Economic Outlook Chicago Association of Spring Manufacturers, Inc Des Plaines, IL January 15, 215 William Strauss Senior Economist and Economic Advisor Federal Reserve Bank of Chicago
The Great Recession ended in June 29 and GDP expanded by 2.7% over the past four quarters 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
Real existing home prices fell by 4%, but have begun to rise Real Median sales price - existing single family home 3- month s moothed (213 dollars) $275, $25, $225, $2, $175, $15, 199'91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14
The forecast calls for a very gradual recovery in housing Housing starts thousands 2,5 2, 1,5 1, 5 Blue Chip Housing Starts Forecast (thousands) Actual Forecast 213 214 215 216 93 998 1,167 1,32 198 '85 '9 '95 ' '5 '1 '15
The stock market has improved since March 29, and has surpassed its previous peak Index: 199 = 1 35 3 25 2 15 1 5 Real S&P 5 stock index 199 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14
GDP is forecast to grow somewhat above trend over the next two years 8 6 4 2-2 - 4-6 - 8-1 Real gross domestic product percent Percent change from a year earlier Quarterly change (saar) Blue Chip GDP Forecast Actual Forecast 213 214 215 216 3.1 2.5 2.9 2.8 Q3-214 2 '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16
The FOMC expects GDP to grow around in 214 and somewhat above trend over the next three years 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 214) 214 2.3 2.4 215 2.6 3. 216 2.5 3. 217 2.3 2.5 Longer run 2. 2.3 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
The path of the current recovery is restrained compared with past deep recession recovery cycles Business cycle recovery path index - business cycle trough = 1 13 125 average annualized growth: 4.9% 1981-82 13 125 12 115 average annualized growth: 4.3% 1974-75 12 115 11 15 28-9 11 15 1 95 average annualized growth: 2.3% - 8-7 - 6-5 - 4-3 - 2-1 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 19 2 21 quarters before trough quarters after trough 1 95
Employment grew by over 2.9 million jobs last year 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
After peaking in October 29, the unemployment rate has fallen by 4.4 percentage points 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
However, 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
Most of the decline in the participation rates has come from the youth percent 9 8 7 6 5 4 3 2 1 Labor force participation rate by age groups 35-44 45-54 25-34 2-24 55-64 16-19 65-69 7-74 75+ 195 '6 '7 '8 '9 ' '1
Civilian Labor Force Participation Rate and Population Share 16 and Older by Age Category, United States, 27 and 214 Labor Force Participation Rate (%) Population Share (%) Change Change 214 27 7-14 214 27 7-14 Population 16 and older 62.9 66.1-3.2 1. 1.. 16 to 24 55. 59.4-4.4 15.6 16.1 -.5 25 to 34 81.2 83.3-2.1 17. 17.1 -.2 35 to 44 82.2 83.8-1.6 16. 18.3-2.3 45 to 54 79.6 82. -2.4 17.3 18.8-1.5 55 to 64 64.1 63.8.4 16. 14. 2. 65 plus 18.6 16. 2.6 18.1 15.6 2.5
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
Employees working part time for economic reasons remains elevated Unemployment rate - part- time workers for economic reasons percent 6 5 4 3 2 1 1994 '96 '98 ' '2 '4 '6 '8 '1 '12 '14
Wages and benefit cost increases remain low Real - Employment cost index percent change from year ago 5 4 benefit costs 3 2 1-1 - 2 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
The unemployment rate is forecast to edge lower Unemployment rate percent 1 Blue Chip Forecast 8 Q4-214 6 4 2 2 '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16
The FOMC forecasts that the unemployment rate will be at the natural rate at the end of 215 Unemployment rate percent 11 1 9 8 7 FOMC Central Tendency (December 214) 215 5.2 5.3 216 5. 5.2 217 4.9 5.3 Longer run 5.2 5.5 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
Inflation remains moderate Personal consumption expenditure - chain price index percent change from a year earlier 6 5 4 3 2 1-1 199'91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14
Adjusted for inflation, current oil prices are well below the levels that existed thirty years ago dol lars per barrel, 213 dollars 16 14 12 1 8 6 4 2 Real West Texas Intermediate oil price 197 '75 '8 '85 '9 '95 ' '5 '1
Natural gas prices remain low dol lars per mmbtu, 213 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
Expenditures on energy are below the historical average Energy goods and services expenditures as a share of total consumption percent 1 9 8 7 6 6s 7s 8s 196-213 5 4 9s s 1s 3 196 '65 '7 '75 '8 '85 '9 '95 ' '5 '1
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
Inflation is forecast to rise 1.4 percent in 215 and 2.3 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 Q3-214 Blue Chip CPI Forecast Actual Forecast 213 214 215 216 1.2 1.3 1.4 2.3 2 '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16
The FOMC anticipates that PCE inflation will remain below two percent through 217 Personal consumption expenditure - chain price index percent change from a year earlier 6 FOMC Central Tendency (December 214) 5 4 3 2 1 214 1.2 1.3 215 1. 1.6 216 1.7 2. 217 1.8 2. Longer run 2. FOMC - 1 199 '92 '94 '96 '98 ' '2 '4 '6 '8 '1 '12 '14 '16
