Economic Outlook Midwest Association of Rail Shippers Lombard, IL January 13, 216 William Strauss Senior Economist and Economic Advisor Federal Reserve Bank of Chicago
The Great Recession ended in June 29 and GDP expanded by 2.1% over the past year 8 6 4 2-2 -4-6 -8-1 Real gross domestic product percent Quarterly change (saar) Percent change from a year earlier 199 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15
The Chicago Fed National Activity Index 3-month average is below zero Chicago Fed National Activity Index 2. 1.. -1. -2. Three month average -3. -4. -5. Monthly 199'91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15
GDP is forecast to have grown around trend in 215 and expected to grow slightly above trend in 216 8 6 4 2-2 -4-6 -8-1 Real gross domestic product percent Percent change from a year earlier Q3-215 Quarterly change (saar) Blue Chip GDP Forecast Actual Forecast 214 215 216 217 2.5 2.1 2.6 2.4 2 '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17
The Federal Open Market Committee (FOMC) expects GDP to grow slightly above trend this year Real gross domestic product percent change from a year earlier 6 5 4 3 2 1-1 -2-3 -4-5 FOMC Central Tendency (December 215) 215 2.1 216 2.3 2.5 217 2. 2.3 218 1.8 2.2 Longer run 1.8 2.2 FOMC 199'91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 '18
The path of the current recovery is restrained compared with past deep recession recovery cycles index - business cycle trough = 1 135 13 125 12 115 11 15 1 95 Business cycle recovery path 1981-82 average annualized growth: 4.8% average annualized growth: 4.3% 1974-75 28-9 average annualized growth: 2.2% -8-6 -4-2 2 4 6 8 1 12 14 16 18 2 22 24 quarters before trough quarters after trough 135 13 125 12 115 11 15 1 95
The Midwest economy s performance has slowed Midwest Economy Index 2 1 Relative MEI -1-2 -3-4 -5 Midwest Economy Index (MEI) 199'91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15
Employment grew by 2.65 million jobs in 215 Total employment percent 4 3 2 1-1 -2-3 -4-5 -6-7 Percent change from a year earlier Quarterly change (saar) 199 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15
With the exception of Illinois, employment growth in the other District states are close to the national average Total employment percent change from a year earlier 6 4 2 IN US -2 IL IA WI -4-6 -8-1 199'91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 MI
The unemployment rate has fallen to 5.% percent 11 1 9 8 7 6 5 4 3 Unemployment rate 199'91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15
Unemployment rates for most of the Midwest states are close to or below the nation s Unemployment rate percent 16 14 MI 12 1 8 6 IL US WI 4 2 IN IA 199'91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15
The labor force participation rate fell to a level last seen in 1977 percent 68 67 66 65 64 63 62 61 6 59 58 Labor force participation rate 195 '55 '6 '65 '7 '75 '8 '85 '9 '95 ' '5 '1 '15
Civilian Labor Force Participation Rate and Population Share 16 and Older by Age Category, United States, 27 and 215 Labor Force Participation Rate (%) Population Share (%) Change Change 215 27 7-15 215 27 7-15 Population 16 and older 62.7 66.1-3.4 1. 1.. 16 to 24 55. 59.4-4.4 15.4 16.1 -.7 25 to 34 81. 83.3-2.3 17.1 17.1 -.1 35 to 44 82.1 83.8-1.7 15.8 18.3-2.5 45 to 54 79.5 82. -2.5 17. 18.8-1.8 55 to 64 63.9 63.8.1 16.2 14. 2.2 65 plus 18.9 16. 2.9 18.5 15.6 2.9
The share of those unemployed more than 6 months remains significantly high percent 5 45 4 35 3 25 2 15 1 5 Unemployed for 27 weeks or more 195 '55 '6 '65 '7 '75 '8 '85 '9 '95 ' '5 '1 '15
Employees working part time for economic reasons remains elevated percent 6 5 4 3 2 1 Unemployment rate - part-time workers for economic reasons (3 month moving average) 1994 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15
