U.S. Economic Outlook€¦ · U.S. Economic Outlook William Strauss Senior Economist and Economic Advisor Federal Reserve Bank of Chicago 2019 SMIFC Conference Chicago, IL. November

U.S. Economic Outlook

William StraussSenior Economistand Economic AdvisorFederal Reserve Bank of Chicago

2019 SMIFC ConferenceChicago, ILNovember 1, 2019

GDP expanded by 2.0% over the past year

-10

-8

-6

-4

-2

0

2

4

6

8

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Real gross domestic productpercent

Quarterly change (saar)

Percent change from a year earlier

The Index of Leading Economic Indicatorshas been edging higher through August

0

20

40

60

80

100

120

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Composite Index of 10 Leading IndicatorsIndex (2016=100)

The probability of a recession over the next two quartershas moved higher, but remains low

0

10

20

30

40

50

60

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Probablility of a recession - two quarters ahead (Survey of Professional Forecasters)percent

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Monthly

Chicago Fed National Activity Index

Three month average

The Chicago Fed National Activity Index3-month average in September 2019 was a bit below trend

The Sahm Current-Time Unemployment Rate Recession Indicator is well below the 0.5% recession threshold

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1970 '75 '80 '85 '90 '95 '00 '05 '10 '15

Sahm Current-Time Unemployment Rate Recession Indicatorpercent

The Federal Open Market Committee (FOMC) expectsGDP to grow just above trend in 2019;

and around trend in 2020, 2021 and 2022

-5-4-3-2-10123456

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22

Real gross domestic productpercent change from a year earlier

FOMC

FOMC Central Tendency (September 2019)

2019 2.1 – 2.32020 1.8 – 2.12021 1.8 – 2.02022 1.7 – 2.0

Longer run 1.8 – 2.0

The stock market is near a record high

50

100

150

200

250

300

350

400

450

500

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Real S&P 500 stock indexIndex: 1990 = 100

-8

-6

-4

-2

0

2

4

6

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Total employmentpercent

Monthly change (saar)

Percent change from a year earlier

Employment increased by nearly 2.1 million jobsover the past 12 months

3

4

5

6

7

8

9

10

11

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Unemployment ratepercent

The unemployment rate was a very low 3.6% in October

3

4

5

6

7

8

9

10

11

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22

Unemployment ratepercent

FOMC

The FOMC forecasts that the unemployment ratewill be below the natural rate through 2022

FOMC Central Tendency (September 2019)

2019 3.6 – 3.72020 3.5 – 3.82021 3.6 – 3.92022 3.7 – 4.0

Longer run 4.0 – 4.3

Wages continue to increase at a moderate ratewhile benefit costs gains are easing

0

1

2

3

4

5

6

7

8

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Employment cost indexpercent change from year ago

benefit costs

wages and salaries

There is a very strong correlation between 9-month lead NFIB: planning to raise compensation and

Employment Cost Index: wages and salaries

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

0

5

10

15

20

25

1986 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20

Employment cost index - wages and salaries and NFIB: Companies planning to raise wages and salaries

% of frims

ECI: wages and salaries(private industry workers) - right scale

NFIB: Companies planning to raise worker compensation(9 month lead) - left scale

% y/y

Correlation = 0.83

Slow productivity growth over the past nine yearshelps explain why relatively strong employment growth

has not translated into higher wages

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0

1

2

3

4

5

1950 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Productivitypercent change (20-qtr rate)

A large part of the weakness in productivity growthhas been the weak pace of investment,

although it had been increasing at a solid pacebeginning in 2017

-30

-20

-10

0

10

20

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Real private nonresidential fixed investment percent

Quarterly change (saar)

Percent change from a year earlier

This may help explain the productivitygrowth improvement over the past couple of years

-3-2-1012345678

1950 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Productivitypercent change from a year earlier

-15

-10

-5

0

5

10

15

20

1950 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Unit labor costpercent

Quarterly change (saar)

