Chad Wilkerson Oklahoma City Branch Executive and Economist

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

Risk Management Association December 12, 2012

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

• 2013 board of directors

• Jim Dunn (chair), Chairman, Mill Creek Lumber & Supply, Tulsa • Paula Bryant-Ellis, COO, BOK Financial Mortgage Group, Tulsa • Linda Capps, Vice Chairman, Citizen Potawatomi Nation, Shawnee • Michael Coffman, CEO, Panhandle Oil & Gas, Inc., Oklahoma City • Pete Delaney, Chairman & CEO, OGE Energy Corp., Oklahoma City • Doug Tippens, President & CEO, Bank of Commerce, Yukon • K. Vasudevan, Chairman, Service & Technology Corp., Bartlesville

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

• U.S. economic growth has been modest, as business investment and exports have waned • How the fiscal cliff is resolved has bearing on both near-term growth and long-term debt

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

The U.S. Economy

2.0 2.4

20.5

7.5

4.4

-3.0

1.3 1.5

8.5

3.6 5.3

-0.7

2.7 1.4

14.2

-2.2

1.1

3.5

-5

0

5

10

15

20

25

Total GDP Consumerspending

Residentialinvestment

Businessinvestment

Exports Governmentspending

2012 Q1

2012 Q2

2012 Q3

Growth in Components of Real GDP

Percent change from the previous period, SAAR

Source: U.S. Bureau of Economic Analysis, Macroeconomic Advisors

GDP growth rebounded somewhat in Q3, but business spending weakened

25

30

35

40

45

50

55

60

65

-1000

-800

-600

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-200

0

200

400

600

Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12

Private Employment (left axis)

ISM Manufacturing Index (right axis)

ISM Non-Manufacturing Index (right axis)

Change from previous month, thousands

Source: Institute for Supply Management, Bureau of Labor Statistics

U.S. Private Payroll Employment and Business Indexes

Early fourth quarter data has been mixed, but suggestive of further modest growth

Index

-2

-1

0

1

2

3

4

5

6

-2

-1

0

1

2

3

4

5

6

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

European Financial Stress Index

U.S. Financial Stress Index

Financial stress in Europe remains elevated, but has improved lately

Eurozone and U.S. Financial Stress

Source: FRBKC

Index

-5.0

-4.5

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

Sequestration - $110 bn

Tax extenders - $20 bn

Payroll tax - $120 bn

Bush tax cuts - $180 bn

AMT - $120 bn

Obamacare - $20 bn

Business expensing - $10 bn

Medicare doc fix - $20 bn Other - $40 bn

Initial debt plan - $40 bn

Pending tax increases

Pending expiring programs

Pending spending cuts

Components of the “Fiscal Cliff” In dollars and as a share of GDP

Percent of GDP

Source: Merrill Lynch

The potential “fiscal cliff” of $720B+ and 4%+ of GDP is weighing on the economy

Extended UI - $40 bn

Economic forecasters assume most of the fiscal cliff will be avoided, without recession

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

Real GDP Projections

-5

-4

-3

-2

-1

0

1

2

3

4

2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4

Real GDP, under CBO fiscal cliff scenario

Real GDP, Blue Chip forecasts

Percent change, quarter-over-quarter (SAAR)

However, avoiding fiscal changes means further increases in the national debt

Source: Congressional Budget Office

Federal 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 (no cliff)

Percent

CBO’s Baseline

Projection (full cliff)

Fiscal cliff components would have varying effects on GDP and the federal deficit in 2013

Source: Moody’s Analytics

Implied Multipliers on GDP and the Federal Deficit 2013

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Emergency UI

Sequestration Bush taxcuts (below

$250K)

Payroll taxholiday

AMT patch Bush tax cuts (above

$250K)

Affordable CareAct

Medicaredoc fix

Bonusdepreciation

Tax extenders

Ratio of GDP to deficit decline

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 Sept. meeting, the FOMC expected unemployment to gradually improve

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 through 2015

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

On monetary policy, over a third of FOMC participants disagree about timing

Long Term

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

• Oklahoma’s economy continues to outperform the nation in 2012 • Energy intensive areas have done well, and housing is picking up

• But recently slower energy activity and the looming fiscal cliff are risks

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 October 2012

Unlike the nation, employment has risen above pre-recession levels in Oklahoma

OK

U.S.

Source: U.S. Bureau of Labor Statistics

Unemployment Rates (percent) October 2012

Unemployment is lowest in energy and agriculture states, highest on the coasts

5.3

U.S. = 7.9

7.9

5.2 3.8

5.7 6.9

6.3

Source: OK Employment Security Commission

Unemployment is below national levels in all but 4 (southeast) Oklahoma counties

County Unemployment Rates September 2012

2.3% – 4.2%

4.3% – 6.2%

6.3% – 9.9%

Source: Baker Hughes

Location of Active Drilling Rigs in Oklahoma Nov. 21, 2012

The location of current oil activity overlaps very closely with county unemployment

Oil

Gas

-16

-12

-8

-4

0

4

8

12

16

20

24

Total Leis &Hosp

Info Prof &BusSvcs

State &LocalGovt

Trade &Transp.

