On the one hand, and on the other. Auber 2019 Fall Conference - PowerPoint PPT Presentation

On the one hand, and on the other. Auber 2019 Fall Conference Savannah, GA October 13, 2019 The views expressed in this presentation do not represent those of the Federal Reserve Bank of Atlanta, the Federal Reserve System, or anyone other than the presenter. If you think you heard otherwise, you are mistaken.

A policy split decision. FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target level for the federal funds rate Percent The Summary 5.0 of Economic 4.5 Projections 4.0 (SEP): 3.5 3.0 2.5 Policy rate 2.0 projections 1.5 (aka, the “dot 1.0 plot”) September 2019 SEP 0.5 0.0 2019 2020 2021 2022 Longer run 2019 2020 2021 2022 2023 2024 2 Source: Federal Reserve Board

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From what we can see now, economic growth is stepping down. Real GDP Component Tracking Forecast For 2019:Q3 GDPNow: Component Annualized Growth Rate GDP Component 2018 Q4/Q4 H1:2019 (October 9) Annualized Real GDP 2.5 2.6 1.7 Growth 4 Sources: Bureau of Economic Analysis Federal Reserve Bank of Atlanta; Haver Analytics

Consumer spending holding steady, business investment not so much. Real GDP Component Tracking Forecast For 2019:Q3 GDPNow: Component Annualized Growth Rate GDP Component 2018 Q4/Q4 H1:2019 (October 9) 2.6 2.9 2.7 Consumption Business Fixed 5.9 1.9 -0.9 Investment Annualized Real GDP 2.5 2.6 1.7 Growth 5 Sources: Bureau of Economic Analysis Federal Reserve Bank of Atlanta; Haver Analytics

Results from the Survey of Business Uncertainty: Looking backward. Did tariff hikes and trade policy tensions cause your firm to cut or postpone capital expenditures in the first half of 2019? Percent of firms responding yes 10-12% Mean percentage cut (among those responding yes) 33-39% Note: Data represents 375 responses collected over the periods Jul 8-19, Aug 12-23, and Sep 9-20, 2019 Source: Survey of Business Uncertainty conducted by the Federal Reserve Bank of Atlanta, Stanford University, and University of 6 Chi B th S h l f B i

Not surprisingly, manufacturing-related sectors have been disproportionately affected. Did tariff hikes and trade policy tensions cause your firm to cut or postpone capital expenditures in the first half of 2019? Percent of firms responding yes 10-12% Mean percentage cut (among those responding yes) 33-39% Estimated aggregate effect on capital expenditures Private Sector -2.7% Manufacturing -6.2% Construction -18.3% Note: Data represents 375 responses collected over the periods Jul 8-19, Aug 12-23, and Sep 9-20, 2019 Source: Survey of Business Uncertainty conducted by the Federal Reserve Bank of Atlanta, Stanford University, and University of 7 Chi B th S h l f B i R ll t d th i d J l 8 19 A 12 23 d S 9 20 2019

New orders of capital goods (ex aircraft) – a forward looking measure of equipment expenditures -- have faded. Manufacturers' Shipments and New Orders Nondefense Capital Goods ex. aircraft year-over-year percent change 15 10 Shipments New Orders 5 0 -5 -10 2014 2015 2016 2017 2018 2019 Sources: Census Bureau; Haver Analytics data through August 2019 8

Results from the Survey of Business Uncertainty: Looking forward. Have recent tariff hikes and ongoing trade policy tensions caused your firm to re-assess or alter its capital expenditure plans for the second half of 2019? Percent of firms responding yes 20-22% Note: Data represents 375 responses collected over the periods Jul 8-19, Aug 12-23, and Sep 9-20, 2019 Source: Survey of Business Uncertainty conducted by the Federal Reserve Bank of Atlanta, Stanford University, and University of 9 Chi B th S h l f B i

What happens to investment in election years? 10

Answer: Nothing great. 11

Where’s the inflation? 12

Inflation is, again, running soft to the FOMC’s target. PCE Price Index year-over-year percent change, monthly 3.5 Headline PCE 3.0 2% inflation goal announced here. 2.5 2.0 1.5 1.0 Core PCE 0.5 0.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 data through August 2019 Sources: Bureau of Economic Analysis; Haver Analytics

“Trimmed” measures (that remove outliers), however, appear more consistent with the FOMC’s objective. PCE Price Index year-over-year percent change, monthly 3.5 Headline PCE 3.0 Core PCE 2.5 FRBD trim 2.0 1.5 1.0 0.5 0.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 data through August 2019 Sources: Bureau of Economic Analysis; Federal Reserve Bank of Dallas; Haver Analytics

The momentum over the past six months suggests a return to target – but will it be sustained? Headline PCE Price Index annualized percent change, SA, 2012=100 6 100% 90% 4 6-month 80% 70% FOMC inflation target 2 60% 0 50% 12-month 40% -2 30% 20% -4 10% -6 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 15 data through August 2019 S B f E i A l i H A l ti

An island no more? 16

The new world? The global economy used to have a simple rule: The U.S. led, everyone else followed… This could be the year that [the] script gets flipped.” Greg Ip: “For a Change, It’s the World That is Pulling Down the U.S. Economy,” The Wall Street Journal , October 2, 2019 . 17

What to make of the yield curve? 6 1 1 4 1 2 1 1 0 1 -2 2-year spread 0 10-year spread 0 -4 0 -6 0 -8 0 1985 1990 1995 2000 2005 2010 2015 data through September 2019 Source: Federal Reserve Board; Haver Analytics 18

Observation #1: The US term structure has persistently flattened over the course of the expansion. Yield Spreads basis points 350 300 250 200 150 100 50 0 1/4/2010 1/4/2011 1/4/2012 1/4/2013 1/4/2014 1/4/2015 1/4/2016 1/4/2017 1/4/2018 1/4/2019 US 10-year/2-year spread 19 Source: Bloomberg

Observation #2: Up to 2018, the slope of the U.S. term structure was highly correlated with estimates of 10-year term premia. ACM Term Premia (right scale) and Yield Spread (left scale) Basis points Percent 350 3 2.5 300 2 250 1.5 200 1 0.5 150 0 100 -0.5 50 -1 0 -1.5 1/4/2010 1/4/2011 1/4/2012 1/4/2013 1/4/2014 1/4/2015 1/4/2016 1/4/2017 1/4/2018 1/4/2019 US 10-year/2-year spread ACM 10-year term premia 20 Sources: Bloomberg Federal Reserve Bank of New York

Observation #3: Since 2018, the slope of the German term structure has been correlated with the 10-year term premia. ACM Term Premia and Yield Spreads 350 3 2.5 300 2 250 1.5 200 1 0.5 150 0 100 -0.5 50 -1 0 -1.5 1/4/2010 1/4/2011 1/4/2012 1/4/2013 1/4/2014 1/4/2015 1/4/2016 1/4/2017 1/4/2018 1/4/2019 German 10-year/2-year spread US 10-year/2-year spread ACM 10-year term premia 21 Sources: Bloomberg Federal Reserve Bank of New York

U.S. policy paths derived from a term structure model conform to Eurodollar and OIS paths when a global factor is included. Without global factor With global factor 3.2 2.5 3 2.8 2 2.6 2.4 2.2 1.5 2 1.8 1.6 1 0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20 22