Percent change from a year earlier

Improving productivity growth is helping to keep unit labor cost growth down even with compensation rising

-100

-50

0

50

100

150

200

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Nonfinancial corporate profitspercent

Quarterly change (saar)

Percent change from a year earlier

Corporate profits are unchanged from a year earlier

-2

-1

0

1

2

3

4

5

6

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Personal consumption expenditure - chain price indexpercent change from a year earlier

Inflation is below the Fed target of 2%

0

20

40

60

80

100

120

140

160

1970 '75 '80 '85 '90 '95 '00 '05 '10 '15

Real West Texas Intermediate oil pricedol lars per barrel, 2018 dollars

In large part inflation has been followingthe pattern of energy prices

3

4

5

6

7

8

9

10

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Energy goods and services expenditures as a share oftotal consumptionpercent

Expenditures on energy remainwell below the historical average

3

4

5

6

7

8

9

10

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Energy goods and services expenditures as a share oftotal consumptionpercent

60s

70s

80s

90s 00s

1960-2018

10s

0

1

2

3

4

5

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Personal consumption expenditure - less food and energy -chain price indexpercent change from a year earlier

Removing the volatile food and energy components from the PCE,

“core” inflation is rising but remains below 2%

The FOMC anticipates that PCE inflation will be aroundits two percent target in 2020 through 2022

-2

-1

0

1

2

3

4

5

6

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22

Personal consumption expenditure - chain price indexpercent change from a year earlier

FOMC

FOMC Central Tendency (September 2019)

2019 1.5 – 1.6 2020 1.8 – 2.0 2021 2.0 2022 2.0 – 2.2

Longer run 2.0

0

1

2

3

4

5

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22

Personal consumption expenditure - less food and energy -chain price indexpercent change from a year earlier

FOMC

The FOMC anticipates that “core” PCE inflationwill also remain around two percent through 2022

FOMC Central Tendency (September 2019)

2019 1.7 – 1.8 2020 1.9 – 2.02021 2.0 2022 2.0 – 2.2

Inflation Exchange RateReal GDP % change Against Interest Rates% change Annual US Dollar 3-Month

Annual Consumer Prices End of Year End of Year2018 2019 2020 2018 2019 2020 2019 2020 2019 2020

United States 2.9 2.3 1.7 2.4 1.8 2.1 - - 2.12 1.54Canada 1.9 1.5 1.5 2.3 2.0 2.0 1.33 1.31 1.68 1.50Mexico 2.0 0.4 1.2 4.9 3.7 3.5 19.88 20.33 7.70 7.03

Japan 0.8 1.0 0.3 1.0 0.7 1.0 106.7 107.0 -0.08 -0.06South Korea 2.7 1.9 2.1 1.5 0.7 1.3 1,213 1,194 1.46 1.37

United Kingdom 1.4 1.2 1.0 2.5 1.9 2.0 1.22 1.30 0.77 0.82Germany 1.5 0.5 0.7 1.9 1.4 1.4 1.10 1.16 -0.45 -0.41

France 1.7 1.3 1.2 2.1 1.2 1.3 1.10 1.16 -0.45 -0.41Euro Zone 1.9 1.2 1.1 1.8 1.3 1.3 1.10 1.16 -0.45 -0.41

Brazil 1.1 0.9 1.9 3.7 3.7 3.7 4.03 3.94 5.27 5.00Russia 2.3 1.1 1.6 2.9 4.6 4.0 65.42 65.23 7.14 6.79China 6.6 6.1 5.8 2.1 2.5 2.5 7.23 7.19 2.65 2.59India 7.4 5.8 6.6 3.9 3.3 4.0 72.10 71.44 5.88 5.68

