Economic Outlook: The Short, and Long, of It
Kartik B. Athreya
November 11, 2015
First, some fine print…
The views and opinions expressed herein are those of the author.
They do not represent an official position of the Federal Reserve Bank
of Richmond or the Federal Reserve System.
Real Gross Domestic Product
6
Percent change from previous quarter at annual rate
6
5
5
4
FOMC Projection
Q3
1.5%
3
4
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
-4
-4
-5
-5
-6
-6
-7
-7
-8
-8
-9
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
-9
Note: Projection is the median, central tendency, and range from the September 2015 Summary of Economic
Projections. Red dots indicate median projections. Projections of change in real gross domestic product (GDP)
are from the fourth quarter of the previous year to the fourth quarter of the year indicated.
Source: Bureau of Economic Analysis via Haver Analytics & Federal Reserve Board
Real Nonresidential Fixed Investment
20
Percent change from previous quarter at annual rate
20
15
15
10
10
Q3
2.1%
5
5
0
0
-5
-5
-10
-10
-15
-15
-20
-20
-25
-25
-30
-30
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: Bureau of Economic Analysis via Haver Analytics
Disposable Personal Income & Expenditures
6
12 Month % Change
6
5
5
4
September
Real Disposable Personal
Income
4
3
3
2
2
1
1
0
0
-1
-1
-2
-3
-4
2007
-2
Month over Month % Change
Income
Expenditures
Real Personal
Consumption Expenditure
2008
2009
2010
2011
2012
2013
July
0.4
0.2
2014
August
0.4
0.4
September
0.2
0.2
2015
-3
-4
2016
Note: Real disposable personal Income was adjusted to remove tax-induced income shifting near end of 2012.
Source: Bureau of Economic Analysis via Haver Analytics
Nonfarm Payroll Employment
400
Quarterly average of monthly changes, thousands of persons
400
Q4 Avg.
300
300
200
200
100
100
0
0
-100
-100
-200
-200
-300
-300
Monthly Change
Oct.
271
Sep.
137
Aug.
153
Jul.
223
Jun.
245
-400
-500
-600
-400
-500
-600
-700
-700
-800
-800
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: Bureau of Labor Statistics via Haver Analytics
Labor Market Flows
4.5
Percent
4.5
Hires Rate*
4
August
3.5
3.5
3
3
2.5
2
4
2.5
2
Job Openings Rate**
Quits Rate*
1.5
1.5
1
1
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Note: *Percent of total employment. **Percent of total employment plus job openings.
Source: JOLTS via Haver Analytics
Alternative Measures of Unemployment in Virginia
Source: Bureau of Labor Statistics via Haver Analytics
Virginia County Unemployment Rates
Source: Bureau of Labor Statistics via Haver Analytics
China: In the News

Three recent developments

Stock market crash

Devaluation of the Yuan

Widespread signs of slowdown
China: Equities
6,000
Shanghai-Shenzhen 300 Stock Price Index
Monthly, Dec 31, 2004=1,000
5,000
4,000
3,000
2,000
1,000
0
2006

2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Dramatic decline in Chinese stock market: 30%

Correction of a bubble (?)

Bank of China intervened massively
Source: Shanghai Stock Exchange via Haver Analytics
China: The Big Picture


Most remarkable economic story since the Industrial
Revolution

massive amounts of labor move into manufacturing

high returns to capital and investment
Process seems to be slowing
China’s Ouput: Huge Structural Change
50
Total Value Added, Percentage of GDP
40
Industry
Services, etc.
30
20
Agriculture
10
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Note: ‘Services, etc.’ includes any statistical discrepancies noted by national compilers.
Source: IMF World Development Indicators
Share of World Exports
14
Percent of World Exports, Annual
12
United States
10
8
6
4
China
2
0
1980
1985
1990
1995
2000
2005
2010
2015
Source: IMF World Development Indicators
GDP Per Capita: A Little Perspective…
50,000
Constant 2005 USD
45,000
40,000
35,000
30,000
United States
25,000
20,000
15,000
10,000
China
5,000
0
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Source: WB World Development Indicators
China and the World: Implications

No first-order effect on the U.S.