Wages and benefit costs continue to increase at a very slow pace Employment cost index percent change from year ago 8 7 benefit costs 6 5 4 3 2 1 wages and salaries 199 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15
Slow productivity growth helps explain why relatively strong employment growth has not translated into higher income percent change (6 month s moothed average) 5 4 3 2 1-1 Productivty 195 '55 '6 '65 '7 '75 '8 '85 '9 '95 ' '5 '1 '15
Education matters millions 4 3 2 1-1 -2-3 -4 Employment change from a year earlier (25 years or older) More than high school degree (65.8%) high school graduate or less than high school diploma (34.2%) 1992 '94 '96 '98 ' '2 '4 '6 '8 '1 '12 '14 percentages in parenthesis are the share of total workers 25 years or older in 214
The unemployment rate is close to the natural rate Unemployment rate percent 1 Blue Chip Forecast 8 6 Q4-215 4 2 2 '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17
The FOMC indicates that the unemployment rate is close to the natural rate Unemployment rate percent 11 1 9 8 7 FOMC Central Tendency (December 215) 216 4.6 4.8 217 4.6 4.8 218 4.6 5. Longer run 4.8 5. 6 5 4 FOMC 3 199'91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 '18
Inflation is very low Personal consumption expenditure - chain price index percent change from a year earlier 6 5 4 3 2 1-1 -2 199'91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15
In large part due to the collapse of energy prices dol lars per barrel, 214 dollars 16 14 12 1 8 6 4 2 Real West Texas Intermediate oil price 197 '75 '8 '85 '9 '95 ' '5 '1 '15
Natural gas prices have also declined and remains very low dol lars per mmbtu, 214 dollars 16 14 12 1 8 6 4 2 Real natural gas price 1994 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15
Removing the volatile food and energy components from the PCE, core inflation remains low Personal consumption expenditure - less food and energy - percent change from a year earlier chain price index 5 4 3 2 1 199'91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15
Prices are forecast to have increased.5 percent in 215 and will rise 2. percent in 216 8 6 4 2-2 -4-6 -8-1 Consumer price index percent Quarterly change (saar) Percent change from a year earlier Q3-215 Blue Chip CPI Forecast Actual Forecast 214 215 216 217 1.2.5 2. 2.3 2 '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17
The FOMC anticipates that PCE inflation will be just under two percent by the end of 218 Personal consumption expenditure - chain price index percent change from a year earlier 6 5 4 3 2 FOMC Central Tendency (December 215) 215.4 216 1.2 1.7 217 1.8 2. 218 1.9 2. Longer run 2. FOMC 1-1 -2 199 '92 '94 '96 '98 ' '2 '4 '6 '8 '1 '12 '14 '16 '18
The FOMC anticipates that core PCE inflation will remain below two percent through 218 Personal consumption expenditure - less food and energy - percent change from a year earlier chain price index 5 FOMC Central Tendency (December 215) 4 3 215 1.3 216 1.5 1.7 217 1.7 2. 218 1.9 2. 2 FOMC 1 199 '92 '94 '96 '98 ' '2 '4 '6 '8 '1 '12 '14 '16 '18
Blue Chip International Consensus Forecasts Inflation Exchange Rate Real GDP % change Against Interest Rates % change Annual US Dollar 3-Month Annual Consumer Prices End of Year End of Year 215 216 217 215 216 217 216 217 216 217 United States 2.5 2.5 2.5.2 1.6 2.3 - -.7 1.7 Canada 1.3 1.9 2.2 1. 2. 2. 1.34 1.29.89 1.63 Mexico 2.4 2.7 3.1 2.8 3.2 3.2 16.78 16.25 3.95 4.33 Japan.6 1.1.8.8.6 1.7 123.5 124.5.1.13 South Korea 2.6 2.8 3..7 1.5 2. 1,216 1,198 1.64 2.3 United Kingdom 2.4 2.2 2.2.1 1.1 1.8 1.49 1.52 1.2 1.51 Germany 1.5 1.8 1.8.3 1.1 1.6 1.9 1.4 -.2.1 France 1.1 1.4 1.5.1.8 1.4 1.9 1.4 -.2.1 Euro Zone 1.5 1.7 1.8.1.9 1.5 1.9 1.4 -.2.1 Brazil -3.3-2.4 1.1 8.9 7.6 5.7 4.18 4.13 13.79 12.11 Russia -3.8 -.4 1.7 15. 8.1 6.1 67.1 65.3 8.6 7.46 China 6.9 6.4 6.2 1.5 1.8 2.2 6.63 6.6 2.84 3. India 7.4 7.6 7.7 5.1 5.5 5.3 67.6 67. 7.7 7.9 Blue Chip Economic Indicators Forecast January 1, 216
