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The Outlook for the U.S.

Economy
Finding Shelter: Assessing Texas Residential
Real Estate
February 12, 2016
Evan F. Koenig

Senior Vice President & Principal Policy Advisor


The views expressed are those of the speaker and should not be attributed
to the Federal Reserve Bank of Dallas or the Federal Reserve System.

Driving Forces

Driving Forces:
Comments
Unfavorable demographics
o Slow growth in the working-age population limits sustainable output
and job growth, and raises concerns about long-term govt finances

Driving Forces:
Comments
Unfavorable demographics
o Slow growth in the working-age population limits sustainable output
and job growth, and raises concerns about long-term govt finances

Low oil prices


o Mostly supply driven: shale revolution + Saudi decision to maintain
production + lifting of Iran embargo + OPEC disarray
o Benefits oil consumers and hurts producers: Should be a net plus
for the U.S. economy

Driving Forces:
Comments
Unfavorable demographics
o Slow growth in the working-age population limits sustainable output
and job growth, and raises concerns about long-term govt finances

Low oil prices


o Mostly supply driven: shale revolution + Saudi decision to maintain
production + lifting of Iran embargo + OPEC disarray
o Benefits oil consumers and hurts producers: Should be a net plus
for the U.S. economy

A strong dollar
o Reflects relative strength of the U.S. economy and prospects for
relatively high risk-adjusted returns on U.S. investments
o Encourages U.S. consumption of foreign-produced goods at the
expense of U.S.-produced goods

Driving Forces:
Comments
Unfavorable demographics
o Slow growth in the working-age population limits sustainable output
and job growth, and raises concerns about long-term govt finances

Low oil prices


o Mostly supply driven: shale revolution + Saudi decision to maintain
production + lifting of Iran embargo + OPEC disarray
o Benefits oil consumers and hurts producers: Should be a net plus
for the U.S. economy

A strong dollar
o Reflects relative strength of the U.S. economy and prospects for
relatively high risk-adjusted returns on U.S. investments
o Encourages U.S. consumption of foreign-produced goods at the
expense of U.S.-produced goods

Accommodative monetary policy and reduced fiscal drag

Demographics: Judging by the path of real GDP,


the current expansion has been unusually weak
Index, business cycle
trough = 100
135

1982

130
125

1991

1975

120
2001
115

2009

110

105
100

3
4
Years into recovery

But divide real GDP by the size of the labor force,


and this expansion looks ordinary
Index, business cycle
trough = 100
125

1982

120

115

1991
2009
2001

110
1975
105

100

3
4
Years into recovery

The explanation: Labor-force growth has been


exceptionally slow
Index, business cycle
trough = 100
115

1975

1982

111

1991
107
2001

103
2009
99

3
4
Years into recovery

Labor-force growth has been slow partly because


the female participation rate has leveled off
Percent

Female rate as a percent


of male rate

85

80

75

70

65

60

55
1975

1980

1985

1990

1995

2000

2005

2010

2015

Also, the 20-64 age group has been expanding at


less than half the pace seen in prior expansions
Percent growth in
population, annualized

20 64 years old

3.5

2.5

2.0
1.5

1.2

1.2

1.0

Average = 1.4
0.6

0.5

-0.5

-1.5

1975

1982

1991

2001

Avg.

2009

Meanwhile, the ranks of seniors are exploding,


and the population of teenagers is shrinking
Percent growth in
population, annualized

16 19 years old
20 64 years old
65 years and older

3.5

3.4

2.5
2.5
2.0

2.0
1.5

1.2

1.2

1.3

1.0

1.2 1.3
1.1
0.6

0.5

0.4

-0.5

-0.4

-1.5

1975

-1.4
1982

1991

2001

Avg.

