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William Strauss, Senior Economist and Economic AdvisorFederal Reserve Bank of Chicago
Economic Summit 1
Economic Insights
William Strauss
Senior Economist
and Economic Advisor
Federal Reserve Bank of Chicago
Paper & Plastics Recycling ConferenceChicago, ILOctober 19, 2016
GDP expanded by 1.3% over the past year
‐10
‐8
‐6
‐4
‐2
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4
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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
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 '16
Monthly
Chicago Fed National Activity Index
Three month average
The Chicago Fed National Activity Index3-month average remains below zero
William Strauss, Senior Economist and Economic AdvisorFederal Reserve Bank of Chicago
Economic Summit 2
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 2015 2016 20171,107 1,179 1,282
The forecast calls for a very gradual recovery in housing
The real value of the stock market has reached new highs
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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
Real S&P 500 stock indexIndex: 1990 = 100
The Federal Open Market Committee (FOMC) expectsGDP to grow around trend over the next three years
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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 '19
Real gross domestic product
percent change from a year earlier
FOMC
FOMC Central Tendency (September 2016)
2016 1.7 – 1.92017 1.9 – 2.22018 1.8 – 2.12019 1.7 – 2.0
Longer run 1.7 – 2.0
William Strauss, Senior Economist and Economic AdvisorFederal Reserve Bank of Chicago
Economic Summit 3
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‐8 ‐6 ‐4 ‐2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28
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 restrainedcompared with past deep recession recovery cycles
average annualized growth: 4.5%
average annualized growth: 4.3%
average annualized growth: 2.1%
Employment grew by over 2.4 million jobsover the past 12 months
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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
Total employment
percent
Quarterly change (saar)
Percent change from a year earlier
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4
5
6
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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
Unemployment ratepercent
The unemployment rate has fallen to 5.0%
William Strauss, Senior Economist and Economic AdvisorFederal Reserve Bank of Chicago
Economic Summit 4
The labor force participation rate fellto a level last seen in 1977
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1950 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15
Labor force participation ratepercent
Civilian Labor Force Participation Rateand 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-’15Population16 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 -0.725 to 34 81.0 83.3 -2.3 17.1 17.1 -0.135 to 44 82.1 83.8 -1.7 15.8 18.3 -2.545 to 54 79.5 82.0 -2.5 17.0 18.8 -1.855 to 64 63.9 63.8 0.1 16.2 14.0 2.265 plus 18.9 16.0 2.9 18.5 15.6 2.9
The share of those unemployed morethan 6 months remains significantly high
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1950 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15
Unemployed for 27weeks or morepercent
William Strauss, Senior Economist and Economic AdvisorFederal Reserve Bank of Chicago
Economic Summit 5
Employees working part time for economic reasons remains somewhat elevated
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1994'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16
Unemploymentrate ‐ part‐time workers for economic reasons(3 month moving average)percent
Wages and benefit costs continue to increaseat a very slow pace
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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
Employment cost indexpercent change from year ago
benefit costs
wages and salaries
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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 '19
Unemployment ratepercent
FOMC
The FOMC forecasts that the unemployment ratewill be just below the natural rate through 2019
FOMC Central Tendency (September 2016)
2016 4.7 – 4.92017 4.5 – 4.72018 4.4 – 4.72019 4.4 – 4.8
Longer run 4.7 – 5.0
William Strauss, Senior Economist and Economic AdvisorFederal Reserve Bank of Chicago
Economic Summit 6
Slow productivity growth helps explain why relatively strong employment growth has not translated into higher wages
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1950 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15
Productivtypercent change (20‐qtr ra te)
A large part of the weakness in productivity growthhas been the weak pace of investment
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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
