1. Economic Outlook: The Short, and Long, of It Kartik B. Athreya November 11, 2015

2. 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. First, some fine print…

3. Q3 1.5% Real Gross Domestic Product Source: Bureau of Economic Analysis via Haver Analytics & Federal Reserve Board Percent change from previous quarter at annual rate FOMC Projection 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.

4. Percent change from previous quarter at annual rate Q3 2.1% Real Nonresidential Fixed Investment Source: Bureau of Economic Analysis via Haver Analytics

5. Disposable Personal Income & Expenditures Source: Bureau of Economic Analysis via Haver Analytics 12 Month % Change Real Personal Consumption Expenditure Real Disposable Personal Income September Note: Real disposable personal Income was adjusted to remove tax-induced income shifting near end of 2012.

6. Quarterly average of monthly changes, thousands of persons Nonfarm Payroll Employment Source: Bureau of Labor Statistics via Haver Analytics Q4 Avg.

7. Percent August Labor Market Flows Source: JOLTS via Haver Analytics Hires Rate* Job Openings Rate** Quits Rate* Note: *Percent of total employment. **Percent of total employment plus job openings.

8. Alternative Measures of Unemployment in Virginia Source: Bureau of Labor Statistics via Haver Analytics

9. Virginia County Unemployment Rates Source: Bureau of Labor Statistics via Haver Analytics

10. China: In the News  Three recent developments  Stock market crash  Devaluation of the Yuan  Widespread signs of slowdown

11. China: Equities  Dramatic decline in Chinese stock market: 30%  Correction of a bubble (?)  Bank of China intervened massively Source: Shanghai Stock Exchange via Haver Analytics

12. 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

13. China’s Ouput: Huge Structural Change Total Value Added, Percentage of GDP Industry Services, etc. Agriculture Note: ‘Services, etc.’ includes any statistical discrepancies noted by national compilers. Source: IMF World Development Indicators

14. Share of World Exports China United States Percent of World Exports, Annual Source: IMF World Development Indicators

15. GDP Per Capita: A Little Perspective… Constant 2005 USD Source: WB World Development Indicators United States China

16. 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?

17. International growth more generally… 17 Source: China National Bureau of Statistics and Eurostat via Haver Analytics

18. US Export Exposure to the World Source: Census Bureau via Haver Analytics

19. September 1.3% FOMC Projection Core Personal Consumption Expenditure Price Index 12 Month % Change Source: Bureau of Economic Analysis & Board of Governors via Haver Analytics 2% Longer-run Target 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.

20. Federal Reserve System Assets Source: Board of Governors via Haver Analytics $, Billions Treasury Securities: $2,462 Agency Debt: $34 Agency MBS: $1,744 Note: Numbers may not add up due to rounding. Total: $4,535 Miscellaneous: $295 Treasury Securities: $1,652 Agency Debt: $87 Agency MBS: $844 Total: $2,865 Miscellaneous: $282

21. Federal Funds Target Rate November 6th Primary Credit Rate Monetary Policy Instruments Percent Source: Board of Governors via Haver Analytics Federal Funds Rate Target Range Interest Rate Paid on Reserves

22. October Real Federal Funds Rate Percent, effective Fed funds rate - lagged year over year change in core PCE price index Source: Bureau of Economic Analysis & Board of Governors via Haver Analytics

23. Time to Maturity Treasury Yield Curve Percent Source: Board of Governors via Haver Analytics

24. Summary of Economic Projections: Federal Funds Rate Percent Source: Board of Governors 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.

25. FOMC Statement 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 September 17, 2015

26. FOMC Statement 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. Market- based 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 October 28, 2015

27. And now, the long of it….  I’ve talked about short-run outcomes, especially in the labor market. What about long-run outcomes?

28. 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?

29. Fear of Technology From Time Magazine, February 24 th : “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.”

30. Fear of Technology …1961

31. Long-run unemployment: no trend. We adapt! Source: Bureau of Labor Statistics, research.stlouisfed.org

32. 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”

33. Skills have long inoculated against unemployment… Source: Bureau of Labor Statistics Unemployment rate, workers 25 years and over

34. Payoffs to skills have steadily increased Source: Bureau of Labor Statistics Median weekly earnings, workers 25 years and over (2013 constant dollars)

35. Why? Since the 1970s, supply response to skill-biased technological change weak. Unprecedented. Source: Goldin and Katz (2009)

36. Non-completion Expected Attainment RealizedNo Degree Student Loan Debt (No Degree) Certificate32%52%$11,160 Associate’s degree 22%62%$10,758 Bachelor’s degree 52%38%$14,457 Many who enroll do not complete any degree within 6 years of completing high school. Source: Avery and Turner (2012) Note: Data reflect survey results from 2004-2009.

37. 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.