2009

Oil: Oils price has fallen steeply since June 2014,


to its lowest levels since 2003
Dollars/Barrel
June 17, 14
150
106.95
125

Dollars/Barrel
150
125
100

100

75

75

WTI,
spot price

50

50

Jan. 29
33.66

25

10

25

10
90

95

00

05

10

15

1/84
1/85
1/86
1/87
1/88
1/89
1/90
1/91
1/92
1/93
1/94
1/95
1/96
1/97
1/98
1/99
1/00
1/01
1/02
1/03
1/04
1/05
1/06
1/07
1/08
1/09
1/10
1/11
1/12
1/13
1/14
1/15
1/16

85

Oil: Oils price has fallen steeply since June 2014,


to its lowest levels since 2003
Dollars/Barrel

Dollars/Barrel
June 17, 14
150
106.95
125

75.9%

150
125
100

100

75

75

WTI,
spot price

73.4%

50

50

64.7%
61.3%
Jan. 29
33.66

25

10

25

10
90

95

00

05

10

15

1/84
1/85
1/86
1/87
1/88
1/89
1/90
1/91
1/92
1/93
1/94
1/95
1/96
1/97
1/98
1/99
1/00
1/01
1/02
1/03
1/04
1/05
1/06
1/07
1/08
1/09
1/10
1/11
1/12
1/13
1/14
1/15
1/16

85

The Dollar: Cumulative increase in the real value


of the With
dollarthe
since
July
2014of
now
exceedsthe
19%
latest
round
increases,
U.S.
Index,
Index,
dollar
is
up
more
than
15%
since
July
20D
July 2014 = 100
July 2014 = 100
160

160
Real broad trade-weighted
exchange value of the U.S. dollar

140

140

Jan.
119.37
120

120

100

100

90

90
90

'85

'90

'95

'00

'05

'10

'15

The Dollar: Cumulative increase in the real value


of the With
dollarthe
since
July
2014of
now
exceedsthe
19%
latest
round
increases,
U.S.
Index,
Index,
dollar
is
up
more
than
15%
since
July
20D
July 2014 = 100
July 2014 = 100
160

160
Real broad trade-weighted
exchange value of the U.S. dollar

140

140

17.9%

Jan.
119.37

120

120

100

100

90

90
90

'85

'90

'95

'00

'05

'10

'15

One reason for a stronger dollar: Emergingmarket growth prospects dimmed during 2015
Purchasing Managers Index,
50+ = expansion
60

55

Jan.
52.2
51.1

50

48.9
47.4

45
Mexico

40

India
35

China (public private avg.)


Brazil

30
2009

2010

2011

2012

2013

2014

2015

2016

Monetary Policy: Remains accommodative,


whether as measured by the yield curves slope...
Percentage points

7.6

Percentage points

Unemployment rate (inverted scale),


2Q change

-1.0
Q4
-0.40

1.8

Q4
2.6

-4.0

0.0

1.0

Five-year, five-year forward Treasury rate, less the federal funds rate
(shifted 8Q)
-9.8

2.0

-15.6

3.0
'85

'87

'89

'91

'93

'95

'97

'99

'01

'03

'05

'07

'09

'11

'13

'15

17

or by the low level of short-term interest rates


relative to the rate of household wealth growth
Percentage points
17

Percentage points

Unemployment rate (inverted scale),


2Q change

-1.0
Q4
-0.40

6
Q3
2.7

0.0

-4

-15

1.0
4Q growth in household net worth, less the federal funds rate
(shifted 2Q)

-25

2.0

-36

-47

3.0
'85

'87

'89

'91

'93

'95

'97

'99

'01

'03

'05

'07

'09

'11

'13

'15

The Fallout

The oil-price drop and soaring dollar have had the


expected impact on demand and its composition
Contribution to real growth,
percentage points, SAAR
4

Components of final demand

2013:Q1 - 2014:Q2
1.9

2014:Q3 - 2015:Q4

1.6

0.6

0.6

0.1
0
-0.3

-0.1

-1

-2
Final demand

Personal
consumption

Residential
investment

Business fixed
investment

Government

Net exports

Households have benefited: their spending has


accelerated
Contribution to real growth,
percentage points, SAAR
4

Components of final demand

2013:Q1 - 2014:Q2
2.1

1.9

2014:Q3 - 2015:Q4

1.6

0.6

0.1

0.6

0.3

0
-0.3

-0.1

-1

-2
Final demand

Personal
consumption

Residential
investment

Business fixed
investment

Government

Net exports

But capex plans have been scaled back in mining


& manufacturing: BFI has decelerated
Contribution to real growth,
percentage points, SAAR
4