Real private nonresidential fixed investment
percent
Quarterly change (saar)
Percent change from a year earlier
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‐1
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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
Personal consumption expenditure ‐ chain price index
percent change from a year earlier
Inflation is very low
William Strauss, Senior Economist and Economic AdvisorFederal Reserve Bank of Chicago
Economic Summit 7
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1970 '75 '80 '85 '90 '95 '00 '05 '10 '15
Real West Texas Intermediate oil pricedol lars per barrel, 2015 dollars
In large part due to the collapse of energy prices
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1994'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16
Real natural gas pricedol lars per mmbtu, 2015 dollars
Natural gas prices have also declined and remains low
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Energy goods and services expenditures as a share oftotal consumptionpercent
Expenditures on energy arewell below the historical average
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1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15
Energy goods and services expenditures as a share oftotal consumptionpercent
60s
70s
80s
90s 00s
1960‐2015
10s
William Strauss, Senior Economist and Economic AdvisorFederal Reserve Bank of Chicago
Economic Summit 8
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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
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
The FOMC anticipates that PCE inflationwill be just under their two percent target by the end of 2019
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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 (September 2016)
2016 1.2 – 1.42017 1.7 – 1.92018 1.8 – 2.0 2019 1.9 – 2.0
Longer run 2.0
0
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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 inflationwill remain below two percent through 2019
FOMC Central Tendency (September 2016)
2016 1.6 – 1.82017 1.7 – 1.92018 1.9 – 2.02019 2.0
William Strauss, Senior Economist and Economic AdvisorFederal Reserve Bank of Chicago
Economic Summit 9
Blue Chip International Consensus Forecasts
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 2.6 1.5 2.2 0.1 1.2 2.3 ‐ ‐ 0.30 0.80
Canada 1.1 1.3 2.0 1.1 1.6 2.0 1.32 1.28 0.75 1.01
Mexico 2.5 2.2 2.4 2.7 2.9 3.3 18.59 18.35 4.38 5.08
Japan 0.6 0.6 0.8 0.7 ‐0.2 0.4 103.5 107.9 ‐0.05 ‐0.02
South Korea 2.6 2.7 2.6 0.7 0.9 1.5 1,156 1,189 1.32 1.34
United Kingdom 2.2 1.8 0.6 0.0 0.7 2.1 1.30 1.29 0.34 0.38
Germany 1.5 1.7 1.4 0.1 0.4 1.4 1.11 1.08 ‐0.26 ‐0.14
France 1.2 1.3 1.1 0.1 0.3 1.2 1.11 1.08 ‐0.26 ‐0.14
Euro Zone 1.6 1.6 1.4 0.0 0.2 1.2 1.11 1.08 ‐0.26 ‐0.14
Brazil ‐3.8 ‐3.3 0.9 9.0 8.6 5.7 3.41 3.46 13.91 11.60
Russia ‐3.7 ‐0.7 1.1 15.5 7.2 5.3 65.8 64.1 10.34 8.04
China 6.9 6.6 6.2 1.4 2.0 2.0 6.75 6.90 2.83 2.86
India 7.5 7.5 7.6 4.9 5.3 5.3 68.0 69.2 6.81 6.66
Blue Chip Economic Indicators Forecast October 10, 2016
Manufacturers’ Purchasing Managers Indexes
Recently the real trade-weighted dollar increased by 19.7%,but has fallen by 3.3% since January
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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
Trade‐weighted exchange value of the U.S. dollar (real)index: March 1973=100
William Strauss, Senior Economist and Economic AdvisorFederal Reserve Bank of Chicago
Economic Summit 10
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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
Industrial production ‐manufacturing
percent
Quarterly change (saar)
Percent change from a year earlier
Manufacturing output is just below itslevel compared with a year earlier
‐20
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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
Manufacturing employment
percent
Quarterly change (saar)
Percent change from a year earlier
Manufacturing employment is alsobelow the level of a year earlier
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Capacity utilization ‐manufacturingpercent
Capacity utilization has been edging lower
William Strauss, Senior Economist and Economic AdvisorFederal Reserve Bank of Chicago
Economic Summit 11
The recovery has also been broad-based withmotor vehicles, computer and electronic components,
primary metals and machinery manufacturing leading the way
‐50 ‐25 0 25 50 75 100 125 150 175
ManufacturingDurable GoodsWood Products
Nonmetallic Mineral ProductsPrimary Metals
Fabricated Metal ProductsMachinery
Computer and Electronic ComponentsElectrical Eqpt, Appliances & Components
Motor Vehicles and PartsAerospace & Miscellaneous Transport Equip
Furniture and Related ProductsMiscellaneous 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 ‐ September 2016
percent change
The supply managers’ composite index is just above 50
