What s Ahead for the Economy: Choppy Waters or Smooth Sailing? NCSL Legislative Summit 21 Louisville, KY July 27, 21 William Strauss Senior Economist and Economic Advisor Federal Reserve Bank of Chicago
The Great Recession appears to have come to an end around the middle of last year and the economy expanded by 2.7% in the first quarter Real gross domestic product percent 1 8 6 4 2-2 -4-6 -8 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
Inventories have contributed substantially to the growth in GDP since the start of the recovery Change in inventory investment contribution to percent change in real GDP percent 4 3 2 1-1 -2-3 -4 199 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1
Final sales has been increasing at a slow pace Final sales percent 8 6 4 2-2 Percent change from a year earlier -4-6 Quarterly change (saar) 199 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1
The Chicago Fed National Activity Index has been rising over the past year with current readings just above zero 2. 1.. Chicago Fed National Activity Index -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
The liabilities side of the Fed s balance sheet shows large amount of excess reserves Liabilities of the Federal Reserve Billions of dollars 2,5 2, 1,5 Deposits of Depository Institutions 1, Treasury Balance 5 Currency in Circulation 27 28 29 21
Personal savings rate has increased Personal savings as a percent of disposable personal income percent 16 14 12 1 8 6 4 2 196 '65 '7 '75 '8 '85 '9 '95 ' '5 '1
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Existing home prices fell by over 25% Median sales price - existing single family home 3-month smoothed $25, $23, $21, $19, $17, $15, $13, $11, $9, 199 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1
The stock market has improved since March 29, but remains well below previous levels S&P 5 stock index Index: 1941-43 = 1 1,6 1,4 1,2 1, 8 6 4 2 199 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1
GDP is forecast to grow above trend in 21 and 211 1 8 6 4 2-2 -4-6 -8 Real gross domestic product percent Quarterly change (saar) Percent change from a year earlier Blue Chip GDP Forecast Actual Forecast 29 21 211.1 2.9 3. Q1-21 2 '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11
The forecast path of the current recovery is relatively muted compared with past deep recession recovery cycles index - business cycle trough = 1 116 114 112 11 18 16 14 12 1 98 Business cycle recovery path 1981-82 1974-75 28-9 Blue Chip forecast recovery path -8-7 -6-5 -4-3 -2-1 1 2 3 4 5 6 7 8 9 1 quarters before trough quarters after trough
Productivity growth is very strong Nonfarm business productivity percent 1 8 6 Percent change from a year earlier Quarterly change (saar) 4 2-2 -4 199 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1
Employment fell by nearly 8.4 million jobs between December 27 and December 29, but it has begun to rise this year Total employment percent 6 5 4 3 2 1-1 -2-3 -4-5 -6-7 Percent change from a year earlier Monthly change (saar) 199 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1
However, private employment has been increasing at a slower pace Private employment percent 6 5 4 3 2-1 1-2 -3-4 -5-6 -7-8 -9 Percent change from a year earlier Monthly change (saar) 199 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1
The unemployment rate appears to have peaked at 1.1% in October 29 Unemployment rate percent 11 1 9 8 7 6 5 4 3 199 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1
The unemployment rate is forecast to edge lower Unemployment rate percent 12 1 Q2-21 Blue Chip Forecast 8 6 4 2 2 '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11
Price changes turned from deflation to inflation over the past year 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
In large part due to the movement of oil prices West Texas Intermediate oil price dollars per barrel 14 12 1 8 6 4 2 197 '75 '8 '85 '9 '95 ' '5 '1
Adjusted for inflation, current oil prices are well below the levels that existed thirty years ago Real West Texas Intermediate oil price dollars per barrel. 29 dollars 14 12 1 8 6 4 2 197 '75 '8 '85 '9 '95 ' '5 '1
Expenditures on energy are currently well below the historical average Energy goods and services expenditures as a share of total consumption percent 1 9 8 7 6 6s 7s 8s 196-29 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 very 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
