Economic Update Baker College - Flint Federal Reserve Bank of Chicago January 10, 2017 Paul Traub Senior Business Economist
Main Economic Indicators Year-over-year Comparison Actual 2014 2015 2016 GDP Annual Growth Rate 1 2.4% 2.2% 1.6% Unemployment Rate 2 6.2% 5.3% 4.9% Participation Rate 2 62.9% 62.7% 62.8% Nonfarm Job Growth 3 251,300 228,700 189,800 PCE Core Inflation Yr. / Yr. 5 1.6% 1.4% 1.7% 1. Year-over-year 2015 & 2016, Q3/Q3 2. Annual Average 3. Monthly Average 4. Annual Average, January through November Source: U.S. Bureau of Economic Analysis, Census Bureau and Bureau of Labor Statistics 1
U.S. Real GDP Billions Chained $2009, % Change Q/Q at SAAR $ Billions 18,000 17,000 Q3 16 $16,727 20.0 15.0 16,000 10.0 15,000 3.5% 5.0 14,000 0.0 13,000-5.0 12,000 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16-10.0 Source: U.S. Bureau of Economic Analysis 2
U.S. Real GDP GDP and Contribution to Change, Q/Q at SAAR 6.0 5.0 4.0 3.0 1.0 0.0-1.0 - -3.0 5.0 4.0 3.5 2.6 2.3 1.4 0.9 0.8-1.2 Q1 '14 Q2 Q3 Q4 Q1 '15 Q2 Q3 Q4 Q1 '16 Q2 Q3 PCE Private Investment Net Exports Government GDP Source: U.S. Bureau of Economic Analysis, September 2016 Blue Chip Economic Indicators. 3
Real Personal Consumption Expenditures Billions Chained $2009, % Change Q/Q at SAAR $ Billions 12,500 12,000 11,500 11,000 10,500 Q3 16 $11,569 35.0 30.0 25.0 20.0 15.0 10,000 9,500 9,000 8,500 8,000 7,500 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 3.0% 10.0 5.0 0.0-5.0-10.0-15.0 Source: U.S. Bureau of Economic Analysis 4
Real Personal Consumption Expenditures Index, Q4 2007 = 100 Index 150.0 140.0 130.0 120.0 110.0 Q3 16 138.8 112.3 111.8 100.0 90.0 80.0 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Durables Nondurables Services Source: Author s calculations using data from the BEA 5
Real Retail Sales Excluding Food Services - % Change Yr./Yr. 6.0 5.0 4.0 3.0 1.0 2014 3.9% 2015 2.5% Nov 16 YTD 2.5% Nov 16 3.6% 0.0 '14 M M J S N '15 M M J S N '16 M M J S N % Chg Yr/Yr Annnual Average % Change Source: Bureau of the Census 6
Internet Users & E-Commerce User per 100 People and E-Commerce as % of Total Sales 100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 Internet Users 2007-75% User Penetration E-Commerce Q3 16 8.4% 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 1.0 0.0 Source: World Bank and Bureau of the Census 7
Real Gross Private Domestic Investment Billions Chained $2009, % Change Q/Q at SAAR $ Billions 3,250 50.0 3,000 2,750 2,500 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 Q3 16 $2,805 3.1% 40.0 30.0 20.0 10.0 0.0-10.0-20.0-30.0-40.0 Source: U.S. Bureau of Economic Analysis 8
Real Domestic Fixed Investment Billions Chained $2009, Index 2005 = 100 Index 140 120 100 Q3 16 127.7 106.4 80 60 66.8 40 20 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Fixed Investment Nonresidential Residential Source: U.S. Bureau of Economic Analysis 9
New Orders & Industrial Production Index 2012 = 100 110.0 108.0 106.0 104.0 10 100.0 98.0 96.0 94.0 9 90.0 2012 2013 2014 2015 2016 Nov 16 103.9 94.8 New Orders Industrial Production Note: Manufacturers New Orders Nondefense Capital Goods Excluding Aircraft. 10
ISM Purchasing Managers Index Manufacturing and Composite, SA - Greater than 50 = Expansion Index 60.0 Dec 16 56.9 54.7 55.0 50.0 45.0 40.0 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Manufacturing Composite Source: Institute for Supply Management, Haver Analytics and FRED 11
