Economic Outlook

William Strauss

Senior Economist

and Economic Advisor

Federal Reserve Bank of Chicago

Multi Chamber Economic Outlook

Oakbrook, IL

February 13, 2015

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

pace somewhat above trend

What I said last year about 2014

•Employment is expected to rise moderately with the

unemployment rate edging lower

•Slack in the economy will lead to a relatively

contained inflation rate

•Growth in manufacturing output should be somewhat

above trend

The “Great Recession” ended in June 2009 and

GDP expanded by 2.5% last year

-10

-8

-6

-4

-2

0

2

4

6

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 '14

Real gross domestic product

percent

Quarterly change (saar)

Percent change from a year earlier

The “Midwest” economy has performed

well over the past year

-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

Midwest Economy Index (MEI)

Midwest Economy Index

Relative MEI

$150,000

$175,000

$200,000

$225,000

$250,000

$275,000

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

Real Median sales price - existing single family home3-month smoothed (2013 dollars)

Real existing home prices fell by 40%, but have begun to rise

0

500

1,000

1,500

2,000

2,500

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

Housing starts

thousands

Blue Chip Housing StartsForecast (thousands)

Actual Forecast 2014 2015 20161,004 1,161 1,298

The forecast calls for a very gradual recovery in housing

The stock market has improved since March 2009,

and has surpassed its previous peak

50

100

150

200

250

300

350

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

Real S&P 500 stock indexIndex: 1990 = 100

-10

-8

-6

-4

-2

0

2

4

6

8

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

Real gross domestic product

percent

Quarterly change (saar)

Percent change from a year earlier Q4-2014

Blue Chip GDP Forecast

Actual Forecast 2014 2015 2016

2.5 2.9 2.8

Blue-Chip is expecting GDP to grow somewhat

above trend over the next two years

The Federal Open Market Committee (FOMC)

expects GDP to grow somewhat above trend

over the next three years

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

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

Real gross domestic product

percent change from a year earlier

FOMC

FOMC Central Tendency (December 2014)

2015 2.6 – 3.0

2016 2.5 – 3.0

2017 2.3 – 2.5

Longer run 2.0 – 2.3

95

100

105

110

115

120

125

130

135

95

100

105

110

115

120

125

130

135

-8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22

Business cycle recovery pathindex - business cycle trough = 100

1981-82

2008-09

1974-75

quarters before trough quarters after trough

The path of the current recovery is restrained

compared with past deep recession recovery cycles

average annualized growth: 4.9%

average annualized growth: 4.3%

average annualized growth: 2.3%

Employment grew by over 3.2 million jobs

over the past 12 months

-8

-6

-4

-2

0

2

4

6

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

Total employment

percent

Monthly change (saar)

Percent change from a year earlier

3

4

5

6

7

8

9

10

11

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

Unemployment ratepercent

After peaking in October 2009,

the unemployment rate has fallen by

4.3 percentage points

However, the labor force participation rate fell

to a level last seen in 1977

58

59

60

61

62

63

64

65

66

67

68

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

Labor force participation ratepercent

Civilian Labor Force Participation Rate

and Population Share 16 and Older

by Age Category, United States, 2007 and 2014

Labor Force Participation Rate (%) Population Share (%)

Change Change

2014 2007 ‘07-’14 2014 2007 ‘07-’14

Population

16 and older 62.9 66.1 -3.2 100.0 100.0 0.0

16 to 24 55.0 59.4 -4.4 15.6 16.1 -0.5

25 to 34 81.2 83.3 -2.1 17.0 17.1 -0.2

35 to 44 82.2 83.8 -1.6 16.0 18.3 -2.3

45 to 54 79.6 82.0 -2.4 17.3 18.8 -1.5

55 to 64 64.1 63.8 0.4 16.0 14.0 2.0

65 plus 18.6 16.0 2.6 18.1 15.6 2.5

The share of those unemployed more

than 6 months remains significantly high

0

5

10

15

20

25

30

35

40

45

50

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

Unemployed for 27 weeks or morepercent

Employees working part time for

economic reasons remains elevated

0

1

2

3

4

5

6

1994 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14

Unemployment rate - part-time workers for economic reasons

percent

Wages and benefit costs have increased over the past year,

but still remains relatively low

-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

Real - Employment cost indexpercent change from year ago

benefit costs

wages and salaries

0

2

4

6

8

10

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

Unemployment rate

percent

Unemployment rate

percent

Q4-2014

Blue Chip Forecast

The unemployment rate is forecast to edge lower

with an additional 2.7 million jobs projected for 2015

3

4

5

6

7

8

9

10

11

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

Unemployment ratepercent

FOMC

The FOMC forecasts that the unemployment rate

will be at the natural rate at the end of this year

FOMC Central Tendency (December 2014)

