10, 2005, Econometric Detail
2006
1010
A Review of 2006
How Accurate Were Blue Chip Forecasters in 2006?
2005 (A) Forecast Actual ErrorCompensation Per Hour 4.1 4.6 4.9 0.3Productivity 2.5 2.2 2.1 -0.1Unit Labor Cost 1.6 2.2 2.8 0.6
Chain-Type GDP Price Index 3.1 2.3 2.5 0.2Consumer Price Index 3.7 2.3 1.9 -0.4Producer Price Index 5.2 1.4 0.2 -1.2
Employment, Civilian 1.9 1.3 2.1 0.8Unemployment Rate (%) 5.0 5.0 4.5 -0.5
NOTE: Percent changes from annual average data. Blue Chip forecasts published in Dec. 10, 2005, Econometric Detail
2006
1111
A Review of 2006
How Accurate Were Blue Chip Forecasters in 2006?
2005 (A) Forecast Actual ErrorCompensation Per Hour 4.1 4.6 4.9 0.3Productivity 2.5 2.2 2.1 -0.1Unit Labor Cost 1.6 2.2 2.8 0.6
Chain-Type GDP Price Index 3.1 2.3 2.5 0.2Consumer Price Index 3.7 2.3 1.9 -0.4Producer Price Index 5.2 1.4 0.2 -1.2
Employment, Civilian 1.9 1.3 2.1 0.8Unemployment Rate (%) 5.0 5.0 4.5 -0.5
NOTE: Percent changes from annual average data. Blue Chip forecasts published in Dec. 10, 2005, Econometric Detail
2006
1212
A Review of 2006
How Accurate Were Blue Chip Forecasters in 2006?
2005 (A) Forecast Actual ErrorCompensation Per Hour 4.1 4.6 4.9 0.3Productivity 2.5 2.2 2.1 -0.1Unit Labor Cost 1.6 2.2 2.8 0.6
Chain-Type GDP Price Index 3.1 2.3 2.5 0.2Consumer Price Index 3.7 2.3 1.9 -0.4Producer Price Index 5.2 1.4 0.2 -1.2
Employment, Civilian 1.9 1.3 2.1 0.8Unemployment Rate (%) 5.0 5.0 4.5 -0.5
NOTE: Percent changes from annual average data. Blue Chip forecasts published in Dec. 10, 2005, Econometric Detail
2006
1313
Themes in the Outlook
1. Resilience in the face of numerous economic challenges; transition from soft patch to trend growth.
1414
The Resilient Economy
Significant economic shocks over the past few years:
• The stock market bust in 2000;
• Corporate governance issues;
• September 11, 2001;
• Military conflicts in Afghanistan and Iraq;
• Major hurricanes in 2004 (Ivan) and 2005 (Katrina);
• Housing (prices and quantities)
1515
The Great Moderation
Economic Volatilities:Output Growth and InflationRolling 40-Quarter Standard Deviations
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Jun-58
Jun-61
Jun-64
Jun-67
Jun-70
Jun-73
Jun-76
Jun-79
Jun-82
Jun-85
Jun-88
Jun-91
Jun-94
Jun-97
Jun-00
Jun-03
Jun-06
Real GDP Growth CPI Inflation Core CPI Inflation
1616
Themes in the Outlook
“I see an economy that appears to be transitioning quite nicely from last year’s slow patch to more sustainable growth.” President Poole, 2-9-2007
1717
Themes in the Outlook
Real GDP GrowthPercent Change, Annual Rate
2.1
4.1
0
1
2
3
4
5
6
2003
:H1
2003
:H2
2004
:H1
2004
:H2
2005
:H1
2005
:H2
2006
:H1
2006
:H2
1818
Themes in the Outlook
No signs of significant imbalances:Bouncing along around the economy’s trend rate of growth.
