Economic UpdateAlison Felix*

Senior EconomistSenior EconomistFederal Reserve Bank of Kansas City

*The views expressed are those of the presenter and do not necessarily reflect the positions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.

U.S. Economic Outlook

• Incoming data suggest that the U.S. economy co g da a sugges a e U S eco o ycontinues to recover at a moderate pace.– Manufacturing, energy and agriculture sectors are

diexpanding.– Consumer spending is well above year-ago levels.

• However, the U.S. economy faces many challenges over the next couple of years.– Unemployment rates are likely to remain stubbornly high.– Residential construction activity is likely to remain weak –

constrained by excess housing supply, falling prices and high foreclosure rates.

A moderate recovery is expected to continue over the next few yearscontinue over the next few years.

Real Gross Domestic ProductPercent change from previous period annualizedPercent change from previous period, annualized

4567

4567

10123

10123

5-4-3-2-1

5-4-3-2-1

FOMC Forecast Range (Jan2011)

-7-6-5

-7-6-5 Range (Jan 2011)

Source: Bureau of Economic Analysis; FOMC

Consumers are spending more as confidence levels gradually increaseconfidence levels gradually increase.

Retail Sales and Consumer Confidence

Percent change from a year ago Index

10

15

100

120Consumer Confidence (right axis)

Retail Sales (left axis)

5 80

-5

0

40

60

-15

-10

0

20

Source: Census Bureau and Consumer Confidence Board

Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11

Inflation remains subdued but is starting to increase slightlyto increase slightly.

InflationPercent change from year ago Percent 55 g y g

4

5

4

5Overall PCE InflationCore PCE Inflation

2

3

2

3

11

-1

0

-1

0

Source: Bureau of Economic Analysis

Feb-01 Feb-03 Feb-05 Feb-07 Feb-09 Feb-11

Inflation expectations have also ticked up recentlyrecently.

Inflation ExpectationsPercent Percent

5

6

7

5

6

7U of Mich Inflation Expectations - 1 year forward5 Yr, 5 Yr Forward Breakeven Inflation Rate (TIPS)U of Mich Inflation Expectations - 5 years forward

3

4

5

3

4

5

0

1

2

0

1

2

-2

-1

0

-2

-1

0

M 06 M 07 M 08 M 09 M 10 M 11

Source: University of Michigan and Federal Reserve Board of Governors

Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11

The Tenth District of the Federal Reserve

Employment fell sharply during the recession but is now increasing in the

U.S.Total Nonfarm Employment

Seasonally adjustedSeasonally adjustedIndex Index

105106107

105106107

US

KS

101102103104

101102103104Wichita

KC

9899

100101

9899100101

959697

959697

Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11

Source: Bureau of Labor Statistics

Unemployment rates remain elevated.

Unemployment RateSeasonally adjustedSeasonally adjusted

Percent Percent 1111

U.S.

99KS

KC

Wichita

5

7

5

7

3

5

3

5

Source: Bureau of Labor Statistics

Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11

Unemployment rates are much lower in Western KansasWestern Kansas.

Unemployment Rate – Feb 2011Unemployment Rate – Feb. 2011Not seasonally adjusted

Legend

2.9% to 3.9% 4% to 4.9%5% to 6.9%7% to 8.9%9% to 14.3%

During the recession, unemployment rates increased sharply in Southeastern

Kansas.

Change in Unemployment RateFeb. 2008 to Feb. 2011

LegendLegend-0.4 to 0.9 1 to 1.92 to 2.93 to 3.94 to 7.8

Employment continued to decline in most industries in Kansas over the past yearindustries in Kansas over the past year.

Employment Growth by IndustryFeb-11 over Feb-10

Percent Percent

8

10

12

8

10

12US

KS

Wi hit

2

4

6

2

4

6 Wichita

KC

6

-4

-2

0

6

-4

-2

0

-10

-8

-6

-10

-8

-6

Mining Prof. Educ. Trans. Manuf. Leis. Trade Constr. Fin. State & Info

Source: Bureau of Labor Statistics

& Busi. & Health & Util. & Hosp. Svcs. Loc. Govt.

Firms expect to hire more workers in the second quartersecond quarter.

Hiring Expectations

Net percent of firms planning to add workers Percent

10

12

10

12

Q3 2010 Q4 2010

6

8

6

8

Q1 2011 Q2 2011

2

4

2

4

-2

0

-2

0

Source: Manpower Inc.

22US KC Wichita

Manufacturers expect to hire more workers over the next 6 monthsworkers over the next 6 months.

Expected Employment Indexes - ManufacturingSeasonally adjusted; six months aheady j

Index Index

30

40

30

40

Number of employees

Average employee workweek

0

10

20

0

10

20

-20

-10

0

-20

-10

0

-40

-30

-40

-30

Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11

Sources: FRBKC Manufacturing Survey

Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11

Manufacturing activity continues to expandexpand.Manufacturing Activity

Seasonally adjusted; month-over-monthy jIndex Index

60

65

60

65

50

55

50

55

40

45

40

45

US

30

35

30

35

Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11

10J

Sources: ISM, FRBKC Manufacturing SurveyNote: 10J index is computed on ISM basis (50 = zero change)

Manufacturers expect further gains over the next 6 monthsthe next 6 months.

