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Economic UpdateAlison Felix*
Senior EconomistSenior EconomistFederal Reserve Bank of Kansas City
*The views expressed are those of the presenter and do not necessarily reflect the positions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.
U.S. Economic Outlook
• Incoming data suggest that the U.S. economy co g da a sugges a e U S eco o ycontinues to recover at a moderate pace.– Manufacturing, energy and agriculture sectors are
diexpanding.– Consumer spending is well above year-ago levels.
• However, the U.S. economy faces many challenges over the next couple of years.– Unemployment rates are likely to remain stubbornly high.– Residential construction activity is likely to remain weak –
constrained by excess housing supply, falling prices and high foreclosure rates.
A moderate recovery is expected to continue over the next few yearscontinue over the next few years.
Real Gross Domestic ProductPercent change from previous period annualizedPercent change from previous period, annualized
4567
4567
10123
10123
5-4-3-2-1
5-4-3-2-1
FOMC Forecast Range (Jan2011)
-7-6-5
-7-6-5 Range (Jan 2011)
Source: Bureau of Economic Analysis; FOMC
Consumers are spending more as confidence levels gradually increaseconfidence levels gradually increase.
Retail Sales and Consumer Confidence
Percent change from a year ago Index
10
15
100
120Consumer Confidence (right axis)
Retail Sales (left axis)
5 80
-5
0
40
60
-15
-10
0
20
Source: Census Bureau and Consumer Confidence Board
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
Inflation remains subdued but is starting to increase slightlyto increase slightly.
InflationPercent change from year ago Percent 55 g y g
4
5
4
5Overall PCE InflationCore PCE Inflation
2
3
2
3
11
-1
0
-1
0
Source: Bureau of Economic Analysis
Feb-01 Feb-03 Feb-05 Feb-07 Feb-09 Feb-11
Inflation expectations have also ticked up recentlyrecently.
Inflation ExpectationsPercent Percent
5
6
7
5
6
7U of Mich Inflation Expectations - 1 year forward5 Yr, 5 Yr Forward Breakeven Inflation Rate (TIPS)U of Mich Inflation Expectations - 5 years forward
3
4
5
3
4
5
0
1
2
0
1
2
-2
-1
0
-2
-1
0
M 06 M 07 M 08 M 09 M 10 M 11
Source: University of Michigan and Federal Reserve Board of Governors
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
The Tenth District of the Federal Reserve
Employment fell sharply during the recession but is now increasing in the
U.S.Total Nonfarm Employment
Seasonally adjustedSeasonally adjustedIndex Index
105106107
105106107
US
KS
101102103104
101102103104Wichita
KC
9899
100101
9899100101
959697
959697
Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11
Source: Bureau of Labor Statistics
Unemployment rates remain elevated.
Unemployment RateSeasonally adjustedSeasonally adjusted
Percent Percent 1111
U.S.
99KS
KC
Wichita
5
7
5
7
3
5
3
5
Source: Bureau of Labor Statistics
Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11
Unemployment rates are much lower in Western KansasWestern Kansas.
Unemployment Rate – Feb 2011Unemployment Rate – Feb. 2011Not seasonally adjusted
Legend
2.9% to 3.9% 4% to 4.9%5% to 6.9%7% to 8.9%9% to 14.3%
During the recession, unemployment rates increased sharply in Southeastern
Kansas.
Change in Unemployment RateFeb. 2008 to Feb. 2011
LegendLegend-0.4 to 0.9 1 to 1.92 to 2.93 to 3.94 to 7.8
Employment continued to decline in most industries in Kansas over the past yearindustries in Kansas over the past year.
Employment Growth by IndustryFeb-11 over Feb-10
Percent Percent
8
10
12
8
10
12US
KS
Wi hit
2
4
6
2
4
6 Wichita
KC
6
-4
-2
0
6
-4
-2
0
-10
-8
-6
-10
-8
-6
Mining Prof. Educ. Trans. Manuf. Leis. Trade Constr. Fin. State & Info
Source: Bureau of Labor Statistics
& Busi. & Health & Util. & Hosp. Svcs. Loc. Govt.
Firms expect to hire more workers in the second quartersecond quarter.
Hiring Expectations
Net percent of firms planning to add workers Percent
10
12
10
12
Q3 2010 Q4 2010
6
8
6
8
Q1 2011 Q2 2011
2
4
2
4
-2
0
-2
0
Source: Manpower Inc.
22US KC Wichita
Manufacturers expect to hire more workers over the next 6 monthsworkers over the next 6 months.
Expected Employment Indexes - ManufacturingSeasonally adjusted; six months aheady j
Index Index
30
40
30
40
Number of employees
Average employee workweek
0
10
20
0
10
20
-20
-10
0
-20
-10
0
-40
-30
-40
-30
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
Sources: FRBKC Manufacturing Survey
Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11
Manufacturing activity continues to expandexpand.Manufacturing Activity
Seasonally adjusted; month-over-monthy jIndex Index
60
65
60
65
50
55
50
55
40
45
40
45
US
30
35
30
35
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
10J
Sources: ISM, FRBKC Manufacturing SurveyNote: 10J index is computed on ISM basis (50 = zero change)
Manufacturers expect further gains over the next 6 monthsthe next 6 months.
