Chad Wilkerson Oklahoma City Branch Executive and Economist

Federal Reserve Bank of Kansas City www.kansascityfed.org/oklahomacity

Crop Insurance Conference Enid, Oklahoma

November 2, 2012

• The “Fed” consists of three main entities:

• Board of Governors: 7 members appointed by U.S. President • Federal Reserve Banks: 12 total; semi-independent by design • Federal Open Market Committee: 19 members; 12 voting

• As with most central banks, the Fed’s primary responsibilities fall within four general areas:

• Lender of last resort – provide liquidity in times of crisis • Monetary policy – promote full employment and low inflation • Bank regulation – ensure safety and soundness of banks • Financial services – bank for banks, bank for federal govt.

Overview of the Federal Reserve System

Federal Reserve Districts and Office Locations

• Functions – 40 staff

• Economic research and outreach for U.S. monetary policy purposes • Examinations and inspections of Oklahoma financial institutions • Economic and financial education outreach to teachers and citizens • Community development outreach to low and moderate income areas

• 2012 board of directors

• Jim Dunn (chair), Chairman, Mill Creek Lumber and Supply, Tulsa • Linda Capps, Vice Chairman, Citizen Potawatomi Nation, Shawnee • Pete Delaney, Chairman, CEO, & President, OGE Energy Corp., OKC • Doug Tippens, President and CEO, Bank of Commerce, Yukon • K. Vasudevan, Chairman, Service and Technology Corp., Bartlesville • Rose Washington, Exec. Director, Tulsa Economic Development Corp.

The Oklahoma City Branch of the Federal Reserve Bank of Kansas City

• U.S. economic growth has slowed in recent months, as uncertainties have risen again • The FOMC expects continued improvement in unemployment, and for inflation to stay low

• The range of views among FOMC members about monetary policy remains relatively wide

U.S. Economy and Monetary Policy

2.0 2.4

20.5

7.5

4.4

-3.0

1.3 1.5

8.5

3.6 5.3

-0.7

2.0 2.0

14.4

-1.3 -1.6

3.7

-5

0

5

10

15

20

25

Total GDP Consumerspending

Residentialinvestment

Businessinvestment

Exports Governmentspending

2012 Q12012 Q22012 Q3

Growth in Components of Real GDP

Percent change from the previous period, SAAR

Source: U.S. Bureau of Economic Analysis

U.S. GDP growth rebounded somewhat in Q3, but business investment & exports weakened

2

3

4

5

6

7

8

9

10

11

12

-1200

-1000

-800

-600

-400

-200

0

200

400

600

800

Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12

Private Employment (left axis)

Unemployment Rate (right axis)

Change from previous month, thousands

Source: Institute for Supply Management, Bureau of Labor Statistics

U.S. Private Payroll Employment and Unemployment Rate

Early third quarter data suggest moderate U.S. growth continued

Percent

-2

-1

0

1

2

3

4

5

6

-2

-1

0

1

2

3

4

5

6

Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12

European Financial Stress Index

U.S. Financial Stress Index

Financial stress in Europe remains higher than a few years ago, creating uncertainty

Eurozone and U.S. Financial Stress

Source: FRBKC

Index

Estimated Impact on 2013 GDP Worst Case

Percentage points

Source: Goldman Sachs

Likewise, the “fiscal cliff” and political uncertainty are weighing on the economy

-4

-3.5

-3

-2.5

-2

-1.5

-1

-0.5

0

Sequestration (automatic discretionary cuts)

AMT fix expires

End extended unemployment benefits

End payroll tax holiday

2001 and 2003 tax cuts lapse

-5

-4

-3

-2

-1

0

1

2

3

4

12 Q3 12 Q4 13 Q1 13 Q2 13 Q3 13 Q4

Real GDP, under CBO fiscal cliff scenario

Real GDP, Blue Chip forecasts

Percent change, quarter-over-quarter (SAAR)

But private forecasters project continued growth (presumably assuming the fiscal cliff is avoided)

Sources: Blue Chip Economic Indicators, Congressional Budget Office, Haver Analytics

Real GDP Projections

The national debt is projected to continue to rise unless fiscal changes are made