The real trade-weighted dollar has increased 17.2% over the past 16 months i ndex: Ma rch 1973=1 115 11 15 1 95 9 85 8 Trade-weighted exchange value of the U.S. dollar (real) 199'91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15
The forecast calls for a very gradual recovery in housing Housing Homeownership starts rate percent thousands 76 2,5 74 2, 72 Midwest 1,5 7 68 1, 66 5 64 62 Blue Chip Housing Starts Forecast (thousands) Actual Forecast 214 215 216 217 1,1 1,114 United 1,254 States 1,37 1965 198 '7 '85'75 '8 '9 '85 '95 '9 ''95 ' '5 '5'1 '1 '15 '15
Since the beginning of the expansion manufacturing output has been increasing at a 3.5% annualized rate and has recovered 93.8% of the output during the recession percent 4 3 2 1-1 -2-3 -4 Industrial production - manufacturing Monthly change (saar) Percent change from a year earlier 199'91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15
While manufacturing jobs have been rising, they have only recovered 38.3% of the jobs lost during the downturn Manufacturing employment percent 5-5 -1 Percent change from a year earlier -15-2 Quarterly change (saar) 199'91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15
Industrial production is forecast to have edged lower last year but improve this year and grow just below its historical rate Total industrial production percent 1 5 Percent change from a year earlier -5-1 -15-2 -25 Quarterly change (saar) Q3-215 Blue Chip IP Forecast Actual Forecast 214 215 216 217 4.4 -.2 2.5 2.5 2 '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17
Light vehicles sales set a record last year Light vehicle sales millions of units (saar) 22 21 2 19 18 17 16 15 14 13 12 11 1 9 8 199'91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15
Vehicle sales rose 5.8% last year and are anticipated to rise 1.6% this year 18 17 16 15 14 13 12 11 1 Vehicle sales millions of units Blue Chip Light-Vehicle Sales Forecast Actual Forecast 215 216 217 17.4 17.7 17.5 198 '85 '9 '95 ' '5 '1 '15
The Federal Reserve increased the Federal Funds rate by.25% in December 215 after seven years of near zero interest rates percent 9 8 7 6 5 4 3 2 1 Fed Funds rate 199'91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15
The Federal Funds rate is expected to remain below the neutral rate through 218 percent 9 8 7 6 5 4 3 2 1 Target Federal Funds Rate FOMC Central Tendency (December 215) 216.9 1.4 217 1.9 3. 218 2.9 3.5 Longer run 3.3 3.5 199'91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 '18 FOMC
The asset side of the Fed s balance sheet has expanded in size and in composition Billions of dollars 4,5 4, 3,5 3, 2,5 2, 1,5 1, Assets of the Federal Reserve 5 Maiden Lane II & III AIG Support Central Bank Swaps Commercial Paper Facility Maiden Lane Term Auction Credit 27 28 29 Term Asset-Backed Securities Loan Facility Securities Held Outright 21 211 212 213 214 215
The money supply (M2) is 3 times bigger than the monetary base Monetary expansion 27-current period billions of dollars 14, 12, M2 1, 8, 6, 4, 2, monetary base 27 '8 '9 '1 '11 '12 '13 '14 '15
The Fed s expansion of the monetary base has allowed the money supply to continue rising, compared with what took place during the 193s 5 Monetary expansion 1929-1936 index: Jan 1929 = 1 5 45 4 35 3 25 2 15 1 monetary base M2 CPI 1929 '3 '31 '32 '33 '34 '35 '36 '37 index: Jan 27 = 1 5 45 4 35 3 25 2 15 1 5 Monetary expansion 27-current period monetary base M2 CPI 27 '8 '9 '1 '11 '12 '13 '14 '15
Summary The outlook is for the U.S. economy to expand at a pace slightly above trend in 216 Employment is expected to rise moderately with the unemployment rate edging lower Slackness in the economy will lead to a relatively contained inflation rate Vehicle sales are anticipated to rise to a record level this year Manufacturing output is expected to increase at a rate slightly below trend in 216
www.chicagofed.org www.federalreserve.gov