Economic Outlook Lake County Chamber of Commerce William Strauss - PowerPoint PPT Presentation

Economic Outlook Lake County Chamber of Commerce William Strauss Mundelein, IL Senior Economist January 18, 2018 and Economic Advisor Federal Reserve Bank of Chicago

What I said last year • The outlook is for the U.S. economy to expand at a pace around trend in 2017 • Employment growth is expected to slow with the unemployment rate remaining below the natural rate • Disappearing slack in the economy will lead to a gradual rising inflation rate • Light vehicle sales are anticipated to edge lower • The housing market is anticipated to continue to improve through 2017

GDP expanded by 2.3% 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 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

The Chicago Fed National Activity Index 3-month has moved above zero 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 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00'01'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

The Midwest economy is growing just above trend but a bit worse than the national economy Midwest Economy Index 2 Relative MEI 1 0 -1 -2 -3 -4 Midwest Economy Index (MEI) -5 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00'01'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

The real value of the stock market has reached new highs Real S&P 500 stock index Index: 1990 = 100 450 400 350 300 250 200 150 100 50 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

The Federal Open Market Committee (FOMC) expects GDP to grow slightly above trend this year and then around trend in 2019 and 2020 FOMC Central Tendency (December 2017) Real gross domestic product 2017 2.4 – 2.5 percent change from a yearearlier 2018 2.2 – 2.6 2019 1.9 – 2.3 6 2020 1.7 – 2.0 5 Longer run 1.8 – 1.9 4 FOMC 3 2 1 0 -1 -2 -3 -4 -5 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

The path of the current recovery is restrained compared with past deep recession recovery cycles Business cycle recovery path index - business cycle trough = 100 140 140 1981-82 135 135 130 130 average annualized growth: 4.3% 125 125 1974-75 120 120 average annualized growth: 4.3% 115 115 2008-09 110 110 105 105 100 100 average annualized growth: 2.2% 95 95 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 quarters before trough quarters after trough

While the probability of recession within the next 6 months has eased Probablility of a recession - two quarters ahead (Survey of Professional Forecasters) percent 60 50 40 30 20 10 0 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06'07 '08'09 '10 '11 '12 '13 '14 '15 '16 '17

Employment increased by just over 2 million jobs in 2017 Total employment percent 4 3 2 1 0 -1 -2 Percent change from a year earlier -3 -4 -5 -6 Quarterly change (saar) -7 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Illinois’ employment growth is well below the national average Total employment percent change from a year earlier 6 4 US IN 2 0 IL WI IA -2 -4 -6 -8 MI -10 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

The unemployment rate has fallen to 4.1% Unemployment rate percent 11 10 9 8 7 6 5 4 3 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00'01'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Illinois’ unemployment rate is well above the nation’s Unemployment rate percent 16 MI 14 12 10 US 8 IL WI 6 4 IA IN 2 0 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

The share of those unemployed more than 6 months remains significantly high Unemployed for 27 weeks or more percent 50 45 40 35 30 25 20 15 10 5 0 1950 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Employees working part time for economic reasons is close to normal Unemploymentrate - part-time workers for economic reasons (3 month moving average) percent 6 5 4 3 2 1 0 1994'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Wages and benefit costs continue to increase at a very slow 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 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

The FOMC forecasts that the unemployment rate will be below the natural rate through 2020 Unemployment rate percent 11 FOMC Central Tendency (December 2017) 10 2018 3.7 – 4.0 2019 3.6 – 4.0 9 2020 3.6 – 4.2 8 Longer run 4.4 – 4.7 7 6 FOMC 5 4 3 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Slow productivity growth helps explain why relatively strong employment growth has not translated into higher wages Productivty 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 increased at a solid pace during 2017 Real private nonresidential fixed investment percent 20 10 0 -10 Percent change from a year earlier -20 Quarterly change (saar) -30 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

This may help explain the productivity growth improvement over the past year Productivty 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

Inflation has been moving close to 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 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

In large part inflation has been following the pattern of energy prices Real West Texas Intermediate oil price dollars per barrel, 2016 dollars 160 140 120 100 80 60 40 20 0 1970 '75 '80 '85 '90 '95 '00 '05 '10 '15

The rig count has been moving higher U.S. rig count 2,500 2,000 1,500 1,000 500 0 1990 '91'92'93'94'95'96'97'98'99'00'01'02'03'04'05'06'07'08'09'10'11'12'13'14'15'16'17

Natural gas prices remain low Real natural gas price dollars per mmbtu, 2016 dollars 16 14 12 10 8 6 4 2 0 1994'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Expenditures on energy are 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 1960-2017 6 6 5 5 10s 90s 00s 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 remains low Personal consumption expenditure - less food and energy - chain price index percent change from a year earlier 5 4 3 2 1 0 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

The FOMC anticipates that PCE inflation will be around its two percent target beginning this year Personal consumption expenditure - chain price index FOMC Central Tendency (December 2017) percent change from a year earlier 2017 1.6 – 1.7 6 2018 1.7 – 1.9 2019 2.0 5 2020 2.0 – 2.1 4 Longer run 2.0 3 2 1 FOMC 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 get close to two percent this year Personal consumption expenditure - less food and energy - chain price index percent change from a year earlier 5 FOMC Central Tendency (December 2017) 2017 1.5 4 2018 1.7 – 1.9 2019 2.0 2020 2.0 – 2.1 3 2 FOMC 1 0 1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20