Components of final demand

2013:Q1 - 2014:Q2
2.1

1.9

2014:Q3 - 2015:Q4

1.6

0.6

0.1

0.3

0.6
0.3

0
-0.3

-0.1

-1

-2
Final demand

Personal
consumption

Residential
investment

Business fixed
investment

Government

Net exports

Government purchases are now a small plus for


growth, rather than a small minus
Contribution to real growth,
percentage points, SAAR
4

Components of final demand

2013:Q1 - 2014:Q2
2.1

1.9

2014:Q3 - 2015:Q4

1.6

0.6

0.1

0.3

0.6
0.3

0.2

0
-0.3

-0.1

-1

-2
Final demand

Personal
consumption

Residential
investment

Business fixed
investment

Government

Net exports

The strong dollar has encouraged substitution of


foreign-made goods for U.S.-made goods
Contribution to real growth,
percentage points, SAAR
4

Components of final demand

2013:Q1 - 2014:Q2
2.1

1.9

2014:Q3 - 2015:Q4

1.6

0.6

0.1

0.3

0.6
0.3

0.2

0
-0.3
-1

-0.1

-0.5

-2
Final demand

Personal
consumption

Residential
investment

Business fixed
investment

Government

Net exports

The net effect of the conflicting forces has been


to boost final demand for domestic product
Contribution to real growth,
percentage points, SAAR
4

Components of final demand

2013:Q1 - 2014:Q2
2.3

2.1

1.9

2014:Q3 - 2015:Q4

1.6

0.6

0.1

0.3

0.6
0.3

0.2

0
-0.3
-1

-0.1

-0.5

-2
Final demand

Personal
consumption

Residential
investment

Business fixed
investment

Government

Net exports

The latest data show service-sector growth


continuing as manufacturing sector stagnates
Index,
50+ = expansion
65
60

ISM Non-Manufacturing
Jan.
53.5

55
50

48.2
ISM Manufacturing

45
40
35
30
'07

'08

'09

'10

'11

'12

'13

'14

'15

'16

This isnt the first time weve seen a sharp


cross-sector split: the prognosis is mixed
Index,
50+ = expansion
65

ISM Non-Manufacturing

60
Jan.
53.5

55
50

48.2
ISM Manufacturing

45
40

Asian economic crisis

35
30
'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

This isnt the first time weve seen a sharp


cross-sector split: the prognosis is mixed
Index,
50+ = expansion
65
Prelude to recession

ISM Non-Manufacturing

60
Jan.
53.5

55
50

48.2
ISM Manufacturing

45
40

Asian economic crisis

35
30
'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

The slowdown in the goods-producing sector has,


so far, failed to put a damper on job growth
Avg. monthly change,
thousands
300
260
243

250

236
220

200
174
150

100

179

193

151
125*

89

50

0
2010

2011

2012

*Job growth likely needed for a steady unemployment rate.

2013

H1 H2
2014

H1 H2
2015

Jan.
2016

The unemployment rate is now at policymakers


estimate of the sustainable minimum
Percent
11

10

Unemployment rate

Median policymaker long-run


unemployment rate

Jan.
4.9

4.9

4
'07

'08

'09

'10

'11

'12

'13

'14

'15

'16

Unemployment increases have been limited to the


oil-producing states (NM, ND, OK, TX, & WY)
Percent
11

10
U.S. unemployment rate, excluding major
oil-producing states

6
Major oil-producing states
unemployment rate

Dec.
5.0

4.7
4
'07

'08

'09

'10

'11

'12

'13

'14

'15

And while headline inflation is below target, the


shortfall is due mostly to transitory factors
12-month % change
5

Headline PCE, current vintage

4
st release
Trimmed-mean PCE, 11st
rls

Dec.
1.7

1
0.6
0

-1

-2
'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

A year ago, unemployment was above its long-run


minimum & trend inflation was lower than desired
1.5

2.5

-1

-2

0.5

3.5

1.57

-0.5

Trimmed-mean
PCE inflation

1.71

-4

RPM

-5

5.5

Monetary
accommodation

Financial Leading
stress
index

5.7
8.5
9

Unemployment rate
(3-mo. moving avg.)

