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Macroeconomic Outlook for U.S. Agriculture 4:00 – 4:45 p.m. Session Sponsored by Macroeconomic Outlook for U.S. Agriculture December 6, 2018 David Oppedahl Federal Reserve Bank Senior Business Economist 312-322-6122 Of Chicago [email protected] Federal Reserve System How does the Fed affect agriculture? • Interest rates • Price level (inflation) • National income (GDP) • Exchange rates (indirectly) What is the Federal Reserve System? • Twelve District Banks • Board of Governors • Federal Open Market Committee (FOMC) • Functions of the Fed – Monetary policy – Regulator of financial institutions – Provides banking services for U.S. government – Electronic funds transfer & financial services – Protect credit rights of consumers Board of Governors of the Federal Reserve System 1 Jerome H. Powell Richard H. Clarida Chairman Vice Chairman 3 4 5? 6? 7? Randal K. Quarles Lael Brainard Michelle W. Bowman Vacant Vacant Vice Chairman For Supervision Presidents of the Federal Reserve Banks Eric S. Rosengren John C. Williams Patrick T. Harker Loretta J. Mester First District - Boston Second District - New York Third District - Philadelphia Fourth District - Cleveland 5 Thomas I. Barkin Raphael W. Bostic Charles L. Evans James B. Bullard Fifth District - Richmond Sixth District - Atlanta Seventh District - Chicago Eighth District - St. Louis Neel Kashkari Esther George Robert Steven Kaplan Mary C. Daly Ninth District - Minneapolis Tenth District - Kansas City Eleventh District - Dallas Twelfth District - San Francisco Federal Reserve Structure Chairman, Board of Governors Sets agenda Supervises Votes, sets agenda Board of Board of Advises Federal Open Market Governors 5 voting 12 Federal Governors Staff Committee Reserve Bank (FOMC) members Presidents 6 other members Votes Set (within Set Advises limits) Discount Directs Rate Open Market Reserve Operations Requirements Advises Goals of Monetary Policy • Price stability -- low and stable inflation • Low unemployment • Economic growth • Moderate interest rates Chicago Fed National Activity Index shows growth picked up recently 2 (standard deviation from trend growth, Above 3-month moving average) Trend 1 Growth 0 Below -1 Trend Growth -2 -3 -4 -5 1999 '01 '03 '05 '07 '09 '11 '13 '15 '17 Fed’s balance sheet expanded to boost growth and now has started to shrink Assets of the Federal Reserve Billions of dollars 4,500 4,000 3,500 3,000Maiden Lane II & III Term Asset-Backed Securities Loan Facility 2,500 AIG Support 2,000 Central Bank Swaps 1,500 Commercial Paper Facility 1,000 Maiden Lane Securities Held Outright 500 Term Auction Credit 0 2007 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Source: Board of Governors of the Federal Reserve System Recent Monetary Policy Actions • No additional asset purchases after November 2014, while continuing to reinvest assets as they mature. • In October 2017 began to reinvest less than 100% of matured assets to gradually reduce balance sheet. • Once in 2015 & 2016, three times in 2017, and in March, June and September of 2018 raised the targeted range of the Fed Funds Rate by 0.25% points each time • The FOMC will monitor economic conditions to tailor future actions to meet objectives of maximum employment and 2% inflation In September 2018, the FOMC raised the Fed Funds rate target to a range from 2.00% to 2.25% 7 Federal Funds Rate (effective), 6 Yields in percent per annum 5 4 3 2 1 0 1999 '01 '03 '05 '07 '09 '11 '13 '15 '17 Source: Board of Governors of the Federal Reserve System Contributions to real GDP growth of 3.5% in the 3rd quarter of 2018 • Consumption 2.5% • Residential Investment -0.1% • Business Investment 0.4% • Inventories 2.3% • Government 0.4% • Net Exports -1.9% Source: Bureau of Economic Analysis The FOMC consensus outlook has output growth rising above trend this year before easing Real gross domestic product percent change from a year earlier 6 5 4 FOMC 3 2 1 0 -1 -2 -3 -4 -5 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 Sources: Bureau of Economic Analysis and Federal Open Market Committee Food price changes still below core inflation (less food and energy) (Consumer Price Index, percent change from year ago) 8 6 4 2 0 -2 1991 1996 2001 2006 2011 2016 CPI Less Food and Energy CPI for Food Source: U.S. Bureau of Labor Statistics Falling oil prices and lower gas prices boost consumers, yet hinder energy sector (2010 $/barrel) 150 100 50 0 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 Sources: CME Group and U.S. Bureau of Labor Statistics Natural gas prices have moderated Real Natural Gas Price {2010 $/mmbtu} 15 10 