Blue Chip Economic Indicators Forecast October 10, 2019

Blue Chip International Consensus Forecasts

Oct-18 No v-18 De c-18 Ja n-19 Fe b -19 Ma r-19 Ap r-19 Ma y-19 Jun-19 Jul-19 Aug 19 Se p 19Glo b a l 52.0 52.0 51.5 50.8 50.6 50.6 50.4 49.8 49.4 49.3 49.5 49.7Unite d Sta te s 55.7 55.3 53.8 54.9 53.0 52.4 52.6 50.5 50.6 50.4 50.3 51.1Ca na d a 53.9 54.9 53.6 53.0 52.6 50.5 49.7 49.1 49.2 50.2 49.1 51.0Me xico 50.7 49.7 49.7 50.9 52.6 49.8 50.1 50.0 49.2 49.8 49.0 49.1Euro zo ne 52.0 51.8 51.4 50.5 49.3 47.5 47.9 47.7 47.6 46.5 47.0 45.7Ge rma ny 52.2 51.8 51.5 49.7 47.6 44.1 44.4 44.3 45.0 43.2 43.5 41.7Fra nce 51.2 50.8 49.7 51.2 51.5 49.7 50.0 50.6 51.9 49.7 51.1 50.1Ita ly 49.2 48.6 49.2 47.8 47.7 47.4 49.1 49.7 48.4 48.5 48.7 47.8Sp a in 51.8 52.6 51.1 52.4 49.9 50.9 51.8 50.1 47.9 48.2 48.8 47.7UK 51.1 53.6 54.2 52.8 52.1 55.1 53.1 49.4 48.0 48.0 47.4 48.3Russ ia 51.3 52.6 51.7 50.9 50.1 52.8 51.8 49.8 48.6 49.3 49.1 46.3Ja p a n 52.9 52.2 52.6 50.3 48.9 49.2 50.2 49.8 49.3 49.4 49.3 48.9China 50.1 50.2 49.7 48.3 49.9 50.8 50.2 50.2 49.4 49.9 50.4 51.4Ind ia 53.1 54.0 53.2 53.9 54.3 52.6 51.8 52.7 52.1 52.5 51.4 51.4Bra zil 51.1 52.7 52.6 52.7 53.4 52.8 51.5 50.2 51.0 49.9 52.5 53.4

Manufacturers’ Purchasing Managers Indexes

More open countries have had better growth

U.S. tariffs used to be much higher

Tariffs: U.S. versus other countries

Tariffs: U.S. versus other countries

Tariffs: Recent threatened tariffscould push the U.S. much higher

The Blue Chip forecast projects a continuingdeterioration in the balance of trade

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-800

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0

2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Net exportsbi l lions of chained 2012 dollars (saar)

Q3-2019

Blue Chip Forecast

0

500

1,000

1,500

2,000

2,500

1980 '85 '90 '95 '00 '05 '10 '15 '20

Housing startsthousands

Blue Chip Housing StartsForecast (thousands)

Actual Forecast 2018 2019 20201,250 1,254 1,266

The Blue Chip Forecast calls for a continuationof the very gradual recovery in housing

Manufacturing output growth is slightly below zero

-40

-30

-20

-10

0

10

20

30

40

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Industrial production - manufacturingpercent

Monthly change (saar) Percent change from a year earlier

62646668707274767880828486

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Capacity utilization - manufacturingpercent

The decline in capacity utilization may have bottomed

-25

-20

-15

-10

-5

0

5

10

15

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Manufacturing employmentpercent

Monthly change (saar)

Percent change from a year earlier

Manufacturing employment increased by49,000 workers over the past 12 months

Year-to-date light vehicle sales are 17.0 million units in 2019,0.8% below the comparable period from a year earlier

89

10111213141516171819202122

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Light vehicle salesmil lions of units (saar)

Year-to-date 2019 light truck sales were 2.8% higher,while year-to-date 2019 passenger car sales were 8.7% lower

3456789

10111213

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Passenger car and light truck salesmil lions of units (saar)

light trucks

passenger cars

Light truck market share is at a record high

30

35

40

45

50

55

60

65

70

75

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Light truck share of light vehicle market salespercent

Alternative powered vehicles (including hybrids)are a very small fraction of total vehicle sales

0102030405060708090

100

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Power-Typepercent of total sales

