BANK OF KANSAS CITY U.S. and Oklahoma Economic Outlook in the Midst of COVID-19 and Low Oil Prices

Chickasha Rotary Club August 20, 2020

Chad Wilkerson Oklahoma City Branch Executive & Economist *The views expressed herein are those of the presenter only and do not necessarily reflect the views of the of Kansas City or the Federal Reserve System. FEDERAL RESERVE BANK OF KANSAS CITY Structure & Functions of the Federal Reserve

The “Fed” consists of three main entities: Primary responsibility areas: • Board of Governors: 7 members appointed by U.S. President • Monetary policy • Federal Reserve Banks: 12 total; semi-independent by design • Bank regulation • Federal Open Market Committee: 19 members; 12 voting • Financial services

2 FEDERAL RESERVE BANK OF KANSAS CITY The Federal Reserve’s Role in Monetary Policy • Dual Mandate from U.S. Congress: 1) Maximum employment 2) Price stability

• Federal Open Market Committee (FOMC): Board of Governors Reserve Bank Presidents • Jerome H. Powell, Chairman • John C. Williams, New York, Vice Chairman • Richard H. Clarida, Vice Chairman • Patrick T. Harker, Philadelphia • Randal K. Quarles, Vice Chairman of Supervision • Robert S. Kaplan, Dallas • • , Minneapolis • Michelle W. Bowman • Loretta J. Mester, Cleveland • Open • Thomas I. Barkin, Richmond • Open • Raphael W. Bostic, Atlanta • Mary C. Daly, • Charles L. Evans, • James Bullard, St. Louis • Esther L. George, Kansas City • Eric Rosengren, Boston

3 *Permanent voters in bold; 2020 rotating voters in red; 2021 rotating voters in blue FEDERAL RESERVE BANK OF KANSAS CITY The Oklahoma City Branch of the Federal Reserve Bank of Kansas City www.kansascityfed.org/oklahomacity

• Functions and purposes ~ 50 staff • Research on U.S. and Oklahoma economies; energy sector and business survey focus • Examinations of Oklahoma financial institutions (~45 banks, ~175 holding cos.) • Risk analysis and IT development for bank exams; exam assistance for other Fed offices • Community development programming for low and moderate income groups, workforce focus • Economic education and public outreach programming

• 2020 OKC Fed Branch Board of Directors • Tina Patel (chair), Co-Owner & CFO, Promise Hotels, Tulsa • Walt Duncan, President, Duncan Oil Properties, Oklahoma City • Susan Plumb, Chair & CEO, Bank of Cherokee County, Tahlequah • Brady Sidwell, Principal, Sidwell Strategies, Enid • Chris Turner, President & CFO, First State Bank, Oklahoma City • Katrina Washington, Owner/Broker, Stratos Realty, Oklahoma City • Dana Weber, Chair & CEO, Webco Industries, Sand Springs

4 FEDERAL RESERVE BANK OF KANSAS CITY 2020 is the Oklahoma City Branch’s Centennial!

• Our branch opened August 2, 1920, as the 3rd branch of the Kansas City Fed (Omaha 1917; Denver 1919), just 13 years after Oklahoma became a state

• Despite our newness as a state, an Oklahoman was one of the founders of the Fed in 1913—Senator Robert L. Owen, Chairman of the Banking Committee

• The branch’s functions have evolved along with the economy and financial system, but we remain Oklahoma’s connection to the nation’s central bank

• For more information about our centennial, go to: https://www.kansascityfed.org/oklahomacity/oklahomacitybranchcentennial

5 FEDERAL RESERVE BANK OF KANSAS CITY U.S. and Oklahoma Economic Summary

• Since March, the spread of COVID-19 and the resulting caution and shutdowns have presented sizable challenges for the U.S. economy

• The Federal Reserve has acted swiftly and many indicators have begun to recover, but the summer surge in COVID cases added uncertainty

• Oklahoma’s economy was already slowing in late 2019 and early 2020, due largely to difficulties in the state’s important energy sector

• COVID initially spread less quickly here, PPP takeup was strong, and some indicators were normalizing by June but have since pulled back

• The state’s economic and energy sector outlooks continue to depend on how the virus evolves and affects consumer and business activity

6 FEDERAL RESERVE BANK OF KANSAS CITY June FOMC: “The virus and the measures taken to protect public health have induced…a surge in job losses.”

