Midwest Perspectives Bill Testa Community Banking Conference Vice - PowerPoint PPT Presentation

Midwest Perspectives Bill Testa Community Banking Conference Vice President University of Wisconsin--Whitewater April 27, 2018 Federal Reserve Bank of Chicago

Topics Today • U.S. Economy (doing well) • Midwest Economy • Near Term (doing well except ag) • Long run challenges (slow growth of pop and workforce, especially small places and rural areas) April 27, 2018 Federal Reserve Bank of Chicago 2

Overview of U.S. 1. Upward revision to Q4 2017 GDP estimate together with strengthening business and consumer optimism has lead to higher economic expectations for 2018. 2. Consumer sentiment increased to 14 year high in April, aided by improving incomes and strength in the labor markets. 3. Business activity (Investment and Export Recovery) remains strong especially in manufacturing. 4. The prospect of high tariff environment has added to market volatility and business uncertainty. 5. Economy running close to potential as labor markets tighten. 6. Wage and price growth firming while inflation (and expectations) remains below the 2-percent objective. 7. Many forecasts revised higher for this year and next with fiscal stimulus of tax reform and higher federal spending

U.S. Real GDP Billions Chained $2009, % Change Q/Q at SAAR $ Billions Percent 18,000 20.0 Q4 ‘17 $17,287 17,000 15.0 16,000 10.0 15,000 5.0 2.9% 14,000 0.0 13,000 -5.0 12,000 -10.0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Source: U.S. Bureau of Economic Analysis

U.S. Real GDP – CBO Projections Percent Change, Fourth Quarter to Fourth Quarter In Billions of Chained $2009 Percent 3.3 3.5 3.0 2.5 2.1 2.0 2.0 1.5 1.5 1.0 0.5 0.0 2018 2019 - 2020 Jun '17 Fcst Apr '18 Fcst Source: Congressional Budget Office.

Real Personal Consumption Real Personal Consumption Expenditures 1 and Retail Sales 2 Percent Change Year-over-year 4.0 3.5 Feb ’18 3.0 2.7% 2.5 2.0 1.7% 1.5 1.0 0.5 0.0 2016 2017 2018 PCE Retail 1. Real Personal Consumption Expenditures - SAAR 2. Real Retail Sales and Food Services - SA Source: Author’s calculation using U.S. Census Bureau of Economic Analysis data.

Consumer Sentiment University of Michigan Index 140 January ‘00 120 112.0 Mar ’18 101.4 100 80 60 40 20 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 Source: Thomson Reuters / University of Michigan

Income and Savings Rate Percent Change and Percent of DPI Percent Percent Real DPI - % Chg. Yr./Yr., $2009 Personal Saving Rate - % of DPI 12.0 10.0 8.0 Pre-recession 3.1% 10.0 Post recession Average 5.5% 6.0 8.0 4.0 Feb ‘18 2.2% 6.0 2.0 0.0 4.0 Feb ’18 3.4% -2.0 Post Recession 1.8% 2.0 -4.0 Pre-recession average 4.0% -6.0 0.0 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '00 '02 '04 '06 '08 '10 '12 '14 '16 Source: U.S. Bureau of Economic Analysis

ISM Purchasing Managers Index Manufacturing & Composite, SA - Greater than 50 = Expansion Index 65.0 Mar ‘18 59.3 58.9 60.0 55.0 50.0 45.0 40.0 35.0 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Mfg. PMI (LHA) Composite (LHA) Source: Institute for Supply Management , Haver Analytics and FRED

Industrial Production & New Orders Index, 2012 = 100 Index Index New Orders Industrial Production Feb ’18 115.0 115.0 104.8 112.6 Feb ‘18 110.0 110.0 106.5 104.9 105.0 105.0 100.0 100.0 95.0 95.0 90.0 90.0 85.0 85.0 80.0 80.0 '17 '17 '17 '17 '17 '17 '17 '17 '17 '17 '17 '17 '18 '18 2017 A J O 2018 Total Manufacturing All Mfg. Mfg. Durable Goods Source: Board of Governors, Federal Reserve and U.S. Census Bureau

Unemployment Rate & Prices Percent Unemployed, PCE / CPI % Change Yr./Yr. Percent Percent Unemployment PCE Inflation – All Items 11.0 4.0 3.5 10.0 3.0 9.0 2.5 8.0 Target 2.0% Feb ‘18 2.0 1.8% 7.0 1.6% 1.5 6.0 1.0 5.0 0.5 4.0 0.0 Mar ‘18 4.1% 3.0 -0.5 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '11 '12 '13 '14 '15 '16 '17 '18 Actual Target PCE - All Items PCE - Core Source: U.S. Department of Labor: Bureau of Labor Statistics , Bureau of Economic Analysis and the Federal Reserve

We’re likely at potential and headed above it April 27, 2018 Federal Reserve Bank of Chicago 12

