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• The Casualty Actuarial Society is committed to adhering strictly to the letter and spirit of the antitrust laws. Seminars conducted under the auspices of the CAS are designed solely to provide a forum for the expression of various points of view on topics described in the programs or agendas for such meetings.
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Alison Felix Economist & Branch Executive
Federal Reserve Bank of Kansas City Denver Branch
Economic Update
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
2007 2008 2009 2010 Q1 Q2 Q3 Q4 Q1 Q2 2012 2013 2014
2011 2012 Projections
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
U.S. GDP growth slowed slightly in the second quarter and is expected to continue to grow at a modest pace.
2 Source: Bureau of Economic Analysis & Federal Open Market Committee (FOMC)
REAL GROSS DOMESTIC PRODUCT (GDP) Annualized Percent Change from Previous Period
June 2012
FOMC Central
Tendency Projections
-2%
-1%
0%
1%
2%
3%
4%
5%
-2%
-1%
0%
1%
2%
3%
4%
5%
Total GDP Consumer Spending
Residential Investment
Business Investment
Net Exports
Government Spending
Inventories
2011Q3
2011Q4
2012Q1
2012Q2
Consumer spending makes up more than 70% of GDP.
3 Source: Bureau of Economic Analysis
CONTRIBUTIONS TO PERCENT CHANGE IN GDP Annualized Percent Change from Previous Period
5.1%
4.6% 4.6%
5.8%
9.3% 9.6%
9.0%
8.3%
4%
5%
6%
7%
8%
9%
10%
4%
5%
6%
7%
8%
9%
10%
2005 2006 2007 2008 2009 2010 2011 July 2012 2013 2014
2012 Projections
Unemployment rates have fallen over the past year but remain stubbornly high.
4
U.S. UNEMPLOYMENT RATE
Source: Bureau of Labor Statistics & Federal Open Market Committee (FOMC)
June 2012
FOMC Central
Tendency Projections
0%
1%
2%
3%
4%
5%
0%
1%
2%
3%
4%
5%
2005 2006 2007 2008 2009 2010 Q1 Q2 Q3 Q4 Q1 Q2 2012 2013 2014
2011 2012 Projections
Inflation increased earlier this year but moderated in the second quarter as oil prices fell.
5 Source: Bureau of Economic Analysis & Federal Open Market Committee (FOMC)
U.S. PERSONAL CONSUMPTION EXPENDITURE (PCE) INFLATION Annualized Percent Change from Previous Period
June 2012
FOMC Central
Tendency Projections
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
6 Source: Board of Governors of the Federal Reserve System
EFFECTIVE FEDERAL FUNDS RATE
“…the Committee decided today to keep the target range for the federal funds rate
at 0 to 1/4 percent and currently anticipates that economic conditions--including
low rates of resource utilization and a subdued outlook for inflation over the
medium run--are likely to warrant exceptionally low levels for the federal funds rate
at least through late 2014.” - FOMC August Statement
-$3
-$2
-$1
$0
$1
$2
$3
-$3
-$2
-$1
$0
$1
$2
$3
2007 2008 2009 2010 2011 2012
7 Source: Board of Governors of the Federal Reserve System
FEDERAL RESERVE BALANCE SHEET
“The Committee also decided to continue through the end of the year its program to extend
the average maturity of its holdings of securities as announced in June, and it is maintaining
its existing policy of reinvesting principal payments from its holdings of agency debt and
agency mortgage-backed securities in agency mortgage-backed securities.”
