1. A Look at the National and Local Economic Landscape Financial Executives Network Group St. Louis, MO Kevin L. Kliesen Business Economist and Research Officer Federal Reserve Bank of St. Louis March 6, 2014 Not an official document

2. An Outline of Today’s Presentation 2 The Big Picture A Closer Look at U.S. Economic Conditions The Outlook for the U.S. Economy in 2014: Two Views What’s Going on in the St. Louis Economy?

3. The views I will express are my own and do not necessarily reflect the positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System. Disclaimer

4. The U.S. Economy: A View From 30,000 Feet 4 Headwinds slowly becoming tail winds; but some mixed signals thus far in 2014. The unemployment rate is falling faster than most expected—but not the St. Louis Fed! The monetary punch bowl is full, credit risks appear low, and banks are flush with cash. The performance of the U.S. economy in 2014 should be better than last year—and with continued low inflation.

5. The U.S. Economy Loses Some Momentum. 5 The economy saw good growth over the second half of 2013... Led to building optimism. But then some key economic data came in weaker than expected. Next, 2013-Q4 real GDP growth was revised from 3.2% to 2.4%. In response, forecasts for 2014-Q1 growth have been trimmed. Is this a first-quarter freeze out, an inventory correction, or a return to the “new normal?”

6. Evidence for a Temporary Lull: A Perfect Storm. 6 January temps were colder than usual and late-January and early-February brought two big storms to the East Coast. Many economic reports and surveys revealed weather responsible for part of the slowdown. In January, manufacturing output fell 0.8 percent, partly because of the severe weather that curtailed production in some regions of the country. (Industrial Production report). Also contributing to the slowdown was the expectation of an inventory run-off.

7. In 2013, the production of goods produced but not sold accounted for about a third of real GDP growth. 7

8. But other key data show no evidence of a pending collapse in economic activity. 8

9. And the unemployment rate has fallen faster than most forecasters and FOMC participants expected. 9

10. Inflation remains relatively low and well below the FOMC’s threshold. 10

11. Financial stress remains lower than average. This generally bodes well for the economy. 11

12. The U.S. Economy in 2014: The Case for Faster Growth 12 Diminishing headwinds, but with periodic hiccups. Business investment—a key to stronger growth—is likely to pick up; stronger global growth will help. Housing should remain a source of strength. Job growth to remain healthy... the unemployment continues to fall. Inflation is likely to remain below 2%, helping to keep interest rates relatively low and stable.

13. Forecasters expect a better composition of growth in 2014: More final sales; fewer unsold goods. 13

14. The Case for Weaker-than-Expected Growth in 2014: A Return to the New Normal 14 What some Fed Presidents are saying. The expansion is nearly 5 years old and labor productivity growth—a key economic variable—is paltry. Labor market fundamentals mean that job gains of 180,000/month are not sustainable. This unfortunate combination suggests the economy’s true growth is around 2%, with a natural rate of unemployment around 6%. Pushing too hard on the gas could lead to higher inflation.

15. A Warning from the President of the San Francisco Federal Reserve Bank 15 The current high level of long-term unemployment may not influence inflation pressures to the same degree as short- term unemployment (unemployed < 27 weeks). The overall unemployment rate may be less useful for forecasting inflation now than it normally is. Accordingly, it could be that slack in labor markets is much less than assumed. I currently see this as a risk to the inflation outlook. For now, measures of wage and price inflation remain muted.

16. Something to worry about? 16

17. Now, this is Something to Worry about: The Economic Policy Concern that Dwarfs All Others Years for Living Standards to Double at Different Growth Rates: 3.4%: 21 Years 2.3%: 30 Years 1.7%: 41 Years 1.2%: 58 Years

18. To Conclude: Will the U.S. Economy Escape the Doldrums in 2014? 18 That’s our forecast and we’re sticking it to yet! But we recognize that: (1) Most forecasters have been too optimistic the past few years; and (2) there appear to be some strong impediments to growth. Are those impediments temporary or more longer- lasting? It’s too early to tell. Monetary policy has done all it can. Fiscal policymakers can help—in several dimensions. Will they?

19. Turning to the St. Louis Economy 19

20. In 1990, St. Louis’ largest employers were in trade, transportation and manufacturing. 20

21. Fast forward to 2013: The St. Louis economy is dominated even more by service-based industries. 21

22. In 2013, St. Louis saw strong job growth in its largest industry, but weak overall job growth. 22

23. St. Louis’ MSA unemployment rate is near the U.S. average but above the Missouri average rate. 23

24. Within Missouri MSAs, St. Louis has the highest unemployment rate 24

25. St. Louis’ post-recession real GDP growth has been weak relative to the nation and other area cities 25

26. The bust in house prices appears to explain a small part of St. Louis’ weak growth since 2009. 26

27. In fact, St. Louis has had pretty weak real GDP growth for more than a decade. 27

28. St. Louis’ poor economic performance importantly stems from its weak labor productivity growth. 28

29. Since 2001, St. Louis city and MSA has seen an outflow of persons in the labor force. 29

30. Is St. Louis poised to turn the corner? Some Challenges and Opportunities. 30 The Good: A world class university and medical center; a vibrant health care sector; a sizable financial sector; a dominant bio-tech company; and T-Rex. The aging of the population presents both challenges and opportunities for the health care and financial industries. The Not-so-Good: Like many Midwestern states, Missouri’s business climate is not ranked as high as other states in faster-growing areas.

31. The Outlook for St. Louis: Near and Far 31 St. Louis economy has been growing slower than the nation’s economy for quite some time. U.S. growth is expected to be around 3% in 2014. Housing construction and manufacturing (less so) have been sources of strength for the U.S. economy, but these are relatively small part of the St. Louis economy. Continued modest growth is likely for the St. Louis region over the next few years.

32. Questions? 32

33. If you would like a PDF copy of my presentation, please e-mail me at: kliesen@stls.frb.org 33