U.S. Housing Starts In Thousands of Units (SAAR) November Average YTD Data (000) s 2,400 2,000 2,080 1,827 1,600 1,370 1,200 800 931 552 590 604 766 921 994 1,103 1,163 400 0 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Note: The United States averaged 1.5 million housing starts per year 1990 to 2004. Source: U.S. Census Bureau 12
U.S. Housing Starts & Household Formation In Thousands of Units Averages by Decade 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 1,758 1,512 1,550 1,498 1,537 1,407 1,372 1,331 1,210 1,104 1,046 837 1960's 1970's 1980's 1990's 2000's 2010's Starts Formation Source: U.S. Census Bureau Single Family Starts and Households by Age 13
Households by Age of Total, Index 1960 = 100 Index 160.0 140.0 2016 Values Index 138.0 24.6% 120.0 100.0 80.0 60.0 1960 1970 1980 1990 2000 2010 Under 30 30 to 44 45 to 64 65 years and older 101.7 96.5 78.4 37.5% 12.6% 25.3% Source: U.S. Census Bureau Table HH-3, Households by Age 14
Median Age of Householder Annual Average 1960 to 2016 Index 53.0 5 51.0 2016 51.9 50.0 49.0 48.0 47.0 46.0 45.0 44.0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: U.S. Census Bureau Table HH-3, Households by Age 15
Good Time to Buy / Sell Fannie Mae Home Purchase Sentiment Survey 80.0 70.0 60.0 50.0 Nov 16 60.0 51.0 40.0 30.0 20.0 10.0 0.0 '11 '12 '13 '14 '15 '16 Good Time to Buy Good Time to Sell of respondents that say it is a good time to buy / sell. Source: Fannie Mae and Haver Analitics 16
Single Family Home Prices S&P CoreLogic Case-Shiller Index, January 2000 = 100 - SA 200.0 180.0 Nov 16 183.6 160.0 140.0 120.0 100.0 107.9 80.0 60.0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 National Detroit Area Detroit-Warren-Dearborn, Metropolitan Statistical Area (MSA) Source: Fannie Mae and Haver Analitics 17
The U.S. Dollar & The Trade Deficit Trade Weighted Dollar- Index 2010 = 100, Trade Deficit Index 2010 = 100 Index 140.0 Trade Weighted Dollar Index 130.0 Trade Deficit 130.0 Stronger Dec 28, 16 128.2 120.0 120.0 110.0 110.0 Q3 16 113.8 100.0 100.0 90.0 Weaker 90.0 80.0 '10 '11 '12 '13 '14 '15 '16 80.0 '10 '11 '12 '13 '14 '15 '16 Source: Federal Reserve Board and Haver Analytics 18
Global Outlook for 2016 & 2017 IMF Forecast for Growth, % Chg. Yr./Yr. 6.0 Change 2016 / 2015 Change 2017 / 2016 6.0 5.0 4.0 3.0 3.4 3.1 4.3 4.2 5.0 4.0 3.0 3.6 3.4 4.7 4.6 2.1 1.6 2.1 1.8 1.0 1.0 0.0 World Advanced Emerging 0.0 World Advanced Emerging January October Forecast Month January October Forecast Month Source: IMF World Economic Outlook 19
U.S. Real GDP Blue Chip Forecast Annual Change Chained $2009 3.0 2.5 1.5 1.5 1.6 1.6 2.1 2.3 2.6 1.8 2.4 2.8 1.0 0.5 0.0 2016 2017 2018 Bottom 10 Average Top 10 Source: Blue Chip Economic Indicators 20
Fiscal Stimulus Likely, But Large Uncertainties President elect s plan includes large tax cuts and increased spending - Details still lacking in many areas - Final package depends on Administration and Congressional priorities Estimates of fiscal impact range from 0.5 to 1.0 percent on level of GDP by end of 2018, falling to zero by 2020 Potential offsets to long-run growth from other policies - Trade restrictions - Immigration legislation - Affordable Care Act - Federal Reserves response to stronger demand and higher inflation 21
U.S. Consumer 22