Inflation is anticipated to rise by 1. percent this year and 1.7 percent next year 8 6 4 2-2 -4-6 -8-1 Consumer price index percent Quarterly change (saar) Percent change from a year earlier Q2-21 Blue Chip CPI Forecast Actual Forecast 29 21 211 1.5 1. 1.7 2 '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11
Industrial output in manufacturing fell quite sharply during the recession, but has risen strongly over the past twelve months, averaging 9.2% and has recovered 42.3% of the loss during the recession Industrial production - manufacturing percent 4 3 2 Monthly change (saar) Percent change from a year earlier 1-1 -2-3 -4 199 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1
Manufacturing capacity utilization has been rising since June of last year Capacity utilization - manufacturing percent 86 84 82 8 78 76 74 72 7 68 66 64 199 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1
Manufacturing employment decreased by more nearly 2.2 million jobs during the recession, but has risen by 136, jobs in the first six months of 21 representing 1 out of every 4 private sector job created Manufacturing employment percent 15 1 5-5 -1-15 Percent change from a year earlier -2-25 Monthly change (saar) 199 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1
Declines in manufacturing output were broad-based during the Great Recession especially in primary metals and vehicle manufacturing Industrial output: December 27 - June 29 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 Apparel and Leather Goods Paper Printing and Related Support Activities Chemicals Petroleum and Coal Products Plastics and Rubber Products Other Manufacturing percent change (annual rate) -5-4 -3-2 -1
The recovery has also been broad-based with primary metals and automotive manufacturing leading the way Industrial output: June 29 - June 21 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 Apparel and Leather Goods Paper Printing and Related Support Activities Chemicals Petroleum and Coal Products Plastics and Rubber Products Other Manufacturing percent change (annual rate) -1 1 2 3 4 5 6
Industrial production is forecast to rise at a strong pace through the end of 211 Total industrial production percent 1 5 Quarterly change (saar) Blue Chip IP Forecast Actual Forecast 29 21 211-3.8 5.7 4.3-5 -1-15 Percent change from a year earlier Q2-21 -2 2 '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11
The inventory to GDP ratio has fallen to record low readings Inventory to GDP ratio ratio 38 36 34 32 3 28 26 24 22 2 18 16 14 12 195 '55 '6 '65 '7 '75 '8 '85 '9 '95 ' '5 '1
The pace of inventory accumulation is predicted to continue to increase through 211 Change in business inventories billions of chained 25 dollars (saar) 125 1 75 5 25-25 -5-75 -1-125 -15-175 Blue Chip Forecast Q1-21 2 '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11
Light vehicle sales collapsed in 29, with sales off 21% 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
Yet, light vehicle production was cut back by 34% Light vehicle production millions of units (saar) 14 13 12 11 1 9 8 7 6 5 4 3 199 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1
Prior to Spyker s deal to buy Saab from General Motors there were rumors that IKEA might buy Saab
Increases in new domestic production share has offset losses in Detroit-3 market share Share of light vehicle sales percent 1 9 8 7 6 5 4 3 2 1 imports new domestics Detroit-3 198 '83 '86 '89 '92 '95 '98 '1 '4 '7 '1 percent 1 9 8 7 6 5 4 3 2 1
Vehicle sales are expected to improve at a moderate pace 18 17 16 15 14 13 12 11 1 Vehicle sales millions of units Blue Chip Light-Vehicle Sales Forecast Actual Forecast 29 21 211 1.4 11.7 13.1 198 '85 '9 '95 ' '5 '1
Consumer spending improved beginning in the second half of 29 Real personal consumption expenditures percent 8 6 Quarterly change (saar) Percent change from a year earlier 4 2-2 -4 199 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1
Consumer spending growth is expected to be solid over the next two years Real personal consumption expenditures percent 8 6 4 Quarterly change (saar) Blue Chip PCE Forecast Actual Forecast 29 21 211 1. 2.8 2.7 2-2 -4 Percent change from a year earlier Q1-21 2 '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11
Net exports contributed quite a bit to GDP growth last year Net exports contribution to percent change in real GDP percent 1.5 1..5. -.5-1. -1.5 199 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9
