Economic Outlook

1. Economic Outlook • William Strauss • Senior Economist • and Economic Advisor • Federal Reserve Bank of Chicago NEW Manufacturing Alliance Appleton, WI March 5, 2012

2. The “Great Recession” ended in June 2009,but the economy expanded by just 1.6% over the past year

3. The Chicago Fed National Activity Index3-month average is just above zero

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

5. The personal savings rate has recently moved lower

6. Existing home prices fell by over 30%

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

8. GDP is forecast to grow near trend in 2012and slightly above trend in 2013

9. The recovery has been led by theconsumer and business sectors

10. The forecast path of the current recovery is relatively muted compared with past deep recession recovery cycles average annualized growth: 5.4% average annualized growth: 5.3% average annualized growth: 2.4%

11. Employment fell by over 8.7 million jobsbetween December 2007 and February 2010,but it began to rise beginning in March 2010and added 1.95 million jobs over the past 12 months

12. After peaking in October 2009,the unemployment rate has fallen by1.7 percentage points

13. The unemployment rate is forecast to edge lower

14. Unemployment rates have been movinglower in many states in the Midwest - however, Illinois’ unemployment rate hasincreased by 0.2 percentage points over the past year

15. Inflation has risen

16. In large part due to the movement of oil prices.However, adjusted for inflation,current oil prices are belowthe levels that existed thirty years ago

17. Natural gas prices remain low

18. Expenditures on energy arebelow the historical average

19. Removing the volatile food and energy components from the PCE, “core” inflation remains low

20. Inflation is anticipated to rise 2.0 percent this yearand 2.2 percent next year

21. Industrial output in manufacturing fell quite sharplyduring the recession, but has risen strongly overthe past thirty-one months, averaging 6.5% and hasrecovered 68.9% of the loss during the recession

22. Manufacturing capacity utilization has been rising since June 2009

23. Declines in manufacturing output werebroad-based during the Great Recession –especially in primary metals and vehicle manufacturing

24. The recovery has also been broad-based withprimary metals and automotive manufacturingleading the way

25. The Chicago purchasing managers indexhas been significantly above the nation’s

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

27. Industrial production is forecast to rise at a solid pace

28. Light vehicle sales have been improving following the2011 Tōhuku earthquake and tsunami

29. New vehicle prices rose sharplyfollowing the Japanese disaster

30. Increases in new domestic production sharehas offset losses in Detroit-3 market share

31. Vehicle sales are expected to improve at a good pace

32. Housing starts fell to a post WWII low

33. The forecast calls for a very gradual recovery in housing

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

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

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

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

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

39. Summary • The outlook is for the U.S. economy to expand at a • pace below trend this year and slightly above trend in 2013 • 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 at a good pace • Growth in manufacturing output should be solid

40. www.chicagofed.org www.federalreserve.gov