An Examination of Current Economic Conditions in the Nation and in Arkansas October 15, 2014Little Rock, ARKevin L. Kliesen,FRB St. LouisCharles S. Gascon,FRB St. Louis Michael R. Pakko,UALR

The views we will express are our own and do not necessarily reflect the positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.

Disclaimer

Uncertainty in Decision-making

3

• “There’s uncertainty about what the path of the economy will be.”—Chair Janet Yellen (June 18)

• Information gleaned from our contacts helps to reduce this uncertainty.

• A positive feedback loop: less uncertainty helps to create better policy, and thus better economic outcomes.

• Forums like this are vitally important to the Fed!

A Brief on the U.S. Economy

4

• Momentum interrupted . . . Momentum restored.

• Job growth has averaged more than 200,000/month this year and the unemployment rate continues to fall.

• Inflation is slowing thanks to falling oil prices and slower growth of food and medical care prices.

• This is good for the consumer.

Lower oil prices are mostly bullish for the near-term outlook.

5

85

90

95

100

105

110

115

120

Jan.2014 Mar.2014 May.2014 Jul.2014 Sep.2014

Spot Crude Oil Prices: BrentDollars per barrel

Last observation: October 10, 2014

A Brief on the U.S. Economy

6

• Business capital spending appears to be on a more solid footing.

• Housing has been more mixed, but still looks to be on an upward trajectory.

• Less drag from government—expenditures and hiring are increasing modestly.

• A stronger dollar and weaker global growth could pressure U.S. exports in Q4 and into 2015.

Financial stress levels have increased but still remain below average.

7

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Dec.09 Aug.10 Apr.11 Dec.11 Aug.12 Apr.13 Dec.13 Aug.14

The St. Louis Fed's Financial Stress IndexWeekly data

European Turmoil, 2010

Last observation: Week of Oct. 3, 2014.

S&P Downgrade, GDP Revision, and Europe, 2011

European Turmoil, 2012

Week of June 18, 2013 FOMC

Zero is “normal”

Lower levels of uncertainty bodes well for businesses and markets—and vice versa.

8

50

75

100

125

150

175

200

225

250

275

Jan.2005 Oct.2006 Jul.2008 Apr.2010 Jan.2012 Oct.2013

Economic Policy Uncertainty IndexMean=100

Last actual observation is September 2014

The Near-Term Outlook: The “Central Tendency”

9

• The Fed’s latest asset purchase program is coming to an end.

• New exit strategy principles established.

• However, markets believe that the return to a “normal” policy rate will be a slow process.

• Depends on the evolution of the data, though.

FOMC Participants: Stronger growth, low inflation, and a falling unemployment rate.

10

3.1

7.0

1.0

2.1

6.0

1.6

2.8

5.5

1.8

0.0

2.0

4.0

6.0

8.0

Real GDP Unemp. Rate Inflation

2013 (A)

2014

2015

September 2014 FOMC Economic Projections for 2014-2015Percent

NOTE: FOMC Projections are the mid-points of the central tendencies. The unemploymentrate is the average of the fourth-quarter for the year indicated.

Risks to the economy and alternative views of the outlook.

11

• Some risks are known but are difficult to quantify (pandemics, geopolitical risks, etc.).

• Signs of financial market excesses.

• Global growth slows by more than expected.

• The economy achieves “escape velocity” . . . the markets begin to worry that the Fed is behind the curve.

Fed Views vs. Market Views

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Oct.2014 Apr.2015 Oct.2015 Apr.2016 Oct.2016 Apr.2017 Oct.2017 Apr.2018 Oct.2018

9/17/2014

Median June '14 SEP Projection

Median Sept '14 SEP Projection

Expected Federal Funds Rates Estimated from Financial Futures Along with Median of SEP ProjectionsPercent

2015

2016 2017

2014

• According to the St. Louis Fed’s latest report on agricultural credit conditions in the second quarter of 2014:– Farm income decreased modestly from a year earlier.

– Quality farmland values averaged $5,473/acre, down slightly over the past year.

– Bankers expect farm income and equipment expenditures in the third quarter to be sharply below last year’s levels.

13

The latest St. Louis Fed survey suggests that District farmland prices may have peaked.

14

20.6

9.112.2

7.5

-3.5-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

2013:Q2 2013:Q3 2013:Q4 2014:Q1 2014:Q2

Year-to-Year Change in Eighth District Quality Farmalnd PricesPercent change from four quarters earlier

Four Looks at Arkansas’ EconomyCharles S. GasconRegional Economist, Sr. Research Support CoordinatorOctober 15, 2014

A Look Back

2006 20132010

Output is up 8%

Producing more with fewer workers

Shift in employment toward the service sector

Shift in employment toward the service sector

Shift in employment toward the service sector

Government payrolls shrinking since 2010

Manufacturing and construction sectors out almost 60,000 jobs

Housing prices have continued to recover…

…but demand remains sluggish

A Look From AboveCounty Unemployment Rates, 2014:Q2

Unemployment rates consistent with national average

Job growth has been half the national rate

Strongest growth in Fayetteville

Incomes about 18% below national average

Cost of living about 12% below national average

Little Rock has the highest “real” income

A Look Around the RegionAre we keeping up with the Joneses?

Regional growth above national average

State Output Growth(%)Texas 4.7%Oklahoma 2.9%Kansas 2.4%Arkansas 2.3%Kentucky 2.3%Tennessee 2.2%US 2.1%Louisiana 1.4%Mississippi 1.3%Missouri 0.7%

Source: Bureau of Economic AnalysisNote: Average Real GSP Growth (2010-2013)

Job growth has been relatively slow in most of the region

State Job Growth (%)Texas 2.3Tennessee 1.4Oklahoma 1.2US 1.1Kentucky 0.9Louisiana 0.7Missouri 0.6Kansas 0.5Arkansas 0.4Mississippi 0.4Note: Avg annual Payroll growth from 2010:Q2 to 2014:Q2Source: Bureau of Labor Statistics

Unemployment rates vary significantly across states

State UnemploymentOklahoma 4.6Kansas 4.8Louisiana 4.8Texas 5.1US 6.2Tennessee 6.4Arkansas 6.4Missouri 6.6Kentucky 7.6Mississippi 7.7

Source: Bureau of Economic AnalysisNote: Unemployment Rate in 2014:Q2

Regional incomes below the national average

MSA Income ($)US 44,200$ Kansas 43,380$ Texas 43,271$ Oklahoma 41,399$ Louisiana 40,617$ Missouri 39,933$ Tennessee 39,002$ Arkansas 36,423$ Kentucky 35,857$ Mississippi 33,446$

Source: Bureau of Economic AnalysisNote: Per capita income in 2013

But prices are lower too!

MSA Cost of LivingUS 0.0%Texas -3.5%Louisiana -8.6%Tennessee -9.3%Oklahoma -10.1%Kansas -10.1%Kentucky -11.2%Missouri -11.9%Arkansas -12.4%Mississippi -13.6%

Source: Bureau of Economic AnalysisNote: Regional Price Parity for 2012

But prices are lower too!

MSA Income ($)Kansas 48,254$ Oklahoma 46,050$ Missouri 45,327$ Texas 44,840$ Louisiana 44,439$ US 44,200$ Tennessee 43,001$ Arkansas 41,579$ Kentucky 40,380$ Mississippi 38,711$

Source: Bureau of Economic AnalysisNote: Real Per capita income in 2012

Business Outlook

Expectations for Local Economic Conditions

Expectations for Local Economic Conditions