A Look at the National and Local Economic LandscapeFinancial Executives Network GroupSt. Louis, MOKevin L. KliesenBusiness Economist and Research OfficerFederal Reserve Bank of St. LouisMarch 6, 2014

Not an official document

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An Outline of Today’s Presentation

• The Big Picture

• A Closer Look at U.S. Economic Conditions

• The Outlook for the U.S. Economy in 2014: Two Views

• What’s Going on in the St. Louis Economy?

The views I will express are my own and do not necessarily reflect the positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.

Disclaimer

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The U.S. Economy: A View From 30,000 Feet• Headwinds slowly becoming tail winds; but

some mixed signals thus far in 2014.

• The unemployment rate is falling faster than most expected—but not the St. Louis Fed!

• The monetary punch bowl is full, credit risks appear low, and banks are flush with cash.

• The performance of the U.S. economy in 2014 should be better than last year—and with continued low inflation.

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The U.S. Economy Loses Some Momentum.

• The economy saw good growth over the second half of 2013. . . Led to building optimism.

• But then some key economic data came in weaker than expected.

• Next, 2013-Q4 real GDP growth was revised from 3.2% to 2.4%.

• In response, forecasts for 2014-Q1 growth have been trimmed.

• Is this a first-quarter freeze out, an inventory correction, or a return to the “new normal?”

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Evidence for a Temporary Lull: A Perfect Storm.• January temps were colder than usual and late-

January and early-February brought two big storms to the East Coast.

• Many economic reports and surveys revealed weather responsible for part of the slowdown.• In January, manufacturing output fell 0.8 percent,

partly because of the severe weather that curtailed production in some regions of the country. (Industrial Production report).

• Also contributing to the slowdown was the expectation of an inventory run-off.

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In 2013, the production of goods produced but not sold accounted for about a third of real GDP growth.

0.79

1.75

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

2007 2008 2009 2010 2011 2012 2013

Final Sales Inventories

The Composition of Real GDP Growth: Inventory Investment and Final SalesPercent change over the past four quarters

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But other key data show no evidence of a pending collapse in economic activity.

200

250

300

350

400

450

500

550

600

650

700

Dec.2005 Mar.2007 Jun.2008 Sep.2009 Dec.2010 Mar.2012 Jun.2013

Initial Weekly Claims for State Unemployment Insurance BenefitsThousands, Four-week moving average

Data through the week ending Feb. 22, 2014.

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And the unemployment rate has fallen faster than most forecasters and FOMC participants expected.

6.6 (Jan)

5.0

6.0

7.0

8.0

9.0

10.0

11.0

Dec.2009 Oct.2010 Aug.2011 Jun.2012 Apr.2013 Feb.2014 Dec.2014 Oct.2015

SOURCE: Bureau of Labor Statistics and author's calculations.

Actual and Projected Unemployment RatePercent of civilian labor force

FOMC Threshold (6.5%)

Actual Projected

Actual

Trend

FOMC Projection,March 2013

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Inflation remains relatively low and well below the FOMC’s threshold.

1.1

2.5

0.0

1.0

2.0

3.0

4.0

Jan.2010 Nov.2010 Sep.2011 Jul.2012 May.2013 Mar.2014

The FOMC's Preferred Inflation MeasurePercent change from a year earlier

FOMC Threshold

NOTE: Inflation calculated from the personal consumption expenditures price index . Last actual observation is December 2013.

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Financial stress remains lower than average. This generally bodes well for the economy.

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Dec.09 Jul.10 Feb.11 Sep.11 Apr.12 Nov.12 Jun.13 Jan.14

The St. Louis Fed's Financial Stress IndexWeekly data

European Turmoil, 2010

Last observation: Week of Feb. 28, 2014.

S&P Downgrade, GDP Revision, and Europe, 2011

European Turmoil, 2012

Week of June 18 FOMC

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The U.S. Economy in 2014: The Case for Faster Growth• Diminishing headwinds, but with periodic hiccups.

• Business investment—a key to stronger growth—is likely to pick up; stronger global growth will help.

• Housing should remain a source of strength.

• Job growth to remain healthy. . . the unemployment continues to fall.

• Inflation is likely to remain below 2%, helping to keep interest rates relatively low and stable.

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Forecasters expect a better composition of growth in 2014: More final sales; fewer unsold goods.

1.8

1.20.7

3.7

2.7

1.0

2.5

3.4

-1.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

Real GDP Final Sales Inventories

2013:H12013:H22014:H1

Real GDP Growth and its Composition in 2013 and 2014(F)Percent

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The Case for Weaker-than-Expected Growth in 2014: A Return to the New Normal

• What some Fed Presidents are saying.

• The expansion is nearly 5 years old and labor productivity growth—a key economic variable—is paltry.

• Labor market fundamentals mean that job gains of 180,000/month are not sustainable.

• This unfortunate combination suggests the economy’s true growth is around 2%, with a natural rate of unemployment around 6%.

• Pushing too hard on the gas could lead to higher inflation.

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A Warning from the President of the San Francisco Federal Reserve Bank

• The current high level of long-term unemployment may not influence inflation pressures to the same degree as short-term unemployment (unemployed < 27 weeks).

• The overall unemployment rate may be less useful for forecasting inflation now than it normally is.

• Accordingly, it could be that slack in labor markets is much less than assumed. 

• I currently see this as a risk to the inflation outlook.  For now, measures of wage and price inflation remain muted.

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Something to worry about?

2.0

3.0

4.0

5.0

6.0

7.0

8.0

1992 1995 1998 2001 2004 2007 2010 2013

Source: Bureau of Labor Statistics. Data through January 2014.