- FOMC August Statement
Traditional Portfolio
Currency in Circulation
Reserves
Other
Federal Agency & Mortgage-Backed
Securities
Foreign Currency Swaps
Short-Term Lending
Assets
Liabilities
Trillions Trillions
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
Oct '10 Sep '11 Jul '12 Jan '13
8 Source: Board of Governors of the Federal Reserve System
FEDERAL RESERVE BANK ASSETS Trillions
>10 years 6 to 10 years 3 to 6 years
≤3 years
Federal Agency &
Mortgage Backed Securities
All Other
Treasuries by Duration
QE2
Projected Operation Twist
Operation Twist
“The Committee also decided to continue through the end of the year its program to extend
the average maturity of its holdings of securities as announced in June, and it is maintaining
its existing policy of reinvesting principal payments from its holdings of agency debt and
agency mortgage-backed securities in agency mortgage-backed securities.”
- FOMC August Statement
9 Source: Federal Reserve Bank of Kansas City
Board of Governors
FEDERAL RESERVE BANK DISTRICTS
95
100
105
110
Jul '02 Jul '04 Jul '06 Jul '08 Jul '10 Jul '12
Employment growth slowed in the second quarter but remains well above year ago levels.
10 Source: Bureau of Labor Statistics
U.S. NONFARM EMPLOYMENT GROWTH Index 100 = July 2002, Seasonally Adjusted
United States 1.4%
July 2012
Year-over-Year Change
JULY 2012 NONFARM EMPLOYMENT Seasonally Adjusted, Year-over-Year Change
Most states have experienced employment gains over the past year.
11 Source: Bureau of Labor Statistics
More than 3%
2 to 3%
1 to 2%
0 to 1%
-1 to 0%
-1.6 to -1%
United States
1.4%
0.6%
13.5%
2.5%
10.2%
12.8%
4.2%
3.3%
9.0%
5.8%
4.0%
11.1%
4.1%
0.4%
3.8%
10.6%
2.0%
2.1%
Over the past year, employment gains were widespread across industries.
12 Source: Bureau of Labor Statistics
Percent Change
U.S. NONFARM EMPLOYMENT OVER THE PAST YEAR, JULY 2012 Seasonally Adjusted
5.8%
3.4%
2.8%
2.2%
2.0%
2.0%
1.9%
1.9%
0.8%
0.7%
0.6%
0.1%
0.1%
0.0%
-0.5%
-0.7%
-1.3%
Natural Resources & Mining Professional & Business Services
Educational Services Leisure & Hospitality
Health Care & Social Assistance Wholesale Trade
Transportation & Warehousing Manufacturing
Financial Activities Other Services
Retail Trade Construction
Utilities State Government
Local Government Information
Federal Government
Share of Total Jobs
However, employment is still down more than 10% in information, manufacturing, and construction.
13 Source: Bureau of Labor Statistics
U.S. NONFARM EMPLOYMENT SINCE THE RECESSION STARTED (DEC. 2007 TO JULY 2012) Seasonally Adjusted
0.6%
2.5%
12.8%
2.1%
10.2%
0.4%
13.5%
3.8%
4.0%
10.6%
3.3%
11.1%
5.8%
4.2%
2.0%
9.0%
4.1%
13.6%
11.9%
9.1%
2.1%
0.5%
-0.3%
-0.6%
-1.7%
-2.5%
-2.9%
-3.8%
-5.2%
-5.9%
-6.6%
-12.5%
-12.8%
-26.4%
Natural Resources & Mining Educational Services
Health Care & Social Assistance Federal Government Leisure & Hospitality
Utilities Professional & Business Services
State Government Other Services
Local Government Transportation & Warehousing
Retail Trade Financial Activities
Wholesale Trade Information
Manufacturing Construction
Percent Change Share of Total Jobs
Although unemployment rates have fallen, rates remain high across much of the country.
14 Source: Bureau of Labor Statistics
JULY 2012 UNEMPLOYMENT RATE Seasonally Adjusted
United States
8.3%
Over 10%
9 to 10%
8 to 9%
7 to 8%
5 to 7%
Less than 5%
20
30
40
50
60
70
80
90
100
110
120
Aug '02 Aug '04 Aug '06 Aug '08 Aug '10 Aug '12
60.6 August 2012
Consumer confidence has fallen in recent months.
