Changes:

Our View on the US

Economy in 2016*

2016 Banking Outlook

Conference

Atlanta, GA

February 25, 2016

* By “our” I mean those of yours truly and the Atlanta Fed research staff.

The views expressed herein do not necessarily represent those of the

Federal Reserve Bank of Atlanta or the Federal Reserve System.

Our story and we are sticking to it: Modestly above trend

growth in 2016.

2

a: assumes 0.4% in QIV.

2015:

q4/q4a

2016:

q4/q4

Longer-

run

Real GDP Growth

Preliminary Forecast 1.7a 2.5 2.1

Source: FRBA forecasts

3

Real GDP Statistics

Q3 Q4a 2015:q4/q4b

Annualized GDP

Growth2.0 0.7 1.7

GDP growth crawled out of 2015 -- what will change the

storyline in 2016?

Source: Bureau of Economic Analysis

a. BEA Estimate, Jan. 29

b: Atlanta Fed estimate, assumes 0.4% in QIV.

4

What probably won’t change.

The manufacturing sector continues to struggle as the

dollar has continued to appreciate.

5

45

50

55

60

65

80

85

90

95

100

105

110

115

120

125

130

01-12 07-12 01-13 07-13 01-14 07-14 01-15 07-15 01-16

The Dollar and the Manufacturing Sector

Nominal Broad Trade-Weighted Exchange Value ofthe US$

ISM Manufacturing: PMI Composite Index (rightaxis)

ISM Mfg: New Export Orders Index (SA, 50+ = EconExpand)

SA, 50+ = ExpansionIndex, Jan-97=100

Source: Federal Reserve Board; Institute for Supply Management Data through January 2016

6

50

60

70

80

90

100

110

06-15 07-15 08-15 09-15 10-15 11-15 12-15 01-16

China and Global EquitiesIndex, June 2015 =100

Source: Wall Street Journal, Financial Times through January 13, 2016

Dow Jones Global Index

Shanghai Index

48.0

48.5

49.0

49.5

50.0

50.5

51.0

51.5

52.0

52.5

53.0

01-13 07-13 01-14 07-14 01-15 07-15

China PMI: ManufacturingSA, 50+=Expansion

Source: China Federation of Logistics & Purchasing (CFLP) through Dec ‘15

Global woes: Is China to blame?

7

If financial markets are your concern, Brexit should worry

you more than a Chinese market meltdown.

Europe

China

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

200-day correlations of 1-day changes in logs of U.S. and foreign stock market indexes

Correlation over previous 200 business days

Equity market indices: S&P500, Europe: STOXX 50, Dow Jones Shanghai.. data through February 12, 2016

If your focus is the real economy, here too it could be easy

to overstate the importance of China…

8

From Macroeconomic Advisers:

Suppose Chinese real GDP growth slows to 3 percent

in 2016 and the yuan sustains a 10 percent devaluation

against the dollar:

• US real GDP: Typical macro model simulations suggests

a ¼ percentage point subtraction from real GDP growth

over the next year.

• Unemployment Rate: A slightly (0.2 percentage point)

higher path for the unemployment rate

• Inflation: Core inflation rate is a 0.1 percentage point

lower for the next year.

… but don’t underestimate the European connection.

9

CountryReal GDP Growth correlations

with United States

China -0.05

Euro Area 0.77

Non-OECD countries* 0.09

Sources: BEA; China National Bank Statistics; Eurostat;

Sample: 1995-2014

*Non-OECD countries: Set of 120 countries, located in Asia, the Middle East, South America, Africa, Eastern

Europe

Some limited help: Forecasts generally predict higher, but

still below trend, foreign growth over the medium term.

10

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

07 08 09 10 11 12 13 14 15 16 17 18

Broad Real Foreign Gross Domestic Product Index (2005=100) percent change, annualized

Q4 2015

Forecast

1980-2007 average

Source: Macroeconomic Advisers Data through Q4 2015, Forecast through Q4 2018

11

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

90 92 94 96 98 00 02 04 06 08 10 12 14 16

Oil Price and Stock Market Correlations5 year moving average of 6-month moving correlation between West Texas

Intermediate (WTI), Brent and S&P500 Index weekly percent change

Brent

WTI

Source: EIA/CME, FT, WSJ through February 19, 2016

The other big (unchanging) story – the surprising negative

impact of lower energy prices on the U.S. economy.

12

0

500

1000

1500

2000

$30

$60

$90

$120

$150

Jan-14 Apr-14 Aug-14 Dec-14 Mar-15 Jul-15 Nov-15

Source: Energy Information Administration, Baker Hughes

Spot Oil Price and Baker Hughes Active Rig Count

Brent Spot, $/barrel (lhs)

Rig Count, number of active rigs (rhs)

Through February 19, 2016

The drag on structures investment will likely continue for

awhile.

