2018 Economic Forecast for the U.S. and Midwest May 10, 2018 Wisconsin Dells, WI David Oppedahl Senior Business Economist 312-322-6122 david.oppedahl@chi.frb.org Hello, my name is David Oppedahl. I’m an economist at the Federal Reserve Bank of Chicago. Today I’m going to talk about the importance of the agricultural economy and some trends that characterize production agriculture in the U.S., briefly discussing some important issues affecting agriculture. But, first I should tell you a bit about the kind of people that farm in the Midwest. Olaf, a Norwegian bachelor farmer, decided to try raising something different for a change and chose chickens. He went into town to the Feed store and bought 300 baby chicks. Three days later he went back to the counter of the feed store and asked for another 300 chicks. "What happened to the first set?" inquired the store owner. "They died," was Olaf's terse reply. Well, small epidemics do have a way of happening so the man sold Olaf another 300 chicks. Four days later Olaf was back needing to buy still another 300 chicks. When told that the second 300 had died as well, the store owner asked if he knew what was going wrong. Olaf replied, "I think I'm either planting them too far apart or too deep." This story is indicative of the role ag plays in the U.S. economy.

Federal Reserve System

The path of this recovery has been below past deep recession recovery cycles, yet now is longer Sources: Bureau of Economic Analysis and Chicago Fed calculations

Chicago Fed National Activity Index shows growth picked up recently (standard deviation from trend growth, 3-month moving average) Above Trend Growth Below Trend Growth

Chicago Fed National Financial Conditions Index Tighter Conditions Looser Conditions

Goals of Monetary Policy Price stability -- low and stable inflation Maximum employment through sustainable economic growth under moderate interest rates

Recent Monetary Policy Actions No additional asset purchases after November 2014, while continuing to reinvest assets as they mature. In October 2017 began to reinvest less than 100% of matured assets to gradually reduce balance sheet. Once in 2015 & 2016, three times in 2017, and in March of 2018 raised the targeted range of the Fed Funds Rate by 0.25% points each time The FOMC will monitor economic conditions to tailor future actions to meet objectives of maximum employment and 2% inflation I added amounts – do I have them right?

In March 2018, the FOMC raised the Fed Funds rate target to a range from 1.50% to 1.75% Federal Funds Rate (effective), Yields in percent per annum Source: Board of Governors of the Federal Reserve System

Fed’s balance sheet expanded to boost growth and now has started to shrink Source: Board of Governors of the Federal Reserve System

The FOMC consensus outlook has output growth rising above trend this year before easing Sources: Bureau of Economic Analysis and Federal Open Market Committee

Contributions to real GDP growth of 2.3% in the 1st quarter of 2018 Consumption 0.7% Residential Investment 0.0% Business Investment 0.8% Inventories 0.4% Government 0.2% Net Exports 0.2% Sources: Bureau of Economic Analysis

Manufacturing is growing briskly; orders for capital goods moving up ISM purchasing managers index (net percent reporting increase) Nondefense capital goods ex. aircraft (orders in millions of dollars, 3-month moving average) Sources: Institute for Supply Management and U.S. Census Bureau

Industrial production and capacity utilization moving up Industrial production index (2012=100) Capacity utilization (percent) Source: Board of Governors of the Federal Reserve System

Industrial production is forecast to improve, expanding at a pace above its historical trend Sources: Federal Reserve Board of Governors and Blue Chip Publications

Blue Chip forecasts vehicle sales to edge lower this year and next year Sources: Autodata Corporation and Blue Chip Publications

Housing market tanked, moving up slowly Housing starts (millions of units, 3-month moving average, SAAR) Home mortgage rate (percent, effective rate for all loans closed) Sources: U.S. Census Bureau and Federal Housing Finance Agency

The forecast calls for a very gradual recovery in housing Sources: U.S. Census Bureau and Blue Chip Publications

Real Expanded House Price Indexes (adjusted by PCE, 1991=100) Wisconsin U.S. Sources: Federal Housing Finance Agency and Bureau of Economic Analysis

Employment grew by over 2.2 million jobs in the past 12 months Source: U.S. Bureau of Labor Statistics

Unemployment rates have fallen since 2010 Source: U.S. Bureau of Labor Statistics

