1. 2018 Economic Forecast for the U.S. and Midwest
May 10, 2018
Wisconsin Dells, WI
David Oppedahl
Senior Business Economist
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.

2. Federal Reserve System

3. 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

4. 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

5. Chicago Fed National Financial Conditions Index
Tighter
Conditions
Looser
Conditions

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

7. 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?

8. 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

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

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

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

12. 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

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

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

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

16. 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

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

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

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

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

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

22. 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

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

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

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

26. IMF real GDP growth forecast for 2018

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

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

29. 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

30. 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 Surges in dairy exports generally seemed to contribute to rises in prices for milk.
* 2018 USDA forecast
Source: USDA, World Agricultural Outlook Board

31. 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

32. 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

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

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

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

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

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

38. Personal consumption shares
Source: Bureau of Economic Analysis

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

40. 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

41. 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

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

43. 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