Economic Outlook: The Short, and Long, of ItKartik B. Athreya

November 11, 2015

The views and opinions expressed herein are those of the author. They do not represent an official position of the Federal Reserve Bank of Richmond or the Federal Reserve System.

First, some fine print…

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-9

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-4

-3

-2

-1

0

1

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5

6

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Q31.5%

Real Gross Domestic Product

Source: Bureau of Economic Analysis via Haver Analytics & Federal Reserve Board

Percent change from previous quarter at annual rate

FOMC Projection

Note: Projection is the median, central tendency, and range from the September 2015 Summary of Economic Projections. Red dots indicate median projections. Projections of change in real gross domestic product (GDP) are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

-30

-25

-20

-15

-10

-5

0

5

10

15

20

-30

-25

-20

-15

-10

-5

0

5

10

15

20

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Percent change from previous quarter at annual rate

Q32.1%

Real Nonresidential Fixed Investment

Source: Bureau of Economic Analysis via Haver Analytics

-4

-3

-2

-1

0

1

2

3

4

5

6

-4

-3

-2

-1

0

1

2

3

4

5

6

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Disposable Personal Income & Expenditures

Source: Bureau of Economic Analysis via Haver Analytics

12 Month % Change

Real Personal Consumption Expenditure

Real Disposable Personal Income

September

Note: Real disposable personal Income was adjusted to remove tax-induced income shifting near end of 2012.

July August SeptemberIncome 0.4 0.4 0.2Expenditures 0.2 0.4 0.2

Month over Month % Change

-800

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-100

0

100

200

300

400

-800

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-100

0

100

200

300

400

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Quarterly average of monthly changes, thousands of persons

Nonfarm Payroll Employment

Oct. 271Sep. 137Aug. 153Jul. 223Jun. 245

Monthly Change

Source: Bureau of Labor Statistics via Haver Analytics

Q4 Avg.

1

1.5

2

2.5

3

3.5

4

4.5

1

1.5

2

2.5

3

3.5

4

4.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Percent

August

Labor Market Flows

Source: JOLTS via Haver Analytics

Hires Rate*

Job Openings Rate**

Quits Rate*

Note: *Percent of total employment. **Percent of total employment plus job openings.

Alternative Measures of Unemployment in Virginia

Source: Bureau of Labor Statistics via Haver Analytics

Virginia County Unemployment Rates

Source: Bureau of Labor Statistics via Haver Analytics

China: In the News

Three recent developments

Stock market crash

Devaluation of the Yuan

Widespread signs of slowdown

China: Equities

Dramatic decline in Chinese stock market: 30%

Correction of a bubble (?)

Bank of China intervened massively

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160

1,000

2,000

3,000

4,000

5,000

6,000Shanghai-Shenzhen 300 Stock Price Index

Monthly, Dec 31, 2004=1,000

Source: Shanghai Stock Exchange via Haver Analytics

China: The Big Picture

Most remarkable economic story since the Industrial Revolution

massive amounts of labor move into manufacturing

high returns to capital and investment

Process seems to be slowing

China’s Ouput: Huge Structural Change

0

10

20

30

40

50

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Total Value Added, Percentage of GDP

Industry

Services, etc.

Agriculture

Note: ‘Services, etc.’ includes any statistical discrepancies noted by national compilers.

Source: IMF World Development Indicators

0

2

4

6

8

10

12

14

1980 1985 1990 1995 2000 2005 2010 2015

Share of World Exports

China

United States

Percent of World Exports, Annual

Source: IMF World Development Indicators

GDP Per Capita: A Little Perspective…

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Constant 2005 USD

Source: WB World Development Indicators

United States

China

China and the World: Implications

No first-order effect on the U.S.

Large effect on commodity exporters (BRIs, Australia), East Asian countries and Germany, which can trigger second-round effects on the U.S.

China growth miracle may be coming to an end

Middle-income trap?

17

International growth more generally…

Source: China National Bureau of Statistics and Eurostat via Haver Analytics

US Export Exposure to the World

Source: Census Bureau via Haver Analytics

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0

0.5

1

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2

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3.5

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4.5

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-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

September1.3%

FOMC Projection

Core Personal Consumption Expenditure Price Index

12 Month % Change

Source: Bureau of Economic Analysis & Board of Governors via Haver Analytics

2% Longer-run Target

Notes: FOMC projection is the median, range, and central tendency for Q4/Q4 percent changes, from the September 2015 meeting. Red dots indicate median projections. Core PCE Price Index excludes expenditures on gasoline and food services.

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2750

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3500

3750

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4500

4750

9/12/2012 11/4/2015

Federal Reserve System Assets

Source: Board of Governors via Haver Analytics

$, Billions

Treasury Securities:$2,462

AgencyDebt: $34

Agency MBS: $1,744

Note: Numbers may not add up due to rounding.

