an examination of current regional economic conditions in ... · an examination of current economic...

An Examination of Current Economic Conditions in

the Nation and in the Memphis Area

Kevin L. Kliesen,FRB St. Louis

Charles S. Gascon,FRB St. Louis

October 20, 2017Memphis, TN

R E G I O N A LECONOMIC BRIEFING

The views we will express are our own and do not necessarily reflect the positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.

Disclaimer

The Big Picture

3

• Healthy forward momentum heading into the second half of 2018. Bodes well for 2019.

• But recent data have been partially distorted by Hurricanes Harvey and Irma.

• Solid labor and financial market conditions and low inflation.

• Fed normalization process is underway.

Key Questions in the Outlook

4

• Is 2% economic growth still the norm.

• Is inflation temporarily low?

• Have we moved to a low interest rate regime?

• If we are in a low interest rate regime, what does that imply for the economy and monetary policy?

A Brief on the U.S. Economy: A Near-Term View

5

• As usual, there are tensions in the data that influence the near-term outlook.

• First, the outlook for manufacturing and business capital spending is improving.o An improving global economy is a tail wind for the U.S.

manufacturing sector.

• Second, labor markets conditions remain solid; the unemployment rate is falling.

Unemployment Rates are Low, Regardless of How They are Measured

6

4.25.6

8.3

9.7

3.0

6.0

9.0

12.0

15.0

18.0

1992 1995 1998 2001 2004 2007 2010 2013 2016

Source: Bureau of Labor Statistics. Data through Sept. 2017.

The U-3 (Official) and U-6 Unemployment Rates and ther Long-Run Median Unemployment RatesPercent

(Dotted Lines are Long-Run Medians)

U-3

U-6

Inflation-Adjusted Wage Gains Have Accelerated Since 2012.

7

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Jan.2005 Jan.2007 Jan.2009 Jan.2011 Jan.2013 Jan.2015 Jan.2017

Wages

Inflation

The Atlanta Fed Wage Growth Tracker and InflationPercent change from a year earlier

Last actual observation is Aug. (Inflation) and Sept. (Wages) 2017.

A positive gap is positive!

A Brief on the U.S. Economy: A Near-Term View

8

• Third, financial conditions are broadly supportive of continued economic growth.

• Fourth, consistent with solid fundamentals, consumer spending growth should remain healthy; auto sales boomed in September.

• Finally, there are divergent trends between single-family and commercial and multi-family construction activity.

Starkly Different Trends in Construction Activity

9

0

5

10

15

20

25

30

35

40

45

Jan 2014 Jul 2014 Jan 2015 Jul 2015 Jan 2016 Jul 2016 Jan 2017 Jul 2017

Commercial

Multi-Family

Commercial and Multi-Family ConstructionPercent changes from 12 months earlier

NOTE: Commercial defined as sum of office, commercial, and health care.SOURCE: Haver Analytics and Census

50

60

70

80

90

Jan.2011 Apr.2012 Jul.2013 Oct.2014 Jan.2016 Apr.2017

Fannie Mae Home Purchase Sentiment IndexIndex, March 2011 = 60

Last actual observation is Sept. 2017.NOTE: Seasonal adjustmentby Haver Analytics.

What’s Up with Inflation? It’s Low

10

• In 2012, the FOMC established a 2% inflation target.

• But inflation has been below the target for most of this time.

• Gyrations in food and energy prices can cause inflation to deviate temporarily from the target.o The collapse in oil prices in June 2014 is an example.

11

Going nowhere fast—inflation remains below the Fed’s target rate (2%).

1.4

0.0

1.0

2.0

3.0

4.0

Jan.2010 Apr.2011 Jul.2012 Oct.2013 Jan.2015 Apr.2016 Jul.2017

The Fed's Preferred Inflation MeasurePercent change from a year earlier

FOMC Inflation Target (2%)

NOTE: Inflation calculated from the personal consumption expenditures price index . Last observation is August 2017. Source is the Bureau of Economic Analysis.

Is There a New Normal for Inflation? Perhaps.

12

• Some economists are beginning to wonder if 2% is attainable in light of fundamental changes in the economy.

• For example, the fracking revolution in the United States seems to have permanently lowered the price of crude oil (“shale band”).

• Others wonder whether the “Amazon effect” has exerted similar effects on retail prices.

The “Amazon Effect?” Falling Prices of Goods Purchased Via Electronic Shopping.

13

84

86

88

90

92

94

96

98

100

102

Jan.1992 Jan.1996 Jan.2000 Jan.2004 Jan.2008 Jan.2012 Jan.2016

E-Commerce Implicit Price Deflator2009 = 100

SOURCE: Bureau of Economic Analysis.

The St. Louis Fed’s Price Pressures Measure Suggests Inflation is Behaving Differently.

14

FOMC: Stronger-than-average growth and lower-than-average inflation in 2017 and 2018.

15

1.9

4.7

1.4

2.4

4.3

1.62.1

4.1

1.91.8

4.6

2.0

0.0

2.0

4.0

6.0

Real GDP Unemployment Rate Inflation

2016 (A) 2017

2018 Longer run

September 20, 2017 FOMC Economic ProjectionsPercent

NOTE: FOMC Projections are the median estimates of FOMC participants. The unemploymentrate is the average of the fourth-quarter for the year indicated.

