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Economic Outlook
NEW Manufacturing Alliance William Strauss
Appleton, WI Senior Economist
March 5, 2012 and Economic Advisor
Federal Reserve Bank of Chicago
The “Great Recession” ended in June 2009,
but the economy expanded by just 1.6% over the past year
Real gross domestic product
percent
10
8
Quarterly change (saar)
6
4
2
0
-2
Percent change from a year earlier
-4
-6
-8
-10
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
The Chicago Fed National Activity Index
3-month average is just above zero
Chicago Fed National Activity Index
2.0
1.0
0.0
-1.0
Three month average
-2.0
-3.0
-4.0
Monthly
-5.0
1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
The liabilities side of the Fed’s balance sheet
shows large amount of excess reserves
Liabilities of the Federal Reserve
Billions of dollars
3,000
2,500
2,000
Deposits of Depository Institutions
1,500
1,000 Treasury Balance
500 Currency in Circulation
0
2007 2008 2009 2010 2011
The personal savings rate has recently moved lower
Personal savings as a percent of disposable personal income
percent
16
14
12
10
8
6
4
2
0
1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10
Existing home prices fell by over 30%
Median sales price - existing single family home
3-month smoothed
$250,000
$230,000
$210,000
$190,000
$170,000
$150,000
$130,000
$110,000
$90,000
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
The stock market has improved since March 2009,
but remains well below previous levels
S&P 500 stock index
Index: 1941-43 = 10
1,600
1,400
1,200
1,000
800
600
400
200
0
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
GDP is forecast to grow near trend in 2012
and slightly above trend in 2013
Real gross domestic product
percent
Blue Chip GDP Forecast
10
Actual Forecast
8 2011 2012 2013
Quarterly change (saar)
6 1.6 2.3 2.8
4
2
0
Q4-2011
-2
Percent change from a year earlier
-4
-6
-8
-10
2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
The recovery has been led by the
consumer and business sectors
Contributions to real GDP growth during the current recovery
percentage points (annual rate)
3
2.5
2
1.5
1 0.6 0.8
0.0
0
-0.2 -0.2
-1
GDP Consumption Business Residential Change in Government Net Exports
Fixed Investment Inventories
Investment
The forecast path of the current recovery is relatively muted
compared with past deep recession recovery cycles
Business cycle recovery path
index - business cycle trough = 100
122
120 1981-82
118 average annualized growth: 5.4%
116 1974-75
114 average annualized growth: 5.3%
112
110 average annualized growth: 2.4%
108
106 2008-09
104
102 Blue Chip forecast recovery path
100
98
-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
quarters before trough quarters after trough
Employment fell by over 8.7 million jobs
between December 2007 and February 2010,
but it began to rise beginning in March 2010
and added 1.95 million jobs over the past 12 months
Total employment
percent
6
4
2
0
-2
Percent change from a year earlier
-4
-6
Monthly change (saar)
-8
1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
After peaking in October 2009,
the unemployment rate has fallen by
1.7 percentage points
Unemployment rate
percent
11
10
9
8
7
6
5
4
3
1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
The unemployment rate is forecast to edge lower
Unemployment rate
percent
12 Blue Chip Forecast
Q4-2011
10
8
6
4
2
0
2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Unemployment rates have been moving
lower in many states in the Midwest -
however, Illinois’ unemployment rate has
increased by 0.2 percentage points over the past year
Unemployment rate
percent
16
MI
14
12
US
10
8
6
IL IA
4 WI
IN
2
0
1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
Inflation has risen
Personal consumption expenditure - chain price index
percent change from a year earlier
6
5
4
3
2
1
0
-1
1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
In large part due to the movement of oil prices.
However, adjusted for inflation,
current oil prices are below
the levels that existed thirty years ago
Real West Texas Intermediate oil price
dollars per barrel. 2011 dollars
140
120
100
80
60
40
20
0
1970 '75 '80 '85 '90 '95 '00 '05 '10
Natural gas prices remain low
Real natural gas price
dollars per mmbtu (2011 dollars)
16
14
12
10
8
6
4
2
0
1994 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Expenditures on energy are
below the historical average
Energy goods and services expenditures as a share of
percent total consumption
10
9
8
80s
60s 70s
7
1960-2012
6
5
10s
90s 00s
4
3
1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10
Removing the volatile food and energy
components from the PCE,
“core” inflation remains low
Personal consumption expenditure - less food and energy -
percent change from a year earlier chain price index
5
4
3
2
1
0
1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Inflation is anticipated to rise 2.0 percent this year
and 2.2 percent next year
Consumer price index
percent
8
Quarterly change (saar)
6
4
2
0
Q4-2011
-2
Percent change from a year earlier
-4 Blue Chip CPI Forecast
-6 Actual Forecast
2011 2012 2013
-8 3.3 2.0 2.2
-10
2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Industrial output in manufacturing fell quite sharply
during the recession, but has risen strongly over
the past thirty-one months, averaging 6.5% and has
recovered 68.9% of the loss during the recession
Industrial production - manufacturing
percent
40
Monthly change (saar)
30
Percent change from a year earlier
