Economic Outlook

William Strauss

Senior Economist

and Economic Advisor

Federal Reserve Bank of Chicago

Lake County Chamber of Commerce

Lake Forest, IL

January 13, 2016

The “Great Recession” ended in June 2009 and

GDP expanded by 2.1% over the past 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 '15

Real gross domestic product

percent

Quarterly change (saar)

Percent change from a year earlier

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

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

Monthly

Chicago Fed National Activity Index

Three month average

The Chicago Fed National Activity Index

3-month average is below zero

-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 '17

Real gross domestic product

percent

Quarterly change (saar)

Percent change from a year earlier Q3-2015

Blue Chip GDP Forecast

Actual Forecast 2014 2015 2016 2017

2.5 2.1 2.6 2.4

GDP is forecast to have grown around trend in 2015

and expected to grow slightly above trend in 2016

The Federal Open Market Committee (FOMC)

expects GDP to grow slightly above trend this year

-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 '18

Real gross domestic product

percent change from a year earlier

FOMC

FOMC Central Tendency (December 2015)

2015 2.1

2016 2.3 – 2.5

2017 2.0 – 2.3

2018 1.8 – 2.2

Longer run 1.8 – 2.2

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 24

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: 4.8%

average annualized growth: 4.3%

average annualized growth: 2.2%

The “Midwest” economy’s performance has slowed

-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 '15

Midwest Economy Index (MEI)

Midwest Economy Index

Relative MEI

Employment grew by 2.65 million jobs in 2015

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

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

Total employment

percent

Quarterly change (saar)

Percent change from a year earlier

With the exception of Illinois,

employment growth in the other District states

are close to the national average

-10

-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

MI

Total employmentpercent change from a year earlier

US

IL

IN

IA WI

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

The unemployment rate has fallen to 5.0%

Unemployment rates for most of the Midwest

states are close to or below the nation’s

0

2

4

6

8

10

12

14

16

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

MI

Unemployment ratepercent

USIL

INIA

WI

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 '15

Labor force participation ratepercent

Civilian Labor Force Participation Rate

and Population Share 16 and Older

by Age Category, United States, 2007 and 2015

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

Change Change

2015 2007 ‘07-’15 2015 2007 ‘07-’15

Population

16 and older 62.7 66.1 -3.4 100.0 100.0 0.0

16 to 24 55.0 59.4 -4.4 15.4 16.1 -0.7

25 to 34 81.0 83.3 -2.3 17.1 17.1 -0.1

35 to 44 82.1 83.8 -1.7 15.8 18.3 -2.5

45 to 54 79.5 82.0 -2.5 17.0 18.8 -1.8

55 to 64 63.9 63.8 0.1 16.2 14.0 2.2

65 plus 18.9 16.0 2.9 18.5 15.6 2.9

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

Unemployment rate - part-time workers for economic reasons(3 month moving average)percent

Wages and benefit costs continue to increase

at a very slow pace

0

1

2

3

4

5

6

7

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 '15

Employment cost indexpercent change from year ago

benefit costs

wages and salaries

Slow productivity growth helps explain why relatively strong

employment growth has not translated into higher income

-1

0

1

2

3

4

5

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

Productivtypercent change (60 month smoothed average)

Education matters

-4

-3

-2

-1

0

1

2

3

4

1992 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14

Employment change from a year earlier (25 years or older)

mil lions

high school graduate or less than high school diploma (34.2%)

More than high school degree (65.8%)

percentages in parenthesis are the share of total workers 25 years or older in 2014

The unemployment rate is close to the natural rate

0

2

4

6

8

10

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

Unemployment rate

percent

Unemployment rate

percent

Q4-2015

Blue Chip Forecast

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 '18

Unemployment ratepercent

FOMC

The FOMC indicates that the unemployment rate

is close to the natural rate

FOMC Central Tendency (December 2015)

2016 4.6 – 4.8

2017 4.6 – 4.8

2018 4.6 – 5.0

Longer run 4.8 – 5.0

-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

Personal consumption expenditure - chain price index

percent change from a year earlier

Inflation is very low

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 very low

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 '15

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 '17

Consumer price index

percent

Quarterly change (saar)

Percent change from a year earlier

Q3-2015

Blue Chip CPI Forecast

Actual Forecast 2014 2015 2016 20171.2 0.5 2.0 2.3

Prices are forecast to have increased 0.5 percent in 2015

and will rise 2.0 percent in 2016

The FOMC anticipates that PCE inflation

will be just under two percent by the end of 2018

-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 index

percent change from a year earlier

FOMC

FOMC Central Tendency (December 2015)

