Economic and Residential Outlook Rockford Area Realtors Rockford, IL July, William Strauss Senior Economist and Economic Advisor The Great Recession ended in June, but the economy expanded by.% over the past year Real gross domestic product Quarterly change(saar) ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' The Chicago Fed National Activity Index -month average is below zero The liabilities side of the Fed s balance sheet shows large amount of excess reserves. Chicago Fed National Activity Index Liabilities of the Federal Reserve Billions of dollars,... Three month average... Monthly. '''''''''''''''''''''',,,, Deposits of Depository Institutions Treasury Balance Currency in Circulation The personal savings rate has moved lower Existing home prices fell by over % Personal savings as a of disposable personal income ' ' ' ' ' ' ' ' ' ' Median sales price existing single family home month smoothed $, $, $, $, $, $, $, $, $, ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' Economic and Residential Outlook
The stock market has improved since March, but remains below previous levels GDP is forecast to grow near trend in and slightly above trend in S&P stock index Index: =,,,, ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' Real gross domestic product Blue Chip GDP Forecast Actual Forecast Quarterly change(saar)... Q ' ' ' ' ' ' ' ' ' ' ' ' ' The forecast path of the current recovery is relatively muted compared with past deep recession recovery cycles Business cycle recovery path index business cycle trough = average annualized growth:.% average annualized growth:.% average annualized growth:.% Blue Chip forecast recovery path quarters before trough quarters after trough Employment fell by over. million jobs between December and February, but began to rise and has added just under. million jobs over the past months Total employment Monthly change (saar) '''''''''''''''''''''' After peaking in October, the unemployment rate has fallen by. age points Unemployment rate '''''''''''''''''''''' Okun s Law: for every age point that GDP growth deviates from its trend leads to a half age change in the unemployment rate in the opposite direction Changes in Real GDP and the unemployment rate since Change in unemployment rate Q/Q,,age points Change in Real GDP Q/Q, age points Economic and Residential Outlook
The unemployment rate is forecast to edge lower Inflation has moderated Unemployment rate Blue Chip Forecast Q Personal consumption expenditure chain price index change from a year earlier ' ' ' ' ' ' ' ' ' ' ' ' ' '''''''''''''''''''''' In large part due to the movement of oil prices. Adjusted for inflation, current oil prices are below the levels that existed thirty years ago Natural gas prices have fallen sharply Real West Texas Intermediate oil price dollars per barrel. dollars ' ' ' ' ' ' ' ' Real natural gas price dollars per mmbtu ( dollars) ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' Expenditures on energy are below the historical average Removing the volatile food and energy components from the PCE, core inflation remains low Energy goods and services expenditures as a share of total consumption s s s s s s Personal consumption expenditure less food and energy change from a year earlier chain price index ' ' ' ' ' ' ' ' ' ' '''''''''''''''''''''' Economic and Residential Outlook
Inflation is anticipated to rise. this year and. next year Consumer price index Quarterly change (saar) Q Blue Chip CPI Forecast Actual Forecast... ' ' ' ' ' ' ' ' ' ' ' ' ' Industrial output in manufacturing fell quite sharply during the recession, but has risen strongly over the past thirty-four months, averaging.% and has recovered.% of the loss during the recession Industrial production manufacturing Monthly change (saar) '''''''''''''''''''''' Manufacturing capacity utilization has been rising since June Declines in manufacturing output were broad-based during the Great Recession especially in vehicle and primary metals manufacturing Capacity utilization manufacturing '''''''''''''''''''''' Industrial output: December June change Manufacturing Durable Goods WoodProd Products Nonmetallic Mineral Products Primary Metals Fabricated Metal Products Machinery Computer and Electronic Components Electrical Eqpt, Appliances & Components Motor Vehicles and Parts Aerospace & Miscellaneous Transport Equip Furniture and Related Products Miscellaneous Durable Goods Nondurable Manufacturing Food, Beverages, and Tobacco Textile and Product Mills Apparel and Leather Goods Paper Printing and Related Support Activities Chemicals Petroleum and Coal Products Plastics and Rubber Products Other Manufacturing The recovery has also been broad-based with vehicle and primary metals manufacturing leading the way Industrial production is forecast to rise at a solid pace Industrial output: June June change Manufacturing Durable Goods WoodProd Products Nonmetallic Mineral Products Primary Metals Fabricated Metal Products Machinery Computer and Electronic Components Electrical Eqpt, Appliances & Components Motor Vehicles and Parts Aerospace & Miscellaneous Transport Equip Furniture and Related Products Miscellaneous Durable Goods Nondurable Manufacturing Food, Beverages, and Tobacco Textile and Product Mills Apparel and Leather Goods Paper Printing and Related Support Activities Chemicals Petroleum and Coal Products Plastics and Rubber Products Other Manufacturing Total industrial production Quarterly change (saar) Q Blue Chip IP Forecast Actual Forecast... ' ' ' ' ' ' ' ' ' ' ' ' ' Economic and Residential Outlook