The FOMC anticipates that core PCE inflation will also remain below two percent through 217 Personal consumption expenditure - less food and energy - percent change from a year earlier chain price index 5 FOMC Central Tendency (December 214) 4 3 214 1.5 1.6 215 1.5 1.8 216 1.7 2. 217 1.8 2. 2 FOMC 1 199 '92 '94 '96 '98 ' '2 '4 '6 '8 '1 '12 '14 '16
Blue Chip International Consensus Forecasts Inflation Exchange Rate Real GDP % change Against % change Annual US Dollar Annual Consumer Prices End of Year 214 215 216 214 215 216 215 216 United States 2.3 3.2 2.9 1.7.8 2.3 - - Canada 2.4 2.4 2.4 2. 1.6 2.1 1.15 1.13 Mexico 2.3 3.3 3.9 3.9 3.6 3.6 13.67 13.37 Japan.6 1. 1.5 2.7 1.5 1.4 121.7 125.8 South Korea 3.4 3.6 3.7 1.4 1.6 2.2 1,92 1,84 United Kingdom 3. 2.6 2.4 1.5 1.3 1.9 1.53 1.53 Germany 1.5 1.3 1.7.9.9 1.5 1.18 1.17 France.4.8 1.3.7.6 1.2 1.18 1.17 Euro Zone.8 1.2 1.5.5.5 1.2 1.18 1.17 Brazil.2.8 1.9 6.3 6.2 5.8 2.72 2.78 Russia.2-1.3.7 7.6 8.4 6. 42.5 43.5 China 7.3 6.9 6.8 2.1 2. 2.4 6.17 6.11 India 5.4 6.1 6.6 7. 5.8 5.6 62.7 62.2 Blue Chip Economic Indicators Forecast January 1, 215
Industrial output in manufacturing fell quite sharply during the recession, and in May 214 it finally regained all the lost output that took place 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
While manufacturing jobs have been rising, they have only recovered 34.3% 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
Capacity utilization is getting very close to full utilization Capacity utilization - manufacturing percent 86 84 82 8 78 76 74 72 7 68 66 64 62 199'91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14
The recovery has also been broad-based with vehicle and primary metals manufacturing leading the way Industrial output: June 29 - November 214 Manufacturing Durable Goods Wood 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 percent change - 25 25 5 75 1 125 15
The supply managers composite index has strengthened net percent reporting i ncreases 65 6 55 5 45 4 35 3 Purchasing managers' index - composite 199'91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14
The industrial sector has performed very well over the past 5 years Current 3 Month Moving Average Growth is: Above Trend and Accerating Above Trend and Decelerating Below Trend and Accelerating Below Trend and Decelerating Contracting but Improving Contracting and Deteriorating Manufacturing Industries Activity Chart Growth (3-month moving average) compared with the most recent 5-year trend 5- year Trend 29 21 211 212 213 214 Manufacturing 4.4% Wood Products 4.9% Nonmetallic Mineral Products 4.5% Primary Metals 6.8% Fabricated Metal Products 6.6% Machinery 8.8% Computer and Electronic Components 9.3% Electrical Eqpt, Appliances & Components 4.5% Motor Vehicles and Parts 1.7% Aerospace & Misc. Transport Equip 4.% Furniture and Related Products 4.1% Miscellaneous Durable Goods 4.3% Food, Beverages, and Tobacco 1.4% Textile and Product Mills 1.6% Apparel and Leather Goods 1.1% Paper -.8% Printing and Related Support Activities.% Chemicals 1.6% Petroleum and Coal Products.8% Plastics and Rubber Products 5.2%
Industrial production is forecast to rise at a pace above trend in 215 and 216 Total industrial production percent 1 5 Percent change from a year earlier - 5-1 - 15-2 - 25 Quarterly change (saar) Q3-214 Blue Chip IP Forecast Actual Forecast 213 214 215 216 3.3 4.5 3.5 3.2 2 '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16
Light vehicles sales have reached pre-recession levels 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
Vehicle sales are forecast to rise around 2% this year and 1% next year 18 17 16 15 14 13 12 11 1 Vehicle sales millions of units Blue Chip Light- Vehicle Sales Forecast Actual Forecast 214 215 216 16.4 16.9 17. 198 '85 '9 '95 ' '5 '1 '15
Credit spreads between Corporate High Yield securities and Corporate Aaa securities have remained low, but has been inching higher since the middle of 214 percent 18 16 14 12 1 8 6 4 2 Credit spreads between Corporate High Yield and Corporate Aaa 27 28 29 21 211 212 213 214 215
Monetary policy has been very aggressive, keeping the Fed Funds near zero since December 28 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
The Federal Funds Rate is anticipated to return to the neutral rate by the end of 217 percent 9 8 7 6 5 4 3 2 1 Target Federal Funds Rate FOMC Midpoint Values (December 214) Longer run 3.75 199'91 '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 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
The money supply (M2) is nearly 3 times bigger than the monetary base Monetary expansion 27- current period billions of dollars 12, 1, M2 8, 6, 4, 2, monetary base 27 '8 '9 '1 '11 '12 '13 '14
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 1929 '3 '31 '32 '33 '34 '35 '36 CPI 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
Summary The outlook is for the U.S. economy to expand at a pace somewhat above trend in 215 and 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 Growth in manufacturing output should be above trend over the next two years
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