Economic Update. Automotive Insights Conference. Paul Traub. Federal Reserve Bank of Chicago January 18, Senior Business Economist

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1 Economic Update Automotive Insights Conference Federal Reserve Bank of Chicago January 18, 2018 Paul Traub Senior Business Economist

2 Main Economic Indicators Year-over-year Comparison GDP Annual Growth Rate 1 2.0% 1.8% 2.3% Unemployment Rate 2 5.3% 4.9% 4.4% Participation Rate % 62.8% 62.8% Nonfarm Job Growth PCE Core Inflation Yr. / Yr % 1.8% 1.5% 1. Year-over-year & 2016 Q4/Q4, 2017 Q3/Q3 2. Annual Average 3. Average Monthly Job Growth in Thousands- SA 4. Change Year-over-year PCE Core Annual Average & November 2017 YTD Source: U.S. Bureau of Economic Analysis, Census Bureau and Bureau of Labor Statistics January 18, 2018 Federal Reserve Bank of Chicago 1

3 U.S. Real GDP GDP and Contribution to Change, Q/Q at SAAR Q1 '15 Q2 Q3 Q4 Q1 '16 Q2 Q3 Q4 Q1 '17 Q2 Q3 Q PCE Private Investment Net Exports Government GDP Contribution 1.5% 1.2% 0.4% 0.1% 3.2% Source: U.S. Bureau of Economic Analysis, and FRB of St Louis FRED database. January 18, 2018 Federal Reserve Bank of Chicago 2

4 Real Personal Consumption Expenditures Index, Q = 100 Index Q '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Durables Nondurables Services Source: Author s calculations using data from the BEA January 18, Federal Reserve Bank of Chicago

5 Real Gross Private Domestic Investment Billions Chained $2009, % Change Q/Q at SAAR $ Billions 3,250 3,000 2,750 2,500 Q $2, ,250 2,000 1,750 1,500 1,250 1,000 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 7.3% Source: U.S. Bureau of Economic Analysis January 18, Federal Reserve Bank of Chicago

6 Real Private Fixed Investment Billions Chained $2009, Index 2005 = 100 Index Q '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Fixed Investment Nonresidential Residential Source: U.S. Bureau of Economic Analysis January 18, Federal Reserve Bank of Chicago

7 Industrial Production & New Orders Index, 2012 = 100 Index 12 Industrial Production Index 14 New Orders Dec Nov '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 6 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Total Manufacturing All Mfg. Mfg. Durable Goods Source: Board of Governors, Federal Reserve and U.S. Census Bureau January 18, 2018 Federal Reserve Bank of Chicago 6

8 ISM Purchasing Managers Index Manufacturing & Composite, SA - Greater than 50 = Expansion Index Dec Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Mfg. PMI (LHA) Composite (LHA) Source: Institute for Supply Management, Haver Analytics and FRED January 18, 2018 Federal Reserve Bank of Chicago 7

9 Real Government Consumption & Investment Billions Chained $2009, % Change Q/Q at SAAR $ Billions 3,200 3,100 3,000 2,900 2,800 2,700 2,600 2,500 Q3 17 $2,900 07% ,400 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17-1 Source: U.S. Bureau of Economic Analysis January 18, Federal Reserve Bank of Chicago

10 The U.S. Dollar and Trade Deficit Index 2012 = 100 Index 14 U.S. Dollar & Import Price Index Index 16 Trade Deficit - Next Exports Dec Q $597.5B Dec '12 '13 '14 '15 '16 '17 TWD Import Prices Source: Board of Governors, Federal Reserve and Bureau of Labor Statistics. 6 '12 '13 '14 '15 '16 '17 January 18, 2018 Federal Reserve Bank of Chicago 9

11 U.S. Real GDP Blue Chip Forecast Change Billions of Chained $ '14 '15 '16 '17 '18 '19 Actual Q/Q (SAAR) Fcst Q/Q (SAAR) Actual (Y/Y) Fcst (Y/Y) Source: BEA and January 2018 Blue Chip Economic Indicators January 18, Federal Reserve Bank of Chicago

12 Employment, Productivity, and Output Nonfarm and Manufacturing Change Yr./Yr Nonfarm Business Sector Q Manufacturing Sector Q '00 '02 '04 '06 '08 '10 '12 '14 '16-3 '00 '02 '04 '06 '08 '10 '12 '14 '16 Employment Output/Person Output Employment Output/Person Output Source: Author s calculations using U.S. Bureau of Labor Statistics data. January 18, 2018 Federal Reserve Bank of Chicago 11