Labor markets tightening, but slack persists Source: U.S. Bureau of Labor Statistics

The FOMC forecasts that the unemployment rate will be below the natural rate through 2020 Sources: U.S. Bureau of Labor Statistics and Federal Open Market Committee

Wages and benefit costs rising at a moderate rate, although may finally be picking up their pace Source: U.S. Bureau of Labor Statistics

Slow productivity growth helps explain why relatively strong employment growth has not translated into higher wages Source: Bureau of Economic Analysis

Poor business investment explains much of the lower productivity levels, but picked up recently Source: Bureau of Economic Analysis

IMF real GDP growth forecast for 2018

The dollar’s exchange value has dipped since the start of 2017, boosting exports Source: Board of Governors of the Federal Reserve System

Real U.S. exports rising again, but more slowly than imports Sources: Bureau of Economic Analysis and Census Bureau

Value of agricultural exports rose in 2017, but expected to be about the same in 2018 2018* Imports This chart shows the dollar value of agricultural exports, imports, and the surplus generated for the U.S. by agricultural trade. A significant decline also occurred back in the 1980s, contributing to the farm financial crisis of that time. Surplus *USDA projection Source: USDA, Economic Research Service

Dairy exports and milk prices The bars on this chart represent exports of dairy products, which provide an outlet for strong growth in U.S. supplies. In the past decade U.S. dairy has become much more active in world markets. The blue line shows the average annual price for milk, which has been mostly falling since peaking in 2014. Surges in dairy exports generally seemed to contribute to rises in prices for milk. * 2018 USDA forecast Source: USDA, World Agricultural Outlook Board

Real net farm income edged up in 2017, but is expected to be down in 2018 2018* This chart shows net income to the farm sector after all expenses are subtracted from revenues. Total net farm income has dropped dramatically since the farm boom ended in 2013. The black portion represents the amount of net income that consists of payments from the federal government. These payments were quite high after the farm financial crisis of the 1980s, yet were pared back in the past decade. *USDA forecast Source: USDA, Economic Research Service

Annual change in farmland values in 7th Federal Reserve District This chart shows the average annual change in farmland values in the Chicago Fed District. Farmland makes up the bulk of farmers total assets, so increases in farmland values make landowners wealthier, and a decline makes them poorer. Farmland values rose rapidly in the 1970s, partly due to inflation, and then crashed in the 1980s. Many farmers were pushed into bankruptcy because both income and farmland values dropped. Often, farmland values depend on current and expected income. Are there any questions on indicators of agricultural performance? If not, we will move on to two ag-related industries--food processing and transportation. Source: Federal Reserve Bank of Chicago

Midwest Economy Index showing growth in states of 7th Federal Reserve District Source: Federal Reserve Bank of Chicago

Manufacturing contributing most to strong Midwest Economy Index Source: Federal Reserve Bank of Chicago

Food price changes still below core inflation (less food and energy) Source: U.S. Bureau of Labor Statistics

Oil prices plummeted and lower gas prices boosted consumer saving/spending (2010 $/barrel) Sources: CME Group and U.S. Bureau of Labor Statistics

Expenditures on energy remain well below their historical average Source: Bureau of Economic Analysis

Personal consumption shares Source: Bureau of Economic Analysis

Even including volatile food and energy components, inflation remains contained (personal consumption expenditure index, year ago % change) Source: Bureau of Economic Analysis

The FOMC anticipates that PCE inflation will be near the two percent target from 2018 forward Sources: Bureau of Economic Analysis and Federal Open Market Committee

The Federal Funds Rate is anticipated to be near the neutral rate by the end of 2019 Source: Board of Governors of the Federal Reserve System

The Federal Funds Rate is anticipated to remain below the neutral rate into 2019

Summary The outlook is for the U.S. economy to expand at a pace above trend in 2018 and 2019 and close to trend in 2020 Employment is expected to rise moderately with the unemployment rate remaining very low Inflation is forecast rise to the Fed’s Inflation target this year Housing is predicted to improve at a modest pace Vehicle sales are anticipated to edge lower this year and in 2019 Manufacturing output is expected to increase at a rate above trend in 2018

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