A Brief on the U.S. Economy: A Longer-Term View

16

• We’re into the 8th year of expansion . . . The average expansion lasts about 5 years.

• Real GDP growth during this expansion has been the weakest on record; growth has averaged a little less than 2.25% per year.

• There are many reasons for this: Deleveraging, tighter access to credit, reregulation, higher taxes, demographics.

Real GDP Growth in the Current Expansion is the Weakest on Record.

17

9.4

13.0

2.9

7.6

4.0

5.64.9 5.1

4.3 4.4 4.33.6

2.82.2

0

2

4

6

8

10

12

14

Average Real GDP Growth During U.S. Business ExpansionsPercent change, annualized rate

SOURCE: BEA and author's calculations.

• In summer 2016, we argued that the U.S.economy could be characterized by:

– Persistently low real GDP growth.

– Goal variables (unemployment rate and inflation) near targets.

– Low real interest rates.

• Our conclusion: It would be a mistake toassume a rapid return to a 4% policy rate.

The St. Louis Fed’s New View of the U.S. Economy, Circa 2016.

The FOMC Believes that the U.S. Economy has Transitioned to a Low-Interest Rate Regime.

19

0.0

0.5

1.0

1.5

2.0

2.5

2012 2013 2014 2015 2016 2017

The FOMC Median Real Long-Term Federal Funds Rate ProjectionPercent

NOTE: The real rate is the median nominal rate less the longer-run projected headline PCE inflation rate.Source: Quarterly Federal Reserve Summary of Economic Projections

• Well, nothing is really permanent exceptdeath and taxes!

• There are many reasons why the FOMC hassteadily lowered its longer-run policy interestrates projection.

• But a key reason is their assessment that theU.S. economy is now stuck in a low economicgrowth regime (“the new normal”).

Is the Low-Interest Rate Regime Temporary or Permanent?

The Framework for Economic Growth: TheFactors that Matter

21

• Growth arises from a discovery of new ideas.

• Economists focus on four factors:

– Capital outlays by business and, less so, government.– Educational attainment– R&D (search for new ideas)– Number of people in the economy

• Second and third factors explain about 80% of economic growth from 1950 to 2007.

The Macroeconomic Growth Recipe

22

• We can boil this framework down to a simple identity that links labor inputs with productivity:

– Real GDP = GDP/Workers * Workers/Population * Population (age 16+)

• The terms are expressed in growth rates.

• Few metrics in macroeconomics are more important than the growth rate of productivity.

Macro Explanations for Lower Economic Growth: Labor Market Developments

23

56.0

58.0

60.0

62.0

64.0

66.0

68.0

1992 1995 1998 2001 2004 2007 2010 2013 2016

Source: Bureau of Labor Statistics. Data through September 2017.

The Labor Force Participation Rate and the Employment-to-Population RatioPercent

Employ/Pop

ParticipationRate

Macro Explanations for Lower Economic Growth: Weaker Labor Productivity

24

-3-2-1012345678

1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014

1948-73 (2.8%) 1974-95 (1.5%)

1996-2005 (2.6%) 2006-2017 (1.2%)

Growth of Labor Productivity, 1948 to 2017Percent change, annual data

NOTE: Labor productivity is output per hour in the nonfarm business sector. Data for 2017 are for the first and second quarters.

Where Might We Be Wrong? Some Considerations.

25

• Economic growth could be low because we are not measuring productivity accurately.

• How? The Internet of things could have created a series of innovations that are not accurately captured in the data.

• Comprehensive tax reform could spur firms to expand their capital stock, which could raise productivity.

Two Scenarios for Future Productivity Growth

26

Item Conservative scenario

Optimistic scenario

Annual percentage growth in labor productivity (baseline assumption) 1.50 1.50 Plus: Sources of additional potential productivity growth (percentage points) Big data in healthcare 0.07 0.14 Robotics 0.07 0.25 E-learning 0.15 0.30 Higher R&D spending in non-Western economies 0.10 0.25 Equals: Total potential labor productivity growth (percent) 1.89 2.44

Source: Branstetter and Sichel (2017)

Conservative and optimistic projections for productivity growth

Answers to Key Questions in the Outlook

27

• 2% economic growth is still the consensus forecast, but there are reasons for optimism.

• Inflation is stubbornly low.

• We are still in a low interest rate economy.

• The FOMC is likely to remain cautious without firm evidence of either faster or slower growth and/or inflation.

Charles S. GasconRegional EconomistOctober 20, 2017

Startups,STEM Jobs,and the Tech Sector

The views I will express are my own and do not necessarily reflect the positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.

R E G I O N A LECONOMIC BRIEFING

6% of all USJobs are STEM Jobs

4% of all MemphisJobs are STEM Jobs

11% of all US

Jobs are at Startups

2% of all Memphis

Jobs are at Startups

4% of all US Jobs are in the Tech Sector

1% of all Memphis Jobs are in the Tech Sector

13 Millionat Startups

490,000 Employed in Tech-Startups

250,000 Employed in STEM Jobs @ Tech-Startups

8.5 Millionan STEM Jobs

4.6 Million in Tech Sector

2.5 Million STEM Jobs in Tech Sector

700,000 Employed STEM Jobs at Startups

Understanding the intersections

If these groups are small why do we care?