2015 5.2 – 5.3

2016 5.0 – 5.2

2017 4.9 – 5.3

Longer run 5.2 – 5.5

-1

0

1

2

3

4

5

6

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

Personal consumption expenditure - chain price index

percent change from a year earlier

Inflation is declining

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, 2014 dollars

In large part due to the collapse of energy prices

0

2

4

6

8

10

12

14

16

1994 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Real natural gas pricedol lars per mmbtu, 2014 dollars

Natural gas prices have also declined and remains low

3

4

5

6

7

8

9

10

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

Energy goods and services expenditures as a share of

total consumptionpercent

Expenditures on energy are

below the historical average

3

4

5

6

7

8

9

10

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

Energy goods and services expenditures as a share of

total consumptionpercent

60s

70s

80s

90s 00s

1960-2013

10s

-2.0

-4.3

-2.3 -0.7

-1.2 -1.6

-1.7

-0.7

Low oil prices benefit most states (Effect of a 50% decline in oil prices on employment)

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

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 remains low

-10

-8

-6

-4

-2

0

2

4

6

8

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

Consumer price index

percent

Quarterly change (saar)

Percent change from a year earlier

Q4-2014

Blue Chip CPI Forecast

Actual Forecast 2014 2015 20161.2 1.1 2.3

Inflation is forecast to rise 1.1 percent in 2015

and 2.3 percent in 2016

The FOMC anticipates that PCE inflation

will remain below two percent through 2017

-1

0

1

2

3

4

5

6

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

Personal consumption expenditure - chain price index

percent change from a year earlier

FOMC

FOMC Central Tendency (December 2014)

2014 1.2 – 1.3

2015 1.0 – 1.6

2016 1.7 – 2.0

2017 1.8 – 2.0

Longer run 2.0

0

1

2

3

4

5

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

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

FOMC

The FOMC anticipates that “core” PCE inflation

will also remain below two percent through 2017

FOMC Central Tendency (December 2014)

2014 1.5 – 1.6

2015 1.5 – 1.8

2016 1.7 – 2.0

2017 1.8 – 2.0

Inflation Exchange Rate

Real GDP % change Against Interest Rates

% change Annual US Dollar 3-Month

Annual Consumer Prices End of Year End of Year

2014 2015 2016 2014 2015 2016 2015 2016

United States 2.4 3.2 2.9 1.7 0.4 2.3 - -

Canada 2.4 2.3 2.3 2.0 1.2 2.1 1.21 1.19

Mexico 2.3 3.3 3.8 3.9 3.6 3.6 14.03 13.75

Japan 0.6 1.0 1.4 2.7 1.2 1.4 123.5 127.2

South Korea 3.4 3.5 3.6 1.4 1.4 2.1 1,097 1,091

United Kingdom 2.6 2.6 2.5 1.5 0.7 1.7 1.49 1.51

Germany 1.5 1.4 1.8 0.9 0.5 1.4 1.11 1.07

France 0.4 0.9 1.3 0.7 0.5 1.1 1.11 1.07

Euro Zone 0.8 1.2 1.6 0.5 0.0 1.1 1.11 1.07

Brazil 0.2 0.3 1.7 6.3 6.4 5.6 2.79 2.85

Russia 0.2 -3.4 0.3 7.6 12.4 7.0 62.4 60.5

China 7.3 6.9 6.7 2.1 1.7 2.2 6.21 6.16

India 5.8 6.1 6.6 7.0 5.5 5.7 63.2 63.1

Blue Chip Economic Indicators Forecast February 10, 2015

Blue Chip International Consensus Forecasts

The real trade-weighted dollar has increased 8.9%

over the past six months

80

85

90

95

100

105

110

115

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

Trade-weighted exchange value of the U.S. dollar (real)index: March 1973=100

Since the beginning of the expansion manufacturing output

has been increasing at a 4.9% annualized rate

and has recovered 116% of the output during the recession

-25

-20

-15

-10

-5

0

5

10

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 '14

Industrial production - manufacturing

percent

Quarterly change (saar)

Percent change from a year earlier

While manufacturing jobs have been rising,

they have only recovered 38.2% of the jobs

lost during the downturn

-25

-20

-15

-10

-5

0

5

10

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 '14 '15

Manufacturing employment

percent

Monthly change (saar)

