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

Oklahoma City Economic Forum August 6, 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 Oklahoma City Branch of the Federal Reserve Bank of Kansas City

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

• 2019 OKC Fed Branch Board of Directors • Clint Abernathy (chair), Owner, Abernathy Farms, Inc., Altus • Susan Chapman Plumb, Chair & CEO, Bank of Cherokee County, Tahlequah • Walt Duncan, President, Duncan Oil Properties, Oklahoma City • Tina Patel, Co-Owner & CFO, Promise Hotels, Tulsa • 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

3 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

4 *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

5 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 6 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 7 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

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 8 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 9 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

10 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 KC Fed President 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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Oklahoma & OKC Metro Economic Outlook

12 FEDERAL RESERVE BANK OF KANSAS CITY The pace of Oklahoma—and to a lesser extent OKC metro—job growth has slowed in 2019

Nonfarm Payroll Employment Growth Percent change, year-over-year 4 4 3 3 2 OKC MSA 2 1 1 0 0 -1 -1 U.S. -2 OK -2 -3 -3 -4 -4 -5 -5 -6 -6 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

13 Sources: U.S. Bureau of Labor Statistics, NBER recession shading FEDERAL RESERVE BANK OF KANSAS CITY Indeed, new claims for unemployment insurance in Oklahoma have recently returned to 2015-2016 levels UI Claims Weekly Average Seasonally Adjusted Number Number 700,000 7,000

600,000 6,000 U.S., left 500,000 5,000

400,000 4,000

300,000 3,000 OK, right 200,000 2,000

100,000 1,000

0 0 2004 2006 2008 2010 2012 2014 2016 2018

14 Sources: U.S. Department of Labor, NBER recession shading FEDERAL RESERVE BANK OF KANSAS CITY State sales tax growth has also been negative the past two months, while city receipts have lagged as well Oklahoma and OKC Sales Tax Revenues Percent change, year-over-year 25 25 20 OKC 20 15 15 10 10 5 5 0 0 -5 Oklahoma -5 -10 -10 -15 -15 -20 -20 -25 -25 Jul-09 Jul-11 Jul-13 Jul-15 Jul-17 Jul-19

15 Source: OK Tax Commission FEDERAL RESERVE BANK OF KANSAS CITY The slower state and metro job growth has been driven mainly by job losses in energy and manufacturing Job Growth by Industry June 2019 Percent change, year-over-year 10 10 U.S. 8 8 OK 6 6 OKC MSA 4 4 2 2 0 0 -2 -2 -4 -4 Constr. Transp. Fed Edc. & Fin. Act. Trade Leis. & Prof. & State & Mining Mfg. Govt. Health Hosp. Bus. Local Services Govt.

16 Sources: U.S. Bureau of Labor Statistics/Haver Analytics FEDERAL RESERVE BANK OF KANSAS CITY Oklahoma’s rig count has dropped this year, and regional energy firms expect further slowing ahead Energy Sector Indicators Index Rigs 80 200 60 175 40 150 20 125 0 100 -20 75 -40 50 KC Fed Drilling/Business Activity Index, left -60 25 Oklahoma Rig Count, right -80 0 Q1'14 Q3'14 Q1'15 Q3'15 Q1'16 Q3'16 Q1'17 Q3'17 Q1'18 Q3'18 Q1'19 Q3'19

17 Note: Q3 2019 rig count data shown through July 2019. Source: Federal Reserve Bank of Kansas City Energy Survey FEDERAL RESERVE BANK OF KANSAS CITY Volatile and marginally profitable oil prices, plus 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

18 Sources: EIA, Federal Reserve Bank of Kansas City Energy Survey FEDERAL RESERVE BANK OF KANSAS CITY Even with fewer rigs and workers this year, oil and gas production in the state continues to hit record highs Oklahoma Oil & Gas Rig Count, Employment, and Production Index May-90=100 200 200 175 175 150 150 125 Rig Count 125 100 100 75 75 Employment 50 Production (BOE/day) 50 25 25 0 0 1990 1994 1998 2002 2006 2010 2014 2018 Note: Employment is for total mining and logging, which 19 in Oklahoma is almost completely oil and gas related. Production is shown as a 3-month moving average. Sources: Baker Hughes, U.S. Energy Information Administration FEDERAL RESERVE BANK OF KANSAS CITY Past industries with rapid productivity gains generally shed jobs the following decade, even as output rose Change in output, investment, and employment 10 years after productivity surge Percent change 125 125 100 100 Real capital expenditures 75 Real output 75 50 50 25 25 0 0 -25 Employment -25 -50 -50 -75 -75 Computer Electronic Wireless Utilities Nonstore Travel Empl. Air & electronic & appliance telecom retailers arrangement placement transport product mfg stores carriers & reservation & exec. services search

20 Sources: U.S. Census Bureau, Bureau Economic Analysis, Bureau of Labor Statistics/Haver Analytics, Author's calculations. FEDERAL RESERVE BANK OF KANSAS CITY Oil and gas’s share of Oklahoma’s economy remains high in terms of GDP and income, less so in jobs

Mining Sector Share of Oklahoma Economic Activity Percent 25% 25%

20% 20%

15% 15%

10% GDP 10%

5% Personal 5% Income Employment 0% 0% 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018

21 Sources: U.S. Bureau of Economic Analysis/Haver Analytics FEDERAL RESERVE BANK OF KANSAS CITY Industries’ shares of Oklahoma employment have shifted slightly over the last 10-15 years, but not much Oklahoma Nonfarm Employment Industry Share Q1 2005 Q1 2019 2% Mining 3% 4% 10% 5% 8% 22% Construction 21% Manufacturing Trade Transp. & Util. 15% 14% 10% Business Svcs 10% Edc. & Health 3% Leis. & Hosp. 4% 9% Admin., Waste, & Other 10% 11% 10% 13% Government 14%

