1. Economic Outlook Multi-Chamber Economic Outlook William Strauss
Downers Grove, IL
February 3, 2017
William Strauss
Senior Economist
and Economic Advisor
Federal Reserve Bank of Chicago

2. What I said last year
The outlook is for the U.S. economy to expand at a
pace slightly above trend in 2016
Employment is expected to rise moderately with the
unemployment rate ticking lower
Slack in the economy will lead to a relatively contained
inflation rate
Vehicle sales are anticipated to rise to a record in 2016
Manufacturing output is expected to increase at a rate
below its trend in 2016

3. GDP expanded by 1.9% over the past year

4. The Chicago Fed National Activity Index 3-month average remains just below zero

5. The Midwest economy has been growing close to trend, a bit better than the national economy

6. The real value of the stock market has reached new highs

7. The Federal Open Market Committee (FOMC) expects GDP to grow around trend over the next three years
FOMC Central Tendency (December 2016)
– 2.3
– 2.2
– 2.0
Longer run – 2.0

8. The path of the current recovery is restrained compared with past deep recession recovery cycles
average annualized growth: 4.4%
average annualized growth: 4.3%
average annualized growth: 2.1%

9. Employment increased by over 2.3 million jobs over the past 12 months

10. Illinois’ employment growth is well below the national average

11. The unemployment rate has fallen to 4.8%

12. Illinois’ unemployment rate is well above the nation’s

13. The labor force participation rate fell to a level last seen in 1977

14. Civilian Labor Force Participation Rate and Population Share 16 and Older by Age Category, United States, 2007 and 2016
Labor Force Participation Rate (%) Population Share (%)
Change Change
‘07-’ ‘07-’16
Population
16 and older
16 to
25 to
35 to
45 to
55 to
65 plus

15. The share of those unemployed more than 6 months remains significantly high

16. Employees working part time for economic reasons remains slightly elevated

17. Wages and benefit costs continue to increase at a very slow pace

18. The FOMC forecasts that the unemployment rate will be just below the natural rate through 2019
FOMC Central Tendency (December 2016)
– 4.6
– 4.7
– 4.8
Longer run – 5.0

19. Slow productivity growth helps explain why relatively strong employment growth has not translated into higher wages

20. A large part of the weakness in productivity growth has been the weak pace of investment

21. Inflation is low, but moving higher

22. In large part inflation has been kept low due to the collapse of energy prices

23. Natural gas prices have also declined and remains low

24. Expenditures on energy are well below the historical average

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

26. The FOMC anticipates that PCE inflation will be around their two percent target over the next three years
FOMC Central Tendency (December 2016)
– 2.0
– 2.0
– 2.1
Longer run

27. The FOMC anticipates that “core” PCE inflation will reach two percent by 2018
FOMC Central Tendency (December 2016)
– 1.9
– 2.0

28. Blue Chip International Consensus Forecasts

29. Manufacturers’ Purchasing Managers Indexes

30. Over the past couple of years, the real trade-weighted dollar increased by 22%

31. Manufacturing output is flat compared with a year earlier

32. Capacity utilization has been edging lower

33. Manufacturing has lost jobs over the past year

34. The Midwest Economy Indexes manufacturing component is near its trend and doing relatively better than the nation

35. Manufacturing jobs were added in Michigan and Wisconsin and lost in Indiana, Illinois and Iowa

36. Industrial production is forecast to improve but expand at a pace below its historical rate

37. Light vehicles sales set a record in 2016 edging up 0.4% from 2015

38. 2016 light truck sales were 7.3% higher while passenger car sales were 7.9% lower

39. Price increases for new vehicles have moderated

40. Alternative powered vehicles (including hybrids) are a very small fraction of total vehicle sales

41. Alternative powered vehicles (including hybrids) market share barely exceeded 4% and have been declining over the past two years

42. Vehicle sales are anticipated to edge lower over the next two years

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

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

45. The Federal Funds Rate is expected to reach the neutral rate at the end of 2019
FOMC Central Tendency (December 2016)
– 1.6
– 2.6
– 3.3
Longer run – 3.0

46. Summary The outlook is for the U.S. economy to expand at a
pace around trend through 2019
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
Manufacturing output is expected to increase at a rate
below its trend in 2017 and 2018
The housing market is expected to continue improving
through 2018

47. www.chicagofed.org www.federalreserve.gov