U S Economic Outlook andU.S. Economic Outlook and Monetary PolicyGlobal Interdependence Center MeetingBuenos AiresNovember 1, 2012

Daniel SullivanExecutive Vice President and Director of ResearchFederal Reserve Bank of Chicago

0

Labor Market Is Slowly Improving …

10300

Private Nonfarm Payroll Employment (average monthly change, thousands)

Unemployment Rates (percent)

80

Q3‐2012

6-300

Sep‐2012

4-600

22000 '02 '04 '06 '08 '10 '12

-9002000 '02 '04 '06 '08 '10 '12

1

…But Has A Big Gap To Make Up

Employment 7 2 million below a150

Total Nonfarm Payroll Employment (SA, millions)

Employment 7.2 million below a reasonable notion of its maximum sustainable level145 Trend Employment 

based on Aaronson, Davis, and Hu (2012) LFP

Growth needed to close the employment gap:– 150,000 / month for 7 years

140

and CBO long run NAIRU projections 

, y– 200,000 / month for 5 years– 250,000 / month for 4 years

130

135

Sep‐2012

1252003 '07 '11 '15 '19

2

Crisis Destroyed Much Household Wealth …

225

Loan Performance Home Price Index (Jan-2000=100)

16000

Wilshire 5000 Stock Price Index

200

Incl. Distressed

14000

175

Aug‐2012

12000

26‐Oct‐2012

125

150

8000

10000

1002000 '02 '04 '06 '08 '10 '12

60002000 '02 '04 '06 '08 '10 '12

3

…Which Forced Deleveraging

140 20

Household Obligations(% of DPI)

Household Liabilities (% of DPI)

100

12018

Home MortgagesConsumer CreditOther Debt

Financial ObligationsDebt ServiceAverage since 1980

60

80

100

16

Q2‐2012

40

60

12

14

0

20

1980 '84 '88 '92 '96 2000 '04 '08 '1210

1980 '84 '88 '92 '96 2000 '04 '08 '12

4

Greater Savings Pushed Down Interest Rates

4

TIPS-based Inflation Compensation (percent)

8

Ten Year Treasury Interest Rates (percent)

36

NominalReal

24‐Oct‐2012

1

2

5 yr 24‐Oct‐20122

4

1

0

y5‐10yr ahead

2

0

-2

-1

2005 '06 '07 '08 '09 '10 '11 '12-4

-2

2005 '06 '07 '08 '09 '10 '11 '12

5

Household Demand Now Recovering …

2.0

Single Family Housing Market (millions of units, annual rate)

150

Indices of Overall Consumer Sentiment (Michigan: Q1-1996=100; Conference Board: 1985=100)

1.5

PermitsStarts

118

Conference Board Consumer ConfidenceMichigan Consumer Sentiment

1.0Sep 2012

85

Oct‐2012

0.5

Sep‐2012

53

0.02000 '02 '04 '06 '08 '10 '12

202000 '02 '04 '06 '08 '10 '12

Sep‐2012

6

… But Risks Have Made Businesses Cautious

6575

Nondefense Capital Goods ex. Aircraft (Bils. $, 3-month MA)

Purchasing Managers Index (50+ equals manufacturing expansion)

55

60

65

70

ShipmentsNew Orders

Aug‐2012 Sep‐2012

45

50

55

55

60

65

40

45

50

55

30

35

2000 '02 '04 '06 '08 '10 '1240

45

2000 '02 '04 '06 '08 '10 '12

7

Headwind/Risk I: Global Growth Slowdown

6-200

Real Net Exports(SA, Bils. 2005$)

Real World GDP Growth (4-quarter percent change)

4

5

400

-300Q3‐2012

IMF ForecastsAs of September 2011As of October 2012

2

3

4

600

-500

-400

1

2

-700

-600

-1

0

2006 '07 '08 '09 '10 '11 '12 '13-900

-800

2006 '07 '08 '09 '10 '11 '12

8

Headwind/Risk II: U.S. Fiscal ConsolidationContributions to Real GDP Growth (percent, annual rate)