Housing starts have been improving Existing home sales have been improving Housing starts month smoothed,,,,,, ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' Existing single family home sales,,,,,,,,, ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' However, new home sales has yet to improve The supply of new single family homes has fallen from very high levels New single family home sales,,,, ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' Months supply of new single family homes months '''''''''''''''''''''' Home prices appear to be stabilizing In the first quarter, home prices rose by. from a year earlier Median sales price existing single family home month smoothed change from a year earlier '''''''''''''''''''''' Economic and Residential Outlook
According to RealtyTrac, in every housing units in the country received a foreclosure filing in June June Foreclosure Rate Heat Map According to RealtyTrac, in every housing units in Illinois received a foreclosure filing in June June Foreclosure Rate Heat Map Mortgage rates continue to move lower Housing affordability improved dramatically Mortgage rate year fixed '''''''''''''''''''''' Composite housing affordability index index= when median family income qualifies for an % mortgage on a median priced existing single family home '''''''''''''''''''''' Yet, consumer attitudes towards buying a home remain very low Home ownership rates have been moving lower Consumer attitudes plan to buy a home in next six months of respondents ' ' ' ' ' ' Homeownership rate ' ' ' ' ' ' ' ' ' Economic and Residential Outlook
Rent has risen CPI Rent on primary residence change from a year earlier Why do you build homes? You build homes for people '''''''''''''''''''''' There is a very close relationship between household formation and housing starts, but housing starts tend to be above household formation The amount of excess housing units compared with trend has disappeared New households and housing starts Housing starts (average),, per year, New households (average),, per year housing starts, Housing starts,, +,, units,,, new households ' ' ' ' ' ' ' ' ' ', -,, units,, units -,, units -,, units ' ' ' ' ' ' ' ' ' ' Since, household formation growth has averaged one Household formation remains below its long-run average Household formation New Households,,,, units -,, units -, units +,, units,, -,, units ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' Economic and Residential Outlook
Looking at the relationship between housing starts and household formation shows a large excess amount of inventory on the market, although it has begun to fall The forecast calls for a very gradual recovery in housing New households and net housing starts, net housing starts,, units -,, units,,, units, new households Housing starts,,,, +,, units -, units ' ' ' ' ' ' ' ' ' ', Blue Chip Housing Starts Forecast () Actual Forecast ' ' ' ' ' ' Credit spreads between Corporate High Yield securities and Corporate Aaa securities have been edging lower Monetary policy has been very aggressive, keeping the Fed Funds near zero since December Credit spreads between Corporate High Yield and Corporate Aaa Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Fed Funds rate ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' The Federal Funds Rate is anticipated to remain very low over the forecast horizon The asset side of the Fed s balance sheet has expanded in size and in composition Target Federal Funds Rate FOMC ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' Assets of the Federal Reserve Billions of dollars, Term Asset Backed Securities Loan Facility, Maiden Lane II & III, AIG Support Central Bank Swaps, Commercial Paper Facility, Maiden Lane Term Auction Credit Securities Held Outright Economic and Residential Outlook
index: Jan = The Fed s expansion of the monetary base has allowed the money supply to continue rising, compared with what took place during the s Monetary expansion monetary base M ' ' ' ' ' CPI index: Jan = Monetary expansion current period monetary base ' ' ' ' ' M CPI Summary The outlook is for the U.S. economy to expand at a pace below trend this year and slightly above trend in Employment is expected to rise moderately with the unemployment rate edging lower Slackness in the economy will lead to a relatively contained inflation rate The housing sector appears to have begun its long road to recovery www.chicagofed.org www.federalreserve.gov Economic and Residential Outlook