Tenth District Manufacturing ExpectationsSeasonally adjusted; sixmonths aheadSeasonally adjusted; six months ahead
Index Index
50
60
50
60Dec-10
Jan-11
30
40
30
40 Feb-11
Mar-11
10
20
10
20
-10
0
-10
0
Production Volume of new New orders Capital Employment
Source: FRBKC Manufacturing Survey
orders for exportsp
expendituresp y
The energy sector is expanding, especially for oil producersespecially for oil producers.
Count of Active Drilling Rigs
# Rigs # Rigs
450
500
1800
2000US-Oil (Left Axis)
US Gas (Left A is)
300
350
400
1200
1400
1600 US-Gas (Left Axis)
10J-Oil (Right Axis)
10J-Gas (Right Axis)
150
200
250
600
800
1000
0
50
100
0
200
400
Source: Baker-Hughes
Mar-08 Mar-09 Mar-10 Mar-11
Lower supplies and increased demand have led to higher crop priceshave led to higher crop prices.
Crop Prices$/Bushel $/Bushel$/Bushel $/Bushel
14
16
18
14
16
18Beans
Wheat
C
10
12
10
12Corn
4
6
8
4
6
8
0
2
0
2
Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
Source: Commodity Research Bureau
Mar 04 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11
Higher livestock prices are helping producers keep pace with rising costsproducers keep pace with rising costs.
U.S. Livestock Prices and Breakeven Costs$/Hundredweight $/Hundredweight
100
110
120
100
110
120Hog BreakevenHog PriceCattle Breakeven
80
90
100
80
90
100 Cattle Price
50
60
70
50
60
70
30
40
50
30
40
50
Feb 05 Feb 06 Feb 07 Feb 08 Feb 09 Feb 10 Feb 11
Source: USDA and Iowa State University
Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11
Farmland prices are increasing at a quick pacepace.
Kansas Farmland Values
Percent change from a year ago Percent
20
25
20
25
10
15
10
15
0
5
0
5
-10
-5
-10
-52007:Q4 2008:Q4
2009:Q4 2010:Q4
Source: FRBKC Ag Survey
Nonirrigated Cropland Irrigated Cropland Ranchland
As expected, home sales plummeted after the expiration of the tax creditthe expiration of the tax credit.
Existing Home SalesSeasonally adjustedSeasonally adjusted
Index: 2005:Q4=100 Index
100
110
100
110USWichitaKS
80
90
80
90
KC
70
80
70
80
50
60
50
60
Source: NAR
2005:Q4 2006:Q4 2007:Q4 2008:Q4 2009:Q4 2010:Q4
Residential construction activity remains weakweak.
Value of Residential Construction ContractsSeasonally adjusted
Index: Feb-06=100 Index
100
110
100
110
US
70
80
90
70
80
90US
KS
40
50
60
40
50
60
10
20
30
10
20
30
Source: FW Dodge
1010Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11
Home prices continued to decline across most of the U S in 2010
Home Price Appreciation – 2010 Q4
most of the U.S. in 2010.
ppPercent change from one year ago
-1.71%
Legend0% and higher -2% to 0%-5% to -2%5% to 2%-10% to -5%Lower than -10%
Home price appreciation has varied widely over the past 5 years
Home Price Appreciation 2010 Q4
widely over the past 5 years.
Home Price Appreciation – 2010 Q4Percent change from five years ago
3.47%
Legend5% and higher 0% to 5%-10% to 0%-10% to -20%Lower than -20%
Foreclosure rates in Kansas are much lower than in other parts of the nation
Foreclosure Rate – 2010 Q4
lower than in other parts of the nation.
2.43%
LegendLegend1% to 2% 2% to 3%3% to 4%4% to 5%Hi h h 5%Higher than 5%
Commercial construction activity remains below pre-recession levelsbelow pre-recession levels.
Value of Commercial Construction ContractsSeasonally adjusted 3-mo mov avSeasonally adjusted, 3-mo. mov. av.
Index: Feb-06=100 Index
150
175
150
175
US
100
125
100
125KS
50
75
50
75
0
25
0
25
Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11
Source: F.W. Dodge Inc.
Office and industrial vacancy rates have leveled off in KC and Wichitaleveled off in KC and Wichita.
Commercial Vacancy RatesPercent Percent
16
18
20
16
18
20
10
12
14
10
12
14
6
8
10
6
8
10
KC - OfficeKC - IndustrialKC Retail
2
4
2
4
2005:Q4 2006:Q4 2007:Q4 2008:Q4 2009:Q4 2010:Q4
KC - RetailKC - MultiFamWichita - Office
Source: Torto-Wheaton Research
Conclusions
• The U.S. and Kansas economies are e U S a d a sas eco o es a eexpected to continue to recover gradually over the next few years.– Weak residential construction activity and high
unemployment may prevent a more robust recovery.– Manufacturing, energy and agriculture sectors are expected g gy g p
to continue to provide a boost to the economy.
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