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
Manufacturing capacity utilization
has been rising since June 2009
Capacity utilization - manufacturing
percent
86
84
82
80
78
76
74
72
70
68
66
64
62
1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Declines in manufacturing output were
broad-based during the Great Recession –
especially in primary metals and vehicle manufacturing
Industrial output: December 2007 - June 2009
percent change
-60 -50 -40 -30 -20 -10 0
Manufacturing
Durable Goods
Wood Products
Nonmetallic Mineral Products
Primary Metals
Fabricated Metal Products
Machinery
Computer and Electronic Components
Electrical Eqpt, Appliances & Components
Motor Vehicles and Parts
Aerospace & Miscellaneous Transport Equip
Furniture and Related Products
Miscellaneous Durable Goods
Nondurable Manufacturing
Food, Beverages, and Tobacco
Textile and Product Mills
Apparel and Leather Goods
Paper
Printing and Related Support Activities
Chemicals
Petroleum and Coal Products
Plastics and Rubber Products
Other Manufacturing
The recovery has also been broad-based with
primary metals and automotive manufacturing
leading the way
Industrial output: June 2009 - January 2012
percent change
-10 0 10 20 30 40 50 60 70 80 90 100
Manufacturing
Durable Goods
Wood Products
Nonmetallic Mineral Products
Primary Metals
Fabricated Metal Products
Machinery
Computer and Electronic Components
Electrical Eqpt, Appliances & Components
Motor Vehicles and Parts
Aerospace & Miscellaneous Transport Equip
Furniture and Related Products
Miscellaneous Durable Goods
Nondurable Manufacturing
Food, Beverages, and Tobacco
Textile and Product Mills
Apparel and Leather Goods
Paper
Printing and Related Support Activities
Chemicals
Petroleum and Coal Products
Plastics and Rubber Products
Other Manufacturing
The Chicago purchasing managers index
has been significantly above the nation’s
Purchasing managers' index - composite
net percent reporting increases
75
70 Chicago
65
60
55
50
45
40
United States
35
30
1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Midwest manufacturing has been
outperforming the U.S. during the recovery
Industrial output - manufacturing
percent change from a year earlier
20
Midwest
15
10 United States
5
0
-5
-10
-15
-20
-25
-30
1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Industrial production is forecast to rise at a solid pace
Total industrial production
percent
10
Quarterly change (saar)
5
0
Q4-2011
-5
Percent change from a year earlier
-10 Blue Chip IP Forecast
Actual Forecast
-15 2011 2012 2013
3.7 3.2 3.3
-20
2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Light vehicle sales have been improving following the
2011 Tōhuku earthquake and tsunami
Light vehicle sales
millions of units (saar)
22
21
20
19
18
17
16
15
14
13
12
11
10
9
1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
New vehicle prices rose sharply
following the Japanese disaster
Consumer price index - new vehicles
percent
25
Monthly change (saar)
20
15
Percent change from a year earlier
10
5
0
-5
-10
-15
1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Increases in new domestic production share
has offset losses in Detroit-3 market share
Share of light vehicle sales
percent percent
100 100
90 imports 90
80 80
70 70
new domestics
60 60
50 50
40 40
30 Detroit-3 30
20 20
10 10
0 0
1980 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10
Vehicle sales are expected to improve at a good pace
Vehicle sales
millions of units
18
17
16
15
14
Blue Chip Light-Vehicle
13 Sales Forecast
12 Actual Forecast
2011 2012 2013
11 12.7 14.0 14.6
10
1980 '85 '90 '95 '00 '05 '10
Housing starts fell to a post WWII low
Housing starts
thousands
2,500
2,000
1,500
1,000
500
0
1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10
The forecast calls for a very gradual recovery in housing
Housing starts
thousands
2,500
2,000
1,500
1,000 Blue Chip Housing Starts
Forecast (thousands)
500 Actual Forecast
2011 2012 2013
607 717 881
0
1980 '85 '90 '95 '00 '05 '10
Credit spreads between Corporate High Yield securities
and Corporate Aaa securities have been edging lower
Credit spreads between Corporate High Yield and Corporate Aaa
percent
18
16
14
12
10
8
6
4
2
0
Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan
2007 2008 2009 2010 2011 2012
Monetary policy has been very aggressive,
keeping the Fed Funds near zero since December 2008
Fed Funds rate
percent
9
8
7
6
5
4
3
2
1
0
1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
The Federal Funds Rate is anticipated to remain
very low over the forecast horizon
Target Federal Funds Rate
percent
9
8
7
6
5
4
3
2
1 FOMC
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
The asset side of the Fed’s balance sheet
has expanded in size and in composition
Assets of the Federal Reserve
Billions of dollars
3,000
Term Asset-Backed Securities
Loan Facility
2,500
Maiden Lane II & III
2,000
AIG Support
Central Bank Swaps
1,500
Commercial Paper Facility
1,000 Maiden Lane
Term Auction Credit Securities Held Outright
500
0
2007 2008 2009 2010 2011
The Fed’s expansion of the monetary base
has allowed the money supply to continue rising,
compared with what took place during the 1930s
Monetary expansion 1929-1933 Monetary expansion 2007-current period
index:Jan 1929 = 100 index:Jan 2007 = 100
350 350
300 300
monetary base
250 250
200 200
150 150 M2
monetary base
100 100 CPI
CPI
M2
50 50
1929 '30 '31 '32 '33 2007 '08 '09 '10 '11 '12
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
www.chicagofed.org
www.federalreserve.gov
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