BANK OF KANSAS CITY U.S. and Kansas Economic Update

Dodge City Economic Forum August 9, 2019

Chad Wilkerson Vice President and Oklahoma City Branch Executive *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 • James Bullard, St. Louis • Randal K. Quarles, Vice Chairman of Supervision • Charles L. Evans, Chicago • • Esther L. George, Kansas City • Michelle W. Bowman • Eric Rosengren, Boston • Open • Patrick T. Harker, Philadelphia • Open • Robert S. Kaplan, Dallas • , Minneapolis • Loretta J. Mester, Cleveland • Thomas I. Barkin, Richmond • Raphael W. Bostic, Atlanta • Mary C. Daly, San Francisco

3 *Permanent voters in bold; 2019 rotating voters in red; 2020 rotating voters in blue FEDERAL RESERVE BANK OF KANSAS CITY

U.S. Economic Outlook and Monetary Policy

4 FEDERAL RESERVE BANK OF KANSAS CITY FOMC: “Although growth of household spending has picked up…business fixed investment has been soft.” Contributions to Percent Change in Real GDP Percent change from the previous period, SAAR 10 14 Q1 2018 8.8 7.9 8 Q2 2018 12 Q1 2019 5.8 10 6 Q2 2019 5.0 4.0 4.3 4.4 4.1 8 4 3.5 3.1 2.9 2.5 2.6 2.1 1.7 6 1.1 1.9 2 0.8 0.6 0.3 0.1 4 0 2 -2 -1.0 -0.6 -1.5 -1.5 0 -4 -3.7 -2 -6 -5.3 -5.2 -4 -8 -6 Total GDP Consumer Residential Business Exports Imports Government spending investment investment spending 5 Source: U.S. Bureau of Economic Analysis FEDERAL RESERVE BANK OF KANSAS CITY FOMC: “the labor market remains strong and… economic activity has been rising at a moderate rate.”

U.S. Payroll Employment and Business Indexes Change from previous month, thousands Index 600 65

400 60

200 55

0 50

-200 45 Payroll Employment (left axis) -400 ISM Manufacturing Index (right axis) 40 ISM Non-Manufacturing Index (right axis) -600 35 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 6 Sources: Institute for Supply Management, Bureau of Labor Statistics FEDERAL RESERVE BANK OF KANSAS CITY FOMC: “The unemployment rate has remained low.”

U.S. Unemployment Rate, Seasonally Adjusted Percent 12 12 U.S. unemployment rate Current (July 2019): 3.7% 10 Range 10 8 Median 8 June FOMC Forecast 6 6

4 4

2 2

0 0 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Longer Run 7 Sources: U.S. Bureau of Labor Statistics, FOMC FEDERAL RESERVE BANK OF KANSAS CITY FOMC: “Overall inflation and inflation for items other than food and energy are running below 2%”

PCE Inflation Index Percent 5 5 PCE Inflation Current Overall PCE (June 2019): 1.4% 4 Range Current Core PCE (June 2019): 1.6% 4 Median June FOMC Forecast 3 3

2 2

1 1

0 0

-1 -1 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Longer Run 8 Sources: U.S. Bureau of Labor Statistics, FOMC FEDERAL RESERVE BANK OF KANSAS CITY FOMC: “In light of…global developments…muted inflation …the [FOMC] decided to lower the… rate.”

Federal Funds Rate Year-End Target Percent 8 8 Fed Funds Rate Current Target: 2.00-2.25% 7 Range 7 6 Median 6 5 5 June FOMC Forecast 4 4 3 3 2 2 1 1 0 0 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Longer Run

9 Sources: U.S. Bureau of Labor Statistics, FOMC FEDERAL RESERVE BANK OF KANSAS CITY

From July 31, 2019 FOMC Statement

“In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the to 2 to 2-1/4 percent. This action supports the Committee's view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective…

“Voting against the action were Esther L. George and Eric S. Rosengren, who preferred at this meeting to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent.”