Alternative

Gasoline and Diesel

Alternative powered vehicles (including hybrids)market share remains below 5%

0

1

2

3

4

5

6

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Alternative Powered Vehiclespercent of total sales

Blue Chip forecasts vehicle sales tomove lower this year and in 2020

10

11

12

13

14

15

16

17

18

1980 '85 '90 '95 '00 '05 '10 '15 '20

Vehicle salesmil lions of units

Blue Chip Light-VehicleSales Forecast

Actual Forecast 2018 2019 202017.2 16.8 16.4

-25

-20

-15

-10

-5

0

5

10

2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Total industrial productionpercent

Quarterly change (saar)

Percent change from a year earlier Q3-2019

Blue Chip IP Forecast

Actual Forecast 2018 2019 20204.0 -0.6 1.1

Industrial production is forecast to fallthis year and increase at a slow pace in 2020

0

2

4

6

8

10

12

14

16

18

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Credit spreads between Corporate High Yield and Corporate Aaapercent

Credit spreads between Corporate High Yield securitiesand Corporate Aaa securities have recently moved higher

-3

-2

-1

0

1

2

3

Yield curve - 10-year Treasury note yield minus2-year Treasury bill yieldpercent

1980 '85 '90 '95 '00 '05 '10 '15

The 10-year vs. 2-year Treasury yield curve is very flat

-1

0

1

2

3

Yield curve - 10-year Treasury note yield minus2-year Treasury bill yieldpercent

2000 '02 '04 '06 '08 '10 '12 '14 '16 '18

The 10-year vs. 2-year Treasury yield curve is very flat

-2

-1

0

1

2

3

4

5

Yield curve - 10-year Treasury note yield minus3-month Treasury bill yieldpercent

1980 '85 '90 '95 '00 '05 '10 '15

The 10-year vs. 3-month Treasury yield curvewas slightly inverted

-1

0

1

2

3

4

Yield curve - 10-year Treasury note yield minus3-month Treasury bill yieldpercent

2000 '02 '04 '06 '08 '10 '12 '14 '16 '18

The 10-year vs. 3-month Treasury yield curvewas slightly inverted

-1

0

1

2

3

4

2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

10-year T-Note to 3-month T-Bill spreadpercent

Q3 -2019

percent

Blue Chip Forecast

Blue Chip expects the yield curve to remain inverted throughthe end of the year and then begin to steepen next year

0

1

2

3

4

5

6

7

8

9

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Fed Funds ratepercent

The Federal Reserve reduced the Federal Funds rateby 25 basis points in July and

another 25 basis points in September

0

1

2

3

4

5

6

7

8

9

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22

Target Federal Funds Ratepercent

FOMC

The Federal Funds Rate is expected to bebelow the neutral range through 2021and then increase to the bottom end

of the neutral range by the end of 2022

FOMC Central Tendency (September 2019)

2019 1.6 – 2.12020 1.6 – 2.1 2021 1.6 – 2.4 2022 1.9 – 2.6

Longer run 2.5 – 2.8

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Assets of the Federal ReserveBi l lions of dollars

Term Auction Credit

Securities Held Outright

Central Bank Swaps

Maiden Lane II & III

Commercial Paper Facility

2007 '08 '09

Term Asset-Backed SecuritiesLoan Facility

AIG Support

Maiden Lane

'10 '11 '12 '13 '14 '15 '16 '17 '18

The Fed’s balance sheet has been falling since October 2017and ended the balance sheet reduction in August 2019

•The outlook is for the U.S. economy to expand at a pace justabove trend in 2019 and close to trend in 2020, 2021 and 2022

Summary

•Employment is expected to rise moderately with theunemployment rate remaining very low

•Inflation is forecast be below the Fed’s inflation target this yearand close to it in 2020, 2021 and 2022

•Vehicle sales are anticipated to edge lower this year and in 2020

•Manufacturing output is expected to decrease this yearand then increase at a slow pace in 2020

•Housing is predicted to improve at a modest pace

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