U.S. Rate

Percent 16 16 Current (July 2020): 10.2% 14 U.S. unemployment rate 14 Range 12 12 Median June FOMC Forecast 10 10 8 8 6 6 4 4 2 2 0 0 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Longer Run

7 Note: Data and FOMC projections are for year-end. Sources: U.S. Bureau of Labor Statistics, FOMC FEDERAL RESERVE BANK OF KANSAS CITY June FOMC: “The ongoing public health crisis will weigh heavily on economic activity… in the near term.”

Change in Real GDP Percent change Percent change 10 10 8 Current (Q2 2020): -32.9% 8 6 6 4 4 2 2 0 0 -2 -2 -4 Real GDP -4 -6 -6 Range -8 -8 -10 Median -10 -12 -12 Longer 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Run

8 Note: Data and FOMC projections are for year-end. Sources: Bureau of Economic Analysis, FOMC FEDERAL RESERVE BANK OF KANSAS CITY June FOMC: “Weaker demand and significantly lower oil prices are holding down consumer price inflation.”

PCE Inflation Index Percent 5 5 PCE Inflation Current Overall PCE (June 2020): 0.8% 4 Range Current Core PCE (June 2020): 0.9% 4 Median 3 3 June FOMC Forecast 2 2

1 1

0 0

-1 -1 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Longer Run 9 Note: Data and FOMC projections are for year-end. Sources: Bureau of Economic Analysis, FOMC FEDERAL RESERVE BANK OF KANSAS CITY June FOMC: “the [FOMC] decided to maintain this target range until…the economy has weathered recent events.”

Federal Funds Rate Year-End Target Percent 8 8 Fed Funds Rate Current Target: 0 - 0.25% 7 Range 7 6 Median 6 5 5 4 June FOMC Forecast 4 3 3 2 2 1 1 0 0 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Longer Run

10 Note: Data and FOMC projections are for year-end. Sources: Bureau of Economic Analysis, FOMC FEDERAL RESERVE BANK OF KANSAS CITY June FOMC: “To support the flow of credit to households and businesses…[the Fed] will increase its holdings.”

Federal Reserve Balance Sheet $ Trillion $ Trillion 8 8 Assets 6 Misc. assets 6 Short term, targeted, MBS & agency debt 4 and rescue lending MBS & Agency debt 4 2 Treasury securities 2 and other assets 0 0 Currency -2 Reserves -2 -4 -4 Other (repurchase -6 agreements, etc.) -6 Liabilities -8 -8 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

11 Source: Federal Reserve Board FEDERAL RESERVE BANK OF KANSAS CITY The Federal Reserve has acted swiftly and forcefully

Monetary Policy: • Cut policy rate to near zero Actions to Encourage Bank Lending: • Provided forward guidance • Dropped reserve requirements to zero • Temporary adjustment to regulations Actions to Improve Market Functioning: • Open Market Purchases Actions to Support the Flow of Credit: • Eased access to • PPP Loan Facility (PPPLF) • Credit Facility (PDCF) • Term Asset-Backed Security Loan • Money Market Mutual Fund Liquidity Facility (TALF) Facility (MMLF) • Corporate Credit Facilities (CCF) • Commercial Paper Funding Facility • Municipal Liquidity Facility (MLF) (CPFF) • Main Street Lending Facility • Expanded Foreign Central Bank Swap Lines

12 FEDERAL RESERVE BANK OF KANSAS CITY COVID-19 initially spread much less in Oklahoma, but then new cases outpaced the U.S., and still remain high Confirmed Cases Number of New Cases % of Pop. % of Pop. # 7-day Average # 1.80 1.80 100,000 1,250 U.S.: 1.66% Oklahoma, right 1.50 1.50 80,000 1,000 1.20 1.20 60,000 U.S., left 750 0.90 0.90 40,000 500 0.60 0.60