Labor Conditions Job Openings and Quit & Layoff Rates Quits and Layoffs & Discharges Ratio Unemployed / Job Adds Percent Divided by Nonfarm Payroll 6.0 2.50 Jan ‘18 2.21% 5.0 2.00 4.0 1.50 3.0 1.19% Mar ‘18 2.0 1.00 1.37 1.0 0.50 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 0.0 Quit Rate Layoffs & Discharge Rate '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Sources: U.S. Department of Labor – Job Openings and Labor Turnover Survey (JOLTS) and Conference Board – Help Wanted Online Data (HWOL)

Topics Today • U.S. Economy • Midwest Economy • Near Term • Long run challenges April 27, 2018 Federal Reserve Bank of Chicago 14

Our District’s labor market is in good shape too April 27, 2018 Federal Reserve Bank of Chicago 15

Things are going well in our District April 27, 2018 Federal Reserve Bank of Chicago 16

Things are going particularly well for manufacturers April 27, 2018 Federal Reserve Bank of Chicago 17

Things are going well in the rest of the world too IMF real GDP growth forecast for 2018 April 27, 2018 Federal Reserve Bank of Chicago 18

Agricultural economy April 27, 2018 Federal Reserve Bank of Chicago 19

7th District Agriculture Products (as % of U.S. total, 2017) 50% 40% 30% 20% 10% 0% Grain Corn Soybeans Hogs Eggs Milk Production Cattle Source: Calculations based on data from USDA, National Agricultural Statistics Service April 27, 2018 Federal Reserve Bank of Chicago 20

Real Cash Crop Prices ($/bushel for Central IL, adjusted by CPI-U for January 2010) 40 30 20 10 0 1976 1981 1986 1991 1996 2001 2006 2011 2016 Corn Soybeans Sources: The Wall Street Journal and U.S. Bureau of Labor Statistics April 27, 2018 Federal Reserve Bank of Chicago 21

Real USDA Livestock Prices ($/hundredweight, adjusted by CPI-U for January 2010) 250 200 150 100 50 0 1976 1981 1986 1991 1996 2001 2006 2011 2016 Hogs Cattle Sources: USDA, National Agricultural Statistics Service and U.S. Bureau of Labor Statistics April 27, 2018 Federal Reserve Bank of Chicago 22

Dairy exports and milk prices $26 8 Billion dollars Price per cwt. $22 6 $18 4 $14 2 $10 0 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 Exports Price 2018 USDA forecast Source: USDA, World Agricultural Outlook Board April 27, 2018 Federal Reserve Bank of Chicago 23

Real net farm income and direct government payments to farmers 150 125 billion 2018$ 100 75 2018* 50 25 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 *USDA forecast government payments Source: USDA, Economic Research Service April 27, 2018 Federal Reserve Bank of Chicago 24

Annual change in farmland values in 7th Federal Reserve District 30 20 10 Percent 0 -10 -20 -30 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: Federal Reserve Bank of Chicago April 27, 2018 Federal Reserve Bank of Chicago 25

Farm loan volume with “major” or “severe” repayment problems in 7th Federal Reserve District 10 8 percent 6 4 2 0 1998 2001 2004 2007 2010 2013 2016 Source: Federal Reserve Bank of Chicago April 27, 2018 Federal Reserve Bank of Chicago 26

Topics Today • U.S. Economy • Midwest Economy • Near Term • Long run challenges April 27, 2018 Federal Reserve Bank of Chicago 27

A rich, prosperous region with world class assets, but challenged • We are a goods-producing region with technology displacing labor, especially manual labor • Many large cities are an asset during an era of globalization/urbanization • but older industrial/ag cities struggling to become service-oriented • small cities and rural areas struggling • We are a populous and diverse region (but Sunbelt migration challenging) • World-class skilled workforce (but aging and becoming closed to immigration on U.S. side) April 27, 2018 Federal Reserve Bank of Chicago 28

Manufacturing as share of total jobs percent Midwest U.S. April 27, 2018 Federal Reserve Bank of Chicago 29

Changing technology/globalization not kind to small places April 27, 2018 Federal Reserve Bank of Chicago 30

Population change region and county April 27, 2018 Federal Reserve Bank of Chicago 31

Demographics: Sunbelt trends return April 27, 2018 Federal Reserve Bank of Chicago 32

Aging adding to workforce dearth April 27, 2018 Federal Reserve Bank of Chicago 33

Loss of political representation Congressional Delegates 1950 2010 Loss Change (%) U.S. 437 435 -2 0% WI 10 8 -2 -20% MN 9 8 -1 -11% IL 25 18 -7 -28% IN 11 9 -2 -18% MI 18 14 -4 -22% OH 23 16 -7 -30% PA 30 18 -12 -40% NY 43 27 -16 -37% GLS 169 118 -51 -30% 34 34 34

QUESTIONS? April 27, 2018 Federal Reserve Bank of Chicago 35