Short-term Unemployment Rate: Actual and Median RatePercent

Now, this is Something to Worry about: The Economic Policy Concern that Dwarfs All Others

3.4

2.3

1.7

1.2

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1982-90 1991-2001 2001-07 2009-PresentBusiness Expansions

Percent change, annualized

NOTE: Quarterly data

Real Per Capita GDP Growth During Business Expansions

Years for Living Standards to Double at Different Growth Rates:

3.4%: 21 Years2.3%: 30 Years1.7%: 41 Years1.2%: 58 Years

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To Conclude: Will the U.S. Economy Escape the Doldrums in 2014? • That’s our forecast and we’re sticking it to yet!

• But we recognize that: (1) Most forecasters have been too optimistic the past few years; and (2) there appear to be some strong impediments to growth.

• Are those impediments temporary or more longer-lasting? It’s too early to tell.

• Monetary policy has done all it can. Fiscal policymakers can help—in several dimensions. Will they?

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Turning to the St. Louis Economy

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In 1990, St. Louis’ largest employers were in trade, transportation and manufacturing.

21.3

11.4

12.4

11.8

8.9

4.3

17.4

2.4 5.94.2

Trade, Transp. &UtilitiesEducation & Health

Professional & BusinessServicesGovernment

Leisure & Hospitality

Mining & Construction

Manufacturing

Information

Financial

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Fast forward to 2013: The St. Louis economy is dominated even more by service-based industries.

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15

12

11

19

15

14

16

10

0 5 10 15 20 25

Trade, Transp. & Utilities

Education & Health

Professional & BusinessServices

Government

Leisure & Hospitality

St. Louis MSA

United States

The Five Largest Industries by Employment: St. Louis vs. United StatesPercent of total employment

Source: Bureau of Labor Statistics/ Haver Analytics

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In 2013, St. Louis saw strong job growth in its largest industry, but weak overall job growth.

0.7

2.3

1.2

0.0

-2.3

1.3

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

Total Trade,Transp. &Utilities

Education &Health

Professional& Business

Services

Government Leisure &Hospitality

St. Louis Employment Growth in the Five Largest Industries in 2013Percent change

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St. Louis’ MSA unemployment rate is near the U.S. average but above the Missouri average rate.

6.7 (U.S.)

5.9 (MO)

6.8 (StL)

3

4

5

6

7

8

9

10

11

2007 2008 2009 2010 2011 2012 2013 2014

United States Missouri St. Louis MSA

U.S., Missouri, and St. Louis MSA Unemployment Rate, Jan. 2007 - Dec. 2013Percent

Source: Bureau of Labor

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Within Missouri MSAs, St. Louis has the highest unemployment rate

6.8

5.9

5.0

4.2

3

4

5

6

7

8

9

10

11

Jan.2009 Oct.2009 Jul.2010 Apr.2011 Jan.2012 Oct.2012 Jul.2013 Apr.2014

St. Louis Kansas City

Springfield Columbia

Unemployment Rates in Missouri MSAs (Jan. 2009 to Dec. 2013)Percent

Source: Bureau of Labor Statistics/ Haver Analytics

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St. Louis’ post-recession real GDP growth has been weak relative to the nation and other area cities

1.2

0.6

3.9

1.2

2.2

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

St. Louis Little Rock Louisville Memphis All MSAs

Real GDP Growth, 2009-2012: How Does St. Louis Stack Up?Annualized Percentage Change

Source: BEA/ Haver Analytics

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The bust in house prices appears to explain a small part of St. Louis’ weak growth since 2009.

6.5

-2.4 -2.6

4.3

11.6

-5.9

-0.2

10.8

-8

-6

-4

-2

0

2

4

6

8

10

12

14

2000-2005 2006-2009 2010-2012 2013

St. Louis MSA United States

Source: CoreLogic and author's calculations.

CoreLogic House Price IndexAverage Annual Percent Change for Period Indicated

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In fact, St. Louis has had pretty weak real GDP growth for more than a decade.

0.5

1.8

1.4

0.7

1.6

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

St. Louis Little Rock Louisville Memphis United States

Annualized Growth of Real GDP in the St. Louis MSA, the Nation, and the Largest Surrounding MSAs, 2001-2012Percent per year

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St. Louis’ poor economic performance importantly stems from its weak labor productivity growth.

0.8

1.31.4

1.0

1.4

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

St. Louis Little Rock Louisville Memphis United States

Annualized Growth of Output Per Worker in the St. Louis MSA, the Nation, and the Largest Surrounding MSAs, 2001-2012Percent per Year

Source: Bureau of Labor Statistics, Bureau of Economic Analysis/ Haver Analytics; author's calculations

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Since 2001, St. Louis city and MSA has seen an outflow of persons in the labor force.

1.2

-0.1

0.2

-0.3-0.2

-1.2

0.80.6

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Growth of Labor Force in Selected Missouri CitiesAnnualized percent change since 2001

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Is St. Louis poised to turn the corner? Some Challenges and Opportunities.• The Good: A world class university and medical

center; a vibrant health care sector; a sizable financial sector; a dominant bio-tech company; and T-Rex.

• The aging of the population presents both challenges and opportunities for the health care and financial industries.

• The Not-so-Good: Like many Midwestern states, Missouri’s business climate is not ranked as high as other states in faster-growing areas.

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The Outlook for St. Louis: Near and Far

• St. Louis economy has been growing slower than the nation’s economy for quite some time. U.S. growth is expected to be around 3% in 2014.

• Housing construction and manufacturing (less so) have been sources of strength for the U.S. economy, but these are relatively small part of the St. Louis economy.

• Continued modest growth is likely for the St. Louis region over the next few years.

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Questions?

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If you would like a PDF copy of my

presentation, please e-mail me at:

kliesen@stls.frb.org