0.30 0.30 20,000 250 OK: 1.25% 0.00 0.00 0 0

13 Sources: The COVID Tracking Project, Authors’ calculations FEDERAL RESERVE BANK OF KANSAS CITY Through Aug. 18, the metros had the biggest outbreaks of cases, but rural counties have had casualties, too

Cases by County, Deaths by County Percent of Population

14 Source: Oklahoma State Department of Health FEDERAL RESERVE BANK OF KANSAS CITY 7+ years of U.S. and Oklahoma job growth were lost in March and April, but May and June showed some gains

Nonfarm Payroll Employment Growth Index, Jan. 1, 2010=100 125 125 U.S. 120 Oklahoma 120 OKC MSA 115 Tulsa MSA 115 Grady County 110 110

105 105

100 100

95 95

90 90 2010 2012 2014 2016 2018 2020

15 Sources: U.S. Bureau of Labor Statistics, NBER recession shading FEDERAL RESERVE BANK OF KANSAS CITY Oklahoma’s year-over-year drop in employment wasn’t as bad as some states, but still down more than 5.5% Nonfarm Payroll Employment Growth June 2020

Percent change, y/y

16 Source: U.S. Bureau of Labor Statistics FEDERAL RESERVE BANK OF KANSAS CITY Oklahoma mining job losses far outweighed those in the U.S. in June, but construction cuts were less Job Growth by Industry June 2020 Percent change, year-over-year 10 10

0 0

-10 -10

-20 -20 U.S. OK -30 OKC -30 Tulsa -40 -40 Total Fed Fin. Act. Transp. Trade State & Edc. & Constr. Mfg. Prof. & Leis. & Mining Govt. Local Health Bus. Hosp. Govt. Services

17 Sources: U.S. Bureau of Labor Statistics/Haver Analytics FEDERAL RESERVE BANK OF KANSAS CITY OK unemployment dropped to 6.6% and Grady County fell to 6% in June, while the U.S. rate was 10.2% in July Unemployment Rates Seasonally Adjusted Percent 16 16 U.S. 14 Oklahoma 14 Tulsa MSA 12 OKC MSA 12 10 Grady County 10 8 8 6 6 4 4 2 2 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

18 Sources: U.S. Bureau of Labor Statistics, NBER recession shading FEDERAL RESERVE BANK OF KANSAS CITY In June, unemployment remained elevated across most of the state compared to pre-COVID County Unemployment Rates Seasonally Adjusted

19 Sources: U.S. Bureau of Labor Statistics/Haver Analytics FEDERAL RESERVE BANK OF KANSAS CITY New and continuing state UI claims were very high through mid-June, but declined some in July & August Weekly UI Claims Ths, sa Through Week Ending August 8, 2020 Ths, sa 200 200 Continuing claims 180 180 Initial claims 160 160 140 140 120 120 100 100 80 80 60 60 40 40 20 20 0 0 2008 2010 2012 2014 2016 2018 2020

20 Source: U.S. Department of Labor FEDERAL RESERVE BANK OF KANSAS CITY Foot traffic at Oklahoma businesses rose steadily through mid-June, but has evened out in July & August

Google Mobility Data Seated Diners at Restaurants 7-day Average Index, 0 = Jan 3-Feb 6, 2020 Percent change, year-over-year 0.2 OK Retail & Recreation 0.2 20 20 OK Workplaces 0.1 U.S. Retail & Recreation 0.1 0 0 U.S. Workplaces 0.0 0.0 -20 -20 -0.1 -0.1 -40 -40 -0.2 -0.2 -60 -60 -0.3 -0.3 -80 -80 U.S. -0.4 -0.4 -100 -100 Oklahoma -0.5 -0.5 -120 -120 1-Mar 1-Apr 1-May 1-Jun 1-Jul 1-Aug 1-Mar 1-Apr 1-May 1-Jun 1-Jul 1-Aug

21 Sources: Google Mobility Data,Track the Recovery, Authors’ calculations FEDERAL RESERVE BANK OF KANSAS CITY Consumer spending in some segments has closely resembled the nation, and exceeded it in others