Economics 101: Demand < Supply

13

Forecast

-3

-2

-1

0

1

2

3

4

5

6

82

84

86

88

90

92

94

96

98

100

2011-Q1 2012-Q1 2013-Q1 2014-Q1 2015-Q1 2016-Q1 2017-Q1

World Liquid Fuels Production andConsumption Balancemillion barrels per day (MMb/d)

Implied stock change and balance (right axis)

World production (left axis)

World consumption (left axis)

Source: Short-Term Energy Outlook, February

MMb/d

14

20

40

60

80

100

120

III IV I II III IV I II III IV I II III IV I

2012 2013 2014 2015 2016

Projection: Global Demand Only

Oil spot price (WTI)

WTI Crude Oil Estimated Demand Effect

Model: log change in oil prices regressed on log changes in copper prices, broad dollar exchange rate, and the change in the 10-year

yield. Daily: estimation: 6/02/11 – 6/30/14. Projection period: 7/01/14-2/12/16

Sources: Bernanke’s Blog (Feb. 19th); EIA; FRB; WSJ; Haver

Bernanke: Only about 45% of the decline in oil prices can

be attributed to a decline in “global demand.”

-60

-40

-20

0

20

40

60

80

100

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

IMF Global Commodity Price Indices ($Dollars)

15

Reinforcing the “oil is a special case” theme: Oil prices have

been falling more rapidly than non-energy commodities.

Source: International Monetary Fund

Crude

Oil

12-month percent change

Non-energy

16

(?)

17

1.1

1.2

1.3

1.4

1.5

1.6

1.7

05 06 07 08 09 10 11 12 13 14 15

Inventory to Sales RatiosSA

Source: Census Bureau data through December 2015

A key unknown: Will inventories continue to weigh

on near term growth?

1.2

1.25

1.3

1.35

1.4

1.45

1.5

05 06 07 08 09 10 11 12 13 14 15

Inventory to Sales Ratio: Total BusinessSA

Manufacturing

Wholesale

Retail

18

Real GDP Component and Tracking Forecasts

2015: Q3 2015: Q4a

2016: Q1

GDPNow b

Annualized GDP

Growth2.0 0.7 2.6

Annualized Final

Sales Growth2.7 1.2 2.5

Inventory adjustments clearly impacted 2015 growth –

will that persist into 2016?

Sources: Bureau of Economic Analysis, FRBA

a. BEA Estimate, Jan. 29

b: Atlanta Fed estimate, Feb. 17

19

Desperately in need of change.

20

Real PCE

2015: Q3 2015: Q4a

Annualized Personal

Consumption

Expenditure Growth

3.0 2.2

The pace of consumer spending took a step down in the

4th quarter of last year.

Sources: Bureau of Economic Analysis, FRBA

a. BEA Estimate, Jan. 29

1%

2%

3%

4%

5%

Mar-14 Sep-14 Mar-15 Sep-15

Real Disposable Personal Incomeyear-over-year percent change, SA

Despite the 4th quarter fall off in PCE growth, consumer

income supported stronger spending than what we saw.

21

Source: Bureau of Economic Analysis through December 2015

4.0

4.5

5.0

5.5

6.0

Nov-13 May-14 Nov-14 May-15 Nov-15

Personal Savings Ratepercent

Source: Bureau of Economic Analysis through December 2015

22

Real PCE

2015: Q3 2015: Q4a

2016: Q1

GDPNow b

Annualized

Personal

Consumption

Expenditure

Growth

3.0 2.2 3.3

Sources: Bureau of Economic Analysis, FRBA

a. BEA Estimate, Jan. 29

b: Atlanta Fed estimate, Feb. 17

It’s early, but consumers appeared to get back in the

game in January.

23

Very gradual change.

24

Even trend measures that “look through” temporary

influence are running soft to the FOMC’s objective.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

12 13 14 15

PCE Price Indexyear-over-year percent change, monthly

PCE

Core PCE

FRBD trimmed-mean PCE

Sources: Bureau of Economic Analysis; Federal Reserve Bank of Dallas through December 2015

FOMC Inflation Objective

We are still assuming some improvement in the inflation

numbers as the year progresses, but still shy of the goal.

25

2015:q4/q4 2016:q4/q4

PCE Inflation

Preliminary Forecast 0.4a 1.6

Core PCE Inflation

Preliminary Forecast 1.4b 1.8

Source: FRBA forecasts

a: assumes 0% in QIV.

b: assumes 1.25% in QIV.

26

How the world is organized, according to the

unemployment statistics.

Though we are probably close to “full employment”, we are

still not quite there.

27

86

87

88

89

90

91

92

93

94

95

07 08 09 10 11 12 13 14 15 16

ZPOP: The Share of the Population Fully Utilizedpercent, seasonally-adjusted

Source: Bureau of Labor Statistics, authors’ calculations through January 2016

Almost 6

percentage point

gap

Less than 1

percentage point

gap

1.5

2.0

2.5

3.0

Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16

U.S. Treasury Yieldsdaily, percent

28Source: Federal Reserve Board through February 11, 2016

Oct

FOMC

statement

Dec

FOMC

statement

(press conf.)

Dec

FOMC

minutes

Sept

FOMC

statement

(press conf.)

Sept

FOMC

minutes

Oct

FOMC

minutes

Interest rates are not made of Fed policy alone -- finding

the “neutral rate” (or “r*”) is an art.

Jan

FOMC

statement

29

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

15 16 17 18

Prescriptions of fed funds using alternative estimates or r*percent

Source: FRBA calculations based on staff forecast and “higher weight on resource gap” rule; see slide 23.

Our forecasts and preferred policy benchmark imply

relatively modest changes in the policy rate through 2016.

1.5

2.4

Assumes model-

based path of r*

Assumes flat

path of r*

Changes:

Our View on the US

Economy in 2016*