13 Employment, Productivity, and GDP Growth Change Yr./Yr. Employment Change Yr./Yr Productivity Change Yr./Yr '60's '70's '80's '90's '00's '10's 4.5 GDP Change Yr./Yr. 5.0 '60's '70's '80's '90's '00's '10's 4.4 CBO Potential Change Yr./Yr '60's '70's '80's '90's '00's '10's '60's '70's '80's '90's '00's '10's '20's Source: Author s Calculations using BEA, BLS, and Fed data. January 18, 2018 Federal Reserve Bank of Chicago 12

14 U.S. Real GDP Actual and Potential Billions Chained $2009 and H/L than Potential $Billions 19,000 18,000 17,000 16,000 15,000 14,000 13,000 12,000 Q3 17 $17,157 $17, % $44.2 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 Gap (Right) Actual (Left) Blue Chip (Left) Potential (Left) Source: Bureau of Economic Analysis and the U.S. Congressional Budget Office January 18, Federal Reserve Bank of Chicago

15 U.S. Consumer January 18, 2018 Federal Reserve Bank of Chicago 14

16 Income and Savings Rate Change and of DPI 1 Real DPI - % Chg. Yr./Yr., $ Personal Saving Rate - % of DPI 8.0 Pre-recession 3.1% Post recession Average 5.6% Nov % Post Recession 1.8% Pre-recession average 4.0% Nov % -6.0 '00 '02 '04 '06 '08 '10 '12 '14 '16 '00 '02 '04 '06 '08 '10 '12 '14 '16 Source: U.S. Bureau of Economic Analysis January 18, Federal Reserve Bank of Chicago

17 Total Consumer Debt by Composition Trillions of Dollars Trillions $8.066 $ $ $ Q $0.386 $1.357 $0.808 $1.213 $ $ '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Mortgage HE Revolving Auto Loan Credit Card Student Loan Other Total Source: Federal Reserve Bank of New York and Equifax January 18, 2018 Federal Reserve Bank of Chicago 16

18 Interest Payments As a of Disposable Personal Income Nov % '59 '63 '67 '71 '75 '79 '83 '87 '91 '95 '99 '03 '07 '11 '15 Source: Federal Reserve Bank - Board of Governors January 18, 2018 Federal Reserve Bank of Chicago 17

19 Household Net Worth Trillions of Current Dollars, Q1 00 to Q1 17 $Trillions Q2 07 $65.2 '00 '02 '04 '06 '08 '10 '12 '14 '16 Financial & Other Total Decline Q2 07 Q1 09 -$12.6 Home Equity Q3 17 $93.6 $28.3 Source: Federal Reserve Z.1 Statistical Release,Table B100, Households and Nonprofit Organizations January 18, 2018 Federal Reserve Bank of Chicago 18

20 Stock Market and Home Prices S&P 500 and S&P Case Shiller Composite, Index 2006 = 100 Index Dec Oct '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Home Prices Stocks Source: Author s calculations using Financial Times and S&P Case Shiller data. January 18, 2018 Federal Reserve Bank of Chicago 19

21 Consumer Sentiment University of Michigan Index January Dec '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 Source: Thomson Reuters / University of Michigan January 18, 2018 Federal Reserve Bank of Chicago 20

22 Monetary Policy January 18, 2018 Federal Reserve Bank of Chicago 21

23 Unemployment Rate & Prices Unemployed, PCE / CPI % Change Yr./Yr Unemployment 4.0 PCE / CPI Inflation All Items Target 2.0% Dec % Nov % Dec % '09 '10 '11 '12 '13 '14 '15 '16 ' '11 '12 '13 '14 '15 '16 '17 Actual Target PCE CPI Source: U.S. Department of Labor: Bureau of Labor Statistics, Bureau of Economic Analysis and the Federal Reserve January 18, Federal Reserve Bank of Chicago

24 Civilian Labor Force Growth Annual Average and Annual Average Change by Year Participation Rate Workers 3,60 3,20 Labor Force in Thousands 3, ,80 2,40 2,00 2, ,60 1, '90 '95 '00 '05 '10 '15-40 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 Note: Current noninstitutionalized civilian population is million people. Source: U.S. Bureau of Labor Statistics & U.S. Census Bureau January 18, Federal Reserve Bank of Chicago

25 U.S. Nonfarm Payrolls Monthly and Annual Average Job Change In Thousands Thousands 6,000 4,000 2,000 2,793 1,425 2,415 1,588 2,208 2,876 2, ,000-1, ,000-6,000-8,000-5,940 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Monthly Actual Source: U.S. Department of Labor: Bureau of Labor Statistics January 18, Federal Reserve Bank of Chicago