2.5
3

-0.5

3.5

-1

2.48

4.5

-1.5
7.5

3
Oil
shock

6.5

4.5

3.5
Yield Unemp.
jump
curve

1.5

0.5

4.5
-1

-3

-2

MPH
4-quarter real
GDP growth
Per capita GDP:
% of prior peak
1 0 2. 8

Today, unemployment approximates its long-run


minimum and trend inflation is close to target
1.5

2.5

-1

-2

0.5

3.5

1.69

-0.5

Trimmed-mean
PCE inflation

0.62

-4

RPM

-5

5.5

Monetary
accommodation

Financial Leading
stress
index

5.0
8.5
9

Unemployment rate
(3-mo. moving avg.)

2.5
3

-0.5

3.5

-1

1.80

4.5

-1.5
7.5

3
Oil
shock

6.5

4.5

3.5
Yield Unemp.
jump
curve

1.5

0.5

4.5
-1

-3

-2

MPH
4-quarter real
GDP growth
Per capita GDP:
% of prior peak
1 0 2. 9

Summary
Accommodative Fed policy, a less-restrictive fiscal
policy, and a supply-driven plunge in energy prices
have boosted domestic demand.
But relatively soft growth prospects overseas and a
strong dollar have damped demand for our
manufactured goods.
The economy as a whole continues to grow, despite
challenges to certain sectors and regions.
The stability of trimmed-mean inflation suggests that
current low headline inflation is transitory.
So far, so good, but where do we go from here?

Looking Ahead

Financial variables (junk-bond & term spreads,


stock & oil prices) suggest 2% GDP growth thru Q3
Percent/year
8

Terror attacks

Lehman failure

6
4
16:Q3
1.95
15:Q4
1.34

2
0
-2
2Q GDP growth

-4
-6

Real-time forecasts

-8
'00

'02

'04

'06

'08

'10

'12

'14

'16

The message from December FOMC: Monetarypolicy accommodation to be gradually scaled back
Percent/year
4.5
Federal funds rate

4.0

3.50

3.5

3.25

SEP projections - Dec. '15


3.0
2.38

2.5

2.0
1.38

1.5
1.0
Q4
0.38

0.5
0.0
'12

'13

'14

'15

'16

'17

'18

Longer run

With less accommodation, declines in the


unemployment rate are likely to slow, then stop
Percent
8.5
Unemployment rate
8.0

7.5

SEP projections - Dec. '15

7.0
6.5

6.0
5.5

Q4
5.0

5.0

4.7

4.7

4.7

4.9

4.5
4.0
'12

'13

'14

'15

'16

'17

'18

Longer run

Our in-house model forecasts an unemployment


path somewhat lower than the SEP median
Percent
8.5

Unemployment rate

8.0

SEP projections - Dec. '15

7.5

Koenig/Armen forecasts

7.0
6.5

6.0
5.5

Q4
5.0

5.0

4.7

4.5

4.6

4.7

4.7

4.4

4.4

4.9

4.6

4.0
'12

'13

'14

'15

'16

'17

'18

Longer run

With a tight labor market, inflation will move rapidly


upward, provided oil and the dollar hold steady
4Q percent growth
2.5

2.0
2.0

1.9
1.5

1.6

1.0
Headline PCE
0.5

Q4
0.4

SEP projections - Dec. '15

0.0
'12

'13

'14

'15

'16

'17

'18

Our in-house model predicts an inflation path


slightly higher than the SEP median
4Q percent growth
2.5
2.1

2.0
2.0

2.0

1.7
1.5

1.9

1.6

1.0
Headline PCE
0.5

Q4
0.4

SEP projections - Dec. '15


Koenig/Armen forecasts

0.0
'12

'13

'14

'15

'16

'17

'18

Conclusions
Weve already reached policymakers estimate
of the full-employment unemployment rate.
Modest further unemployment declines are likely
during 2016.

Barring a further fall in the price of oil or a new


surge in the dollar, Fed policymakers are likely
to achieve their 2 percent longer-run inflation
objective in 2017.

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