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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
Purchasing managers' index ‐ compositenet percent reporting increases
Current 3 Month Moving Average Growth is:Above Trend and Accerating
Above Trend and DeceleratingBelow Trend and AcceleratingBelow Trend and Decelerating
Contracting but ImprovingContracting and Deteriorating
5-year Trend 2010 2011 2012 2013 2014 2015 2016Manufacturing 1.2%
Wood Products 2.9%
Nonmetallic Mineral Products 2.9%
Primary Metals -2.1%
Fabricated Metal Products 0.5%
Machinery -0.4%
Computer and Electronic Components 4.0%
Electrical Eqpt, Appliances & Components 0.9%
Motor Vehicles and Parts 7.5%
Aerospace & Misc. Transport Equip 2.6%
Furniture and Related Products 1.7%
Miscellaneous Durable Goods 0.8%
Food, Beverages, and Tobacco 0.8%
Textile and Product Mills 0.8%
Apparel and Leather Goods -4.4%
Paper -0.6%
Printing and Related Support Activities -0.2%
Chemicals -0.7%
Petroleum and Coal Products 0.8%
Plastics and Rubber Products 2.3%
Manufacturing Industries Activity ChartGrowth (3-month moving average)
compared with the most recent 5-year trend
The industrial sector’s growth remains soft
William Strauss, Senior Economist and Economic AdvisorFederal Reserve Bank of Chicago
Economic Summit 12
Industrial production is forecast to improve this yearbut expand at a pace below its historical rate
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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 Q3‐2016
Blue Chip IP Forecast
Actual Forecast 2015 2016 2017‐1.6 0.3 2.2
Light vehicles sales set a record in 2015 andyear-to-date sales in 2016 are 0.5% higher than a year earlier
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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
Light vehicle salesmil lions of units (saar)
Year-to-date light truck sales are 7.1% higherwhile passenger car sales are 8.0% lower
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Passenger car and light truck salesmil lions of units (saar)
light trucks
passenger cars
William Strauss, Senior Economist and Economic AdvisorFederal Reserve Bank of Chicago
Economic Summit 13
Alternative powered vehicles (including hybrids)are a very small fraction of total vehicle sales
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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
Power‐Typepercent of total sales
Alternative
Gasoline and Diesel
Alternative powered vehicles (including hybrids)market share barely exceeded 4%
and have been declining over the past two years
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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
Alternative Powered Vehiclespercent of total sales
Light vehicle production has reached pre-recession levels
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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
Light vehicle productionmil lions of units (saar)
William Strauss, Senior Economist and Economic AdvisorFederal Reserve Bank of Chicago
Economic Summit 14
Vehicle sales rose 5.8% last yearand are anticipated to edge lower this year and next year
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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 17.2 17.1
While the probability of recession within the next 6 months has increased,
it remains below the level that has beenassociated with a recession
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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
Probablility of a recession ‐ two quarters ahead (Survey of Professional Forecasters)percent
Credit spreads between Corporate High Yield securitiesand Corporate Aaa securities have been moving lower
William Strauss, Senior Economist and Economic AdvisorFederal Reserve Bank of Chicago
Economic Summit 15
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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
Fed Funds ratepercent
Monetary policy has been very aggressive,keeping the Fed Funds near zero since December 2008
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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 '19
Target Federal Funds Ratepercent
FOMC
The Federal Funds Rate is expected to remainbelow the neutral rate through 2019
FOMC Central Tendency (September 2016)
2016 0.6 – 0.92017 1.1 – 1.82018 1.9 – 2.82019 2.4 – 3.0
Longer run 2.8 – 3.0
•The outlook is for the U.S. economy to expand at a
pace around trend through 2019
Summary
•Employment growth is expected to slow with the
unemployment rate remaining below the natural rate
•Disappearing slack in the economy will lead to a gradual
rising inflation rate
•Light vehicle sales are anticipated to edge lower
•The housing market is anticipated to continue to improve
through 2017
William Strauss, Senior Economist and Economic AdvisorFederal Reserve Bank of Chicago
Economic Summit 16
www.chicagofed.org www.federalreserve.gov
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