2015 0.4

2016 1.2 – 1.7

2017 1.8 – 2.0

2018 1.9 – 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 '18

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

FOMC

The FOMC anticipates that “core” PCE inflation

will remain below two percent through 2018

FOMC Central Tendency (December 2015)

2015 1.3

2016 1.5 – 1.7

2017 1.7 – 2.0

2018 1.9 – 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

2015 2016 2017 2015 2016 2017 2016 2017 2016 2017

United States 2.5 2.5 2.5 0.2 1.6 2.3 - - 0.70 1.70

Canada 1.3 1.9 2.2 1.0 2.0 2.0 1.34 1.29 0.89 1.63

Mexico 2.4 2.7 3.1 2.8 3.2 3.2 16.78 16.25 3.95 4.33

Japan 0.6 1.1 0.8 0.8 0.6 1.7 123.5 124.5 0.10 0.13

South Korea 2.6 2.8 3.0 0.7 1.5 2.0 1,216 1,198 1.64 2.03

United Kingdom 2.4 2.2 2.2 0.1 1.1 1.8 1.49 1.52 1.02 1.51

Germany 1.5 1.8 1.8 0.3 1.1 1.6 1.09 1.04 -0.02 0.01

France 1.1 1.4 1.5 0.1 0.8 1.4 1.09 1.04 -0.02 0.01

Euro Zone 1.5 1.7 1.8 0.1 0.9 1.5 1.09 1.04 -0.02 0.01

Brazil -3.3 -2.4 1.1 8.9 7.6 5.7 4.18 4.13 13.79 12.11

Russia -3.8 -0.4 1.7 15.0 8.1 6.1 67.1 65.3 8.60 7.46

China 6.9 6.4 6.2 1.5 1.8 2.2 6.63 6.60 2.84 3.00

India 7.4 7.6 7.7 5.1 5.5 5.3 67.6 67.0 7.07 7.09

Blue Chip Economic Indicators Forecast January 10, 2016

Blue Chip International Consensus Forecasts

The real trade-weighted dollar has increased 17.2%

over the past 16 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

62

64

66

68

70

72

74

76

1965 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

United States

Homeownership ratepercent

Midwest

The forecast calls for a very gradual recovery in housing

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 2016 20171,001 1,114 1,254 1,370

Since the beginning of the expansion manufacturing output

has been increasing at a 3.5% annualized rate

and has recovered 93.8% of the output during the recession

-40

-30

-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 '15

Industrial production - manufacturing

percent

Monthly change (saar)

Percent change from a year earlier

While manufacturing jobs have been rising,

they have only recovered 38.3% of the jobs

lost during the downturn

-20

-15

-10

-5

0

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

Manufacturing employment

percent

Quarterly change (saar)

Percent change from a year earlier

Purchasing managers’ continue to report declines in activity

30

35

40

45

50

55

60

65

70

75

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

Chicago

Purchasing managers' index - compositenet percent reporting increases

United States

Industrial production is forecast

to have edged lower last year but improve this year

and grow just below its historical rate

-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

Total industrial production

percent

Quarterly change (saar)

Percent change from a year earlier

Q3-2015

Blue Chip IP Forecast

Actual Forecast 2014 2015 2016 20174.4 -0.2 2.5 2.5

Light vehicles sales set a record last year

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 rose 5.8% last year

and are anticipated to rise 1.6% this 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 2015 2016 201717.4 17.7 17.5

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

The Federal Reserve increased the

Federal Funds rate by 0.25% in December 2015

after seven years of near zero interest rates

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 '18

Target Federal Funds Ratepercent

FOMC

The Federal Funds rate is expected to remain

below the neutral rate through 2018

FOMC Central Tendency (December 2015)

2016 0.9 – 1.4

2017 1.9 – 3.0

2018 2.9 – 3.5

Longer run 3.3 – 3.5

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 2015

The asset side of the Fed’s balance sheet

has expanded in size and in composition

The money supply (M2) is 3 times

bigger than the monetary base

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2007 '08 '09 '10 '11 '12 '13 '14 '15

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 '15

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 '37

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 slightly above trend in 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

•Vehicle sales are anticipated to rise to a record level this year

•Manufacturing output is expected to increase at a rate

slightly below trend in 2016

www.chicagofed.org

www.federalreserve.gov