Sources: Congressional Budget Office

Federal Public Debt as a Share of GDP

0

20

40

60

80

100

120

0

20

40

60

80

100

120

1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Actual Projected

Alternative Fiscal

Scenario

Percent

CBO’s Baseline Projection

Unemployment Rate Seasonally Adjusted

Percent

Source: U.S. Bureau of Labor Statistics, FOMC

0

2

4

6

8

10

12

0

2

4

6

8

10

12

1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

Sept. FOMC Forecast Ranges in Yellow

At its September meeting, the FOMC expected unemployment to fall further

Long Term

PCE Inflation Index

Percent change, year-over-year

Source: U.S. Bureau of Economic Analysis, FOMC

0

1

2

3

4

5

6

7

8

0

1

2

3

4

5

6

7

8

1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

Sept. FOMC Forecast Ranges in Yellow

And for inflation to remain at or near its long-term target

Long Term

0

2

4

6

8

10

12

0

2

4

6

8

10

12

1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

(1)

(3)

(2)

(12)

Federal Funds Rate Year-end target

Percent

Source: U.S. Bureau of Economic Analysis, FOMC

Sept. FOMC Forecast Ranges in Yellow

The majority of FOMC members expect interest rates to stay low through 2015

Long Term

Note – Number of participants who project the initial increase will occur in the specified year in parenthesis

Federal Reserve Balance Sheet

Dollars, trillions

Source: Federal Reserve Board

The Fed’s balance sheet is at historically high levels and now set to rise further

-3

-2

-1

0

1

2

3

-3

-2

-1

0

1

2

3

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

Treasury securities

Targeted lending

programs

Short term lending

Rescue operations

Currency

Reserves

Other

MBS & agency debt

Liabilities

Assets

• Oklahoma economic growth has slowed a bit but conditions remain solid, with most industries stronger than the nation • The relative strength compared to the nation has reflected solid energy and factory activity

• Europe is less of a direct risk to the region, but drought and low natural gas prices hurt

The Oklahoma Economy

92

94

96

98

100

102

92

94

96

98

100

102

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Index: Jan-08=100

Source: U.S. Bureau of Labor Statistics

Level of Payroll Employment Through September 2012

Employment has finally risen above pre-recession levels in OK, unlike the nation

OK

U.S.

Source: U.S. Bureau of Labor Statistics

Employment Growth, Year-over-Year (percent) September 2012

There remains considerable variation in employment strength across the nation

2.5

U.S. = 1.4

1.6

1.0 1.3

0.8 0.4

(1.3)

0

2

4

6

8

10

12

14

16

18

0

2

4

6

8

10

12

14

16

18

US 10J NE OK WY KS NM MO CO

Aug. 2012 actual

Aug. 2012 @ 2007 LFPR

Percent

Source: Bureau of Labor Statistics

Unemployment Rates Seasonally Adjusted

Unemployment is low, but would be higher with more labor force participation

Source: OK Employment Security Commission

Unemployment is especially low in northwest and south central Oklahoma

County Unemployment Rates August 2012

-16

-12

-8

-4

0

4

8

12

16

20

24

Total Const Leis &Hosp

Info State &LocalGovt

Mfg Educ &Health

Trade &Transp.

FedGovt

Finance Prof &BusSvcs

Energy

Q1 2012Q2 2012Q3 2012

Percent change, quarter-to-quarter, annualized

Source: Bureau of Labor Statistics

Oklahoma Employment Growth by Industry

Growth in energy jobs slowed in Q3, but other industries posted positive growth

0

20

40

60

80

100

120

140

160

180

0

20

40

60

80

100

120

140

160

180

Aug-02 Aug-04 Aug-06 Aug-08 Aug-10 Aug-12

U.S.

OK

Source: Census Bureau

Single-Family Home Permits Seasonally Adjusted

Index, Aug-02=100

New home permits in Oklahoma have edged higher, though are still at low levels

Percent

Source: FDIC

Noncurrent Loans as a Share of Total Loans Commercial Banks

Banks have also done better and have shown solid recent improvement

0

1

2

3

4

5

6

0

1

2

3

4

5

6

Q2 2002 Q2 2003 Q2 2004 Q2 2005 Q2 2006 Q2 2007 Q2 2008 Q2 2009 Q2 2010 Q2 2011 Q2 2012

U.S.

