U.S. Economic Update

May 23, 2018

Nate Kauffman Omaha Branch Executive and Bank of Kansas City

The views expressed are those of the speaker and do not necessarily reflect the OF KANSAS CITY opinions of the Federal Reserve Bank of Kansas City or the Federal Reserve System. The Federal Reserve System consists of 12 Regional Reserve Banks and the Board of Governors.

FEDERAL RESERVE BANK OF KANSAS CITY The Board of Governors has gone through recent changes, with vacancies still remaining.

Jerome H. Powell Randal K. Quarles Chairman Vice Chairman for Supervision Governor Term Ending: January 31, 2028 Term Ending: October 13, 2021 Term Ending: January 31, 2026

Marvin Goodfriend Richard Clarida Open Seat Nominee – Governor Nominee – Nominee - Governor Vice Chairman FEDERAL RESERVE BANK OF KANSAS CITY Outlook Themes

• The U.S. economy has gained momentum in recent years alongside a strengthening global economy, and despite concerns about trade.

• Alongside a strong U.S. economy and some signs of inflationary pressures picking up, the Fed has continued to raise rates gradually.

• Despite modest recent increases in longer-term rates, the yield curve has flattened over the past year.

FEDERAL RESERVE BANK OF KANSAS CITY The U.S. economy has continued to expand, and at a slightly faster pace than a year ago.

U.S. Real GDP Growth

Percent change from previous year, SAAR 6 6 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 -2 2010 2011 2012 2013 2014 2015 2016 2017 2018

Note: 2018 Q2-4 are forecasts from Macroeconomic Advsiors as of May 3. FEDERAL RESERVE BANK OF KANSAS CITY Sources: BEA, Macroeconomic Advisors and Haver Analytics. Personal consumption has remained a primary component of growth, and investment has picked up.

U.S. Real GDP Growth by Component

Percent change from previous year, SAAR 8 8 Personal Consumption Net Exports 6 Domestic Investment Government 6 Real GDP Growth 4 4

2 2

0 0

-2 -2

-4 -4 2014 2015 2016 2017 2018

Sources: BEA and Haver Analytics. FEDERAL RESERVE BANK OF KANSAS CITY The global economy has also improved, particularly in Europe, Japan, and commodity-dependent countries.

Real GDP Growth

Percent change from previous year 12 12 2001-2007 Annual Average 10 10 2015 8 2016 8 6 2017 6 4 2018 Forecast 4 2 2 0 0 -2 -2 -4 -4 -6 -6 U.S. U.K. Euro Area Japan China Brazil

Sources: IMF, Blue Chip Forecasts, and Haver Analytics. FEDERAL RESERVE BANK OF KANSAS CITY A number of regional economic indicators have reached or exceeded pre-recession highs.

Manufacturing Activity FHFA House Price Index

Index Index, Q1:2007 = 100 65 65 125 125 60 60 120 Omaha 120 115 (Left Scale) 115 55 55 110 U.S. (Right 110 Scale) 50 50 105 105 45 45 100 100 95 95 40 40 ISM 90 90 35 KC Fed 35 85 85 30 30 80 80 2007 2009 2011 2013 2015 2017 2007 2009 2011 2013 2015 2017

Sources: ISM, FRB KC, FHFA, Haver Analytics. FEDERAL RESERVE BANK OF KANSAS CITY In Nebraska, economic growth has slowed, possibly due, in part, to tightness in labor markets.

Nebraska GDP Growth Employment Growth Percent change from previous year, SAAR Percent change from previous year, SA 8 8 3 3 7 7 6 6 2 2 5 5 1 1 4 4 3 3 0 0 2 2 -1 -1 1 1 Nebraska 0 0 -2 -2 United States -1 -1 -3 -3 -2 -2 -3 -3 -4 -4 2010 2012 2014 2016 2010 2012 2014 2016 2018

Source: BEA, BLS, Haver Analytics. FEDERAL RESERVE BANK OF KANSAS CITY U.S. labor markets have also continued to strengthen.