Large effect on commodity exporters (BRIs, Australia),
East Asian countries and Germany, which can trigger
second-round effects on the U.S.

China growth miracle may be coming to an end

Middle-income trap?
International growth more generally…
Source: China National Bureau of Statistics and Eurostat via Haver Analytics
17
US Export Exposure to the World
Source: Census Bureau via Haver Analytics
Core Personal Consumption Expenditure Price Index
5
12 Month % Change
5
4.5
4.5
4
4
3.5
3.5
3
3
FOMC Projection
2.5
2% Longer-run Target
2
2
1.5
1.5
1
1
September
1.3%
0.5
0.5
0
0
-0.5
-0.5
-1
-1.5
2008
2.5
-1
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
-1.5
2019
Notes: FOMC projection is the median, range, and central tendency for Q4/Q4 percent changes, from the September
2015 meeting. Red dots indicate median projections. Core PCE Price Index excludes expenditures on gasoline and
food services.
Source: Bureau of Economic Analysis & Board of Governors via Haver Analytics
Federal Reserve System Assets
4750
$, Billions
Total: $4,535
4500
Agency
Debt: $34
4250
Miscellaneous: $295
4000
3750
3500
Agency MBS: $1,744
3250
Total: $2,865
3000
2750
2500
Agency
Debt: $87
Miscellaneous: $282
2250
2000
Agency MBS: $844
1750
1500
Treasury Securities:
$2,462
2462
1250
1000
750
Treasury Securities:
$1,652
1652
500
250
0
9/12/2012
11/4/2015
Note: Numbers may not add up due to rounding.
Source: Board of Governors via Haver Analytics
Monetary Policy Instruments
7.0
Percent
7.0
6.5
6.5
6.0
6.0
5.5
5.5
5.0
5.0
4.5
4.5
4.0
4.0
3.5
3.5
3.0
Federal Funds Target Rate
3.0
2.5
2.5
2.0
2.0
1.5
1.5
Primary Credit Rate
1.0
0.5
0.0
2005
November 6th
Interest Rate Paid on
Reserves
Federal Funds Rate
Target Range
2006
2007
2008
1.0
0.5
2009
2010
2011
2012
2013
2014
2015
0.0
2016
Source: Board of Governors via Haver Analytics
Real Federal Funds Rate
6
Percent, effective Fed funds rate - lagged year over year change in core PCE price index
6
5
5
4
4
3
3
2
2
October
1
1
0
0
-1
-1
-2
-2
-3
-3
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Bureau of Economic Analysis & Board of Governors via Haver Analytics
Treasury Yield Curve
3.5
Percent
3.5
3.25
3.25
3
3
2.75
2.75
October 26, 2015
2.5
November 6, 2015
2.5
2.25
2.25
2
2
1.75
1.75
1.5
1.5
1.25
1.25
1
1
0.75
0.75
0.5
0.5
0.25
0.25
0
0
6M
2 Yrs 3 Yrs
5 Yrs
7 Yrs
10 Yrs
Time to Maturity
Source: Board of Governors via Haver Analytics
Summary of Economic Projections: Federal Funds Rate
5
Percent
5
4
4
3
3
2
2
1
1
0
0
-1
Note: Each dot in the chart represents the value of an FOMC participant’s judgment of the midpoint of the appropriate
target range (or the appropriate target level) for the federal funds rate at the end of the calendar year.
Projections made for the September 2015 meeting.
2015
2016
2017
2018
-1
Longer run
Source: Board of Governors
FOMC Statement
September 17, 2015
Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace.
Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however,
net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor
market indicators show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the
Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of
inflation compensation moved lower; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Recent global economic and
financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the
near term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate
pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee
continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad.
Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2
percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate.
The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to
1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the
Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This
assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures
and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate
to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably
confident that inflation will move back to its 2 percent objective over the medium term.
Source: Board of Governors
FOMC Statement
October 28, 2015
Information received since the Federal Open Market Committee met in September suggests that economic activity has been expanding at a
moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector
has improved further; however, net exports have been soft. The pace of job gains slowed and the unemployment rate held steady. Nonetheless,
labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year. Inflation has continued
to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Marketbased measures of inflation compensation moved slightly lower; survey-based measures of longer-term inflation expectations have remained
stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that,
with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move
toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic
activity and the labor market as nearly balanced but is monitoring global economic and financial developments. Inflation is anticipated to
remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term
as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to
monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to
1/4 percent target range for the federal funds rate remains appropriate. In determining whether it will be appropriate to raise the target
range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and
2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions,
indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee
anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement
in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
Source: Board of Governors
And now, the long of it….
 I’ve talked about short-run outcomes, especially in the labor
market. What about long-run outcomes?
In the long run…
 Growth comes solely from better methods of production
 But much innovation embedded in new machines and
technologies
Where will this leave the labor force?
Fear of Technology
From Time Magazine, February 24th :
“The rise in unemployment has raised some new alarms
around an old scare word: automation. ...While no one has
yet sorted out the jobs lost because of the overall drop in
business from those lost through automation and other
technological changes, many a labor expert tends to put
much of the blame on automation. ...Many of the losses in
factory jobs have been countered by an increase in the
service industries or in office jobs. But automation is
beginning to move in and eliminate office jobs too. ...
Today's new industries have comparatively few jobs for
the unskilled or semiskilled, just the class of workers
whose jobs are being eliminated by automation.”
Fear of Technology
…1961
Long-run unemployment: no trend. We adapt!
12.0
Civilian Unemployment Rate
10.0
8.0
6.0
4.0
2.0
1948
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
0.0
Source: Bureau of Labor Statistics,
research.stlouisfed.org
But, while unemployment shows no trend over time…
Trade and smart technologies have made it harder for
those with low skills, and easier for those with high skills…
“Skill-biased technological change”
Skills have long inoculated against unemployment…
Unemployment rate, workers 25 years and over
16%
14%
12%
Less than high school
High school
Some college or associate's degree
Bachelor's degree or higher
10%
8%
6%
4%
2%
0%
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Source: Bureau of Labor Statistics
Payoffs to skills have steadily increased
Median weekly earnings, workers 25 years and over (2013 constant dollars)
$1,400
$1,300
$1,200
$1,100
Bachelor's degree or higher
Some college or associate's degree
High school
Less than high school
$1,000
$900
$800
$700
$600
$500
$400
Source: Bureau of Labor Statistics
Why? Since the 1970s, supply response to skill-biased
technological change weak. Unprecedented.
15
Years of Schooling at Age 35 Years
14
Men
13
12
11
Women
10
9
8
1870
1880
1890
1900
1910
1920
1930
1940
1950
1960
1970
1980
Year of Birth
Source: Goldin and Katz (2009)
Non-completion
Many who enroll do not complete any degree within 6
years of completing high school.
Expected
Attainment
Realized
No Degree
Student Loan
Debt (No Degree)
Certificate
32%
52%
$11,160
Associate’s
degree
22%
62%
$10,758
Bachelor’s
degree
52%
38%
$14,457
Note: Data reflect survey results from 2004-2009.
Source: Avery and Turner (2012)
Conclusions

Short run: Macroeconomy gathering strength, labor market “slack”
diminishing.
 Consumption strong
 Sustained Employment gains
 Core inflation moving in the right direction
 International picture : China slowing, but expected, US exposure limited

Long run: Skills are key to “maximum employment.”
 Preparedness and good information critical for individual and aggregate
outcomes.
 But US facing, for the first time, potentially serious barrier to increasing skill
acquisition, especially higher ed.
 …Something for all of us to worry about.