Percent change from a year earlier

Capacity utilization is getting very close to full utilization

62

64

66

68

70

72

74

76

78

80

82

84

86

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

Capacity utilization - manufacturingpercent

The recovery has also been broad-based with

vehicle and primary metals manufacturing

leading the way

-25 0 25 50 75 100 125 150

ManufacturingDurable Goods

Wood ProductsNonmetallic Mineral Products

Primary MetalsFabricated Metal Products

MachineryComputer and Electronic Components

Electrical Eqpt, Appliances & ComponentsMotor Vehicles and Parts

Aerospace & Miscellaneous Transport EquipFurniture and Related Products

Miscellaneous Durable GoodsNondurable Manufacturing

Food, Beverages, and TobaccoTextile and Product Mills

Apparel and Leather GoodsPaper

Printing and Related Support ActivitiesChemicals

Petroleum and Coal ProductsPlastics and Rubber Products

Other Manufacturing

Industrial output: June 2009 - December 2014

percent change

Light vehicles sales have reached pre-recession levels

89

10111213141516171819202122

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

Light vehicle salesmil lions of units (saar)

Vehicle sales are forecast to rise

around 3% this year and 1% next year

10

11

12

13

14

15

16

17

18

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

Vehicle sales

mil lions of units

Blue Chip Light-VehicleSales Forecast

Actual Forecast 2014 2015 201616.4 16.9 17.1

The purchasing managers’ index has

moderated over the past few months

30

35

40

45

50

55

60

65

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

Purchasing managers' index - compositenet percent reporting increases

Current 3 Month Moving Average Growth is:

Above Trend and Accerating

Above Trend and Decelerating

Below Trend and Accelerating

Below Trend and Decelerating

Contracting but Improving

Contracting and Deteriorating

5-year Trend 2009 2010 2011 2012 2013 2014

Manufacturing 4.5%

Wood Products 4.9%

Nonmetallic Mineral Products 4.9%

Primary Metals 5.3%

Fabricated Metal Products 6.6%

Machinery 8.7%

Computer and Electronic Components 9.2%

Electrical Eqpt, Appliances & Components 5.0%

Motor Vehicles and Parts 10.6%

Aerospace & Misc. Transport Equip 4.0%

Furniture and Related Products 4.5%

Miscellaneous Durable Goods 4.3%

Food, Beverages, and Tobacco 1.7%

Textile and Product Mills 1.3%

Apparel and Leather Goods 1.5%

Paper -0.6%

Printing and Related Support Activities 0.2%

Chemicals 1.8%

Petroleum and Coal Products 2.1%

Plastics and Rubber Products 5.1%

The industrial sector has performed

very well over the past 5 years

Manufacturing Industries Activity Chart Growth (3-month moving average)

compared with the most recent 5-year trend

Industrial production is forecast to rise

at a pace above trend in 2015 and 2016

-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

Total industrial production

percent

Quarterly change (saar)

Percent change from a year earlier

Q4-2014

Blue Chip IP Forecast

Actual Forecast 2014 2015 20164.8 3.4 3.2

0

2

4

6

8

10

12

14

16

18

2007 2008 2009 2010 2011 2012 2013 2014 2015

Credit spreads between Corporate High Yield and Corporate Aaa

percent

Credit spreads between Corporate High Yield securities

and Corporate Aaa securities have remained low,

but has been inching higher since the middle of 2014

0

1

2

3

4

5

6

7

8

9

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

Fed Funds ratepercent

Monetary policy has been very aggressive,

keeping the Fed Funds near zero since December 2008

0

1

2

3

4

5

6

7

8

9

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

Target Federal Funds Ratepercent

FOMC

The Federal Funds Rate is anticipated to

return to the neutral rate by the end of 2017

FOMC Midpoint Values

(December 2014)

Longer run 3.75

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 2008 2009

Term Asset-Backed SecuritiesLoan Facility

AIG Support

Maiden Lane

2010 2011 2012 2013 2014

The asset side of the Fed’s balance sheet

has expanded in size and in composition

The money supply (M2) is nearly 3 times

bigger than the monetary base

0

2,000

4,000

6,000

8,000

10,000

12,000

2007 '08 '09 '10 '11 '12 '13 '14

Monetary expansion 2007-current periodbi l lions of dollars

monetary base

M2

50

100

150

200

250

300

350

400

450

500

2007 '08 '09 '10 '11 '12 '13 '14

Monetary expansion 2007-current periodindex: Jan 2007 = 100

monetary base

M2

CPI

50

100

150

200

250

300

350

400

450

500

1929 '30 '31 '32 '33 '34 '35 '36

Monetary expansion 1929-1936index: Jan 1929 = 100

monetary base

M2 CPI

The Fed’s expansion of the monetary base

has allowed the money supply to continue rising,

compared with what took place during the 1930s

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

pace somewhat above trend in 2015 and 2016

Summary

•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 above trend

over the next two years

www.chicagofed.org

www.federalreserve.gov