15 Source: The Conference Board, Inc.
CONSUMER CONFIDENCE INDEX Seasonally Adjusted
Slower employment growth and lower confidence have contributed to slower consumer spending growth.
16 Source: Federal Reserve Bank of St. Louis
REAL RETAIL & FOOD SERVICE SALES Index 100 = July 2002, Seasonally Adjusted
United States 2.7%
July 2012 Year-over-Year
95
97
99
101
103
105
107
109
111
113
Jul '02 Jul '04 Jul '06 Jul '08 Jul '10 Jul '12
95
100
105
110
115
120
125
0%
2%
4%
6%
8%
10%
Jul '02 Jul '04 Jul '06 Jul '08 Jul '10 Jul '12
Over the last few months personal income gains have outpaced growth in consumer spending leading to a higher savings rate.
17 Source: Bureau of Economic Analysis
REAL PERSONAL INCOME & SPENDING Seasonally Adjusted Annual Rate
Index 100 = July 2002
Disposable Personal Income (left)
Personal Consumption Expenditures (left)
Savings Rate (right) Seasonally Adjusted
Annual Rate
July 2012 Year-over-Year
2.0% 2.0%
July 2012 4.2%
30
35
40
45
50
55
60
65
Aug '02 Aug '04 Aug '06 Aug '08 Aug '10 Aug '12
The manufacturing sector continues to expand in the Tenth District.
18 Source: Institute for Supply Management & Federal Reserve Banks of Kansas City
MANUFACTURING ACTIVITY Diffusion Index, Seasonally Adjusted, Month-over-Month
Note: Federal Reserve Surveys are computed on an ISM Basis (50 = no change)
Kansas City District 54.2 August United States (ISM) 49.8 July
Expanding
Contracting 50
0
5
10
15
20
25
30
35
Production Volume of new orders
Number of employees
Capital expenditures
New orders for exports
2011Q4
2012Q1
2012Q2
Average July & August 2012
Manufacturers in the Tenth District expect higher levels of activity over the next six months.
19 Source: Institute for Supply Management
TENTH DISTRICT MANUFACTURING EXPECTATIONS Diffusion Index, Seasonally Adjusted, Six Months Ahead
More than 10%
5 to 10%
0 to 5%
-5 to 0%
-10 to -5%
-25 to -10%
Less than -25%
Home prices fell sharply over the last few years in many parts of the country.
20 Source: Federal Housing Finance Agency
CHANGE IN HOME PRICES Peak (2007Q2) to Current (2012Q2) FHFA Purchase-Only Index
United States
-17.6%
However, home prices have stabilized over the past year.
21 Source: Federal Housing Finance Agency
United States
3.0%
CHANGE IN HOME PRICES Year-over-Year, 2012Q2 FHFA Purchase-Only Index
More than 4%
2 to 4%
0 to 2%
-2 to 0%
-4 to -2%
-7.6 to -4%
0
20
40
60
80
100
120
140
160
180
Jul '02 Jul '04 Jul '06 Jul '08 Jul '10 Jul '12
VALUE OF RESIDENTIAL CONSTRUCTION CONTRACTS Index 100 = July 2002, Seasonally Adjusted, Three-Month Moving Average
Residential construction activity is picking up but remains well below pre-recession levels.
22 Source: McGraw Hill/F.W. Dodge
July Year-to-Date over the Same Period Last Year
United States
24.6%
Residential construction activity has increased in almost every state over the
past year.
23 Source: McGraw Hill/F.W.Dodge
More than 40%
30 to 40%
20 to 30%
10 to 20%
0 to 10%
-15 to 0%
VALUE OF RESIDENTIAL CONSTRUCTION Percent Change, Cumulative Year-to-Date January through July 2012
United States
24.6%
$15
$20
$25
$30
$35
$40
Jul '02 Jul '04 Jul '06 Jul '08 Jul '10 Jul '12
Non-residential construction activity has struggled to recover from the recent recession.
