Agenda - 02-16-2016 - 8-c - FY2015-16 Second Quarter General Fund and Enterprise Funds Financial Report

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17 NC STATE ECONOMIST SEE:. Ec ,,jiht464,F4Ini , 2016 production reducing the need for imported policymakers—almost tripled between the two foreign oil, the trade deficit maintained its periods. Besides the weakness of the moderate level. economy, these actions didn't spark the higher inflation that many feared for two reasons: the Households continued to improve their unprecedented increase in excess reserves economic position in 2015. Real median held at the Fed, and the dramatic drop in household income grew by 5.3%, well above money velocity. The increase in excess both the twenty year average and the post- reserves was a way for the Fed to create recessionary average. Real hourly earnings money as a backstop for the banks, but to keep increased more than in the years since the that money at the Fed so as not to elevate recession, and work hours also edged up. prices. The decline in money velocity reduced Household debt relative to GDP, which almost the ability of dollars in circulation to generate reached 100% prior to the Great Recession, higher inflation. moderated close to the 1990-2010 annual average. Low interest rates also allowed At the end of 2015 the Fed announced a households to post a thirty-year low in their debt modest increase (0.25 percentage points) in the service payments as a percent of disposable federal funds rate, the first of many expected income. The personal savings rate, which had rate hikes. Growth rates in both the money fallen into negative territory prior to the supply and excess reserves moderated in 2015, recession, continued to register above 5%. and the reduction in money velocity was likewise more modest. All these moves With a stronger economy, the fiscal situation of signaled a shift away from stimulative policies the federal government became less introduced by the Fed over the past few years. unbalanced. As a percent of GDP, the deficit in 2015 was smaller than the 1990-2010 annual The National Economy in 2016 average, and well under the average for 2010- 2014 when fiscal policy was used to stimulate The last column in Table 1 presents forecasts economic growth. The relative size of the total for the national economic indicators in 2016. In federal debt declined slightly in 2015. And general, the forecasts are upbeat and suggest a again compliments of low interest rates, the national economy growing at a slightly faster carrying cost of the federal debt (federal interest pace than in 2015. Among the `General' payments as a percent of GDP) in 2015 was measures, the biggest changes will be in under the post-recessionary average and just inflation and interest rates. Oil prices will stop over half of the annual average posted in the falling—and may even rise modestly—in 2016, two decades from 1990 to 2010. which will cause the all-item CPI rate to be After almost a decade of first attempting to stop closer to 2%, as compared to the 0.5% rate in the economy's decline during the Great 2015. Higher measured inflation will reduce Recession and then trying to stimulate the some of the real per capita gains in personal economic recovery, monetary policy operated income and consumption. As a result of the by the Federal Reserve turned the corner in Fed's tightening of interest rates, short-term 2015. Fed policy was enormously rates will undoubtedly move higher. Long-term accommodative during and immediately after rates will also move up due to higher expected the Great Recession. Table 1 shows the future inflation rates, along with expectations federal funds rate—one of the Fed's key policy that the Fed will push interest rates higher over tools—averaged 3.8% during 1990-2007, but a multi-year period. was virtually zero from 2007 to 2014. Likewise, the annual growth rate in the money supply— The biggest change in the `Business' environ- another important tool used by Fed ment will be an increase in the rate of housing 3