A Perspective from the Federal Reserve Institute of Internal Auditors – San Antonio Chapter

August 19, 2015

Blake Hastings

Senior Vice President

The views expressed in this presentation are strictly those of the presenter and do not necessarily reflect the positions of the Federal Reserve Bank of Dallas or the Federal Reserve System. Any secondary distribution of this material is strictly prohibited.

The Federal Reserve Bank

Founded by Congress in 1913, as the central bank of

the U.S., independent within government.

Composed of three key parts:

• The Federal Open Market Committee (FOMC)

• Board of Governors

• A group of 12 District Banks and 25 Branches

The Fed has an established internal check and balances system

The Federal Reserve Bank

• Fed’s Goals:

– Strong Output and Income Growth

– High Employment

– Stable Prices

• Fed’s Responsibilities:

– Financial Services (U.S. government’s bank)

– Supervising and Regulating Banks

– Containing Systemic Risks

– Monetary Policy

The Federal Reserve Bank

The Federal Reserve’s Balance Sheet

Source: FR Board of Governors’ Factors Affecting Reserve’s Balances H.4.1. Haver Analytics.

TREASURIES TREASURIES TREASURIES

TREASURIES

MBS

MBS

FEDERAL AGENCY

FEDERAL AGENCY

FEDERAL AGENCY

TSLF TSLF

TSLF FX SWAPS FX SWAPS FX SWAPS

SPECIAL CREDIT FACILITIES

SPECIAL CREDIT FACILITIES SPECIAL CREDIT

FACILITIES

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

4500000

5000000

Sept. 3 2008 Dec. 10 2008 Mar. 25 2009 Aug. 12 2015

$ MILLIONS

$ 1.02 T

$ 2.43 T

$ MILLIONS

SPECIAL CREDIT FACILITIES

$ MILLIONS $ MILLIONS

$ 4.46 T

$ MILLIONS $ MILLIONS $ MILLIONS $ MILLIONS

$ 2.14 T

TSLF

EKG of the Financial Sector

Source: Financial Times. Reuters. Haver Analytics

Aug 15 = .13

0

0.5

1

1.5

2

2.5

3 PERCENT

LIBOR-OIS SPREAD (THREE MONTH)

TAF ESTABLISHED (Dec. 12, 2007)

BEAR STEARNS

LEHMAN BROTHERS

G-7 ACTION (Oct. 10, 2008)

National Economy Picking Up After 1st Quarter Pause

• Consumer spending picked up in 2014 as housing prices and stock market improved and consumer debt fell – job growth picked up

• Declining energy prices providing a further boost – although retail sales data this year weaker than expected

• Unusually bad weather, strong dollar, West Coast port slowdown, sharp declines in energy sector investment and jobs all factor into 1st quarter weakness

• Real GDP picked up in the 2nd quarter - stronger growth expected in remainder of year

Source: Keith Phillips, Dallas Fed AVP and Sr. Economist, August 2015.

The Regional Economy

Texas Ranked Third in Job Growth in 2014

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

ND FL TX GA

UT

NV

OR

CO

WA

CA

NC SC AR

AZ

TN US

DE ID KY

MA LA WY

MI

WI

OK

NY

AL

NM

MD CT IN IA KS

OH

NH

MN RI

PA IL DC

VT

AK

VA SD MO NJ

NE

MS

MT

ME HI

WV

Percent Change,Dec. 2013 - Dec. 2014

U.S.

TX

Source: Bureau of Labor Statistics

Texas Ranked 31st in Job Growth So Far in 2015, Though Above Most Energy States

Source: Keith Phillips, Dallas Fed AVP and Sr. Economist, August 2015.

-4

-3

-2

-1

0

1

2

3

4

5

NV

UT

SD IDW

AM

ISC FL CO CA HI

MA

OR IN VT

NY RI

US

NC CT

MN

ME

KY IA VA

MD

GA

TN DE

AR NJ

TX MT

OH

MO

MS

PA

NH

WI

AZ IL AL

KS

DC

NE

NM LA OK

AK

WV

WY

ND

Annualized Percent Change,Dec. 2014 - June 2015

U.S.

