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Economic Update Alison Felix Economist & Branch Executive Federal Reserve Bank of Kansas City Denver Branch
U.S. GDP growth slowed slightly in the second quarter and is expected to continue to grow at a modest pace. R EAL G ROSS D OMESTIC P RODUCT (GDP) Annualized Percent Change from Previous Period June 2012 5% 5% FOMC Central Tendency Projections 4% 4% 3% 3% 2% 2% 1% 1% 0% 0% -1% -1% -2% -2% -3% -3% -4% -4% 2007 2008 2009 2010 Q1 Q2 Q3 Q4 Q1 Q2 2012 2013 2014 2011 2012 Projections 2 Source: Bureau of Economic Analysis & Federal Open Market Committee (FOMC)
Consumer spending makes up more than 70% of GDP. C ONTRIBUTIONS TO P ERCENT C HANGE IN GDP Annualized Percent Change from Previous Period 5% 5% 2011Q3 2011Q4 4% 4% 2012Q1 2012Q2 3% 3% 2% 2% 1% 1% 0% 0% -1% -1% -2% -2% Total GDP Consumer Residential Business Net Government Inventories Spending Investment Investment Exports Spending 3 Source: Bureau of Economic Analysis
Unemployment rates have fallen over the past year but remain stubbornly high. U.S. U NEMPLOYMENT R ATE 10% 10% 9.6% 9.3% 9.0% 9% 9% 8.3% 8% 8% 7% 7% June 2012 FOMC Central 6% 6% 5.8% Tendency Projections 5.1% 5% 5% 4.6% 4.6% 4% 4% 2005 2006 2007 2008 2009 2010 2011 July 2012 2013 2014 2012 Projections 4 Source: Bureau of Labor Statistics & Federal Open Market Committee (FOMC)
Inflation increased earlier this year but moderated in the second quarter as oil prices fell. U.S. P ERSONAL C ONSUMPTION E XPENDITURE (PCE) I NFLATION Annualized Percent Change from Previous Period 5% 5% 4% 4% June 2012 FOMC Central 3% 3% Tendency Projections 2% 2% 1% 1% 0% 0% 2005 2006 2007 2008 2009 2010 Q1 Q2 Q3 Q4 Q1 Q2 2012 2013 2014 2011 2012 Projections 5 Source: Bureau of Economic Analysis & Federal Open Market Committee (FOMC)
“…the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the 9% medium run--are likely to warrant exceptionally low levels for the federal funds rate 8% at least through late 2014.” - FOMC August Statement 7% E FFECTIVE F EDERAL F UNDS R ATE 6% 5% 4% 3% 2% 1% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 6 Source: Board of Governors of the Federal Reserve System
“The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage- backed securities.” - FOMC August Statement F EDERAL R ESERVE B ALANCE S HEET Trillions Foreign Trillions Currency Swaps $3 $3 Assets $2 $2 Federal Agency & Short-Term Mortgage-Backed Lending $1 Securities $1 Traditional Portfolio $0 $0 Currency in Circulation -$1 -$1 Reserves -$2 Liabilities -$2 Other -$3 -$3 2007 2008 2009 2010 2011 2012 7 Source: Board of Governors of the Federal Reserve System
“The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage- backed securities.” - FOMC August Statement F EDERAL R ESERVE B ANK A SSETS Trillions $3.0 $2.5 All Other $2.0 QE 2 Federal Agency & $1.5 Mortgage Backed Securities $1.0 Treasuries by Duration Operation >10 years Twist 6 to 10 years Projected $0.5 3 to 6 years Operation Twist ≤3 years $0.0 Oct '10 Sep '11 Jul '12 Jan '13 8 Source: Board of Governors of the Federal Reserve System
F EDERAL R ESERVE B ANK D ISTRICTS Board of Governors 9 Source: Federal Reserve Bank of Kansas City
Employment growth slowed in the second quarter but remains well above year ago levels. U.S. N ONFARM E MPLOYMENT G ROWTH Index 100 = July 2002, Seasonally Adjusted 110 105 July 2012 Year-over-Year Change United States 1.4% 100 95 Jul '02 Jul '04 Jul '06 Jul '08 Jul '10 Jul '12 10 Source: Bureau of Labor Statistics
Most states have experienced employment gains over the past year. J ULY 2012 N ONFARM E MPLOYMENT Seasonally Adjusted, Year-over-Year Change More than 3% 2 to 3% 1 to 2% 0 to 1% -1 to 0% -1.6 to -1% United States 1.4% 11 Source: Bureau of Labor Statistics
