Economic OutlookEconomic Outlook

William StraussSenior Economist

Lake County Chamber of CommerceVernon Hills, IL

and Economic AdvisorFederal Reserve Bank of Chicago

February 19, 2013

•The outlook is for the U S economy to expand at a

What I said last year about 2012The outlook is for the U.S. economy to expand at apace below trend

•Employment is expected to rise moderately with theEmployment is expected to rise moderately with theunemployment rate edging lower

•Slack in the economy will lead to a relatively contained•Slack in the economy will lead to a relatively containedinflation rate

•Vehicle sales are anticipated to rise at a good pace•Vehicle sales are anticipated to rise at a good pace

•Growth in manufacturing output should be solid

The “Great Recession” ended in June 2009The “Great Recession” ended in June 2009and the economy expanded by 1.5% over the past year

10

Real gross domestic productpercent

46810

Quarterly change (saar)

‐4‐202

Percent change from a year earlier

‐10‐8‐6‐4

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '121990 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

The liabilities side of the Fed’s balance sheetThe liabilities side of the Fed’s balance sheetshows large amount of excess reserves

3,000

Liabilities of the Federal ReserveBillions of dollars

2,000

2,500

Treasury Balance

1,000

1,500 Deposits of Depository Institutions

0

500 Currency in Circulation

2007 2008 2009 2010 2011 20122007 2008 2009 2010 2011 2012

Existing home prices fell by over 30%, but have begun to rise

$250,000

Median sales price ‐ existing single family home3‐month smoothed

$190,000

$210,000

$230,000

$130 000

$150,000

$170,000

$190,000

$90,000

$110,000

$130,000

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '121990 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

The stock market has improved since March 2009The stock market has improved since March 2009,but remains below previous levels

1,600

S&P 500 stock indexIndex: 1941‐43 = 10

1,000

1,200

1,400

400

600

800

1,000

0

200

400

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

GDP is forecast to grow slightly above trend in 2013GDP is forecast to grow slightly above trend in 2013and somewhat above trend in 2014

10

Real gross domestic productpercent

Blue Chip GDP Forecast

46810

Quarterly change (saar)

p

Actual Forecast        2012                2013     20141.5                   2.4         2.9        

‐4‐202

Percent change from a year earlierQ4‐2012

‐10‐8‐6‐4

2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '142000 01 02 03 04 05 06 07 08 09 10 11 12 13 14

The FOMC expects GDP to grow somewhatThe FOMC expects GDP to grow somewhatabove trend over the next three years

6

Real gross domestic productpercent change from a year earlier

23456

2‐1012

FOMC

FOMC Central Tendency (December 2012)

2013 2.3 – 3.0

‐5‐4‐3‐2

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

0 3 3 3 02014 3.0 – 3.52015 3.0 – 3.7

Longer run 2.3 – 2.5

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

The path of the current recovery is restrainedThe path of the current recovery is restrainedcompared with past deep recession recovery cycles

122

Business cycle recovery pathindex ‐ business cycle trough = 100

112114116118120 1981‐82

1974‐75average annualized growth: 5.4%

average annualized growth: 5.3%

104106108110112

2008‐09

average annualized growth: 2.1%

98100102104

‐8 ‐7 ‐6 ‐5 ‐4 ‐3 ‐2 ‐1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14quarters before trough quarters after trough

Employment fell by over 8.7 million jobsbetween December 2007 and February 2010between December 2007 and February 2010,

since then it has added just over2.0 million jobs over the past 12 months

6

Total employmentpercent

2

4

6

4

‐2

0

‐8

‐6

‐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

Monthly change (saar)

Percent change from a year earlier

199091 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

After peaking in October 2009,p gthe unemployment rate has fallen by

2.1 percentage points

11

Unemployment ratepercent

8

9

10

5

6

7

8

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 '13199091 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

The unemployment rate is forecast to edge lower

10

Unemployment ratepercent

Unemployment ratepercent Blue Chip Forecast

8

10Q4‐2012

4

6

0

2

2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '142000 01 02 03 04 05 06 07 08 09 10 11 12 13 14

The FOMC forecasts that the unemployment rate willThe FOMC forecasts that the unemployment rate willremain above the natural rate through the end of 2015

11

Unemployment ratepercent

FOMC Central Tendency (December 2012)

8

9

10FOMC Central Tendency (December 2012)

2013 7.4 – 7.72014 6.8 – 7.32015 6.0 – 6.6

Longer run 5.2 – 6.0

5

6

7

8FOMC

g

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

Inflation has moderated

6

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

4

5

6

1

2

3

‐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 '121990 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

In large part due to the movement of oil prices.g p pAdjusted for inflation, current oil prices are below

the levels that existed thirty years ago

160

Real West Texas Intermediate oil pricedollars per barrel. 2012 dollars

100

120

140

40

60

80

100

0

20

40

1970 '75 '80 '85 '90 '95 '00 '05 '101970 75 80 85 90 95 00 05 10

Natural gas prices remain low

16

Real natural gas pricedollars per mmbtu (2012 dollars)