24 Source: McGraw Hill/F.W. Dodge
VALUE OF NON-RESIDENTIAL & NON-BUILDING CONSTRUCTION Seasonally Adjusted, Three-Month Moving Average
United States, Billions
United States
-5.4%
July Year-to-Date over the Same Period Last Year
Improvements in non-residential construction activity have varied across
the country.
25 Source: McGraw Hill/F.W.Dodge
More than 50%
25 to 50%
0 to 25%
-25 to 0%
-50 to -25%
-71.9 to -50%
VALUE OF NON-RESIDENTIAL & NON-BUILDING CONSTRUCTION Percent Change, Cumulative Year-to-Date January through July 2012
United States
-5.4%
0
200
400
600
800
1000
1200
1400
1600
1800
Aug '90 Aug '95 Aug '00 Aug '05 Aug '10
Drilling activity is responding to prices with oil drilling up and natural gas drilling down.
26 Source: U.S. Department of Energy, Energy Information Administration & Baker Hughes
Crude Oil
Natural Gas
U.S. ACTIVE DRILLING RIG COUNT
-2%
0%
2%
4%
6%
Advanced Economies
Euro Area Germany France Italy Spain UK
2010
2011
2012 Forecast
2013 Forecast
27 Source: International Monetary Fund (IMF)
Growth has slowed sharply in Europe this year and is expected to remain slow in 2013.
WORLD ECONOMIC OUTLOOK PROJECTIONS Percent Change
'11 '12
Exports to Europe make up about 18% of total U.S. exports.
28
U.S. EXPORTS BY TRADE PARTNER Billions
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
Total Trade 7.0% SHARE* All Other 8.2 38.1% Japan 7.0 4.5 Mexico 11.3 13.3 Canada 5.9 19.0 China 6.7 7.0 Eurozone 2.9 18.1
Source: International Trade Administration & WiserTrade *2011 Shares Note: The Eurozone includes the 27 European Union member countries
JUNE 2012
YEAR-TO-DATE Percent Change
YTD through June
-2%
0%
2%
4%
6%
8%
10%
12%
World Emerging & Developing Countries
China India Brazil Mexico Russia
2010 2011 2012 Forecast 2013 Forecast
29 Source: International Monetary Fund (IMF)
WORLD ECONOMIC OUTLOOK PROJECTIONS Percent Change
Growth has also slowed somewhat among emerging and developing countries, but growth is expected to pick up next year.
0%
20%
40%
60%
80%
100%
120%
0%
20%
40%
60%
80%
100%
120%
1940 1950 1960 1970 1980 1990 2000 2010 2020
U.S. DEBT TO GDP RATIO
U.S. Federal government debt levels have increased significantly over the last few years.
30 Source: Bureau of Economic Analysis & Congressional Budget Office (August 2012 Projections)
Alternative Scenario
Baseline (Current Law)
Under current law, U.S. deficits are expected to fall sharply over the next
several years.
31
U.S. DEFICIT TO GDP RATIO
Source: Congressional Budget Office (August 2012 Projections)
0%
1%
2%
3%
4%
5%
6%
7%
8%
2012 2013 2014 2015 2016 2017 2018 2019 2020
Debt Service Payments
Spending Cuts
Extended Tax Policies
Baseline (Current Law)
CBO Projections
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
2007 2008 2009 2010 2011 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2012 2013
32 Source: Bureau of Economic Analysis & Congressional Budget Office (August 2012 Projections)
GDP & THE “FISCAL CLIFF” Percent Change (Annualized Quarterly Rates)
Baseline (Current Law)
CBO Projections 2012Q2 to 2013Q4
Under current law, several tax increases and spending cuts could lead to a slowdown in economic growth next year.
Alison Felix [email protected]
United States Economic Update
This presentation will be available at
http://www.kc.frb.org/denver/