Growth of Real GDPPercent
0
1
2
3
4
5
6
1994 1996 1998 2000 2002 2004 2006
4-Qtr 40-Qtr
1919
1. Resilience in the face of numerous economic challenges; transition from soft patch to trend growth.
2. Two economies: Housing and everything else.
Themes in the Outlook
2020
500
800
1100
1400
1700
2000
1985 1988 1991 1994 1997 2000 2003 2006
Actual Average, 1985-2006 Average, 1997-2006
Single-Family Housing Starts
Themes in the Outlook
2121
Themes in the Outlook
Housing and Real GDP GrowthPercent
-2.0-1.00.01.02.03.04.05.0
GDP Housing GDP less Housing
4-Quarter Growth: 2-Quarter Growth:
2222
1. Resilience in the face of numerous economic challenges; transition from soft patch to trend growth.
2. Two economies: Housing and everything else.
3. Solid labor market conditions.
Themes in the Outlook
2323
Themes in the Outlook
Monthly Employment GainsThousands
0
50
100
150
200
250
300
350
400
1/1/05 5/1/05 9/1/05 1/1/06 5/1/06 9/1/06 1/1/07 5/1/07
Monthly Delta Feb. 2007 Forecast 3-Month MA
2424
Themes in the Outlook
Average Monthly Payroll Employment Gain in 2006, Pre- and Post-Benchmark Revision
Thousands of Jobs
0
50
100
150
200
Pre-BM Post-BM
2525
Themes in the Outlook
Civilian Unemployment RatePercent
3.03.54.04.55.05.56.06.57.0
1994 1996 1998 2000 2002 2004 2006
Actual 40-Qtr Trend
2626
1. Resilience in the face of numerous economic challenges; transition from soft patch to trend growth.
2. Two economies: Housing and everything else.
3. Solid labor markets.
4. Partial unwinding of energy prices. Repealing the tax hike.
Themes in the Outlook
2727
Themes in the Outlook
Energy Drag on Real After-Tax IncomePercent
-25.0-20.0-15.0-10.0-5.00.05.0
10.015.020.0
1989 1992 1995 1998 2001 2004 2007
NOTE: 4-Qtr growth of real DPI less 4-Qtr growth of consumer energy prices.
Stimulus
Drag
2828
Themes in the Outlook
Crude Oil Futures Prices: Near and Far$ per barrel
20.00
30.00
40.00
50.00
60.00
70.00
80.00
3/5/04 9/5/04 3/5/05 9/5/05 3/5/06 9/5/06 3/5/07
1-Month Dec. 2010
2929
Themes in the Outlook
Factors Affecting Consumer Spending, 2002-2005
2002 2003 2004 2005 2006Household Owners' Equity 8.5 8.1 11.3 12.6 6.4Financial Assets -7.3 15.4 8.7 6.5 6.9Real Compensation 1.5 3.0 2.8 2.4 2.7
Real Consumer Outlays 1.9 3.4 4.0 2.9 3.6
Personal Saving Rate 1.8 2.2 2.3 -0.3 -1.2
NOTE: Tangible and financial asset data through 2006:Q3.
3030
1. Resilience in the face of numerous economic challenges; transition from soft patch to trend growth.
2. Two economies: Housing and everything else.
3. Solid labor markets.
4. Partial unwinding of energy prices. Repealing the tax hike.
5. Stable inflation expectations.
Themes in the Outlook
3131
Themes in the Outlook
CPI Inflation Expectations
1
1.5
2
2.5
3
3.5
4
4.5
1991 1996 2001 2006
1-Yr Forecast 10-Yr Forecast
SOURCE: Survey of Professional Forecasters (FRB Philadelphia)
3232
Let’s Turn to the Consensus Forecast
3333
A period of steady but below-trend growth of the economy characterized by:
A steady or gently rising unemployment rate.
No recession.
The vaunted soft-landing
The Consensus Forecast
3434
The Consensus Forecast
Forecasters Anticipate a Soft Landing
Forecast Unemployment RateForecaster Date (2007) 2007 2008 2007 2008 2007 2008FOMC Feb. 2.5 - 3.0 2.75 - 3.0 4.5 - 4.75 4.5 - 4.75 2.0 - 2.25 1.75 - 2.0 (Core PCE)Blue Chip Feb. 2.7 3.0 4.8 4.8 2.3 2.2 (Core CPI)M.A. Feb. 3.0 3.1 4.8 4.8 2.3 2.4 (Core CPI)SPF Feb 2.8 3.0 4.7 4.8 2.0 2.1 (Core PCE)CEA Feb 2.9 3.1 4.6 4.8 2.6 2.6 (CPI)NABE Feb 2.8 3.1 4.7 4.8 2.3 2.3 (Core CPI)Averages 2.8 3.0 4.4 4.5 2.4 2.4
NOTE: Real GDP forecasts from the SPF are annual average percent changes. Where possible, the unemployment rate forecast is the average of the fourth quarter for the year indicated.