10

12

14

4

6

8

10

0

2

4

1994 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '131994 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Expenditures on energy areExpenditures on energy arebelow their historical average

10

Energy goods and services expenditures as a share oftotal consumptionpercent

10

Energy goods and services expenditures as a share oftotal consumptionpercent

8

9

8

9

60s 70s80s

5

6

7

5

6

7 60s 70s

1960‐2012

10

3

4

5

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '103

4

5

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

90s 00s10s

1960 65 70 75 80 85 90 95 00 05 101960 65 70 75 80 85 90 95 00 05 10

Removing the volatile food and energy g gycomponents from the PCE, “core” inflation remains low

5

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

4

5

2

3

0

1

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '121990 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Inflation is anticipated to rise 1 9% this yearInflation is anticipated to rise 1.9% this yearand 2.2% next year

8

Consumer price indexpercent

2

4

6

8Quarterly change (saar)

‐4

‐2

0

2

Percent change from a year earlierQ4‐2011

Blue Chip CPI Forecast

‐10

‐8

‐6

2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

Actual Forecast     2012               2013     20141.9             1.9         2.2

2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14

The FOMC anticipates that PCE inflationThe FOMC anticipates that PCE inflationwill remain below two percent through 2015

6

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

4

5

6 FOMC Central Tendency (December 2012)

2013 1.3 – 2.02014 1.5 – 2.02015 1.7 – 2.0

Longer run 2 0

1

2

3

FOMC

Longer run 2.0

‐1

0

1

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '141990 92 94 96 98 00 02 04 06 08 10 12 14

The FOMC anticipates that “core” PCE inflationThe FOMC anticipates that “core” PCE inflationwill also remain below two percent through 2015

5

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

4

5FOMC Central Tendency (December 2012)

2013 1.6 – 1.92014 1.6 – 2.02015 1.8 – 2.0

2

3

FOMC

0

1

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

FOMC

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

Industrial output in manufacturing fell quite sharplyduring the recession but has risen strongly overduring the recession, but has risen strongly over

the past forty-three months, averaging 5.5% and hasrecovered 80.5% of the loss during the recession

40

Industrial production ‐manufacturingpercent

20

30

40Monthly change (saar)

Percent change from a year earlier

‐10

0

10

‐40

‐30

‐20

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13199091 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

And while manufacturing jobs have been rising,g j gadding 490,000 jobs, they have only recovered

21.4% of the jobs lost during the downturn

15

Manufacturing employmentpercent

5

10

15

‐10

‐5

0

Percent change from a year earlier

‐25

‐20

‐15

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Monthly change (saar)

Percent change from a year earlier

199091 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Declines in manufacturing output wereg pbroad-based during the Great Recession –

especially in vehicle and primary metals manufacturing

‐60 ‐50 ‐40 ‐30 ‐20 ‐10 0

Industrial output:December 2007  ‐ June 2009percent change

60 50 40 30 20 10 0

ManufacturingDurable GoodsWood Products

Nonmetallic Mineral Products Primary Metals

Fabricated Metal Products M hiMachinery

Computer and Electronic ComponentsElectrical Eqpt, Appliances & Components

Motor Vehicles and PartsAerospace & Miscellaneous Transport Equip

Furniture and Related Products Miscellaneous Durable GoodsNondurable Manufacturing

F d B d T bg

Food, Beverages, and TobaccoTextile and Product Mills

Apparel and Leather GoodsPaper

Printing and Related Support ActivitiesChemicals

Petroleum and Coal ProductsPlastics and Rubber Products 

h fOther Manufacturing

The recovery has also been broad-based withyvehicle and primary metals manufacturing

leading the way

‐20 0 20 40 60 80 100 120 140

Industrial output: June 2009  ‐ January 2013percent change

20 0 20 40 60 80 100 120 140

ManufacturingDurable GoodsWood Products

Nonmetallic Mineral Products Primary Metals

Fabricated Metal Products M hiMachinery

Computer and Electronic ComponentsElectrical Eqpt, Appliances & Components

Motor Vehicles and PartsAerospace & Miscellaneous Transport Equip

Furniture and Related Products Miscellaneous Durable GoodsNondurable Manufacturing

F d B d T bg

Food, Beverages, and TobaccoTextile and Product Mills

Apparel and Leather GoodsPaper

Printing and Related Support ActivitiesChemicals

Petroleum and Coal ProductsPlastics and Rubber Products 

h fOther Manufacturing

Midwest manufacturing has beenMidwest manufacturing has beenoutperforming the U.S. during the recovery

20Midwest

Industrial output ‐manufacturingpercent change from a year earlier

051015

Midwest

United States

‐15‐10‐50

‐30‐25‐20

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '121990 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Industrial production is forecast to risepat a slightly above trend pace this year

and improve to somewhat above trend in 2014

10

Total industrial productionpercent

0

5

10Quarterly change (saar)

