US Economic Recovery
Transcript of US Economic Recovery
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Assessing the Strength of theU.S. Economic Recovery
James BullardPresident and CEOFederal Reserve Bank of St. Louis
Washington University in St. LouisOlin Business SchoolSt. Louis, MO6 May 2010
Any opinions expressed here are my own and do not necessarily reflect those of the Federal Open Market Committee participants.
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This Talk
State of the U.S. economyThe rest of the worldMonetary policyRisks to the outlook
Financial regulatory reform
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State of the U.S. Economy
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Continued signs of recovery
-8
-6
-4
-2
0
2
4
6
8
2007 2008 2009 2010 2011
Real Gross Domestic ProductActual and forecasted, percent change from previous quarter at annual rate
Real GDP Growth
Apr-2010 BC Forecast
Apr-2010 MA Forecast
Percent
Source: Bureau of Economic Analysis, Macroeconomic Advisers, Blue Chip Economic Indicators.
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GDP expected to reach 2008:Q2 peak before year-end
98
99
100
101
102
103
104
2007 2008 2009 2010
2007:Q1 = 100
Real Gross Domestic Product and MA Forecast(As of May 5, 2010)
Source: Bureau of Economic Analysis, Macroeconomic Advisers.
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Composition of real output
65
70
75
80
85
90
95
100
105
Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10
2007Q1 = 100
Components of Real Gross Domestic Product
Nondurables plus services
Durables
Investment
Source: Bureau of Economic Analysis.
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Home prices are increasing but remain low
1
1.2
1.4
1.6
1.8
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
2001Q1=1
S&P Case Schiller House Prices and Nominal GDP
Nominal GDP
U.S. National S&PCase-Schiller Price Index
Source: Bureau of Economic Analysis, S&P, Fiserv, and MacroMarkets LLC.
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Manufacturing has rebounded
25
30
35
40
45
50
55
60
-4
-3
-2
-1
0
1
2
2007 2008 2009 2010
Industrial Production and the ISM Manufacturing Index
Industrial Production (Left Axis)ISM Manufacturing (Right Axis)
Percent Change from Previous Index
Source: Federal Reserve Board/Institute of Supply Management.
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Labor market conditions are slowly improving
-1000
-800
-600
-400
-200
0
200
400
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10
Nonfarm Payroll Employment GrowthChange from previous month.
Thousands
162 thousand jobs gained in March
Source: Bureau of Economic Analysis, S&P, Fiserv, and MacroMarkets LLC.
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Unemployment remains high
4
5
6
7
8
9
10
11
12
200
250
300
350
400
450
500
550
600
650
700
2005 2006 2007 2008 2009 2010
Unemployment and Initial Claims
ThousandsPercent
Initial Claims for UnemploymentInsurance, 4-wk moving average(Left Axis)
Unemployment Rate, SA (Right Axis)
Source: Bureau of Labor Statistics/Department of Labor.
Jan.-Mar.9.7%
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The Rest of the World
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Japan3.8, 5.2, 2.9
Australia1.9, 4.7, 2.5
China9.6, 10.8, 8.4EU
0.2, 0.3, 1.9
South Africa
3.2, 4.3, 4.4
Global growth
Latin America6.5, 4.8, 4.3
Canada5.0, 5.0, 4.0U.S.
5.6, 3.2, 4.0India
-2.2, 12.0, 9.0
Real GDP growth, SAAR, Percent, 2009:Q4, 2010:Q1, and 2010:Q2Source: Barclays Capital Global Economic Weekly.
Russia15.0, 9.4, 7.0
U.K.1.8, 1.3, 2.6
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U.S. leads major partners in productivity
93
95
97
99
101
103
105
107
2007:1 2007:2 2007:3 2007:4 2008:1 2008:2 2008:3 2008:4 2009:1 2009:2 2009:3 2009:4
Index, 2007:Q1 = 100
Output per Employed Person
United States
Canada
JapanU.K.
Euro Area
Source: Board of Governors.
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But the U.S. shed a larger percentage of the workforce
94
95
96
97
98
99
100
101
102
103
2007:1 2007:2 2007:3 2007:4 2008:1 2008:2 2008:3 2008:4 2009:1 2009:2 2009:3 2009:4 2010:1
Index, 2007:Q1 = 100
Employment
United States
Canada
Japan
U.K.Euro Area
Source: Board of Governors.