Income and Savings Rate Change and of DPI 10.0 Real DPI - % Chg. Yr./Yr., $2009 1 Personal Saving Rate - % of DPI 8.0 Pre-recession 3.1% 10.0 6.0 Post recession Average 5.9% 4.0 Nov 16 2.3% 8.0 6.0 Nov 16 5.5% 0.0 4.0 - -4.0 Post Recession % Pre-recession average 4.0% -6.0 0.0 '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 23
Real DPI & Personal Savings Rate As of Personal Income 5.0 4.5 4.0 3.5 3.0 2.5 1.5 4.6 Real Disposable Personal Income - $2009 3.4 3.3 3.1 2.6 2.1 14.0 1 10.0 8.0 6.0 4.0 11.1 11.8 Personal Savings Rate of DPI 9.3 6.7 4.3 5.9 1.0 0.5 0.0 '60's '70's '80's '90's '00's '10's 0.0 '60's '70's '80's '90's '00's '10's Source: U.S. Bureau of Economic Analysis 24
Consumer Credit and Interest Payments As a of Disposable Personal Income 28.0 26.0 Revolving & Non-revolving Credit Oct 16 26.2% 3.5 3.0 Personal Interest Payments 24.0 2.5 2 20.0 18.0 18.9% 1.5 Nov 16 % 16.0 '00 '02 '04 '06 '08 '10 '12 '14 '16 Total Credit Total Less Government Held Student Loans 1.0 '00 '04 '08 '12 '16 Source: Federal Reserve Bank - Board of Governors January 10, 2017 Federal Reserve Bank of Chicago 25
Inflation PCE & CPI Price Index Change Yr / Yr 6.0 PCE Price Indexes 6.0 CPI Price Indexes 5.0 5.0 4.0 4.0 3.0 1.0 Nov 16 1.7% 1.4% 3.0 1.0 Nov 16 2.1% 1.7% 0.0 0.0-1.0-1.0 - - -3.0 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16-3.0 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 All Items Core All Items Core Source: U.S. Department of Labor: Bureau of Labor Statistics data. 26
Unemployment Rate of Labor Force 1 10.0 Oct 09 10.0% 8.0 6.0 4.0 Dec 16 4.7% 0.0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Source: U.S. Bureau of Labor Statistics 27
Initial Unemployment Claims Monthly Average as of Nonfarm Employment 0.90 0.80 0.70 0.71 0.74 0.60 0.50 0.40 0.45 0.46 0.37 0.50 0.30 0.20 0.10 0.17 0.00 '67 '70 '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09 '12 '15 Source: U.S. Bureau of Labor Statistics 28
Real Household Net Worth Home Equity and Financial & Other - Index 2007 = 100, $2009 Index 140.0 120.0 100.0 Index 119.8 116.4 100.2 Q2 16 $Trillions $66.2 $77.7 $11.5 80.0 60.0 40.0 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Source: Author s calculations using Federal Reserve data. Home Equity Financial & Other Total Note: Total Household Net Worth in Current Dollars is $85.9 Trillion. 29
Consumer Sentiment University of Michigan Index 140 120 January 00 11 100 Dec 16 98.2 80 60 40 20 '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 10, 2017 Federal Reserve Bank of Chicago 30
Monetary Policy Employment & Inflation 31
F.O.M.C Statement December 21, 2016 1. Information since the F.O.M.C. met in November indicates that the labor market has continued to strengthened and that economic activity has been expanding at a moderate pace since mid-year. 2. Job gains have been solid in recent months and the unemployment rate has declined. 3. Household spending has been rising moderately but fixed investment has remained soft. 4. Inflation has increased since earlier this year but is still below the Committee s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. 5. Market-based measures of inflation compensation have moved up considerably but are still low; most surveyed based measures of longer-term inflation expectations are little changed, on balance, in recent months. 32
