Transcript Midwest Economic Outlook - Elmhurst Chamber of Commerce

Economic Outlook
Multi-Chamber Economic Outlook Luncheon
Westmont, IL
February 27, 2014
William Strauss
Senior Economist
and Economic Advisor
Federal Reserve Bank of Chicago
What I said last year about 2013
•The outlook is for the U.S. economy to expand at a
pace around trend in 2013
•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 around trend in 2013
The “Great Recession” ended in June 2009 and
GDP expanded by 2.7% in 2013
Real gross domestic product
percent
8
Quarterly change (saar)
6
4
2
0
-2
-4
Percent change from a year earlier
-6
-8
-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
A large share of the growth in Real GDP
came from an increase in inventories
Contributions to real GDP growth in 2013
percentage points
3
2.7
2
1.6
0.9
1
0.3
0.3
0.2
0
-0.4
-1
GDP
Consumption
Business
Fixed
Investment
Residential
Investment
Change in Government Net Exports
Inventories
However, real final sales
(GDP less change in private inventories)
growth was far more restrained
Real final sales
percent
8
Percent change from a year earlier
6
4
2
0
-2
-4
-6
Quarterly change (saar)
-8
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
The liabilities side of the Fed’s balance sheet
shows large amount of excess reserves
Liabilities of the Federal Reserve
Bi l lions of dollars
4,000
3,500
3,000
Treasury Balance
2,500
2,000
Deposits of Depository Institutions
1,500
1,000
Currency in Circulation
500
0
2007
2008
2009
2010
2011
2012
2013
Real existing home prices fell by 40%, but have begun to rise
Real Median sales price - existing single family home
3-month s moothed (2013 dollars)
$275,000
$250,000
$225,000
$200,000
$175,000
$150,000
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
The forecast calls for a very gradual recovery in housing
Homeownership
rate
Housing
starts
percent
thousands
76
2,500
74
Midwest
2,000
72
70
1,500
68
1,000
66
Blue Chip Housing Starts
Forecast (thousands)
500
64
Actual
Forecast
2013
2014 2015
United
States1,311
928
1,106
62 0
1965
1980 '70
'85'75
'80
'90
'85 '95
'90
'00'95
'00
'05
'05 '10 '10
'15
The stock market has improved since March 2009,
and has exceeded its previous peak
Real S&P 500 stock index
Index: 1990 = 100
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
GDP is forecast to grow somewhat
above trend in 2014 and 2015
Real gross domestic product
Blue Chip GDP Forecast
percent
Actual
2013
2.7
8
6
Forecast
2014 2015
2.7
3.0
4
2
0
-2
Q4-2013
Percent change from a year earlier
-4
-6
-8
Quarterly change (saar)
-10
2000 '01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
The FOMC expects GDP to grow somewhat
above trend over the next three years
Real gross domestic product
percent change from a year earlier
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
FOMC
FOMC Central Tendency (December 2013)
2014
2015
2016
2.8 – 3.2
3.0 – 3.4
2.5 – 3.2
Longer run
2.2 – 2.4
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
The path of the current recovery is restrained
compared with past deep recession recovery cycles
Business cycle recovery path
i ndex - business cycl e trough = 100
126
124
122
120
118
116
114
112
110
108
106
104
102
100
98
126
124
122
1974-75 120
118
116
114
112
110
2008-09
108
106
104
102
100
98
1981-82
average annualized growth: 5.0%
average annualized growth: 4.6%
average annualized growth: 2.4%
-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
quarters before trough
quarters after trough
Employment fell by over 8.7 million jobs
between December 2007 and February 2010,
since then it has added over 7.8 million jobs,
with just over 2.2 million jobs added over the past 12 months
Total employment
percent
6
4
2
0
-2
-4
Percent change from a year earlier
-6
-8
Monthly change (saar)
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
After peaking in October 2009,
the unemployment rate has fallen by
3.4 percentage points
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
The unemployment rate is forecast to edge lower
Unemployment rate
percent
Blue Chip Forecast
10
Q4-2013
8
6
4
2
0
2000 '01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
The FOMC forecasts that the unemployment rate
will approach the natural rate towards the end of 2016
Unemployment rate
percent
11
10
9
8
7
FOMC Central Tendency (December 2013)
2014
2015
2016
6.3 – 6.6
5.8 – 6.1
5.3 – 5.8
Longer run
5.2 – 5.8
FOMC
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
Inflation has moderated
Personal consumption expenditure - chain price index
percent change from a year earlier
6
5
4
3
2
1
0
-1
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
Adjusted for inflation, current oil prices are below
the levels that existed thirty years ago
Real West Texas Intermediate oil price