Tenth District Manufacturing ExpectationsSeasonally adjusted; sixmonths aheadSeasonally adjusted; six months ahead

Index Index

50

60

50

60Dec-10

Jan-11

30

40

30

40 Feb-11

Mar-11

10

20

10

20

-10

0

-10

0

Production Volume of new New orders Capital Employment

Source: FRBKC Manufacturing Survey

orders for exportsp

expendituresp y

The energy sector is expanding, especially for oil producersespecially for oil producers.

Count of Active Drilling Rigs

# Rigs # Rigs

450

500

1800

2000US-Oil (Left Axis)

US Gas (Left A is)

300

350

400

1200

1400

1600 US-Gas (Left Axis)

10J-Oil (Right Axis)

10J-Gas (Right Axis)

150

200

250

600

800

1000

0

50

100

0

200

400

Source: Baker-Hughes

Mar-08 Mar-09 Mar-10 Mar-11

Lower supplies and increased demand have led to higher crop priceshave led to higher crop prices.

Crop Prices$/Bushel $/Bushel$/Bushel $/Bushel

14

16

18

14

16

18Beans

Wheat

C

10

12

10

12Corn

4

6

8

4

6

8

0

2

0

2

Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11

Source: Commodity Research Bureau

Mar 04 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11

Higher livestock prices are helping producers keep pace with rising costsproducers keep pace with rising costs.

U.S. Livestock Prices and Breakeven Costs$/Hundredweight $/Hundredweight

100

110

120

100

110

120Hog BreakevenHog PriceCattle Breakeven

80

90

100

80

90

100 Cattle Price

50

60

70

50

60

70

30

40

50

30

40

50

Feb 05 Feb 06 Feb 07 Feb 08 Feb 09 Feb 10 Feb 11

Source: USDA and Iowa State University

Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11

Farmland prices are increasing at a quick pacepace.

Kansas Farmland Values

Percent change from a year ago Percent

20

25

20

25

10

15

10

15

0

5

0

5

-10

-5

-10

-52007:Q4 2008:Q4

2009:Q4 2010:Q4

Source: FRBKC Ag Survey

Nonirrigated Cropland Irrigated Cropland Ranchland

As expected, home sales plummeted after the expiration of the tax creditthe expiration of the tax credit.

Existing Home SalesSeasonally adjustedSeasonally adjusted

Index: 2005:Q4=100 Index

100

110

100

110USWichitaKS

80

90

80

90

KC

70

80

70

80

50

60

50

60

Source: NAR

2005:Q4 2006:Q4 2007:Q4 2008:Q4 2009:Q4 2010:Q4

Residential construction activity remains weakweak.

Value of Residential Construction ContractsSeasonally adjusted

Index: Feb-06=100 Index

100

110

100

110

US

70

80

90

70

80

90US

KS

40

50

60

40

50

60

10

20

30

10

20

30

Source: FW Dodge

1010Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11

Home prices continued to decline across most of the U S in 2010

Home Price Appreciation – 2010 Q4

most of the U.S. in 2010.

ppPercent change from one year ago

-1.71%

Legend0% and higher -2% to 0%-5% to -2%5% to 2%-10% to -5%Lower than -10%

Home price appreciation has varied widely over the past 5 years

Home Price Appreciation 2010 Q4

widely over the past 5 years.

Home Price Appreciation – 2010 Q4Percent change from five years ago

3.47%

Legend5% and higher 0% to 5%-10% to 0%-10% to -20%Lower than -20%

Foreclosure rates in Kansas are much lower than in other parts of the nation

Foreclosure Rate – 2010 Q4

lower than in other parts of the nation.

2.43%

LegendLegend1% to 2% 2% to 3%3% to 4%4% to 5%Hi h h 5%Higher than 5%

Commercial construction activity remains below pre-recession levelsbelow pre-recession levels.

Value of Commercial Construction ContractsSeasonally adjusted 3-mo mov avSeasonally adjusted, 3-mo. mov. av.

Index: Feb-06=100 Index

150

175

150

175

US

100

125

100

125KS

50

75

50

75

0

25

0

25

Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11

Source: F.W. Dodge Inc.

Office and industrial vacancy rates have leveled off in KC and Wichitaleveled off in KC and Wichita.

Commercial Vacancy RatesPercent Percent

16

18

20

16

18

20

10

12

14

10

12

14

6

8

10

6

8

10

KC - OfficeKC - IndustrialKC Retail

2

4

2

4

2005:Q4 2006:Q4 2007:Q4 2008:Q4 2009:Q4 2010:Q4

KC - RetailKC - MultiFamWichita - Office

Source: Torto-Wheaton Research

Conclusions

• The U.S. and Kansas economies are e U S a d a sas eco o es a eexpected to continue to recover gradually over the next few years.– Weak residential construction activity and high

unemployment may prevent a more robust recovery.– Manufacturing, energy and agriculture sectors are expected g gy g p

to continue to provide a boost to the economy.