TX

SOURCE: Bureau of Labor Statistics

Job Growth has been Broad-Based Across Large Texas Metro Areas

Source: Keith Phillips, Dallas Fed AVP and Sr. Economist, August 2015.

90

95

100

105

110

115

120

125

2008 2009 2010 2011 2012 2013 2014 2015

HoustonSan Antonio

Ft. Worth

Austin

Dallas

Nonfarm Employment IndexAug. 2008=100

TX

El Paso

Corpus Christi

U.S.*

*Indexed from U.S. Peak Employment in January 2008Source: Bureau of Labor Statistics, Federal Reserve Bank of Dallas

Energy, Construction & Manufacturing Have Weakened Significantly in 2015

Source: Keith Phillips, Dallas Fed AVP and Sr. Economist, August 2015.

-20

-15

-10

-5

0

5

10

15

20

(Job Growth 2012-2015)

Oil & Gas

Construction

Trade, Transportation,

& Utilities

Manufacturing

Business Services

Finance, Insurance, & Real Estate

Leisure & Hospitality

Information Services Health &

Education Government

(2.4%) (5.6%) (20.2%) (7.4%) (13.4%) (6.0%) (10.5%) (1.7%) (13.3%) (15.7%)

Share of Total Employment

Dec/DecPercent Change

Note: Striped bars represent Dec. 2014 - June 2015 annualized changeSource: Bureau of Labor Statistics, Federal Reserve Bank of Dallas

Drilling Rig Count Picking Up, but Oil Prices Falling Back Below $50

Source: Keith Phillips, Dallas Fed AVP and Sr. Economist, August 2015.

0

20

40

60

80

100

120

140

160

200

300

400

500

600

700

800

900

1000

Gas price(*10)

Oil price

Rig Count

Source: Oil and Gas Journal, Baker Hughes

Number

Source: Oil and Gas Journal, Baker Hughes.

Nominal $

• Oil prices have declined by 45% since last July, initial drop from $106 to $80 likely was good for TX economy

• Sustained drop from $80 to $45 will hurt TX economy - $50 is below the breakeven point for majority of shale drilling.

• Texas GDP growth will likely weaken more than jobs as output per worker in mining is about 4.6 times more than average for the state.

Low Oil Prices Will Likely Dampen TX Job Growth in 2015

Source: Keith Phillips, Dallas Fed AVP and Sr. Economist, August 2015.

Energy’s Share of TX Economy Increased with Shale Drilling

Source: Keith Phillips, Dallas Fed AVP and Sr. Economist, August 2015.

0

2

4

6

8

10

12

14

16

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Mining as a Share of Total Texas Employment

Mining as a Share of Nominal Texas GDP

Percent, SA Percent

NOTE: GDP values prior to 1997 and employment values prior to 1990 extrapolated from SIC coded data.SOURCES: Bureau of Labor Statistics, Bureau of Economic Analysis, FRB Dallas.

2.4%

13.8%

0

20

40

60

80

100

120

140

160

-6

-5

-4

-3

-2

-1

0

1

2

3

4

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Real Oil Price

Texas Job Growth Relative to U.S.

Percent difference in TX and U.S. growth, 12MMA

Real price, $, monthly average

SOURCES: Wall Street Journal, Bureau of Labor Statistics.

TX Job Growth Relative to Nation Impacted by Oil Prices

Source: Keith Phillips, Dallas Fed AVP and Sr. Economist, August 2015.

• U.S. economy picked up in 2014 – slowing so far this year – biggest concern is weak foreign demand and strong dollar.

• Texas growth was strong and broad-based in 2014 - initial oil price decline from $106 to $80 had positive impact.

• This year Texas job growth likely to moderate to 0.5-1.5% • Bottom line: Texas likely to continue to grow but not nearly as

strong as last year. San Antonio likely will have faster job growth than Texas this year.

Summary

Source: Keith Phillips, Dallas Fed AVP and Sr. Economist, June 2015.

For More Information, Visit

www.dallasfed.org

The views expressed in this presentation are strictly those of the presenter and do not necessarily reflect the positions of the Federal Reserve Bank of Dallas or the Federal Reserve System. Any secondary distribution of this material is strictly prohibited.