22 Sources: U.S. Bureau of Labor Statistics/Haver Analytics FEDERAL RESERVE BANK OF KANSAS CITY Despite slower state and metro economic growth recently, unemployment remains exceptionally low Unemployment Rates Seasonally Adjusted Percent 11 11 10 10 9 U.S. 9 8 OK 8 7 7 6 6 5 OKC MSA 5 4 4 3 3 2 2 1 1 0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

23 Sources: U.S. Bureau of Labor Statistics, NBER recession shading FEDERAL RESERVE BANK OF KANSAS CITY Looking at longer-term trends, more people have been leaving Oklahoma than moving into the state

U.S. vs. Oklahoma population Oklahoma population changes by growth, 1970-2018 component, 2003-2018*

Percent change, year-over-year Persons Percent change, year-over-year 4 4 30,000 3.0

3 OK 3 20,000 2.0 2 2 U.S. 10,000 1.0 1 1 0 0.0 0 0 Net Domestic Migration, left -10,000 -1.0 -1 -1 Net International Migration, left Natural Increase, left Population, right -2 -2 -20,000 -2.0 1970 1976 1982 1988 1994 2000 2006 2012 2018 2003 2006 2009 2012 2015 2018

24 Note: Annual BEA population data used through 2017, Sources: Bureau of Economic Analysis, Census Bureau/Haver Analytics, Census population data used for the most recent year. Population and Housing Unit Estimates – Census Bureau and authors’ calculations FEDERAL RESERVE BANK OF KANSAS CITY Large metro migration improved slightly in 2018, while outflows from western Oklahoma have been sizable

Oklahoma Net Domestic Migration Net Domestic Migration by County, by Area, 2011-2018 2015-2018

Persons 15,000 15,000 OKC 10,000 10,000

5,000 Tulsa 5,000

0 0

-5,000 Lawton -5,000 Rest of state (OK-metros) -10,000 -10,000 2011 2012 2013 2014 2015 2016 2017 2018

25 Sources: Bureau of Economic Analysis, Census Bureau/Haver Analytics, Population and Housing Unit Estimates – Census Bureau and authors’ calculations FEDERAL RESERVE BANK OF KANSAS CITY Highly educated Oklahomans of all age groups have been leaving, including from the OKC metro

Oklahoma Net Domestic Migration Oklahoma City MSA Net Domestic of Those with a Bachelor's Degree Migration of Those with a or More by Age Bachelor's or More Number of people Number of people 6000 6000 6000 6000

4000 4000 4000 4000

2000 2000 2000 2000

0 0 0 0

-2000 -2000 -2000 -2000

-4000 -4000 -4000 -4000 Under 25 -6000 -6000 -6000 -6000 25 to 34 Within state 35-54 -8000 -8000 -8000 Out of state -8000 Over 55 Total with Bachelor's or More Total with Bachelor's or More -10000 -10000 -10000 -10000 2000 2002 2004 2006 2008 2010 2012 2014 2016 2005 2007 2009 2011 2013 2015 2017

26 Note: Metro area timeseries data was harmonized in IPUMS using the 2013 Sources: U.S. Census Bureau ACS 1-year sample Public Use Microdata, OMB delineations. IPUMS-USA, authors' calculations. FEDERAL RESERVE BANK OF KANSAS CITY Oklahomans with a bachelor’s degree or more are mostly moving to Texas, especially Dallas-Fort Worth

States Gaining the Most Oklahomans Net Migration of Oklahomans with with a Bachelor's or More on Net a Bachelor's or More to Texas

Number of people 6000 6000 Number of people 12000 12000 4000 4000 2003-2007 2013-2017 10000 10000 2000 2000

8000 8000 0 0

6000 6000 -2000 -2000

4000 4000 -4000 -4000 Dallas-Fort Worth MSA 2000 2000 -6000 All Other Texas -6000

0 0 -8000 Total Oklahomans With Bachelor's -8000 Degree or More Moving to Texas -10000 -10000 2005 2007 2009 2011 2013 2015 2017

27 Note: Metro area timeseries data was harmonized in IPUMS using the 2013 Sources: U.S. Census Bureau ACS 1-year sample Public Use Microdata, OMB delineations. IPUMS-USA, authors' calculations. FEDERAL RESERVE BANK OF KANSAS CITY Consequence: Educational attainment is growing less Silver lining?: People keep coming, just more have left

Educational Attainment as the Share of Oklahoma Domestic Migration Flows of Population Over 25 with a Bachelor's or More Those with a Bachelor's or More

Percent of Population 39.4 Number of people 40 40 30000 30000 2013 2017 37.3 Inflow Oklahoma Outflow OKC MSA 38 38 25000 Inflow OKC MSA Outflow Oklahoma 25000 20000 20000 36 36 33.7 15000 15000 34 34 10000 10000 32 30.9 31.3 32 5000 5000 29.6 30 28.8 28.7 30 0 0 28.1 28 28 -5000 -5000 26.2 -10000 -10000 26 24.8 26 23.5 -15000 -15000 24 24 -20000 -20000 22 22 -25000 -25000 20 20 -30000 -30000 U.S. Oklahoma OKC Texas DFW Colorado 2000 2002 2004 2006 2008 2010 2012 2014 2016

28 Sources: U.S. Census Bureau ACS 5-year estimates, ACS 1-year sample Public Use Microdata, IPUMS-USA, authors' calculations. 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

• Oklahoma and OKC job growth has slowed in 2019, as lower energy prices hurt, but unemployment remains very low

• A longer-term trend worth watching is the state’s switch in net domestic migration flows in recent years, as more highly educated Oklahomans have been moving out

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Questions?

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