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Monetary Policy
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Near-Zero Policy Rates in the G-7
0
1
2
3
4
5
6
2007 2008 2009 2010
Percent
U.S.
Euro Area
Canada
Japan
U.K
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Federal Reserve balance sheet
0
500
1,000
1,500
2,000
2,500
3,000
Jan-2007 Jul-2007 Jan-2008 Jul-2008 Jan-2009 Jul-2009 Jan-2010
Short-Term Lending to Financial Firms and Markets
Rescue Operations
Operations Focused on Longer-Term Credit Conditions
Traditional Portfolio
Traditional Portfolio and Long-Term Assets
Billions $
Source: Board of Governors.
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-3
-2
-1
01
2
3
4
5
6
2003 2004 2005 2006 2007 2008 2009 2010
Percent
Headline CPI Inflation
Core CPI Inflation
Inflation remains low
Source: Bureau of Labor Statistics.
Headline CPI Inflation and Core CPI Inflation(Year-over-year percent change. Monthly data. Last observation: March 2010.)
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Risks to the Outlook
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Sovereign Credit ProtectionFive-Year CDS ratesBasis Points
Source: Bloomberg.
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U.S. State Debt Burdens
Source: The State of California Debt Affordability Report October 2009.
Debt Ratios of the 10 Most Populous States Ranked by Ratio of Debt to Personal Income
State Moodys / S&P/ Fitch Debt to Personal Income Debt per Capita
Texas Aa1/AA+/AA+ 1.4% $520
Michigan Aa3/AA-/A+ 2.2% $766Pennsylvania Aa2/AA/AA 2.5% $950
Ohio Aa2/AA+/AA 2.8% $962
Florida Aa1/AAA/AA+ 2.9% $1,115
Georgia Aaa/AAA/AAA 3.0% $984California Baa1/A/BBB 4.4% $1,805
Illinois A1/AA-/A 4.6% $1,877
New York Aa3/AA/AA- 6.3% $2,921
New Jersey Aa3/AA/AA- 7.3% $3,621
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Financial Regulatory Reform
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Bank supervision
The Fed should continue to supervise state member
banks and bank holding companies of all sizes.Understanding the entire financial landscape helps the Fedmake sound monetary policy decisions.It is important that the Fed remain connected with Main Street
America, and not become biased toward the very large, mostlyNew York-based institutions.
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Fed structureThe Federal Reserve has three parts.
Washington: Board of Governors.
New York: One bank in the nations financial capital.Main Street: Eleven banks in the rest of the nation.
The regional structure was designed to keep some power out of New York and Washington.
It allows for input on key policy questions from around the U.S.This system has been very successful.
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Fed governanceThe Board of Governors members are appointed by the Presidentand confirmed by the Senate.
The Board of Governors has oversight authority for the Fed.This includes budget authority.It also includes authority over key appointments in the Fed.
This means Presidents, First Vice-Presidents, as well as the Chair andVice-Chair of the Board of Directors at each Bank.
There is considerable accountability in the Roosevelt-era re-designof the Federal Reserve.
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Auditing monetary policyMonetary policy is vigorously debated everyday, both inside and outsidethe Fed.The Fed is extensively auditedour rough estimate is about 425,000 hours
annually:Internal audit function.Board of Governors oversight.External auditor (Deloitte).
Each hour of audit time requires staff time for compliance.In addition, the Fed is subject to auditing by the GAO, the investigativearm of Congress.Additional audits are welcome, so long as they do not constitute politicalmeddling.
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Federal Reserve independenceAllowing short-term politics to mix too closely with monetarypolicy leads to poor economic outcomes.
This has occurred frequently in the developing world over the past50 years.In the U.S., erosion of Fed independence could result in a1970s-style period of volatility.
The consequences for the U.S. and the global economy would belarge.No one would be served well by this outcome.
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Federal Reserve Bank of St. Louisstlouisfed.org
Federal Reserve Economic Data (FRED)research.stlouisfed.org/fred2/
James Bullard
research.stlouisfed.org/econ/bullard/