Over the past year, employment gains were widespread across industries. U.S. N ONFARM E MPLOYMENT O VER THE P AST Y EAR , J ULY 2012 Seasonally Adjusted Percent Change Share of Total Jobs Natural Resources & Mining 5.8% 0.6% Professional & Business Services 3.4% 13.5% Educational Services 2.8% 2.5% Leisure & Hospitality 2.2% 10.2% Health Care & Social Assistance 2.0% 12.8% Wholesale Trade 2.0% 4.2% Transportation & Warehousing 1.9% 3.3% Manufacturing 1.9% 9.0% Financial Activities 0.8% 5.8% Other Services 0.7% 4.0% Retail Trade 0.6% 11.1% Construction 0.1% 4.1% Utilities 0.1% 0.4% State Government 0.0% 3.8% Local Government -0.5% 10.6% Information -0.7% 2.0% Federal Government -1.3% 2.1% 12 Source: Bureau of Labor Statistics
However, employment is still down more than 10% in information, manufacturing, and construction. U.S. N ONFARM E MPLOYMENT SINCE THE R ECESSION S TARTED (D EC . 2007 TO J ULY 2012) Seasonally Adjusted Percent Change Share of Total Jobs Natural Resources & Mining 13.6% 0.6% Educational Services 11.9% 2.5% Health Care & Social Assistance 9.1% 12.8% Federal Government 2.1% 2.1% Leisure & Hospitality 0.5% 10.2% Utilities -0.3% 0.4% Professional & Business Services -0.6% 13.5% State Government -1.7% 3.8% Other Services -2.5% 4.0% Local Government -2.9% 10.6% Transportation & Warehousing -3.8% 3.3% Retail Trade -5.2% 11.1% Financial Activities -5.9% 5.8% Wholesale Trade 4.2% -6.6% Information 2.0% -12.5% Manufacturing -12.8% 9.0% Construction -26.4% 4.1% 13 Source: Bureau of Labor Statistics
Although unemployment rates have fallen, rates remain high across much of the country. J ULY 2012 U NEMPLOYMENT R ATE Seasonally Adjusted Over 10% 9 to 10% 8 to 9% 7 to 8% 5 to 7% Less than 5% United States 8.3% 14 Source: Bureau of Labor Statistics
Consumer confidence has fallen in recent months. C ONSUMER C ONFIDENCE I NDEX Seasonally Adjusted 120 110 100 90 80 70 60 60.6 August 2012 50 40 30 20 Aug '02 Aug '04 Aug '06 Aug '08 Aug '10 Aug '12 15 Source: The Conference Board, Inc.
Slower employment growth and lower confidence have contributed to slower consumer spending growth. R EAL R ETAIL & F OOD S ERVICE S ALES Index 100 = July 2002, Seasonally Adjusted 113 July 2012 Year-over-Year 111 United States 109 2.7% 107 105 103 101 99 97 95 Jul '02 Jul '04 Jul '06 Jul '08 Jul '10 Jul '12 16 Source: Federal Reserve Bank of St. Louis
Over the last few months personal income gains have outpaced growth in consumer spending leading to a higher savings rate. R EAL P ERSONAL I NCOME & S PENDING Seasonally Adjusted Annual Rate Index 100 = July 2002 July 2012 125 Year-over-Year Disposable Personal 2.0% Income ( left ) 120 2.0% Personal Consumption 115 Expenditures ( left ) 10% 110 Savings Rate ( right ) 8% 105 Seasonally Adjusted Annual Rate 100 6% July 2012 4.2% 95 4% 2% 0% Jul '02 Jul '04 Jul '06 Jul '08 Jul '10 Jul '12 17 Source: Bureau of Economic Analysis
The manufacturing sector continues to expand in the Tenth District. M ANUFACTURING A CTIVITY Diffusion Index, Seasonally Adjusted, Month-over-Month Kansas City District 54.2 August United States (ISM) 49.8 July 65 60 55 Expanding 50 50 Contracting 45 40 35 30 Aug '02 Aug '04 Aug '06 Aug '08 Aug '10 Aug '12 Note: Federal Reserve Surveys are computed on an ISM Basis (50 = no change) 18 Source: Institute for Supply Management & Federal Reserve Banks of Kansas City
Manufacturers in the Tenth District expect higher levels of activity over the next six months. T ENTH D ISTRICT M ANUFACTURING E XPECTATIONS Diffusion Index, Seasonally Adjusted, Six Months Ahead 35 2011Q4 2012Q1 30 2012Q2 25 Average July & August 2012 20 15 10 5 0 Production Volume of new Number of Capital New orders for orders employees expenditures exports 19 Source: Institute for Supply Management
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