August 2, 2019 Statement by Esther George

“I dissented with the decision to lower the target range for the federal funds rate. In my view, incoming economic data and the outlook for economic activity over the medium term warranted no change in the policy rate. The moderation of economic growth in 2019 is in line with my outlook that calls for a gradual decline to a trend level over the medium term. With moderate growth, record low unemployment, and a benign inflation outlook, maintaining the Committee’s policy settings at 2.25-2.5 percent would have been appropriate, in my view. There are certainly risks to the outlook as the economy faces the crosscurrents emanating from trade policy uncertainty and weaker global activity. Should incoming data point to a weakening economy, I would be prepared to adjust policy consistent with the Federal Reserve’s mandates for maximum sustainable employment and stable prices.”

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Kansas & Dodge City Area Economic Outlook

11 FEDERAL RESERVE BANK OF KANSAS CITY The pace of Kansas employment growth has remained solid in the metro areas, while slower near Dodge City Nonfarm Payroll Employment Growth Percent change, year-over-year 6 6

4 Ford county 4

2 U.S. 2

0 0 KS -2 -2

-4 -4

-6 -6 2011 2012 2013 2014 2015 2016 2017 2018 2019

12 Sources: U.S. Bureau of Labor Statistics, NBER recession shading FEDERAL RESERVE BANK OF KANSAS CITY At the state level, most industries have seen slower growth than the nation the past year Kansas Job Growth by Industry Percent change, year-over-year 8 8 7 U.S. 7 6 6 KS 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 -2 Total Constr. Transp. Mining Fed Leis. & Fin. Act. Edc. & Trade Mfg. State & Prof. & Govt. Hosp. Health Local Bus. Govt. Services

13 Sources: U.S. Bureau of Labor Statistics/Haver Analytics FEDERAL RESERVE BANK OF KANSAS CITY Key industries in southwest Kansas include energy, agriculture, government, and manufacturing

Employment Share by Area and by Industry, 2017

Percent of Total Employment Location Quotient Ford 28 county Ford 28 county U.S. KS KS Industry County area County area Mining 0.8 2.6 N/A 6.8 3.4 N/A 8.8 Agriculture 1.3 3.3 3.4 9.4 2.5 2.5 7.0 State & Local Government 10.0 12.1 11.8 15.3 1.2 1.2 1.5 Manufacturing 6.8 8.8 27.8 9.0 1.3 4.1 1.3 Trade 13.1 13.0 12.8 12.7 1.0 1.0 1.0 Transportation & Utilities 4.2 4.0 3.9 3.4 0.9 0.9 0.8 Construction 5.4 4.8 3.6 3.8 0.9 0.7 0.7 Financial Activities 5.4 5.5 2.6 3.4 1.0 0.5 0.6 Leisure & Hospitality 9.8 8.0 8.8 5.4 0.8 0.9 0.6 Federal Government 2.4 3.0 1.6 1.2 1.2 0.6 0.5 Professional & Business Services 20.9 17.3 10.8 7.1 0.8 0.5 0.3 Education & Health 13.7 12.0 N/A N/A 0.9 N/A N/A Note: Location quotient is the division of local share by national share. Red denotes industries with a higher concentration than the U.S. 28 county area includes southwestern Kansas: Barber, Barton, Clark, Comanche, Edwards, Finney, Ford, Grant, Gray, Greeley, Hamilton, Haskell, Hodgeman, Kearny, Kiowa, Lane, Meade, Morton, Ness, Pawnee, Pratt, Rush, Scott, Seward, Stafford, Stanton, Stevens, and Wichita counties.