6 Government Expenditures 13

Disposable Personal Income (Trils. 2005$, SAAR)

2

4

Government ExpendituresOther Contributions

12

Before Social Security, Taxes, and TransfersDisposable Personal Income

-2

0

Q3 2012

11

Sep‐2012

-6

-4Q3‐2012

9

10

-10

-8

2007 '08 '09 '10 '1182004 '06 '08 '10 '12

9

Fiscal Cliff

According to current law, many significant changes to taxes and spending are scheduled for January 1, 2013– Substantial uncertainty about what will happen and the impact

on the economy

Many analysts expect an end to only the payroll tax holiday and extended unemployment insurance program– Reasonable estimates of the implied reduction in 2013 growth

range from 0.5 to 1.0 percentage points of GDP

If all possible tax and spending changes occurred– CBO’s midpoint point estimates show an additional 2.0 percentage

reduction in GDP growth in 2013

1010

Unemployment Rate Forecasts: SEP and BCUnemployment Rate (percent)

10

9FOMC Central Tendency

7

8

Blue Chip Consensus

Range between the top 10 and bottom 10 Blue Chip projections

6FOMC central tendency for longer‐run unemployment rate

4

5

2010 2011 2012 2013 2014

1111

2010 2011 2012 2013 2014

*2014 Blue Chip forecasts are from October 2012 Long-run Projections

Recent And Forecast Inflation Below TargetPCE Price Index (12-month percent change)

4

5

TotalCore

2

3

FOMC Long-Run Target

0

1FOMC forecasts*

Sep‐2012

-1

12*Midpoints of the central tendency of the forecasts made by the FOMC participants

Wages And Commodity Prices Tame

15012006

Wages (4-quarter percent change)

Commodity Prices(Index 1967=100 and $/bbl)

12510005

Nonfarm Business CompensationEmployment Cost Index

KR‐CRB IndexBrent Oil

75

100

600

800

3

4

Q2‐2012 Sep‐2012

25

50

200

400

1

2

0

25

0

200

2002 '04 '06 '08 '10 '120

1

2002 '04 '06 '08 '10 '12

13

Traditional Monetary Policy At Its Limit

8

Fed Funds Rate (percent)

History

4

6

History

Taylor (1999) RuleMarket Expectations

0

2

4

Sep‐2012

-2

0

-6

-4

2001 '03 '05 '07 '09 '11 '13

14

September FOMC Actions Begin open-ended purchases of Agency MBS at a pace of

$40B per month

Continue Maturity Extension Program purchases of long-term Treasury securities at pace of $45B per month

Si lt l lli t f h t t T i– Simultaneously selling same amount of short-term Treasuries

Pledge Resolve: If labor market outlook does not improve substantially continue purchasing Agency MBS other assetssubstantially, continue purchasing Agency MBS, other assets, and employ other tools until the outlook does improve

Expect highly accommodative policy to be appropriate for a Expect highly accommodative policy to be appropriate for a considerable period after economic recovery strengthens– In particular, expect near zero funds rate to be warranted at least

through mid 2015

1515

through mid 2015

GDP Growth and Consensus Projections

6

Real GDP Growth (percent change, annual rate)

3

Consensus Blue Chip Forecasts as of October 2012

Q3‐2012

0

-6

-3

-92004 '06 '08 '10 '12

16

Greater Underlying Strength But Big Risks

U.S. household demand strengthening– Debt burdens becoming more manageableg g

Should lead to stronger growth despite continued headwinds– Modestly better in 2013Modestly better in 2013– Significantly better in 2014 as headwinds abate

But there are significant downside risks But, there are significant downside risks– Further slowing in world economy– Possible intensification of European financial crisis– U.S. fiscal cliff– Uncertainty related to downside risks likely already holding

back growth

1717