dol lars per barrel, 2013 dollars
160
140
120
100
80
60
40
20
0
1970
'75
'80
'85
'90
'95
'00
'05
'10
Natural gas prices remain low
Real natural gas price
dol lars per mmbtu, 2013 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
Between 1994 and 2005 the natural gas to oil price ratio
averaged 13.4% - it fell to average 3.8% in 2013
Natural gas price to oil price ratio
percent (dollars per mmbtu/dollars per barrel West Texas i ntermediate)
35
30
25
20
15
10
5
0
1994 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
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
Inflation is forecast to rise 1.9 percent in 2014
and 2.1 percent in 2015
Consumer price index
percent
8
Percent change from a year earlier
6
4
2
0
Q4-2013
-2
-4
Blue Chip CPI Forecast
-6
-8
Actual
2013
1.2
Quarterly change (saar)
Forecast
2014 2015
1.9
2.1
-10
2000 '01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
The FOMC anticipates that PCE inflation
will remain below two percent through 2016
Personal consumption expenditure - chain price index
percent change from a year earlier
6
FOMC Central Tendency (December 2013)
5
2014
2015
2016
4
1.4 – 1.6
1.5 – 2.0
1.7 – 2.0
Longer run
2.0
3
2
FOMC
1
0
-1
1990
'92
'94
'96
'98
'00
'02
'04
'06
'08
'10
'12
'14
'16
The FOMC anticipates that “core” PCE inflation
will also remain below two percent through 2016
Personal consumption expenditure - less food and energy chain price index
percent change from a year earlier
5
FOMC Central Tendency (December 2013)
2014
2015
2016
4
1.4 – 1.6
1.6 – 2.0
1.8 – 2.0
3
2
FOMC
1
0
1990
'92
'94
'96
'98
'00
'02
'04
'06
'08
'10
'12
'14
'16
Industrial output in manufacturing fell quite sharply
during the recession, but has risen strongly over
the past fifty-four months, averaging 4.4% and has
recovered 85.1% of the loss during the recession
Industrial production - manufacturing
percent
40
30
Monthly change (saar)
Percent change from a year earlier
20
10
0
-10
-20
-30
-40
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
While manufacturing jobs have been rising,
they have only recovered 27.1% of the jobs
lost during the downturn
Manufacturing employment
percent
15
10
5
0
-5
-10
-15
-20
Percent change from a year earlier
Monthly change (saar)
-25
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
Industrial production is forecast to rise
at a pace slightly above trend in 2014 and 2015
Total industrial production
percent
10
Percent change from a year earlier
5
0
Q4-2013
-5
-10
Blue Chip IP Forecast
Actual
2013
3.6
-15
Quarterly change (saar)
Forecast
2014 2015
3.4
3.5
-20
2000 '01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
After rising by 13% in 2012, vehicle sales rose 7% in 2013
and are forecast to rise around 3% this year and next year
Vehicle sales
mi l lions of units
18
17
16
15
14
Blue Chip Light-Vehicle
Sales Forecast
13
12
Actual
2013
15.5
11
Forecast
2014 2015
16.0 16.4
10
1980
'85
'90
'95
'00
'05
'10
Credit spread between Corporate High Yield securities
and Corporate Aaa securities has remained low
Credit spreads between Corporate High Yield and Corporate Aaa
percent
18
16
14
12
10
8
6
4
2
0
2007
2008
2009
2010
2011
2012
2013
2014
Monetary policy has been very aggressive,
keeping the Fed Funds near zero since December 2008
Fed Funds rate
percent
9
8
7
6
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
The Federal Funds Rate is anticipated to remain
low over the forecast horizon
Target Federal Funds Rate
percent
9
8
7
6
5
4
FOMC Midpoint Value
(December 2013)
3
2
FOMC
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
The asset side of the Fed’s balance sheet
has expanded in size and in composition
Assets of the Federal Reserve
Bi l lions of dollars
4,000
3,500
3,000
Maiden Lane II & III
2,500
2,000
Term Asset-Backed Securities
Loan Facility
AIG Support
Central Bank Swaps
1,500
Commercial Paper Facility
1,000 Maiden Lane
Securities Held Outright
Term Auction Credit
500
0
2007
2008
2009
2010
2011
2012
2013
The money supply (M2) is nearly 4 times
bigger than the monetary base
Monetary expansion 2007-current period
bi l lions of dollars
12,000
M2
10,000
8,000
6,000
4,000
2,000
monetary base
0
2007
'08
'09
'10
'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 1930s
Monetary expansion 1929-1936
Monetary expansion 2007-current period
index:Jan 1929 = 100
index:Jan 2007 = 100
450
450
400
400
350
350
300
300
250
250
200
monetary base
200
monetary base
150
150
100
100
M2
CPI
CPI
M2
50
1929
'30
'31
'32
'33
'34
'35
'36
50
1929
'30
'31
'32
'33
'34
'35
'36
Summary
•The outlook is for the U.S. economy to expand at a
pace somewhat above trend in 2014
•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 somewhat above
trend this year
www.chicagofed.org
www.federalreserve.gov