economic assessment and outlook

Economic Assessmentand Outlook

Rick Kaglic Senior Business Economist Federal Reserve Bank of Chicago

Midwest, Great Plains, and Western Outlook ConferenceIndianapolis, IndianaAugust 14, 2003

Growth in Q2 surprised many

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Real gross domestic product

percent

Quarterly change (saar)

Percent change from year ago

Final sales were even stronger

-2

-1

0

1

2

3

4

5

6

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Real gross domestic product and final sales to domestic purchasers

percent change from year ago

Final sales to domestic purchasers

Gross domestic product

The CFNAI is signaling slow, but improving growth

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Chicago Fed National Activity Index

Monthly

Three-month average

Employers continue to delay hiring

-3

-2

-1

0

1

2

3

4

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Total employment

percent

Quarterly change (saar)

Percent change from year ago

The “job loss” recovery?

Employment growth

0.98

0.99

1.00

1.01

1.02

-24 -20 -16 -12 -8 -4 0 4 8 12 16 20 24

rece

ssio

n t

rou

gh

=1.0

0 1991

2001

Unemployment rates continued to trend up in Q2, but fell modestly in July

3

4

5

6

7

8

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Unemployment rate

percent

Productivity surged in Q2 as outputrose and worker hours fell

-6-5-4-3-2-10123456789

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Nonfarm business productivity

percent

Quarterly change (saar)Percent change from year ago

Benefits costs are rising, but productivity gains have kept unit labor costs in check

0

1

2

3

4

5

6

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Employment cost index

percent

Quarterly change (saar)Percent change from year ago

Headline consumer prices had been increasing...

-1

0

1

2

3

4

5

6

7

8

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Inflation - consumer price index

percent

Quarterly change (saar)Percent change from year ago

…largely due to higher energy costs

-20

-15

-10

-5

0

5

10

15

20

25

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Consumer price index - energy

percent change from year ago

Excluding food and energy, the core rate ofinflation continues to trend down

0

1

2

3

4

5

6

7

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Inflation - consumer price index - core rate

percent

Quarterly change (saar)

Percent change from year ago

Household spending has held up

Contributors:

Households

Business

Rest of the world

Government

Contribution to GDP growth

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

I-00 I-01 I-02 I-03

perc

ent

GDP

PCE

Retail spending picked up in July

Contributors:

Households

Business

Rest of the world

Government

11

12

13

14

15

16

17

18

19

20

21

22

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Light Vehicle Salesmillions of unit saar

Residential activity remains resilient

Contributors:

Households

Business

Rest of the world

Government

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Housing starts

Midwest

U.S.

percent change from year ago, 3-month smoothed

Mortgage interest rates are rising, but are still low

5

6

7

8

9

10

11

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Mortgage rate - 30 year fixedpercent

Contributors:

Households

Business

Rest of the world

Government

Home price appreciation has been a boost

-2

0

2

4

6

8

10

12

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Existing single family home median sales price

Midwest

U.S.

percent change from year ago, 3-month smoothed

Contributors:

Households

Business

Rest of the world

Government

It is a buyer’s market

-3

-2

-1

0

1

2

3

4

5

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Inflation - new vehicles

Percent change from year ago

Contributors:

Households

Business

Rest of the world

Government

Personal income growth held up from,in part due to tax cuts and transfers

-8

-6

-4

-2

0

2

4

6

8

10

12

14

16

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Real disposable personal income

percent

Quarterly change (saar)

Percent change from year ago

Contributors:

Households

Business

Rest of the world

Government

Equity markets have recovered somewhat

-30

-20

-10

0

10

20

30

40

50

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

S&P 500 stock indexpercent change from year ago

Contributors:

Households

Business

Rest of the world

Government

Consumer confidence improvedafter the war, but is still fragile

Consumer sentiment

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

1990 92 94 96 98 00 02

ind

ex U of Mich

Conf Board

Contributors:

Households

Business

Rest of the world

Government

Expectations are falling

Consumer expectations

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

1990 92 94 96 98 00 02

ind

ex

Conf Board

U of Mich

Contributors:

Households

Business

Rest of the world

Government

Business spending is displaying signs of life

Contributors:

Households

Business

Rest of the world

Government

Contribution to GDP growth

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

I-00 II III IV I-01 II III IV I-02 II III IV I-03 II

% c

on

trib

uti

on

GDP Consumption Investment

Manufacturing capacity utilization isnear the lowest level since 1983

Contributors:

Households

Business

Rest of the world

Government

70

72

74

76

78

80

82

84

86

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Capacity utilization - manufacturing

percent

Despite recent improvements,industrial output remains weak

Contributors:

Households

Business

Rest of the world

Government

-15

-10

-5

0

5

10

15

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Industrial output for manufacturing

Midwest

U.S.

percent change from year ago

Capital goods orders are trending up, but barely

Contributors:

Households

Business

Rest of the world

Government

30

35

40

45

50

55

60

65

70

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Nondefense capital goods, excluding aircraft and parts

Mfgs' Shipments

Mfgs' New Orders

Billions of dollars (SA)

Inventories are very low

Contributors:

Households

Business

Rest of the world

Government

-120

-100

-80

-60

-40

-20

0

20

40

60

80

100

120

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Change in nonfarm private inventories

Billions of chained real dollars

Inventories are very low

Contributors:

Households

Business

Rest of the world

Government

1.8

1.9

2.0

2.1

2.2

2.3

2.4

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Inventory to Final Sales ratioratio

Corporate profits are improving

Contributors:

Households

Business

Rest of the world

Government

-50

-25

0

25

50

75

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Nonfinancial corporate profits

percent

Quarterly change (saar)

Percent change from year ago

Net exports are typically a drag on GDP growth

Contributors:

Households

Business

Rest of the world

Government

Contribution to GDP growth

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

I-00 I-01 I-02 I-03

pe

rce

nt

GDP

NetX

…both exports and imports fell in Q2

Contributors:

Households

Business

Rest of the world

Government

-15

-10

-5

0

5

10

15

20

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Real exports and imports

percent change from year ago

Imports

Exports

Government spending, particularlyat the federal level has helped

Contributors:

Households

Business

Rest of the world

Government

Contribution to GDP growth

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

I-00 I-01 I-02 I-03

per

cen

t

GDPGOVT

Most states continue to struggle with budget woes

States that cut spending after FY 2003 budgets were passed

Outlook

Economic improvement is broad-based. Final sales growth between 3.0% and 3.5% in second half of 2003.

Labor markets will improve, but modestly.

Price pressures remain subdued.

Business spending begins to pick up, particularly for inventories and equipment and software.

Government and rest of world will be a mixed bag.

Risks

Will businesses continue to focus on cost-cutting to improve profit margins?

Can households keep it up?

Will rising interest rates put a damper on the recovery?

What in the world is going on?

What impact will state and local spending cuts have?