• Business startup activity key to US job creation and economic dynamism

• STEM job growth is faster than non-STEM growth

• STEM jobs pay higher wages• Tech sector is small, but innovations are

disrupting many other industries

Startups

Is today’s economy less dynamic?

Source: Census Bureau, Business Dynamics Statistics

5%

7%

9%

11%

13%

15%

17%

1977 1982 1987 1992 1997 2002 2007 2012

Business Startup Rate

U.S. Memphis

Business Startup Rates (2014)

Arkansas: 6.7%

National Rate: 8.0%


Tennessee: 6.9%

Mississippi: 6.4%

Startup rates vary across the region


Startup Rate (%)

6.2%

It is only a small set of “high-growth firms” driving overall job growth

Business Startup

High Growth Firms

30%

Firm older than 5 yr.

50%

Failure

50%

70%“Subsistence”entrepreneurs

Source: Decker et. at, Journal of Economic Perspectives (Summer 2014)

50% of Gross Job Creation

20% of Gross Job Creation

Startups account for a disproportionate share of job creation


Net job creation as share of total employment - US

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 20130-5 Years Old 6-10 Years Old 11+ Years Old

Startups account for a disproportionate share of job creation


-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Net Job Creation as a share of total employment - Memphis

0-5 Years Old 6-10 Years Old 11+ Years Old

Young firms driving net job creation


81%

121% 126%

74%

112%

71%

57% 63%74%

48%

0%

50%

100%

150%

Startup (0 to 5 yr.) firms' contributions to net job creation (2011-2014)

STEM Jobs

STEM jobs = “Tech Jobs”

• 6% of US Jobs are STEM• 4% of Memphis Jobs are STEM• TN STEM Jobs are concentrated in 3 MSAs:

o 37% in Nashville, MSAo 18% in Memphis, MSAo 17% in Knoxville, MSA

Source: Bureau of Labor Statistics, Occupational Employment Statistics

STEM Jobs are found in all sectors of the economy


STEM share of total employment (2015)

Arkansas: 4%Mississippi: 3%


Percent

Tennessee: 5%

Low rates of STEM employment in the region

STEM ShareSTEM Growth

(2014- 15)US 6.2% 2.9%AR 4.0% 3.4%MS 3.3% 2.5%TN 4.6% 4.0%

Memphis 3.9% -3.8%Nashville 5.3% 7.0%Louisville 4.1% 0.9%

Cincinnati 6.8% 3.4%Indianapolis 6.4% 0.3%

St. Louis 6.1% -2.2%


Educational attainment key factor for STEM employment

San Jose

Source: American Community Survey, BLS Occupational Employment Statistics

0

5

10

15

20

25

0 10 20 30 40 50

STEM

Sha

re in

201

5 (%

)

% with College Degree in 2010

Nashville

Memphis

STEM wages are 2 times non-stem wages

$-

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

Non-STEM (wage) STEM (wage)

Tech Sector

The “Tech sector” defined

Source: Compustat and Authors calculations

NACIS Industry Name Largest Firm

334 Computer Manufacturing Apple

454111 Electronic Shopping Amazon

5112 Software Publishing Microsoft

518 Data Processing, Hosting & Related Services Xerox

51913 Internet Publishing & Broadcasting and Web Search Google

5415 Computer Systems Design IBM

5417 Scientific and R&D Services QuintilesIMS

Tech sector generally concentrated in the northeast and west coast

Arkansas: 1.6%Mississippi: 1.1%

National Rate: 3.9%

Source: Bureau of Labor Statistics and authors calculations

Tennessee: 1.7%

Tech Employment

Share (%)

Growth in the tech sector has outpaced the broader economy since 2010


60

70

80

90

100

110

120

130

140

150

160

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Index, Jan. 1990 = 100

Tech Sector Employment Private Sector Employment

Regional performance a bit weaker


Index, Jan. 1990 = 100

60

70

80

90

100

110

120

130

140

150

160

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Arkansas Employment

Tech Sector Employment

Private Sector Employment

60

70

80

90

100

110

120

130

140

150

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Mississippi Employment



60

70

80

90

100

110

120

130

140

150

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Tennessee Employment



Computer systems focus in regional tech sector

22%

51%

5% 6%1%

7% 7%

23%

41%

6%4% 4%

14%

7%

0%

10%

20%

30%

40%

50%

60%

ComputerManufacturing

ComputerSystems

Design andServices

DataProcessing and

Hosting

ElectronicShopping

InternetPublishing and

Web Search

Scientific R&D SoftwarePublishing

Industry Share of Tech Employment - Memphis

Memphis US

Final thoughts

While employing a relatively small share of workers, these areas are vital to economic prosperity. • They are key drivers of job growth;• the jobs provide high wages;• they can lead to productivity growth and

positive spillovers within a region.

Find out more!research.stlouisfed.org/regecon

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