Unemployment Rate & PCE Inflation Unemployed, PCE % Change Yr./Yr. 11.0 Unemployment 3.0 PCE Inflation 10.0 2.5 9.0 % 8.0 1.5 Nov 16 1.4% 7.0 6.0 5.0 Dec 16 4.7% 1.0 0.5 1.7 2.5 1.9 1.3 1.5 1.0 4.0 '09 '10 '11 '12 '13 '14 '15 '16 0.0 0.3 '09 '10 '11 '12 '13 '14 '15 '16 Actual Target Annual Actual Target Source: U.S. Department of Labor: Bureau of Labor Statistics, Bureau of Economic Analysis and the Federal Reserve 33
U.S. Nonfarm Payrolls Monthly and Annual Average Job Change In Thousands Thousands 350 300 250 200 150 100 50 0 2014 251.3 2015 228.7 2016 YTD 179.8 2014 2015 2016 Monthly Actual Annual Average Dec 16 156 Source: U.S. Department of Labor: Bureau of Labor Statistics 34
Underutilization of Labor U6 Unemployment Rate - SA 20.0 18.0 16.0 14.0 1 10.0 Dec 16 9.2% 8.0 6.0 4.0 '00 '02 '04 '06 '08 '10 '12 '14 '16 Includes total unemployed plus marginally attached workers plus employed part-time for economic reasons. Source: U.S. Department of Labor: Bureau of Labor Statistics, Bureau of Economic Analysis and the Federal Reserve 35
Inflation Compensation 5 Year and 10 Year Inflation Expectations 4.0 3.0 1.0 5 & 10 Year TIPS Minus 5 & 10 Year Treasuries- Constant Maturity Rate Dec 30 16 1.96% 1.85% 0.0-1.0 - -3.0 '06 '08 '10 '12 '14 '16 5 Year Breakeven 10 Year Breakeven Source: Author s calculation using Federal Reserve System data. Source: U.S. Department of Labor: Bureau of Labor Statistics, Bureau of Economic Analysis and the Federal Reserve 36
Yield Curve 10 Year 1 Year Treasuries in Basis Points 3.5 3.0 2.5 1.5 1.0 30-Dec-2016 251 bps 164 bps 87 bps 0.5 0.0 '12 '13 '14 '15 '16 10 Yr - 1 Yr T-Bill Spread 1 Year Treasury 10 Year Treasury Source: Board of Governors Federal Reserve System 37
Inflation Expectations Headline PCE Inflation Yr./Yr. & Q4/Q4 2.4 Survey of Professional Forecasters Q3 16 Forecast 1.9 1.8 1.9 1.9 1.9 1.6 1.4 1.2 0.8 0.9 1.0 1.0 0.4 0.0 Q1 '16 Q2 '16 Q3 '16 Q4 '16 Q1 '17 Q2 '17 Q3 '17 Q4 '17 2016 2017 2018 Actual Expectations Source: Bureau of Economic Analysis and FRB Philadelphia Q1 16 Survey 38
Economic Projections Comparisons September 2015 versus September 2016 PCE Inflation - Annual PCE Core Inflation - Annual 2.25 2.25 0 1.9 1.9 0 1.75 1.75 1.7 1.7 1.8 1.8 1.50 1.5 1.50 1.3 1.25 1.25 1.00 2016 2017 2018 2019 Longer run Sep '16 Dec '16 1.00 2016 2017 2018 2019 Sep '16 Dec '16 Source: Board of Governors Federal Reserve System, September 2015 & September 2016 39
Economic Projections Comparisons September 2015 versus September 2016 5.5 Unemployment Rate Q4 Est. 2.4 GDP - % Chg. Q4/Q4 5.0 4.5 4.8 4.7 4.6 4.6 4.5 4.5 4.5 4.5 4.8 4.8 2.1 1.8 1.8 1.9 1.9 1.8 1.8 1.8 4.0 1.5 3.5 2016 2017 2018 2019 Longer run 1.2 2016 2017 2018 2019 Longer run Sep '16 Dec '16 Sep '16 Dec '16 Source: Board of Governors Federal Reserve System, September 2015 & September 2016 40
Appropriate pace of policy firming Fed Funds Rate Year End Projections 4.5 4.0 3.5 3.0 2.5 1.5 1.0 0.5 0.0 2016 2017 2018 2019 Long Run 41
Economic Projections Comparisons Real GDP Change Q4/Q4 Sep 15 versus Sep 16 3.0 2.5 2.4 1.9 2.2 2.1 1.9 1.8 1.5 1.0 2016 2017 2018 2019 Longer run Dec '15 Projection Dec '16 Projection Source: Board of Governors Federal Reserve System, June 2016 & September 2016 Median Predictions 42
Labor and Productivity Growth Labor Force and Real Output Per Hour Average Annual Growth 3.5 Labor Force 3.5 Real Output Per Hour 3.0 2.5 1.5 1.0 1.1 1.7 2.7 1.7 1.2 1.0 3.0 2.5 1.5 1.0 2.8 2.8 1.9 1.5 2.1 2.6 0.9 0.5 0.4 0.5 0.0 50's 60's 70's 80's 90's 00's 10's 0.0 50's 60's 70's 80's 90's 00's 10's Source: U.S. Department of Labor: Bureau of Labor Statistics 43