5 0 1997 2002 2007 2012 2017 Sources: Natural Gas Intelligence and U.S. Bureau of Labor Statistics Real Cash Crop Prices ($/bushel for Central IL, adjusted by CPI-U for January 2010) 40 30 20 10 0 1976 1981 1986 1991 1996 2001 2006 2011 2016 Corn Soybeans Sources: The Wall Street Journal and U.S. Bureau of Labor Statistics Real USDA Livestock Prices ($/hundredweight, adjusted by CPI-U for January 2010) 250 200 150 100 50 0 1976 1981 1986 1991 1996 2001 2006 2011 2016 Hogs Cattle Sources: USDA, National Agricultural Statistics Service and U.S. Bureau of Labor Statistics The FOMC anticipates that PCE inflation will be near the two percent target from 2018 forward Personal consumption expenditure - chain price index percent change from a year earlier 6 5 4 3 FOMC 2 1 0 -1 -2 1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 Sources: Bureau of Economic Analysis and Federal Open Market Committee Employment increased by over 2.5 million jobs during the past 12 months Total employment percent 6 4 2 0 -2 -4 Percent change from a year earlier -6 Monthly change (saar) -8 1990'91'92'93'94'95'96'97'98'99'00'01'02'03'04'05'06'07'08'09'10'11'12'13'14'15'16'17'18 Source: U.S. Bureau of Labor Statistics Decline in labor force participation rate (civilians, 16-64 years, percent SA) 70 68 66 64 62 60 1999 '01 '03 '05 '07 '09 '11 '13 '15 '17 Source: U.S. Bureau of Labor Statistics Labor participation rate for men had been falling prior to 2010 (percent of civilians, 16-64 years) 80 75 70 65 60 55 50 1991 1996 2001 2006 2011 2016 Men Women Source: U.S. Bureau of Labor Statistics The FOMC forecasts that the unemployment rate will be below the natural rate through 2021 Unemployment rate percent 11 10 9 8 7 6 5 4 3 FOMC 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 Sources: U.S. Bureau of Labor Statistics and Federal Open Market Committee Wages and benefit costs rising at a moderate rate, although may finally be picking up their pace Employment cost index percent change from year ago 8 benefit costs 7 6 5 4 3 2 wages and salaries 1 0 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Source: U.S. Bureau of Labor Statistics Slow productivity growth helps explain why relatively strong employment growth has not translated into higher wages Productivty percent change (20-qtr rate) 5 4 3 2 1 0 -1 1950 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 Source: Bureau of Economic Analysis Poor business investment explains much of the lower productivity levels, but picked up recently Real private nonresidential fixed investment percent 20 10 0 -10 Percent change from a year earlier -20 Quarterly change (saar) -30 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Source: Bureau of Economic Analysis Housing market recovering slowly, stalling recently Housing starts Home mortgage rate (millions of units, 3-month moving average, SAAR) (percent, effective rate for all loans closed) 2.5 9 8 2.0 7 1.5 6 5 1.0 4 0.5 3 1999 '01 '03 '05 '07 '09 '11 '13 '15 '17 1999 '01 '03 '05 '07 '09 '11 '13 '15 '17 Sources: U.S. Census Bureau and Federal Housing Finance Agency U.S. Mortgage Delinquencies (percent, SA, data from the Mortgage Bankers Association) 12 10 8 6 4 2 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 House Price Indexes (expanded data from the Federal Housing Finance Agency) 450 U.S. 400 350 300 Illinois 250 Indiana 200 150 100 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 U.S. tariffs still below the levels of many countries The dollar’s exchange value dipped to boost exports, but has risen in 2018 (Real Broad Trade-Weighted Exchange Value of the US$) {March 1973=100} 120 110 100 90 80 1991 1996 2001 2006 2011 2016 Source: Board of Governors of the Federal Reserve System Real U.S. exports rising again, but more slowly than imports (billions of 2015 dollars, SA) 300 250 200 150 100 50 1992 1996 2000 2004 2008 2012 2016 Exports Imports Sources: Bureau of Economic Analysis and Census Bureau Value of agricultural exports rose in 2018, but expected to be down a bit in 2019 160 140 2019* 120 Exports 100 80 billion $ 60 Imports 40 20 Surplus 0 FY19701975 1980 1985 1990 1995 2000 2005 2010 2015 *USDA projection Source: USDA, Economic Research Service High-value agricultural exports outpaced more variable bulk exports, but both slowed 100 High-value 80 60 40 billion 2016$ Bulk 20 0 1976 1981 1986 1991 1996 2001 2006 2011 2016 Source: USDA, Economic Research Service Personal consumption shares 40% 30% 20% 10% 0% 1950 1960 1970 1980 1990 2000 2010 Food Health Care Source: Bureau of Economic Analysis Impacts on Agriculture •Solid U.S.
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