‐10

‐5

0

Percent change from a year earlier

Q4‐2012

Blue Chip IP Forecast

‐20

‐15

2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

p

Actual Forecast            2012           2013       20142.8           2.8           3.6      

2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14

After rising by 13% in 2012 vehicle sales are predictedAfter rising by 13% in 2012, vehicle sales are predictedto rise over 5% this year and 4% next year

18

Vehicle salesmillions of units

16

17

18

13

14

15

Blue Chip Light‐VehicleSales Forecast

10

11

12

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

Actual  Forecast         2012             2013        201414.4 15.2         15.8

1980 85 90 95 00 05 10

The forecast calls for a gradual recovery in housing

2 500

Housing startsthousands

2,000

2,500

1,000

1,500

Blue Chip Housing StartsForecast (thousands)

0

500

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

Actual Forecast            2012          2013         2014781            948         1,158

1980 85 90 95 00 05 10

Credit spreads between Corporate High Yield securitiesCredit spreads between Corporate High Yield securitiesand Corporate Aaa securities have been edging lower

18

Credit spreads between Corporate High Yield and Corporate Aaapercent

12141618

468

10

024

JanApr Jul Oct JanApr Jul Oct JanApr Jul Oct JanApr Jul Oct JanApr Jul Oct JanApr Jul Oct JanApr

2007 2008 2009 2010 2011 2012 2013

Monetary policy has been very aggressiveMonetary policy has been very aggressive,keeping the Fed Funds near zero since December 2008

9

Fed Funds ratepercent

6

7

8

3

4

5

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 '13199091 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

The Federal Funds Rate is anticipated to remainThe Federal Funds Rate is anticipated to remainvery low over the forecast horizon

9

Target Federal Funds Ratepercent

6

7

8

3

4

5

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

FOMC

The asset side of the Fed’s balance sheetThe asset side of the Fed’s balance sheethas expanded in size and in composition

3,000

Assets of the Federal ReserveBillions of dollars

k d

2,000

2,500 Maiden Lane II & III

Term Asset‐Backed SecuritiesLoan Facility

AIG Support

1,000

1,500Central Bank Swaps

Commercial Paper Facility

AIG Support

Maiden Lane

0

500 Term Auction Credit Securities Held Outright

2007 2008 2009 2010 2011 20122007 2008 2009 2010 2011 2012

The money supply (M2) is nearly 4 timesThe money supply (M2) is nearly 4 timesbigger than the monetary base

12,000

Monetary expansion 2007‐current periodbillions of dollars

8,000

10,000M2

4,000

6,000

0

2,000

2007 '08 '09 '10 '11 '12

monetary base

2007 08 09 10 11 12

The Fed’s expansion of the monetary base p yhas allowed the money supply to continue rising,compared with what took place during the 1930s

350

Monetary expansion 2007‐current periodindex: Jan 2007 = 100

350

Monetary expansion 1929‐1935index: Jan 1929 = 100

250

300monetary base

250

300

100

150

200

M2CPI

100

150

200monetary base

50

100

2007 '08 '09 '10 '11 '12 '1350

100

1929 '30 '31 '32 '33 '34 '35

M2

CPI

The federal government’s top tax rate hasg pvaried widely over the past 80 years –

although government receipts has been relatively stable

10535

Federal government top tax rate and receipts as a share of GDPpercent percent

10535

Federal government receipts and expenditures as a share of GDPpercent percent

75

90

25

30

75

90

25

30

30

45

60

10

15

20

30

45

60

10

15

20

receipts ‐ left axis

0

15

30

0

5

10

1930 '40 '50 '60 '70 '80 '90 '00 '10

top tax rate ‐ right axis

0

15

30

0

5

10

1930 '40 '50 '60 '70 '80 '90 '00 '10

top tax rate ‐ right axis

Federal government expenditures are theFederal government expenditures are thehighest outside of the World War II period

35

Federal government receipts and expenditures as a share of GDPpercent

25

30expenditures

10

15

20receipts

0

5

10

1930 '40 '50 '60 '70 '80 '90 '00 '10

Federal government receipts have never exceeded 21%Federal government receipts have never exceeded 21%and has averaged 18.3% over the past 52 years

26dit

Federal government receipts and expenditures as a share of GDPpercent

22232425 expenditures

18192021

15161718

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

receipts

The per capita share of the federal debt is nearly $53,000

$55,000

Per capita share of real federal debt2012 real dollars

$35,000

$45,000

$15,000

$25,000

‐$5,000

$5,000

1950 '60 '70 '80 '90 '00 '10

•The outlook is for the U.S. economy to expand at aSummary

pace around trend in 2013 and above trend in 2014

•Employment is expected to rise moderately with theunemployment rate edging lower

•Slackness in the economy will lead to a relatively contained inflation rate

•Growth in manufacturing output should be around trend this yearand somewhat above trend next year

www chicagofed orgwww.chicagofed.org www federalreserve govwww.federalreserve.gov