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Economic Overview/Manufacturing

Economic Overview/Manufacturing . Ankeny, Iowa October 7, 2010. Bill Testa Senior Economist and Economic Advisor Federal Reserve Bank of Chicago www.chicagofed.org/Midwest/. The Seventh District– Unemployment Rates.

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Economic Overview/Manufacturing

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  1. Economic Overview/Manufacturing Ankeny, Iowa October 7, 2010 • Bill Testa • Senior Economist • and Economic Advisor • Federal Reserve Bank of Chicago • www.chicagofed.org/Midwest/

  2. The Seventh District– Unemployment Rates

  3. The “Great Recession” appears ended last year andthe economy expanded by 1.7% in the second quarter

  4. GDP is forecast to grow just below trend in 2010and slightly above trend in 2011

  5. The forecast path of the current recovery isextremely modest compared with pastdeep recession recovery cycles

  6. Monetary policy has been very aggressive,lowering the Fed Funds rate by nearly 525 basis pointsand keeping them near zero since December 2008

  7. Lower funds rate Provide liquidity broadly through monetary policy actions Credit easing Target specific stress points in financial markets through various liquidity facilities Exceptional support Manage distress at systemically important institutions LSAPs: Large Scale Asset Purchases Purchase additional long-term assets to further lower long-term interest rates Key Elements of Fed Response to Credit Crisis 7

  8. The outlook from the FOMC has core inflationremaining low over the next few years • FOMC Central Tendency (June) • Core • 2010 0.8 – 1.0 • 0.9 – 1.3 • 1.0 – 1.5

  9. Why the slow recovery?

  10. Consumer spending improvedbeginning in the second half of 2009, but remains moribund

  11. Personal savings rate has increased

  12. Household net worth has been falling

  13. Existing home prices fell by over 25%

  14. The stock market has improved since March 2009,but remains well below previous levels

  15. A labor market worse than slow output recovery?

  16. The unemployment rate is forecast to edge lower

  17. Labor Market Unemployment/Vacancy Rate (ratio) Much like the previous two recessions, hiring is slow to recover as labor hoarding first must unwind. As hours worked are climbing, and productivity gains abating, hiring will resume. Based on Help Wanted Ads Based on JOLTS

  18. And because the U.S. recession was caused by a “bubble,” much of remaining unemployment is “structural”; Even if demand bounces back, there will be much stubborn unemployment 27+ weeks

  19. There are several reasons why out-migration and re-location will be less likely to ease the unemployment situation . As seen here, home owners have experienced drastic drops in home equity so that the selling of a home to look for or acquire a new job elsewhere remains very difficult.

  20. Recovery and expansion

  21. Credit spreads between Corporate High Yield securitiesand Corporate Aaa securities rose by over 1,400 basis points

  22. Corporate profits have been rising

  23. Manufacturing profits have begun to improve

  24. Employment fell by nearly 8.4 million jobsbetween December 2007 and December 2009,but it has begun to rise this year

  25. Consumer credit as a share of disposable incomehas been moving sharply lower over the past several years

  26. Mortgage debt as a share of disposable incomehas also been falling

  27. Debt service payments have been falling quite sharply

  28. Inventories have contributed substantiallyto the growth in GDP since the start of the recovery, accounting for 60% of the growth over the past year

  29. Manufacturing output has begun its recovery

  30. Industrial output in manufacturing fell quite sharplyduring the recession, but has risen strongly overthe past 14 months, averaging 9.3% and hasrecovered 48.0% of the loss during the recession

  31. Midwest manufacturing productionhas risen at a faster pace than nation

  32. Manufacturing capacity utilization has been rising since June of last year

  33. Industrial production is forecast torise at a strong pace through the end of 2011

  34. Summary • The outlook is for the U.S. economy to expand at a • solid pace this year and next year • Employment is expected to rise moderately this year and next • year, with the unemployment rate edging lower through 2011 • Slackness in the economy will lead to a relatively • low inflation rate over the next two years • Growth in manufacturing output will be solid in 2010 and 2011 • due to improving demand and rebuilding of depleted inventories

  35. A brief look at Iowa manufacturing trends and structure

  36. Source: Staff analysis using BEA output and employment data.

  37. Long term views of manufacturing in the U.S. and Iowa

  38. U.S. manufacturing (labor) productivity has soared

  39. What took 1,000 workers to produce in 1950takes less than 200 workers today

  40. Manufacturing employment as a share of national employment has been declining for over 50 years

  41. Production agriculture falls away as national income rises…. Manufacturing remains an important part of highly developed economies…both jobs and output Source: FRB Dallas Annual Report

  42. Manufacturing: Still the Innovative Engine of the MW Economy

  43. Midwest Sectors with High R&D

  44. Job growth by educational attainment—Upskilling taking place in manufacturing

  45. www.chicagofed.org/Midwest

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