The Economic Outlook and Its Policy Implications Eric S. Rosengren - - PowerPoint PPT Presentation

The Economic Outlook and Its Policy Implications

Eric S. Rosengren President & CEO Federal Reserve Bank of Boston Worcester Regional Research Bureau Worcester, Massachusetts

May 30, 2012

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Overview

• Only modest growth expected: 2-2.5

percent for 2012

 Assumes Europe is able to “muddle through”  Assumes fiscal compromise that avoids a

“fiscal cliff” (expiration of Bush tax cut, payroll tax cut, AMT revisions, unemployment benefits, along with sequestration)

• Implies little improvement in labor markets

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Figure 1

Growth in Real GDP Components: Consumption and Residential Investment

Source: Bureau of Economic Analysis / Haver Analytics 2011:Q2 - 2012:Q1

• 1

1 2 3 4 2011:Q2 2011:Q3 2011:Q4 2012:Q1 Percent Change at Annual Rate

Consumption

• 5

5 10 15 20 2011:Q2 2011:Q3 2011:Q4 2012:Q1 Percent Change at Annual Rate

ResidentialInvestment

4

Figure 2 Growth in Real House Prices by Census Region*

Source: Federal Housing Finance Agency / Haver Analytics 1984:Q1 - 2012:Q1

• 30
• 20
• 10

10 20 30

1984:Q1 1988:Q1 1992:Q1 1996:Q1 2000:Q1 2004:Q1 2008:Q1 2012:Q1 NE MA ENC WNC SA ESC WSC M P

Percent Change from Year Earlier

* The 9 census regions are: New England (NE), Middle Atlantic (MA), East North Central (ENC), West North Central (WNC), South Atlantic (SA), East South Central (ESC), West South Central (WSC), Mountain (M) and Pacific (P).

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Figure 3

Growth in Real GDP Components: Government Spending and Business Investment

Source: Bureau of Economic Analysis / Haver Analytics 2011:Q2 - 2012:Q1

• 5.0
• 2.5

0.0 2.5 5.0 2011:Q2 2011:Q3 2011:Q4 2012:Q1 Percent Change at Annual Rate

GovernmentSpending

• 5

5 10 15 20 2011:Q2 2011:Q3 2011:Q4 2012:Q1 Percent Change at Annual Rate

Business Investment

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Figure 4 Estimates of Real GDP Growth

Source: Bureau of Economic Analysis 2010:Q1 - 2012:Q1

0.0 1.0 2.0 3.0 4.0

2010:Q1 2010:Q3 2011:Q1 2011:Q3 2012:Q1 Advance Estimate Second Estimate Third Estimate Revised Estimate

Percent Change at Annual Rate

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Figure 5

Economic Projections of FOMC Participants and the Federal Reserve Bank of Boston, April 2012

Source: Federal Reserve Board, Federal Reserve Bank of Boston

Variable FOMC Central Tendency

(Percent)

Federal Reserve Bank of Boston

(Percent)

Unemployment Rate (2012:Q4) 7.8 to 8.0 8.1 Real GDP Growth (2011:Q4 – 2012:Q4) 2.4 to 2.9 2.3 PCE Inflation (2011:Q4 – 2012:Q4) 1.9 to 2.0 1.7 Core PCE Inflation (2011:Q4 – 2012:Q4) 1.8 to 2.0 1.7

Note: The central tendency excludes the three highest and three lowest projections for each variable.

Summary

• Downside risks restrain current growth
• Monetary policy should remain

accommodative to promote faster growth and lower unemployment

• Further accommodation is both appropriate

and necessary

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Can Policy Address High Unemployment?

• Some structural unemployment – mismatch

in skills occurs during most recessions/ recoveries

• Cyclical factors still the most important

source of high unemployment

• Want to avoid a cyclical problem becoming

a structural problem

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Figure 6 Employment Growth by Census Region*

Source: Bureau of Labor Statistics / Haver Analytics 1980:Q1 - 2012:Q1

• 8
• 6
• 4
• 2

2 4 6 8

1980:Q1 1984:Q1 1988:Q1 1992:Q1 1996:Q1 2000:Q1 2004:Q1 2008:Q1 2012:Q1 NE MA ENC WNC SA ESC WSC M P

Percent Change from Year Earlier

* The 9 census regions are: New England (NE), Middle Atlantic (MA), East North Central (ENC), West North Central (WNC), South Atlantic (SA), East South Central (ESC), West South Central (WSC), Mountain (M) and Pacific (P).

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Figure 7 Unemployment Rate by Census Region

Source: Bureau of Labor Statistics / Haver Analytics December 2007 and April 2012

2 4 6 8 10 12

New England Middle Atlantic East North Central West North Central South Atlantic East South Central West South Central Mountain Pacific United States

December 2007 April 2012

Percent

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Figure 8 Employment Change from Peak Employment

Source: Bureau of Labor Statistics / Haver Analytics Most Recent and Three Previous Peaks

• 7
• 6
• 5
• 4
• 3
• 2
• 1

1

• 32
• 28
• 24
• 20
• 16
• 12
• 8
• 4

4 8 12 16 20 24 28 July 1981 June 1990 February 2001 January 2008

Percent Change from Peak Employment

Months Before and After Employment Trough

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Figure 9

Employment Change from Peak Employment: Total and Total Excluding Construction and Government

Source: Bureau of Labor Statistics / Haver Analytics Most Recent Peak

• 7
• 6
• 5
• 4
• 3
• 2
• 1

1

• 32
• 28
• 24
• 20
• 16
• 12
• 8
• 4

4 8 12 16 20 24 28

January 2008 - Total Employment January 2008 - Total Employment Excluding Construction and Government

Percent Change from Peak Employment

Months Before and After Employment Trough Note: Both series use peak and trough of total employment series.

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Figure 10 Employment Growth by Industry

Source: Bureau of Labor Statistics / Haver Analytics 1980:Q1 - 2012:Q1

• 20
• 15
• 10
• 5

5 10 15

1980:Q1 1986:Q1 1992:Q1 1998:Q1 2004:Q1 2010:Q1

Construction Manufacturing Trade, Transportation and Utilities Information Financial Activities Professional and Business Services Education and Health Services Leisure and Hospitality Other Services Government

Percent Change from Year Earlier

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Figure 11

Employment Cost Index for Wages and Salaries by Industry

Source: Bureau of Labor Statistics / Haver Analytics 2002:Q1 - 2012:Q1

• 1

1 2 3 4 5 6 7

2002:Q1 2004:Q1 2006:Q1 2008:Q1 2010:Q1 2012:Q1 Construction Manufacturing Trade, Transportation and Utilities Information Financial Activities Professional and Business Services Education and Health Services Leisure and Hospitality Other Services State and Local Government

Percent Change from Year Earlier

Conclusion

• Unemployment is uncomfortably high and

PCE inflation is likely to be below 2 percent

• Significant downside risks
• Monetary policy should be more stimulative

to address inadequate demand

• Should downside risks materialize, more

aggressive policy certainly warranted

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