FedGovt

Finance Const Mfg Educ &Health

Energy

Q1 2012 Q2 2012 Q3 2012 Oct-12*

Percent change, quarter-to-quarter, annualized

*Compared to Q3 2012

Oklahoma Employment Growth by Industry

Most industries in the state have continued to add jobs, but energy has shed jobs lately

Source: Bureau of Labor Statistics

Number of rigs

Source: Baker Hughes

Oklahoma Rig Count Seasonally Adjusted

The state rig count is down from summer highs, as gas prices remain too low

0

50

100

150

200

250

0

50

100

150

200

250

Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12

Oil

Natural Gas

Diffusion Index

Source: ISM, Federal Reserve Banks

Manufacturing Month-over-Month PMI Indexes Seasonally Adjusted

Regional manufacturing activity has also slowed in recent months

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40

45

50

55

60

65

30

35

40

45

50

55

60

65

Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12

KC FedISMNY, Philly, Rich, Dallas Avg.

Diffusion Index

Source: ISM, Federal Reserve Banks

Manufacturing 6-Month Ahead Indexes Seasonally Adjusted

Factory expectations have also eased, but remain positive except for hiring

-40

-30

-20

-10

0

10

20

30

40

50

-40

-30

-20

-10

0

10

20

30

40

50

Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12

ProductionEmploymentCapital Spending

3.4 2.3 2.8 2.1 2.2

1.3 1.5 1.7

9.1 9.8 9.3

6.6 4.6

4.9 4.6 3.8

0

2

4

6

8

10

12

14

U.S. NE KS MO CO WY OK NM

Rest of World

Europe

Exports as Share of GDP, 2010 U.S. and Tenth District states

Percent

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

Exposure to Europe is much less in Oklahoma than in the nation or even region

Federal Expenditures Per Capita, Fiscal Year 2010 U.S. and Tenth District states

Percent

Sources: U.S. Census Bureau, Consolidated Federal Funds Report

Exposure to the “fiscal cliff” is probably about average in Oklahoma as a whole

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

U.S. NM MO WY OK KS CO NE

Salaries & WagesProcurement ContractsGrantsOther Direct PaymentsRetirement & Disability

0

150

300

450

600

750

900

1,050

1,200

1,350

1,500

0

16,000

32,000

48,000

64,000

80,000

96,000

112,000

128,000

144,000

160,000

Sep-96 Sep-98 Sep-00 Sep-02 Sep-04 Sep-06 Sep-08 Sep-10 Sep-12

US (left)OK (right)

Number, 3-month moving avg.

Single-Family Housing Permits Seasonally adjusted

On the positive side, housing activity has grown strongly in Oklahoma the past year

Source: U.S. Census Bureau

65

70

75

80

85

90

95

100

105

110

65

70

75

80

85

90

95

100

105

110

2002Q3 2004Q3 2006Q3 2008Q3 2010Q3 2012Q3

OK

U.S.

Index: 2007Q1=100

Source: FHFA

Home Price Index Purchase-Only

Oklahoma home prices are edging up, and unlike U.S. are higher than pre-recession

Percent

Source: FDIC

Noncurrent Loans as a Share of Total Loans Commercial Banks

Past due loans still remain much more elevated in the U.S. than Oklahoma

0

1

2

3

4

5

6

0

1

2

3

4

5

6

Q3 2002 Q3 2003 Q3 2004 Q3 2005 Q3 2006 Q3 2007 Q3 2008 Q3 2009 Q3 2010 Q3 2011 Q2 2013

U.S.

OK

Percent

Source: FDIC

Share of Unprofitable Institutions Commercial Banks

And the share of unprofitable banks in Oklahoma is basically back to “normal”

0

5

10

15

20

25

30

35

0

5

10

15

20

25

30

35

Q3 2002 Q3 2003 Q3 2004 Q3 2005 Q3 2006 Q3 2007 Q3 2008 Q3 2009 Q3 2010 Q3 2011 Q2 2013

U.S.

OK

0

5

10

15

20

25

30

35

40

0

5

10

15

20

25

30

35

40

District NE MO KS Mtn States (CO, NM,

WY)

OK

Q1 2012Q2 2012Q3 2012

Source: FRBKC Agricultural Credit Survey

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

Regional farmland values are still up considerably from year-ago levels

Percent

Recent U.S. economic growth has

been modest, with low inflation, as fiscal concerns remain a focus

Oklahoma economic activity remains

relatively solid, but low gas prices have hurt and the fiscal cliff looms

Summary

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?