1

The Outlook for the U.S. Economy

Anthony Murphy (anthony.murphy@dal.frb.org)

Federal Reserve Bank of Dallas

Vistas from Texas: An Economic Update Houston, 7th August 2015

The views expressed are those of the author and do not reflect the views of the

Federal Reserve Bank of Dallas or the Federal Reserve System

2

Slow and Uneven Recovery from the Great Recession Output Recovered in 2011 Q2, Employment and Production in 2014 Q2

10,000

11,000

12,000

13,000

14,000

15,000

16,000

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

Real GDP

2011 Q2

Sources BEA. Note: Shaded areas indicate recessions.

3

Much Slower Recovery than in Previous Recessions Many Domestic and External Headwinds/Shocks

4

Consumer Confidence Was Easily Rocked … Relatively High Now Despite Dip in July

20

30

40

50

60

70

80

90

100

110

2007 2008 2009 2010 2011 2012 2013 2014 2015

U. Michigan

Conference Board

Index

EuroCrisis I

Fiscal Cliff

Government Shutdown

EuroCrisis III

Debt Ceiling & Euro Crisis II

Sources: Conference Board and Reuters/U. Michigan future expectations indices

5

Bond Risk Spreads Rose in Crises Spread a Little Elevated - 10 Year Treasuries Low

1

2

3

4

5

6

7

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

BAA - 10 YrT-Note Spread

2% Average Spread1970-2007

Percent

Sources: Federal Reserve and Moody’s (Haver)

6

Deleveraging Contributed to Anemic Recovery Households and firms had to reduce their debt

Banks had to rebuild their balance sheets

80

90

100

110

120

130

140

150

500

520

540

560

580

600

620

640

660

96 98 00 02 04 06 08 10 12 14 16

Debt / Income

Net Worth / Income

Percent PercentHousehold Net Worth and Debt

Sources: BEA (Disposable Personal Income) and Board of Governors (Net Worth & Debt)

7

The State of the Economy

8

Estimate of 2.3% GDP Growth in Q2 Likely to be Revised Up Weak 0.6% Growth in Q1

-10.0

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Real GDP Growth Rate

Percent, SAAR

Blue ChipForecasts

Source: BEA. Note: Shading denotes NBER dated recessions.

9

Momentum Regained - Economic Activity Improving According to ADS Coincident Index

-5

-4

-3

-2

-1

0

1

2

-12

-8

-4

0

4

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Output Gap (Left Axis)ADS Index (Right Axis)

ADS Index Gap (%)

Above Trend

Below Trend

Source: BEA, CBO and Philly Fed

10

ISM Composite Indices Suggest Economy Is Expanding Manufacturing Dipped a Little, Non-Manufacturing Rose Sharply in July

30

35

40

45

50

55

60

65

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

ISM ManufacturingISM Nonmanufacturing

Index, 50+ = Expansion

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The Labor Market

12

Recent Payroll Employment Numbers Quite Strong

-1,000

-800

-600

-400

-200

0

200

400

600

05 06 07 08 09 10 11 12 13 14 15

3-Month MovingAverage

Monthly Change (000's, SA)

Non-Farm Payrolls (000’s,SA,BLS)

Average Monthly 2012 2013 2014 Jan Feb Mar Apr May Jun Jul 188 199 260 201 266 119 187 254 223 ?

13

Low Level of Labor Market Slack Headline Unemployment Rate of 5.3% in June; Wage Growth Muted

2

4

6

8

10

12

14

16

18

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Headline U3 Rate

CBO"NAIRU" or Natural Rate

Broad U6 Rate

Percent

10.5%

5.3%

Unemployment Rates

Sources: BLS and CBO. Notes: The U-6 unemployment includes discouraged workers, other

marginally attached workers, and those working part time for economic reasons

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15

Core and Trimmed Mean PCE Inflation Below 2% Target Inflation Expectations Well Anchored

-2

-1

0

1

2

3

4

5

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Core PCE InflationHeadline PCE InflationTrimmed Mean PCE Inflation

2% "Target"

Percent, YoY

PCE Inflation (12 month) 2013 2014 Jun 2015 Headline 1.20% 1.33% 0.33% Core (Ex. Food & Energy) 1.34% 1.41% 1.29% Trimmed Mean (May) 1.45% 1.57% 1.61%

Sources: BEA and Dallas Fed.

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Housing Markets

17

Gradual Improvement in Housing Market

Starts and Permits

0

400

800

1,200

1,600

2,000

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Single-Family Starts

Single-Family Permits

Multi-Family Starts

Multi-Family Permits

Annualized (000's)

Source: Census Bureau

18

Gradual Improvement in Housing Market

Single-Family Home Sales

3,000

4,000

5,000

6,000

7,000

200

400

600

800

1,000

1,200

1,400

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

New Single-family

Existing Single-family

Annualized (000's)

Sources: NAR and Census Bureau.

