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Economic Outlook

Economic Outlook. William Strauss Senior Economist and Economic Advisor Federal Reserve Bank of Chicago. Lake County Chamber of Commerce Vernon Hills, IL January 17, 2019. What I said last year. The outlook is for the U.S. economy to expand at a pace somewhat above trend in 2018.

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Economic Outlook

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  1. Economic Outlook • William Strauss • Senior Economist • and Economic Advisor • Federal Reserve Bank of Chicago Lake County Chamber of Commerce Vernon Hills, IL January 17, 2019

  2. What I said last year • The outlook is for the U.S. economy to expand at a • pace somewhat above trend in 2018 • Employment growth is expected to rise moderately with the • unemployment rate remaining little changed and very low • Inflation is forecast to rise to the Fed’s inflation target in 2018 • The housing market is predicted to improve at a modest pace • Light vehicle sales were anticipated to edge lower last year • Manufacturing output was expected to increase at a rate just • below trend in 2018

  3. GDP expanded by 3.0% over the past year

  4. The Chicago Fed National Activity Index3-month average has been above trend during 2018

  5. The Midwest economy is growing close to trend,somewhat slower than the nation’s performance

  6. Manufacturing has been the driving sectorfor growth in the Midwest

  7. The real value of the stock market fellnearly 12% over the past several monthsbut remains high

  8. The Federal Open Market Committee (FOMC) expectsGDP to grow above trend in 2018 and 2019;and around trend in 2020 and 2021 FOMC Central Tendency (December 2018) 2018 3.0 – 3.1 2019 2.3 – 2.5 2020 1.8 – 2.0 2021 1.5 – 2.0 Longer run 1.8 – 2.0

  9. Blue Chip also expects a slowing path foreconomic growth over the next two years

  10. The probability of recession in the next quarter remains low

  11. The same is true for the chances of a recessionover the next two quarters

  12. The index of leading indicators continues to rise

  13. Employment increased by over 2.6 million jobsin 2018

  14. All Chicago Fed District state’s employment growthhave been below the nation’s growth ratewith Illinois experiencing the slowest growth of the statesat nearly half the growth rate of the nation

  15. The unemployment rate has fallen to 3.9%

  16. Wisconsin and Iowa’s unemployment ratesare below the nation’s

  17. The FOMC forecasts that the unemployment ratewill be well below the natural rate through 2021 FOMC Central Tendency (December 2018) 2019 3.5 – 3.7 2020 3.5 – 3.8 2021 3.6 – 3.9 Longer run 4.2 – 4.5

  18. Blue Chip sees the unemployment rate edging down in 2019and then edging higher in 2020, but still remaining below 4%

  19. Wages and benefit costs continue to increaseat a moderate rate,although it may finally be picking up some its pace

  20. There is a very strong correlation between 9-month lead NFIB: planning to raise compensation andEmployment Cost Index: wages and salaries

  21. Slow productivity growth over the past nine yearshelps explain why relatively strong employment growthhas not translated into higher wages

  22. A large part of the weakness in productivity growthhas been the weak pace of investment,although it has been increasing at a strong pacebeginning in 2017

  23. This may help explain the productivitygrowth improvement over the past year

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

  25. Corporate profits continue to improve

  26. Inflation is just below the Fed target of 2%

  27. In large part inflation has been followingthe pattern of energy prices

  28. The rig count has been moving higher

  29. Natural gas prices remain low

  30. Expenditures on energy remainwell below the historical average

  31. Removing the volatile food and energy components from the PCE, “core” inflation is just below 2%

  32. The FOMC anticipates that PCE inflation will be aroundits two percent target through 2021 FOMC Central Tendency (December 2018) 2018 1.8 – 1.9 2019 1.8 – 2.1 2020 2.0 – 2.1 2021 2.0 – 2.1 Longer run 2.0

  33. The FOMC anticipates that “core” PCE inflationwill get to also remain around two percent through 2021 FOMC Central Tendency (December 2018) 2018 1.8 – 1.9 2019 2.0 – 2.1 2020 2.0 – 2.1 2021 2.0 – 2.1

  34. Blue Chip expects inflationary to remain flat

  35. Blue Chip International Consensus Forecasts

  36. More open countries have had better growth

  37. U.S. tariffs used to be much higher

  38. Tariffs: U.S. versus other countries

  39. Tariffs: U.S. versus other countries

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

  41. Manufacturers’ Purchasing Managers Indexes

  42. Manufacturing output growth slowed at the end of 2018

  43. Capacity utilization has been movinghigher over the past year,but is still below full utilization

  44. Manufacturing employment increased by284,000 workers in 2018

  45. The Midwest Economy Indexes manufacturing componentis above its trend and doing better thanthe nation’s manufacturing sector

  46. Manufacturing jobs gains were strong in Iowa and Wisconsin

  47. Light vehicle sales were 17.2 million units in 2018,0.5% higher than the previous year

  48. 2018 light truck sales were 7.4% higher,while 2018 passenger car sales are 13.0% lower

  49. Light truck market share is over 70 percent

  50. Blue Chip Forecasts vehicle sales tomove lower this year and in 2020

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