U.S. Labor Market U.S. Unemployment Rate Conditions Index Percent Positive = Above Long Run Average 20 20 2 2

1 1 16 16 0 0

12 12 -1 -1

8 8 -2 -2 -3 Activity -3 4 Headline Rate 4 -4 Momentum -4 U6 Rate FOMC Median Projection 0 0 -5 -5 2007 2010 2013 2016 2019 2007 2010 2013 2016

Sources: BLS, FRB KC, and Haver Analytics. FEDERAL RESERVE BANK OF KANSAS CITY Inflation has been subdued in recent years, but has ticked up recently.

U.S. Inflation Inflation Expectations

Percent Percent 5 5 3.5 3.5 Headline PCE 4 Core PCE 4 3.0 3.0 FOMC Median Projection 3 3 2.5 2.5 2.0 2.0 2 2 1.5 1.5 1 1 1.0 1.0 0 0 0.5 5-Year, 5-Year 0.5 -1 -1 Forward Expectations 0.0 0.0 -2 -2 2007 2010 2013 2016 2019

Sources: BLS, FRB STL, Board of Governors, and Haver Analytics. FEDERAL RESERVE BANK OF KANSAS CITY The Fed has begun to raise rates, gradually. But long-run expectations have been revised lower.

Appropriate Pace of Policy Firming Target Rate at Year-End Percent 4.0 4.0 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 Effective Fed Funds Rate 0.5 2015 FOMC Projection 0.5 0.0 2018 FOMC Projection 0.0 2015 2016 2017 2018 2019 2020 LR-15 LR-18

Sources: Federal Reserve Board, Summary of Economic Projections, March 2015 and FEDERAL RESERVE BANK OF KANSAS CITY March 2018. With momentum in the economy, the Fed has begun to (also gradually) reduce the size of its balance sheet.

Federal Reserve Balance Sheet

Dollars (trillions) Dollars (trillions) Dollars (trillions) 5.0 5.0 4.50 4.5 Other Assets 4.5 Mortgage-Backed Securities 4.0 4.0 US Treasury Securities 4.45 3.5 3.5 3.0 3.0 2.5 2.5 4.40 2.0 2.0 1.5 1.5 4.35 1.0 1.0 0.5 0.5 0.0 0.0 4.30

FEDERAL RESERVE BANK OF KANSAS CITY Source: Federal Reserve Board and Haver Analytics. Longer-term rates have inched higher, but spreads have narrowed.

Spread Btw. 10yr and Interest Rates 2yr Treasury Percentage points 6.0 Percent 6.0 3.0 Fed Funds Target 5.0 5.0 2.5 2-Year Treasury May 22, 2018 4.0 10-Year Treasury 4.0 2.0

3.0 3.0 1.5

2.0 2.0 1.0

1.0 1.0 0.5

0.0 0.0 0.0

Sources: Federal Reserve Board, Haver Analytics. FEDERAL RESERVE BANK OF KANSAS CITY Equity markets have also been a focus of recent concern.

Shiller Cyclically Adjusted S&P CBOE Market Volatility Index Price to Earnings Ratio Index Ratio 70 70 50 50

60 60 45 45 40 40 50 50 35 35 40 40 30 30 30 30 25 25 20 20 20 20 10 10 15 15 0 0 10 10 2007 2010 2013 2016 2000 2003 2006 2009 2012 2015 2018

Sources: Wall Street Journal, Robert Shiller, Haver Analytics. FEDERAL RESERVE BANK OF KANSAS CITY Concluding Remarks

• The U.S. economy appears well-positioned for further growth despite some risks.

• Regionally, growth in Omaha and Lincoln has mirrored the nation. The outlook is less optimistic in rural areas.

• With a strengthening economy and inflation closer to the 2% target, the Fed has maintained a gradual pace of policy normalization.

FEDERAL RESERVE BANK OF KANSAS CITY Questions?

Nate Kauffman Economist and Omaha Branch Executive Federal Reserve Bank of Kansas City Email: [email protected] Website: http://www.kansascityfed.org/omaha/

FEDERAL RESERVE BANK OF KANSAS CITY