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Testimony for Hearings on FY 2008 Revenues Yolanda K. Kodrzycki Senior Economist and Policy Advisor Federal Reserve Bank of Boston Presented to: Massachusetts House and Senate Ways and Means Committees January 16, 2007. Summary of testimony. - PowerPoint PPT Presentation
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Testimony for Hearings on FY 2008 Revenues
Yolanda K. KodrzyckiSenior Economist and Policy Advisor
Federal Reserve Bank of Boston
Presented to:
Massachusetts House and Senate Ways and Means CommitteesJanuary 16, 2007
2
Summary of testimony
• Massachusetts economy poised to show moderate output and income growth in CY 2007.
• Projection premised on U.S. economy growing at or a little below its trend rate.
• Housing sector will put a damper on overall U.S. and MA economic growth in CY 2007.
• Labor force slowdown in MA poses longer-term uncertainties, but implications for revenue estimates not clear.
3
U.S. economic outlook for CY 2007
• Moderate growth expected– 2006: GDP grew at approximately its potential (trend)
2007: growth expected to be similar or a little weaker
• Energy prices– Recent declines boost real income and ease inflation
• Housing market– Presents a challenge
4
300
500
700
900
1100
1300
1500
Nov-90 Nov-92 Nov-94 Nov-96 Nov-98 Nov-00 Nov-02 Nov-04 Nov-06
2000
3000
4000
5000
6000
7000
Sales are down, but they appear to be flattening…
Source: Census Bureau.
Construction has slowed significantly, and will continue to slow…
New single-family sales (left scale)
Existing single-family sales (right scale)
Thousands of units, annual rates Thousands of units, annual rates
110012001300140015001600170018001900
Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06
Single-family permits
Single-family housing starts
Thousands of units, annual rates
Weak housing market is slowing the economy
5
… until the large stock of unsold homes are purchased
3.0
4.0
5.0
6.0
7.0
8.0
Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06
Nationwide, house prices have flattened.
Months’ supply of new 1-family homes at current sales rate
Ratio
OFEHO U.S. House Price Index (right scale)
New Home Sales, Median Price (left scale)
Dollars Index, 1980:Q1 = 100
Source: Office of Federal Housing Oversight (house price index) and Census Bureau.
150000
175000
200000
225000
250000
2002:Q32003:Q12003:Q32004:Q12004:Q32005:Q12005:Q32006:Q12006:Q3
250.00
300.00
350.00
400.00
450.00
6
But the consumer remains upbeat
126000128000130000132000134000136000138000
Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06
104000106000108000110000112000114000116000
Employment continues to expand steadily
Source: Bureau of Labor Statistics.
-400-300-200-100
0100200300400
Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06
Recent job growth has been a bit above the rate consistent with maintaining full employment
Monthly employmentgrowth consistentwith growth in the
labor force
Total nonfarm employment (left scale)
Private nonfarm employment (right scale)
Thousands Thousands
Change, 3-month moving average
Total nonfarm employmentaverage 3-month change
Private nonfarm employmentaverage 3-month change
7
Strong job growth and declining energy prices are boosting real incomes
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00Dollars per barrel
Real disposable personal income(right scale)
Domestic spot oil price(left scale)
Growth, previous 12 months
Sources: Wall Street Journal (oil) and Bureau of Economic Analysis (real DPI).
8
Capital spending fundamentals remain reasonable
47000
52000
57000
62000
67000
72000
Nov-03 May-04 Nov-04 May-05 Nov-05 May-06 Nov-06
Orders are running a bit ahead of shipments,suggesting modest investment growth
Source: Census Bureau (top panel) and Bureau of Economic Analysis (bottom panel).