Real GDP Growth Inflation
3535
What a difference a month makes!
2006:Q4 real GDP growth was revised down by 1.3 percentage points to 2.2%
The Consensus Forecast
3636
The Consensus Forecast
Macroeconomic Advisers 2007:Q1 Tracking Forecast
Real GDP Growth
0
1
2
3
4
12/20/2006 1/4/2007 1/19/2007 2/3/2007 2/18/2007 3/5/2007 3/20/2007
Percent
GDP Dec. 22 Baseline Feb. 2 Baseline
Real Business Fixed Investment Growth
-3
0
3
6
9
12
15
12/20/2006 1/4/2007 1/19/2007 2/3/2007 2/18/2007 3/5/2007 3/20/2007
Percent
Real Business Fixed Investment StructuresEquipment & Software Dec. 22 BaselineFeb. 2 Baseline
3737
Recession Probabilities
Recession Probability in the Next 12 Months According to WSJ Forecasters
0%
5%
10%
15%
20%
25%
30%
Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07
3838
Recession ProbabilitiesBased on the term structure
Probability of Recession from Markov-Switching Model with Term Structure
0
0.2
0.4
0.6
0.8
1
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Note: Term structure is the 10 year constant maturity Treasury security yield less the effective federal funds rate. Feb. data is estimated using the average of the daily data.Source: Haver/U.S. Treasury, author's calculations.
3939
Recession ProbabilitiesBased on payroll employment
Probability of Recession from Markov-Switching Model with Employment Data
0
0.2
0.4
0.6
0.8
1
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005Note: February 2007 is forecasted.Source: Haver/BLS, author's calculations.
4040
Estimates of Neutral Fed Funds Target Rate
012345678
Dec-91 Dec-94 Dec-97 Dec-00 Dec-03 Dec-06
Actual FFR Equil. FFR Estimate
The Consensus Forecast
4141
Market Expectations of the FOMC Federal Funds Target Rate
9/20/06
10/24/0612/12/06
Expected Federal Funds Rates Estimated from Financial Futures
1/31 3/21 5/9 6/28 8/7 9/18 10/31 12/114.00
4.25
4.50
4.75
5.00
5.25
5.50
1/31/07 4/30/07 7/31/07 10/31/07 1/31/08 4/30/08 7/31/08 10/31/08
Percent
12/12/06 02/26/07 02/27/07 FOMC Meeting Dates
4242
Inflation recedes back into the Chairman’s “comfort zone.”
Comfort zone is 1-2% year-over-year growth of the PCE price index that excludes food and energy prices (core inflation)
The Consensus Forecast
4343
The Consensus Forecast
3-, 6-, and 12-Month Core PCE Inflation and Chairman Bernanke's "Comfort Zone"
Percent
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
3-Month 6-Month 12-Month
4444
The Consensus Forecast
Mean Probability Attached to Core PCE InflationPercent
404244464850525456
Less than 2% More than 2%
06Q4 TO 07Q4 07Q4 TO 08Q4Forecasters see a higher probability that core inflation will be above 2% in 2007 and in 2008 than less than 2%.
4545
Risks to the Outlook
4646
1. Housing correction intensifies by more than expected and spills over to other aspects of the economy.
Two-Sided Risks to the Outlook
4747
1. Housing correction intensifies by more than expected and spills over to other aspects of the economy.
2. Housing correction over; consumer and business spending pickup as energy prices fall and foreign demand growth strengthens; wage growth begins to outpace gains in labor productivity; inflation expectations trend upward. Bond yields on the upswing.
Two-Sided Risks to the Outlook
4848
3. Energy prices spike again. Instability in the Middle East (Iraq and Iran), Nigeria, Venezuela, etc.; Chinese authorities fail to slow economic growth;
Two-Sided Risks to the Outlook
4949
3. Energy prices spike again. Instability in the Middle East (Iraq and Iran), Nigeria, Venezuela, etc.; Chinese authorities fail to slow economic growth.
4. Low household saving rate; slower growth of household equity; no cushion to soften another significant demand shock.
Two-Sided Risks to the Outlook
5050
Questions?