Oklahoma vs. U.S. Consumer Spending

% chg % chg

100 OK: Grocery and food 100 OK: Accommodation and food service U.S.: Grocery and food U.S.: Accommodation and food service OK: Transportation OK: Healthcare U.S.: Transportation U.S.: Healthcare OK: Arts and entertainment OK: General merchandise 50 U.S.: Arts and entertainment 50 U.S.: General merchandise OK: Total U.S.: Total 0 0

-50 -50

-100 -100 1-Feb 1-Apr 1-Jun 1-Aug 1-Feb 1-Apr 1-Jun 1-Aug

22 Sources: Affinity Solutions, Track the Recovery, Authors’ calculations FEDERAL RESERVE BANK OF KANSAS CITY Agricultural commodity prices remain lower than at the beginning of the year, especially for livestock Commodity Prices

Index (Jan 1, 2020=100) Index (Jan 1, 2020=100) 110 110 100 100 90 90 80 80 70 70 60 60 50 50 40 40 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Corn Soybeans Live Cattle Hogs Wheat Ethanol

23 Sources: CME, WSJ, Haver Analytics FEDERAL RESERVE BANK OF KANSAS CITY Agricultural incomes in the state continued to decline through Q2 2020, but land values have held up Oklahoma Farm Income and Farmland Values Diffusion Index Percent change, year-over-year 200 20 180 15 160 10 140 120 5 100 0 80 -5 60 -10 40 Farm Income, left 20 -15 Farmland Value, right Expectations 0 -20 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

24 Sources: FRBKC Ag Credit Survey FEDERAL RESERVE BANK OF KANSAS CITY Oil prices have rebounded somewhat, but remain below profitable drilling levels for most regional firms Oil & Natural Gas Profitability and Prices Natural gas prices ($/mmbtu) Oil prices ($/barrel) 11 110 Henry Hub, left 10 Natural Gas: Avg. Profitable Price, left 100 9 WTI, right 90 8 Oil: Avg. Profitable Price, right 80 7 70 6 60 5 50 4 40 3 30 2 20 1 10 0 0 2014 2015 2016 2017 2018 2019 2020

25 Sources: EIA, FRBKC Energy Survey FEDERAL RESERVE BANK OF KANSAS CITY Rig counts in energy states have decreased dramatically, nowhere moreso than Oklahoma Active Drilling Rig Count, Top 8 Oil- and Gas-Producing States Percent change, year-over-year 20 20

0 0

-20 -20

-40 -40

-60 -60 February 28, 2020 -80 -80 August 14, 2020 -100 -100 U.S. Oklahoma Colorado North Texas Louisiana New Dakota Mexico

26 Source: Baker Hughes/Haver Analytics FEDERAL RESERVE BANK OF KANSAS CITY The KC Fed’s quarterly energy survey, released July 10, showed another sharp drop, but expected stabilization Kansas City Fed Energy Indexes Index, vs. a year ago 80 80 60 60 40 Expectations 40 20 20 0 0 -20 -20 -40 -40 -60 Drilling/Business Activity -60 -80 Number of Employees -80 Access to Credit -100 -100 Q1-14 Q1-15 Q1-16 Q1-17 Q1-18 Q1-19 Q1-20

27 Source: FRBKC Energy Survey FEDERAL RESERVE BANK OF KANSAS CITY Conclusions

• Since March, the spread of COVID-19 and the resulting caution and shutdowns have presented sizable challenges for the U.S. economy

• The Federal Reserve has acted swiftly and many indicators have begun to recover, but the summer surge in COVID cases added uncertainty

• Oklahoma’s economy was already slowing in late 2019 and early 2020, due largely to difficulties in the state’s important energy sector

• COVID initially spread less quickly here, PPP takeup was strong, and some indicators were normalizing by June but have since pulled back

• The state’s economic and energy sector outlooks continue to depend on how the virus evolves and affects consumer and business activity

28 FEDERAL RESERVE BANK OF KANSAS CITY

Questions?

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