Profits and productivity continue to promote investment
0.01.02.03.04.05.06.0
2000:Q3 2001:Q3 2002:Q3 2003:Q3 2004:Q3 2005:Q3 2006:Q3
5.0
6.0
7.0
8.0
9.0
$ Millions, SAAR
Manufacturers’ shipments of nondefensecapital goods excluding aircraft
Manufacturers’ new orders for nondefensecapital goods excluding aircraft
Growth, previous 4-quarters Share of GDP
Profit Share (right scale)Nonfarm productivity(left scale)
9
4.00
4.50
5.00
5.50
6.00
6.50
6/ 5/ 06 7/ 5/ 06 8/ 5/ 06 9/ 5/ 06 10/ 5/ 06 11/ 5/ 06 12/ 5/ 06 1/ 5/ 07
Financial conditions remain supportive
0.94
0.99
1.04
1.09
1.14
6/ 5/ 06 7/ 5/ 06 8/ 5/ 06 9/ 5/ 06 10/ 5/ 06 11/ 5/ 06 12/ 5/ 06 1/ 5/ 07
Broad stock price indexes are up over the past year
And the 10-year Treasury remains below 5%, with corporate yields maintaining recent spreads
Sources: Wall Street Journal (Dow Jones and Wilshire), Standard and Poor’s (S&P 500), Board of Governorsof the Federal Reserve System (treasury yield) and Merrill Lynch (Corporate yield).
Index, 6/1/2006 = 1.0
Dow Jones Industrial Average
Wilshire 5000
S&P 500
10-year Treasury rate, constant maturity
7-10 year Investment grade corporate yield
Percent
10
Massachusetts economic conditions
• Employment recovery has been only so-so…
-Since recession low point, MA has added 56,000 jobs, or 1.8 percent (vs. 4.8 percent nationally).
• But personal income growth is now on track.
• And forward-looking indicators point to solid economic growth for CY 2007.
11
Massachusetts’ job growth has been up and down on a monthly basis, but fairly steady year-over-year.
-25-20-15-10-5
05
101520
Nov-99 Nov-00 Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06
-8
-6
-4
-2
0
2
4
6
8
Nov-91 Nov-92 Nov-93 Nov-94 Nov-95 Nov-96 Nov-97 Nov-98 Nov-99 Nov-00 Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06
Monthly Employment Change in Massachusetts, Thousands of Jobs
Employment: Percent Change from Year Earlier
Source: U.S. Bureau of Labor Statistics
United States
Massachusetts
Note: Gray shaded area indicates 10 and 90 percentile boundaries for the 50 states.Source: U.S. Bureau of Labor Statistics.
12
Sectors with highest job gains: education & health services,
professional, scientific & business services,financial activities.
-0.1
1.6
-0.2
1.8
2.3
2.5
2.8
0.7
1.2
-0.5
0.8
0.6
1.6
1.9
1.6
0.1
-0.4
0.3
-0.4
1.9
0.4
-1.8
-0.60.2
-2.0 -1.0 0.0 1.0 2.0 3.0
Construction
Manufacturing
Retail Trade
Wholesale Trade
Trans., Warehousing, & Utilities
Information
Financial Activities
Professional & Business Services
Private Education & Health Services
Leisure and Hospitality
Other Services
Government
United StatesMassachusetts
Employment by Industry: Percent Change, Nov 2005 – Nov 2006
Source: Bureau of Labor Statistics
13
-4%
-2%
0%
2%
4%
6%
8%
10%
Q3-86 Q3-88 Q3-90 Q3-92 Q3-94 Q3-96 Q3-98 Q3-00 Q3-02 Q3-04 Q3-06
Source: Bureau of Economic Analysis
Note: Gray shaded area indicates 10 and 90 percentile boundaries for the 50 states.
United States
Massachusetts
MA real personal income now rising at almost the same pace as national.
Real Personal Income: Percent Change from Year Earlier
Source: Bureau of Economic Analysis.
14
Forward-looking indicators such as AIM business confidence and U Mass leading index are solidly in
positive territory.
-4
-2
0
2
4
6
8
Nov-00May-03Nov-03May-03Nov-03May-03Nov-03May-04Nov-04May-05Nov-05May-06Nov-0638
44
50
56
62
68
74
Source: Associated Industries of Massachusetts and the University of Massachusetts.
U Mass Leading Index (left scale) AIM Business Confidence (right scale)
Predicted growth over next six-months
Readings above 50 are generally optimistic
15
020406080
100120140160180
Source: Census Bureau.