19

Fairly Moderate House Price Gains at National Level Lending Standards Starting to Ease

120

140

160

180

200

220

240

260

280

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

CoreLogic

FHFAHouse Price

Index

Appreciation (YoY) Dec 2013 Dec 2014 May/Jun 2015 CoreLogic house prices +11.3% +4.9% +6.3% (Jun) FHFA house prices +7.6% +5.5% +5.6% (May) Notes: CoreLogic single family incl. distressed sales and FHFA purchase only series.

The series are not seasonally adjusted.

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Financial Markets

21

Limited Stress in U.S. Financial Markets

-2

-1

0

1

2

3

4

5

6

7

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Normal Level

Kansas City FinancialStress Index

Note: The KC Fed financial stress index captures the common component in a range of financial variables, including the TED spread, various corporate bond spreads, and the VIX.

22

Stock Markets High … Albeit Very Volatile

40

80

120

160

200

240

05 06 07 08 09 10 11 12 13 14 15

S&P 500

Eurofirst 300FTSE 100

Nikkei 225

Index, 30 Jun 2009 = 100

DJ 30

Source: Haver Analytics.

23

Interest Rates Are Low … Expected to Rise Gradually

0

1

2

3

4

5

6

7

2000 2002 2004 2006 2008 2010 2012 2014 2016

10-Year Treasury

3-Month Treasury

Blue ChipForecasts

QE1 QE2 Twist QE3

Percent

TaperTantrum

Sources: Federal Reserve Board and Blue Chip.

24

Plunge in Oil Prices

On Net, Good for U.S. and Global Economy

But A Jolt for Texas

25

Plunge in Oil Prices and U.S. Economy

• Strong supply and weak global demand

o Nov 2014 OPEC decision to maintain production

o June nuclear deal with Iran

• For the U.S., a net importer of oil, the main effects are: o Incomes (↑): real incomes and consumption rise Estimated $700+ gain for typical household

o Costs & Profits (↓?): Oil exploration related investment falls sharply Other investment gradually rises

o Inflation (↓): headline and core inflation fall temporarily

26

NYMEX WTI Futures Prices Great Uncertainty!

20

40

60

80

100

120

140

06 07 08 09 10 11 12 13 14 15 16

NYMEX WTI FuturesNYMEX 95% CIs

Brent

WTI

Actual Forecast

Dollars Per Barrel

Sources: Haver Analytics, Bloomberg and author’s calculations

27

Forecasts of U.S. Economy

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Forecasts of GDP Growth and Inflation

• Very difficult to forecast GDP (output) growth with any reasonable degree of accuracy: o The economy continually evolves

o Shocks are common, but unpredictable

o Turning points are hard to identify in real time

• It was easier to forecast inflation – less so now

• Average or combinations of forecasts better than any individual forecast e.g. o SPF (Survey of Professional Forecasters)

o Blue Chip Economic Indicators

o FOMC (Federal Open markets Committee)

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Forecasts for Current and Next Two Quarters

Output / GDP Growth (SAAR)

2015 Q3 2015 Q4 2016 Q1 Blue Chip 3.2% 3.0% 2.7% SPF 3.1% 2.9% 2.4%

Unemployment Rate (Ave) 2015 Q3 2015 Q4 2016 Q1

Blue Chip 5.3% 5.1% 5.0% SPF 5.3% 5.2% 5.1%

Sources: Blue Chip Economic Indicators, July 2015 and Survey of Professional Forecasters (SPF), May 2015.

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Annual Forecasts Economic Indicator

Forecaster Actual 2014

Forecasts 2015 2016 2017 Long Run

Real GDP Growth, Q4/Q4

Blue Chip 2.4%

2.4% 2.8% - 2.5% FOMC 1.8%–2.0% 2.4%–2.7% 2.1%–2.5% 2.0%–2.3% SPF 2.2% 2.8%# 2.8% 2.5%

Unemployment Rate, Q4 Ave

Blue Chip 5.7%

5.3% 4.9% - 5.0% FOMC SPF

5.2%–5.3%

5.2% 4.9%–5.1%

4.9%# 4.9%–5.1%

4.8% 5.0%–5.2%

4.8%

PCE Inflation Rate, Q4/Q4

FOMC 1.1%

0.6%–0.8% 1.6%–1.9% 1.9%–2.0%

2.0% SPF 0.8% 1.9% 1.9% FOMC, Core

1.4% 1.3%-1.4% 1.6%-1.9% 1.9%-2.0%

SPF, Core 1.4% 1.7% 1.9% Sources: Blue Chip Economic Indicators July 2015 (longer run from March 2015), FOMC Projection June 2015, and Survey of Professional Forecasters (SPF) May 2015. # denotes an estimate.

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Risks to the U.S. Economic Outlook

• Risks are pretty balanced • Main downside risks are external

o Further appreciation of the dollar o Downturn in China o Slow growth in other emerging economies o Flare up of conflict in Ukraine or Middle East