26 Labor Conditions Job Openings and Quit & Layoff Rates Ratio 6.0 Unemployed / HWOL Job Ads Rate Quits and Layoffs & Discharges Divided by Nonfarm Payroll Nov % Dec % 1.0 '08 '09 '10 '11 '12 '13 '14 '15 '16 ' '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Quit Rate Layoffs & Discharge Rate Sources: U.S. Department of Labor Job Openings and Labor Turnover Survey (JOLTS & Conference Board Help Wanted Online Data (HWOL) January 18, 2018 Federal Reserve Bank of Chicago 25

27 Average Hourly Earnings Private Employees Change Year / Year % = 1.5 Productivity Growth + 2% Inflation Dec % 2.3% 1.0 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 All Employees Production & Nonsupervisory Source: U.S. Department of Labor: Bureau of Labor Statistics January 18, Federal Reserve Bank of Chicago

28 Inflation Expectations 1-5 Year and 5-10 Year Inflation Expectations 6.0 Consumer s Inflation Expectations 4.0 TIPS Inflation Compensation Dec % 2.0 Jan 12, % % '06 '07 '08 '08 '09 '10 '12 '13 '14 '15 '16 '17 1 Year & 5 Years Out '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 ' Year Rate Source: Survey of Consumers University of Michigan and Federal Reserve Board January 18, 2018 Federal Reserve Bank of Chicago 27

29 Yield Curve 10 Year 1 Year Treasuries in Basis Points Jan 12, bps 76 bps 178 bps '12 '13 '14 '15 '16 '17 10 Yr - 1 Yr T-Bill Spread 1 Year Treasury 10 Year Treasury Source: Board of Governors Federal Reserve System January 18, Federal Reserve Bank of Chicago

30 Appropriate pace of policy firming Fed Funds Rate Year End Projections Market Expectations 1/5/ Long Run Source: Federal Reserve - F.O.M.C. participants, September 20, 2017 January 18, Federal Reserve Bank of Chicago

31 Target Federal Funds Rate Long Run Projections Sep % % 3.0% Sep '12 Sep '13 Sep '14 Sep '15 Sep '16 Sep '17 Jan '18 Low Median High Jan % 2.75% 2.25% Source: Federal Reserve - F.O.M.C. participants projections. January 18, 2018 Federal Reserve Bank of Chicago 30

32 U.S. Auto Industry January 18, 2018 Federal Reserve Bank of Chicago 31

33 U.S. Light Vehicle Sales S.A.A.R Millions of Units Millions Cash for Clunkers Aug Dec SAAR 17.1 Annual '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 SAAR Annual Average Note: Total 2016 Light Vehicle Sales: 17,465,020 / Including M/H: 17,866,260. Source: Ward s Automotive and BEA January 18, 2018 Federal Reserve Bank of Chicago 32

34 U.S. Light Vehicle Inventory & Production Index 2015 = SA Millions Dec Nov Inventory N.A. Production January 18, 2018 Federal Reserve Bank of Chicago 33

35 Vehicle Incentives As of Transaction Price - SA Dec '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Source: Author s calculations using FOMC Board of Governors and J.D. Power data. January 18, 2018 Federal Reserve Bank of Chicago 34

36 Buying Conditions for Vehicles University of Michigan Index Dec '08 '10 '12 '14 '16 Source: Thomson Reuters / University of Michigan January 18, 2018 Federal Reserve Bank of Chicago 35

37 Reasons for Buying Conditions for Vehicles University of Michigan Good / Bad Reason: Why do you say so? Low Prices Prices Will Increase Low Interest Rates Rising Interest Rates Time's good Fuel Efficiency Prices High High Interst Rates Can't Afford Uncertain Future Gas Prices Poor Selection Note: May add to more than a 100 due to multiple mentions. Source: University of Michigan Survey of Consumers December 2017 survey January 18, 2018 Federal Reserve Bank of Chicago 36

38 Average Finance Term & Transaction Price Months to Term and Annual Average Transaction Price Months Finance Term $(000) $26.3 Transaction Price $ '02 '04 '06 '08 '00 '12 '14 '16 Note: 2017 data is September year-to-date. Source: J.D. Power data. 1 '02 '04 '06 '08 '00 '12 '14 '16 January 18, 2018 Federal Reserve Bank of Chicago 37

39 Sales Weighted Vehicle Age 10 Year Moving Average Millions Years '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 L.V. Sales (LHA) Sales Weighted Age (RHA) 4.75 Source: Author's calculations using WardsAuto data. January 18, 2018 Federal Reserve Bank of Chicago 38

40 U.S. Light Vehicle Sales Calendar Year Sales Millions of Units Thousands 20,000 18,000 16,000 17,350 17,135 16,700 Long-term Trend 16,525 14,000 12,000 10,000 10,402 8,000 6,000 '00 '01 '01 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 Source: WardsAuto January 18, 2018 Federal Reserve Bank of Chicago 39

41 Thank You!