The dollar lost 2.2% of its value since early 22 and this has assisted the improvement in the trade deficit Real net exports and change in real value of the dollar billions of chained real dollars 6 4 percent change from a year earlier 15 1 dollar (right axis) 2-2 -4-6 -8 net exports (left axis) 1974 '76 '78 '8 '82 '84 '86 '88 '9 '92 '94 '96 '98 ' '2 '4 '6 '8 '1 5-5 -1-15 -2
Export growth has been above import growth since early 25 Real exports and imports percent change from year ago 2 15 Imports 1 5-5 -1-15 Exports Exports -2 199 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1
The trade deficit is forecast to edge higher through 211 Net exports billions of chained 25 dollars (saar) Blue Chip Forecast -1-2 -3-4 -5 Q1-21 -6-7 -8 2 '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11
Residential investment increased in the third quarter of 29, its first gain since 25 25 2 15 1 5-5 -1-15 -2-25 -3-35 -4 Real residential investment percent 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
Residential investment as a share of GDP is very low Residential investment as a share of GDP percent 7 6 5 4 3 2 196 '65 '7 '75 '8 '85 '9 '95 ' '5 '1
Housing starts fell to a post WWII low 2,5 Housing starts thousands 2, 1,5 1, 5 196 '65 '7 '75 '8 '85 '9 '95 ' '5 '1
When you take into account the growth of households, it is an even more dramatic decline 4 35 3 25 2 15 1 5 Housing starts per 1, households 196 '65 '7 '75 '8 '85 '9 '95 ' '5 '1
Housing starts, which were cut-back sharply, have begun to expand Housing starts 3-month smoothed - percent change from a year earlier 4 3 2 1-1 -2-3 -4-5 -6 199 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1
The supply of new single family homes has fallen from very high levels Months supply of new single family homes months 13 12 11 1 9 8 7 6 5 4 3 199 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1
Mortgage rates remain very low Mortgage rate - 3-year fixed percent 11 1 9 8 7 6 5 4 199 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1
Home price declines have been large, but appear to be close to a bottom Median sales price - existing single family home 3-month smoothed - percent change from a year earlier 2 15 1 5-5 -1-15 -2 199 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1
In the first quarter, home prices fell by just over three percent over the past year
Housing affordability improved dramatically 19 18 17 16 15 14 13 12 11 1 Composite housing affordability index index=1 when median family income qualifies for an 8% mortgage 9 on a median priced existing single family home 199'91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1
Yet, consumer attitudes for buying a home remain very low Consumer attitudes - plan to buy a home in next six months percent of respondents 6 5 4 3 2 1 198 '85 '9 '95 ' '5 '1
The forecast calls for a very slow recovery in housing Housing starts thousands 2,5 2, 1,5 1, 5 Blue Chip Housing Starts Forecast (thousands) Actual Forecast 29 21 211 553 656 879 198 '85 '9 '95 ' '5 '1
Credit spreads between Corporate High Yield securities and Corporate Aaa securities have recently begun to move higher 2 4 6 8 1 12 14 16 18 J a n A p r J u l O c t J a n A p r J u l O c t J a n A p r J u l O c t J a n A p r J u l Credit spreads between Corporate High Yield and Corporate Aaa percent 27 28 29 21
Monetary policy has been very aggressive, lowering the Fed Funds rate by nearly 525 basis points and keeping them near zero since December 28 Fed Funds rate percent 9 8 7 6 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
The asset side of the Fed s balance sheet has expanded in size and in composition Billions of dollars 2,5 2, 1,5 1, Assets of the Federal Reserve AIG Support Central Bank Swaps Commercial Paper Facility Maiden Lane Maiden Lane II & III Term Asset-Backed Securities Loan Facility 5 Term Auction Credit Securities Held Outright 27 28 29 21
Summary The outlook is for the U.S. economy to expand at a solid pace this year and next year Employment is expected to rise moderately this year and next year, with the unemployment rate edging lower through 211 Slackness in the economy will lead to a relatively low inflation rate over the next two years Growth in manufacturing output will be solid in 21 and 211 due to improving demand and rebuilding of depleted inventories Housing starts are expected to improve moderately over the next two years
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