Importance of an Independent Fed Policymakers, academics, and other informed observers around the world agree that the goals of monetary policy should be established by the political authorities, but the conduct of monetary policy in pursuit of those goals should be free from political influence.* The Fed has congressionally mandated goals of price stability, maximum employment, and moderate long-term interest rates. Many studies support that central banks able to conduct day-to-day monetary policy operations free of political pressure tend to deliver better inflation outcomes, without compromising economic growth. Achieving monetary goals can at times take substantial time, this requires that monetary policy makers take a longer-term perspective when making their decisions. * Source: Board of Governors of the Federal Reserve 44
Importance of an Independent Fed (con t) In contrast, short-term political influences may cause pressure to over stimulate the economy resulting in output and employment gains that exceed the economy s underlying potential. Such gains may look good at first, but they are not sustainable and will likely create an inflationary environment that is detrimental to longerterm economic growth. In short, monetary policy interference can generate boom-bust cycles with high inflation and less stable economic activity. Additionally, a government that controls the central bank could abuse the central bank s money-creation powers to help finance government budget deficits which would inevitably lead to high inflation and interest rates and a volatile economy. 45
U.S. Auto Industry 46
U.S. Light Vehicle Sales S.A.A.R Millions of Units Millions 20.0 18.0 Dec 16 18.3 / 18.7 16.0 14.0 Cash for Clunkers Aug 09 14.6 1 10.0 8.0 6.0 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 SAAR Annual Average Note: Total 2016 Light Vehicle Sales: 17,465,020 / Including M/H: 17,866,260. Source: Ward s Automotive and BEA 47
U.S. Light Vehicle Incentives As of Transaction Price - SA 13.0 1 Dec 16 12.2% 11.0 10.0 9.0 8.0 7.0 '10 '11 '12 '13 '14 '15 '16 Source: Author s calculation using Ward s Automotive and J.D Power data. 48
Light Vehicle Transaction Price Annual Average & Change Yr./Yr. Dollars $32,000 4.5 2016 $31,151 6.0 $30,000 $28,000 1.5 0.5 1.5 1.8 2.4 2.3 2.8 1.5 2.1 0.9 2.7 2.4 2.3 1.6 4.0 $26,000 0.0 $24,000 - $22,000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16-3.6 % Chg. Yr/Yr (Right) Transaction Price (Left) -4.0 Source: Author s calculation using J.D Power data. 49
Finance Term Length of Loan in Months 70.0 68.0 66.0 64.0 6 60.0 58.0 56.0 54.0 5 50.0 67.8 66.9 65.9 65.0 64.5 63.8 63.6 63.5 62.7 63.1 62.6 62.8 6 61.0 59.6 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Source: J.D Power data. 50
Buying Conditions for Vehicles University of Michigan Index 160 150 140 130 Dec 16 137.0 120 110 100 90 80 '08 '10 '12 '14 '16 Source: Thomson Reuters / University of Michigan January 10, 2017 Federal Reserve Bank of Chicago 51
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 1 1 3 4 5 5 6 6 12 13 21 25 Note: May add to more than a 100 due to multiple mentions. Source: University of Michigan Survey of Consumers 0.0 5.0 10.0 15.0 20.0 25.0 30.0 52
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