Economic Outlook Fastener Tech 19 William Strauss Rosemont, IL - PowerPoint PPT Presentation

Economic Outlook Fastener Tech ‘19 William Strauss Rosemont, IL Senior Economist June 5, 2019 and Economic Advisor Federal Reserve Bank of Chicago

GDP expanded by 3.2% over the past year Real gross domestic product percent 8 6 4 2 0 -2 Percent change from a year earlier -4 -6 -8 Quarterly change (saar) -10 1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

The Chicago Fed National Activity Index 3-month average in April 2019 was well below trend Chicago Fed National Activity Index 2.0 1.0 0.0 -1.0 Three month average -2.0 -3.0 -4.0 Monthly -5.0 1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

The stock market has recovered nearly all of the losses experienced in the final quarter of last year Real S&P 500 stock index Index: 1990 = 100 500 450 400 350 300 250 200 150 100 50 1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

The Federal Open Market Committee (FOMC) expects GDP to grow just above trend in 2019; and around trend in 2020 and 2021 FOMC Central Tendency (March 2019) Real gross domestic product 2019 1.9 – 2.2 percent change from a year earlier 2020 1.8 – 2.0 2021 1.7 – 2.0 6 Longer run 1.8 – 2.0 5 4 FOMC 3 2 1 0 -1 -2 -3 -4 -5 1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20

The probability of a recession over the next two quarters has moved higher, but remains low Probablility of a recession - two quarters ahead (Survey of Professional Forecasters) percent 60 50 40 30 20 10 0 1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

The Index of Leading Economic Indicators has continued to move higher through April Composite Index of 10 Leading Indicators Index (2016=100) 120 100 80 60 40 20 0 1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Employment increased by over 2.6 million jobs over the past 12 months Total employment percent 6 4 2 0 -2 -4 Percent change from a year earlier -6 Monthly change (saar) -8 1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

The unemployment rate fell to a very low 3.6% in April, the lowest reading since 1969 Unemployment rate percent 11 10 9 8 7 6 5 4 3 1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

The FOMC forecasts that the unemployment rate will be below the natural rate through 2021 Unemployment rate percent FOMC Central Tendency (March 2019) 11 2019 3.6 – 3.8 2020 3.6 – 3.9 10 2021 3.7 – 4.1 9 Longer run 4.1 – 4.5 8 7 6 5 4 FOMC 3 1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20

Wages and benefit costs continue to increase at a moderate rate, although it may finally be picking up some its pace Employment cost index percent change from year ago 8 benefit costs 7 6 5 4 3 2 wages and salaries 1 0 1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

There is a very strong correlation between 9-month lead NFIB: planning to raise compensation and Employment Cost Index: wages and salaries Employment cost index - wages and salaries and NFIB: Companies planning to raise wages and salaries % of frims % y/y 25 4.5 ECI: wages and salaries (private industry workers) - right scale 4.0 20 3.5 15 3.0 2.5 10 2.0 5 1.5 NFIB: Companies planning to raise worker compensation Correlation = 0.84 (9 month lead) -left scale 0 1.0 1986 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Slow productivity growth over the past nine years helps explain why relatively strong employment growth has not translated into higher wages Productivity percent change (20-qtr rate) 5 4 3 2 1 0 -1 1950 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

A large part of the weakness in productivity growth has been the weak pace of investment, although it has been increasing at a strong pace beginning in 2017 Real private nonresidential fixed investment percent 20 10 0 -10 Percent change from a year earlier -20 Quarterly change (saar) -30 1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

This may help explain the productivity growth improvement over the past couple of years Productivity percent change from a year earlier 8 7 6 5 4 3 2 1 0 -1 -2 -3 1950 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Improving productivity growth is helping to keep unit labor cost growth down even with compensation rising Unit labor cost percent 20 Quarterly change (saar) 15 10 5 0 -5 Percent change from a year earlier -10 -15 1950 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Corporate profits continue to improve Nonfinancial corporate profits percent 200 150 100 Quarterly change (saar) 50 0 -50 Percent change from a year earlier -100 1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Inflation is below the Fed target of 2% Personal consumption expenditure - chain price index percent change from a year earlier 6 5 4 3 2 1 0 -1 -2 1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

In large part inflation has been following the pattern of energy prices Real West Texas Intermediate oil price dollars per barrel, 2018 dollars 160 140 120 100 80 60 40 20 0 1970 '75 '80 '85 '90 '95 '00 '05 '10 '15

Expenditures on energy remain well below the historical average Energy goods and services expenditures as a share of Energy goods and services expenditures as a share of total consumption total consumption percent percent 10 10 9 9 8 8 80s 60s 7 7 70s 1960-2018 6 6 10s 5 5 00s 90s 4 4 3 3 1960 1960 '65 '65 '70 '70 '75 '75 '80 '80 '85 '85 '90 '90 '95 '95 '00 '00 '05 '05 '10 '10 '15 '15

Removing the volatile food and energy components from the PCE, “core” inflation is below 2% Personal consumption expenditure - less food and energy - chain price index percent change from a year earlier 5 4 3 2 1 0 1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

The FOMC anticipates that PCE inflation will be around its two percent target through 2021 Personal consumption expenditure - chain price index percent change from a year earlier FOMC Central Tendency (March 2019) 6 2019 1.8 – 1.9 2020 2.0 – 2.1 5 2021 2.0 – 2.1 Longer run 2.0 4 3 FOMC 2 1 0 -1 -2 1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20

The FOMC anticipates that “core” PCE inflation will also remain around two percent through 2021 Personal consumption expenditure - less food and energy - chain price index percent change from a year earlier 5 FOMC Central Tendency (March 2019) 4 2019 1.9 – 2.0 2020 2.0 – 2.1 2021 2.0 – 2.1 3 FOMC 2 1 0 1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20

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 2018 2019 2020 2018 2019 2020 2019 2020 2019 2020 United States 2.9 2.6 1.9 2.4 1.9 2.2 - - 2.42 2.39 Canada 1.8 1.6 1.7 2.3 1.9 2.0 1.31 1.30 1.92 2.11 Mexico 2.0 1.6 1.8 4.9 3.9 3.7 19.90 20.15 8.09 7.64 Japan 0.8 0.7 0.5 1.0 0.9 1.2 109.1 107.9 -0.03 -0.01 South Korea 2.7 2.3 2.4 1.5 1.1 1.7 1,125 1,104 1.94 2.11 United Kingdom 1.4 1.2 1.4 2.5 2.0 2.0 1.34 1.39 0.93 1.20 Germany 1.5 0.9 1.4 1.9 1.6 1.7 1.16 1.21 -0.24 -0.07 France 1.6 1.3 1.4 2.1 1.3 1.5 1.16 1.21 -0.24 -0.07 Euro Zone 1.8 1.2 1.4 1.8 1.4 1.5 1.16 1.21 -0.24 -0.07 Brazil 1.1 1.9 2.5 3.7 3.9 4.0 3.84 3.79 6.26 6.79 Russia 2.3 1.5 1.7 2.9 4.9 4.0 66.01 64.71 7.40 7.05 China 6.6 6.3 6.1 2.1 2.3 2.4 6.73 6.69 2.91 2.99 India 7.4 7.1 7.2 3.9 4.2 4.7 70.19 69.92 6.63 6.64 Blue Chip Economic Indicators Forecast May 10, 2019