OK

Percent

Source: ISM, FRBKC Manufacturing Survey

Month-Over-Month PMI Indexes Seasonally Adjusted

Regional manufacturing activity declined in October, however, driven by uncertainties

30

35

40

45

50

55

60

65

30

35

40

45

50

55

60

65

Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12

U.S. ISM

KC Fed

-40

-30

-20

-10

0

10

20

30

40

-40

-30

-20

-10

0

10

20

30

40

Jan-09 Oct-09 Jul-10 Apr-11 Jan-12

U.S.DistrictOK

Percent change, year-over-year

Source: WISERTrade

Total Manufacturing Exports Through Aug-12

Manufacturing exports have flattened in the region and nation

3.4 2.1 2.3 2.8 2.1 2.2

1.3 1.5 1.7

9.1

6.2

9.8 9.3

6.6 4.6

4.9 4.6 3.8

0

2

4

6

8

10

12

14

U.S. 10J NE KS MO CO WY OK NM

Rest of World

Europe

Exports as Share of GDP, 2010

Percent

Sources: U.S. Bureau of Economic Analysis, USDA, WISERTRADE

Exports to Europe are a smaller part of the regional economy, especially in Oklahoma

Number of rigs

Source: Baker Hughes

Oklahoma Rig Counts Seasonally Adjusted

Energy activity has also declined slightly from high levels, with gas prices low

0

50

100

150

200

250

Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12

Oil

Natural Gas

$/Barrel; 10$/MMBTU

Source: Bloomberg Energy Services, Oil and Gas Weekly

Energy Prices

Natural gas and NGL prices have rebounded slightly but remain low

0

40

80

120

160

200

240

280

0

20

40

60

80

100

120

140

Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13

WTI Oil (left axis)

Natural Gas (left axis)

NGLs (right axis)

Cents/Gallon

Severe to exceptional drought is still gripping the state and region

Source: Commodity Research Bureau

Crop prices have moderated somewhat, but still remain very favorable to producers

U.S. Crop Prices

Dollars per bushel

0

2

4

6

8

10

12

14

16

18

0

2

4

6

8

10

12

14

16

18

Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12

SoybeanCornWheat

Source: Commodity Research Bureau

But livestock owners continue to be squeezed by high feed costs

U.S. Livestock Prices and Breakeven Costs

Dollars per hundredweight

20

30

40

50

60

70

80

90

100

110

120

130

140

150

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30

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60

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100

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120

130

140

150

Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12

Cattle PriceCattle breakevenHog priceHog breakeven

Share of Loans 90+ days Past Due Q2 2012

Percent

Source: FDIC

Ag loans are more current than any other type of loan at Oklahoma banks

0

2

4

6

8

10

12

TotalLoans

Constr. &Develop.

1-4 FamilyRes.

MultifamilyRes. RE

CreditCards

Comm. RE Comm. &Ind.

HomeEquity

All Other(Incl. Farm)

U.S.

OK

Agriculture Loans as a Share of Total Loans Q2 2012

Percent

Source: FDIC

And ag loans are much more important to Oklahoma banks than they are in the nation

1.03

4.07 0.92

4.29

0

2

4

6

8

10

U.S. Oklahoma

Farm Operating Loans

Farmland Loans

0

5

10

15

20

25

30

35

40

0

5

10

15

20

25

30

35

40

District NE KS Mtn States (CO, NM,

WY)

MO OK

Q4 2011Q1 2012Q2 2012

Source: FRBKC Agricultural Credit Survey

Tenth District Non-Irrigated Cropland Values Percent Change, Year-over-year

Regional farmland prices continue to surge, and have accelerated in Oklahoma

Percent

Growth in the U.S. economy has slowed

moderately, as concerns about Europe and politics remain elevated

Inflation has remained low, and monetary policymakers disagree about future paths

Oklahoma economic activity remains

relatively solid, but drought, uncertainty, and low natural gas prices have hurt

Conclusions

For more information about the Oklahoma and Kansas economies, subscribe to the quarterly Oklahoma Economist

for Oklahoma and the Midwest Economist for Kansas at: www.kansascityfed.org/publications/research/oke

Questions?