14 Source: U.S. Bureau of Economic Analysis FEDERAL RESERVE BANK OF KANSAS CITY District energy activity has slowed over the past 9 months, and expectations have declined KC Fed Energy Indexes Index 80 80 60 60 40 40 20 20 0 0 -20 -20 -40 Drilling/Business Activity -40 Access to Credit Expectations -60 -60 -80 -80 Q1'14 Q3'14 Q1'15 Q3'15 Q1'16 Q3'16 Q1'17 Q3'17 Q1'18 Q3'18 Q1'19 Q3'19

15 Source: Federal Reserve Bank of Kansas City Energy Survey FEDERAL RESERVE BANK OF KANSAS CITY Volatile and marginally profitable oil prices, and low natural gas prices have contributed to slower activity Oil & Natural Gas Profitability and Prices Oil prices ($/barrel) Natural gas prices ($/mmbtu) 120 8 7 100 6 80 5 60 4 3 40 WTI, left 2 20 Oil: Avg. Profitable Price, left Henry Hub, right 1 Natural Gas: Avg. Profitable Price, right 0 0 2014 2015 2016 2017 2018 2019

16 Sources: EIA, Federal Reserve Bank of Kansas City Energy Survey FEDERAL RESERVE BANK OF KANSAS CITY Monthly survey indexes also show that regional factory activity is slowing, in part due to tariff disruptions

Manufacturing June Special Question: Given various tariffs that have been put in place, has your firm or your firm's Composite Indexes suppliers changed their sources of input as a result? Diff. Index Percent 65 65 100 100 Manufacturing 60 60 80 Services 80

55 55 60 60

50 50 40 40

45 KC Fed 45 20 20 ISM 40 40 0 0 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Yes No

17 Note: Fed index shown on a three-month moving average Sources: Federal Reserve Bank of Kansas City Surveys and ISM FEDERAL RESERVE BANK OF KANSAS CITY In agriculture, incomes have continued to decline, but by less than in recent years, and land values have held District Farm Income and Farmland Values Diffusion Index Percent change, year-over-year 200 30 180 160 20 140 10 120 100 0 80 60 -10 Farm Income, left 40 -20 20 Farmland Value, right Expectations 0 -30 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

18 Source: FRBKC Ag Credit Survey FEDERAL RESERVE BANK OF KANSAS CITY Cattle and wheat are down from earlier in the year but are similar to recent years, while corn has finally risen

Agriculture Commodity Prices $/bushel $/cwt 10 300

8 250 200 6 150 4 100 Wheat, left 2 Corn, left Live Cattle, right 50 Feeder Cattle, right 0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

19 Source: WSJ FEDERAL RESERVE BANK OF KANSAS CITY U.S. ag exports to China are concentrated primarily in soybeans, hogs, and dairy

Share of U.S. Ag Exports to China Percent 70% 70% 60% Annual 2016 June 2019 YTD 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% Cattle Hogs Corn Wheat Poultry Soybeans Dairy products

20 Source: USDA FEDERAL RESERVE BANK OF KANSAS CITY Kansas has slightly less soybean production as a share of its production than the nation, and much less hogs

2017 Commodity Production Shares U.S. Kansas

Cattle 4% 13% Hogs 23% 1% 11% 10% 15% Corn 7% Wheat Poultry 57% 24% 16% Soybeans 14% 3% Dairy products 4%

21 Source: WISERTrade, FEDERAL RESERVE BANK OF KANSAS CITY Despite slower state and local economic growth recently, unemployment remains exceptionally low Unemployment Rates Seasonally Adjusted Percent 11 11 10 10 9 9 U.S. 8 8 7 7 6 KS 6 5 5 4 4 3 Ford county 3 2 2 1 1 0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

22 Sources: U.S. Bureau of Labor Statistics, NBER recession shading FEDERAL RESERVE BANK OF KANSAS CITY Unemployment remains especially low across western Kansas Unemployment Rate May 2019

Over 5% 4 to 5% 62.3% of LF 3 to 4% 2 to 3% Under 2%

23 Source: U.S. Bureau of Labor Statistics FEDERAL RESERVE BANK OF KANSAS CITY Summary

• The national economy continues to grow, with low unemployment, but business investment has slowed

• The Fed lowered its target for the federal funds rate by 25 basis points on July 31, with two FOMC members dissenting

• Kansas and SW Kansas job growth has slowed in 2019 with lower commodity prices, but unemployment remains very low

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Questions?

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