Total: $4,535

Miscellaneous: $295

Treasury Securities:$1,652

AgencyDebt: $87

Agency MBS: $844

Total: $2,865

Miscellaneous: $282

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Federal Funds Target Rate

November 6thPrimary Credit Rate

Monetary Policy Instruments

Percent

Source: Board of Governors via Haver Analytics

Federal Funds Rate Target Range

Interest Rate Paid on Reserves

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

October

Real Federal Funds RatePercent, effective Fed funds rate - lagged year over year change in core PCE price index

Source: Bureau of Economic Analysis & Board of Governors via Haver Analytics

0

0.25

0.5

0.75

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1.5

1.75

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2.5

2.75

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0.75

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1.5

1.75

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2.25

2.5

2.75

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3.25

3.5

6 M 2 Yrs 3 Yrs 5 Yrs 7 Yrs 10 Yrs

October 26, 2015 November 6, 2015

Time to Maturity

Treasury Yield Curve

Percent

Source: Board of Governors via Haver Analytics

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2015 2016 2017 2018 Longer run

Summary of Economic Projections: Federal Funds RatePercent

Source: Board of Governors

Note: Each dot in the chart represents the value of an FOMC participant’s judgment of the midpoint of the appropriate target range (or the appropriate target level) for the federal funds rate at the end of the calendar year. Projections made for the September 2015 meeting.

FOMC Statement

Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved lower; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

Source: Board of Governors

September 17, 2015

FOMC Statement

Information received since the Federal Open Market Committee met in September suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. The pace of job gains slowed and the unemployment rate held steady. Nonetheless, labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved slightly lower; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring global economic and financial developments. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

Source: Board of Governors

October 28, 2015

And now, the long of it….

I’ve talked about short-run outcomes, especially in the labor market. What about long-run outcomes?

In the long run…

Growth comes solely from better methods of production

But much innovation embedded in new machines and technologies

Where will this leave the labor force?

Fear of Technology

From Time Magazine, February 24th :“The rise in unemployment has raised some new alarms around an old scare word: automation. ...While no one has yet sorted out the jobs lost because of the overall drop in business from those lost through automation and other technological changes, many a labor expert tends to put much of the blame on automation. ...Many of the losses in factory jobs have been countered by an increase in the service industries or in office jobs. But automation is beginning to move in and eliminate office jobs too. ... Today's new industries have comparatively few jobs for the unskilled or semiskilled, just the class of workers whose jobs are being eliminated by automation.”

Fear of Technology

…1961

Long-run unemployment: no trend. We adapt!

Source: Bureau of Labor Statistics, research.stlouisfed.org

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1996

1999

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0.0

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12.0 Civilian Unemployment Rate

But, while unemployment shows no trend over time…

Trade and smart technologies have made it harder for those with low skills, and easier for those with high skills…

“Skill-biased technological change”

Skills have long inoculated against unemployment…

Source: Bureau of Labor Statistics

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2%

4%

6%

8%

10%

12%

14%

16% Less than high schoolHigh schoolSome college or associate's degreeBachelor's degree or higher

Unemployment rate, workers 25 years and over

Payoffs to skills have steadily increased

Source: Bureau of Labor Statistics

Median weekly earnings, workers 25 years and over (2013 constant dollars)

19791981

19831985

19871989

19911993

19951997

19992001

20032005

20072009

20112013

$400

$500

$600

$700

$800

$900

$1,000

$1,100

$1,200

$1,300

$1,400 Bachelor's degree or higherSome college or associate's degreeHigh schoolLess than high school

Why? Since the 1970s, supply response to skill-biased technological change weak. Unprecedented.

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980

Year of Birth

8

9

10

11

12

13

14

15Y

ears

of

Sch

ooli

ng a

t Age

35

Yea

rs

Women

Men

Source: Goldin and Katz (2009)

Non-completion

Expected Attainment Realized No Degree

Student Loan Debt (No Degree)

Certificate 32% 52% $11,160

Associate’s degree 22% 62% $10,758

Bachelor’s degree 52% 38% $14,457

Many who enroll do not complete any degree within 6 years of completing high school.

Source: Avery and Turner (2012)Note: Data reflect survey results from 2004-2009.

Conclusions

Short run: Macroeconomy gathering strength, labor market “slack” diminishing.

Consumption strong

Sustained Employment gains

Core inflation moving in the right direction

International picture : China slowing, but expected, US exposure limited

Long run: Skills are key to “maximum employment.”

Preparedness and good information critical for individual and aggregate outcomes.

But US facing, for the first time, potentially serious barrier to increasing skill acquisition, especially higher ed.

…Something for all of us to worry about.