Existing single-family sales
Thousands of units, annual rates
0
500
1000
1500
Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06
Single-family permits
Housing units, seasonally adjusted
Massachusetts housing sales and constructionhave slowed.
16
0%
5%
10%
15%
20%
25%
Q3-00 Q3-01 Q3-02 Q3-03 Q3-04 Q3-05 Q3-06
Repeat Sales Home Price Index: Percent Change from Year Earlier
Source: Office Of Federal Housing Enterprise Oversight
United States
Massachusetts
Home price appreciation has downshifted: MA house prices fell in the 2nd and 3rd quarters.
Note: Gray shaded area indicates 10 and 90 percentile boundaries for the 50 states.
17
0
0.5
1
1.5
2
2.5
3
3.5
4
2003:Q1 2003:Q3 2004:Q1 2004:Q3 2005:Q1 2005:Q3 2006:Q1 2006:Q3
Subprime
All loans
0
0.5
1
1.5
2
2.5
3
3.5
4
2003:Q1 2003:Q3 2004:Q1 2004:Q3 2005:Q1 2005:Q3 2006:Q1 2006:Q3
Subprime
United States Massachusetts
Foreclosures have risen in recent months,especially in subprime market.
Foreclosures initiated in quarter, as a percent of loans in pool.
Source: Mortgage Bankers Association
All loans
18
Construction accounts for a relatively small share of the MA economy.
0%
2%
4%
6%
8%
10%
12%
14%
Jan-1985 Jan-1987 Jan-1989 Jan-1991 Jan-1993 Jan-1995 Jan-1997 Jan-1999 Jan-2001 Jan-2003 Jan-2005
Nevada
Arizona
United States
Massachusetts
Source: Bureau of Labor Statistics
19
0
10
20
30
40
50
60
Q3-96 Q3-98 Q3-00 Q3-02 Q3-04 Q3-06
0
5
10
15
20
25
30
Q3-96 Q3-98 Q3-00 Q3-02 Q3-04 Q3-06
Sources: National Real Estate Index, CB Richard Ellis.
0
5
10
15
20
25
30
Q3-96 Q3-98 Q3-00 Q3-02 Q3-04 Q3-06
0
10
20
30
40
50
60
Q3-96 Q3-98 Q3-00 Q3-02 Q3-04 Q3-06
United States
United States
United States
United States
Boston
BostonBoston
Boston
Note: Shaded areas indicate 10 and 90 percentile boundaries for 60 selected metropolitan areas.
Recovery in commercial real estate markets may provide a boost to offset softer housing.
Office Vacancy Rates, Downtown Office Vacancy Rates, Suburban
Adjusted Asking Rent per S/F, Downtown
Adjusted Asking Rent per S/F, Suburban
20
The MA labor force has not grown since 2000-- constraint on future job growth?
Source: Bureau of Labor Statistics
0.92
0.96
1
1.04
1.08
1.12
1.16
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006*
Index, 1996 = 1.00
**Assuming zero net in-commuting in 1996, then increasing gradually to 60,154 in 2004. Source of 2004 net in-commuting estimate: Massachusetts Institute for a New Commonwealth. Mass Economy: the Labor Supply and Our Economic Future, Table 8, page 38.
*2006 annual average estimated as average of January-October seasonally adjusted data.
US
MA MA, adjusted for cross-state commuting**
21
Concerns focus on loss of 25- to 44- year olds.Massachusetts Population by Age Group
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
2000 2001 2002 2003 2004 2005
Po
pu
lati
on
Under 18 18 to 24 25 to 44 45 to 64 65 and over
Source: Census Bureau
22
For FY 2008+ revenue estimates:LF slowdown
• is occurring nationwide • may not constrain income growth.
Dates Massachusetts United StatesLong-term historical trend 1969-1996 0.8 1.9
Last 10 years 1996-2006 0.4 1.2
Late 1990s boom 1996-2000 1.0 1.6
Post 1990s boom 2000-2006 0.0 1.0
Source: Bureau of Labor Statistics