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Economic Outlook William Strauss Senior Economist and Economic Advisor Federal Reserve Bank of Chicago Multi-Chamber Economic Outlook Downers Grove, IL February 7, 2020
Economic Outlook
William Strauss
Senior Economist
and Economic Advisor
Federal Reserve Bank of Chicago
Multi-Chamber Economic Outlook
Downers Grove, IL
February 7, 2020
•The outlook was for the U.S. economy to expand at a
pace somewhat above trend in 2019
What I said last year
•Employment growth was expected to rise moderately with the
unemployment rate remaining very low
•Inflation was forecast rise to the Fed’s Inflation target in 2019
•Vehicle sales were anticipated to edge lower in 2019
•Manufacturing output was expected to increase at a slow
pace in 2019
•Housing was predicted to improve at a modest pace
GDP expanded by 2.3% over the past year
-10
-8
-6
-4
-2
0
2
4
6
8
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
Real gross domestic product
percent
Quarterly change (saar)
Percent change from a year earlier
The Index of Leading Economic Indicators
peaked in July and has been ticking lower through December
0
20
40
60
80
100
120
1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15
Composite Index of 10 Leading IndicatorsIndex (2016=100)
The probability of a recession over the
next two quarters has moved higher
0
10
20
30
40
50
60
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
Probablility of a recession - two quarters ahead (Survey of Professional Forecasters)percent
The Sahm Current-Time Unemployment Rate Recession
Indicator is well below the 0.5% recession threshold
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1970 '75 '80 '85 '90 '95 '00 '05 '10 '15 '20
Sahm Current-Time Unemployment Rate Recession Indicatorpercent
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
Monthly
Chicago Fed National Activity Index
Three month average
The Chicago Fed National Activity Index
3-month average in December 2019 was below trend
-5
-4
-3
-2
-1
0
1
2
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
Midwest Economy Index (MEI)
Midwest Economy Index
Relative MEI
The Midwest economy is growing below trend,
somewhat slower than the nation’s performance
Manufacturing has been the biggest sector
challenge for growth in the Midwest
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
2010 '12 '14 '16 '18
Manufacturing Construction and Mining Services Consumer Spending
Midwest Economy Index - Sectoral Contributions
The stock market is at a record high
50
100
150
200
250
300
350
400
450
500
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20
Real S&P 500 stock indexIndex: 1990 = 100
The Federal Open Market Committee (FOMC) expects
GDP to grow just above trend in 2019;
and around trend in 2020, 2021 and 2022
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22
Real gross domestic product
percent change from a year earlier
FOMC
FOMC Central Tendency (December 2019)
2020 2.0 – 2.2
2021 1.8 – 2.0
2022 1.8 – 2.0
Longer run 1.8 – 2.0
-8
-6
-4
-2
0
2
4
6
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20
Total employment
percent
Monthly change (saar)
Percent change from a year earlier
Employment increased by over 2.0 million jobs
over the past 12 months
All Chicago Fed District state’s employment growth
have been below the nation’s growth rate
-10
-8
-6
-4
-2
0
2
4
6
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
MI
Total employmentpercent change from a year earlier
US
IL
IN
IA WI
3
4
5
6
7
8
9
10
11
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20
Unemployment ratepercent
The unemployment rate was a very low 3.6% in January
0
2
4
6
8
10
12
14
16
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
MI
Unemployment ratepercent
US
IL
IN IA
WI
Illinois’ unemployment rate just above the nation’s
3
4
5
6
7
8
9
10
11
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22
Unemployment ratepercent
FOMC
The FOMC forecasts that the unemployment rate
will be below the natural rate through 2022
FOMC Central Tendency (December 2019)
2020 3.5 – 3.7
2021 3.5 – 3.9
2022 3.5 – 4.0
Longer run 3.9 – 4.3
-2
-1
0
1
2
3
4
5
6
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
Inflation is below the Fed target of 2%
0
20
40
60
80
100
120
140
160
1970 '75 '80 '85 '90 '95 '00 '05 '10 '15 '20
Real West Texas Intermediate oil pricedol lars per barrel, 2018 dollars
In large part inflation has been following
the pattern of energy prices
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
Crude and petroleum productsthousand of barrels per day
Imports
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
Crude and petroleum productsthousand of barrels per day
Exports
Imports
There has been a drastic change in the
U.S. crude and petroleum products trade balance
3
4
5
6
7
8
9
10
1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15
Energy goods and services expenditures as a share oftotal consumptionpercent
Expenditures on energy remain
well below the historical average
3
4
5
6
7
8
9
10
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
1960-2018
10s
0
1
2
3
4
5
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
Removing the volatile food and energy
components from the PCE,
“core” inflation remains below 2%
The FOMC anticipates that PCE inflation will be around
its two percent target in 2020 through 2022
-2
-1
0
1
2
3
4
5
6
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22
Personal consumption expenditure - chain price index
percent change from a year earlier
FOMC
FOMC Central Tendency (December 2019)
2020 1.8 – 1.9
2021 2.0 – 2.1
2022 2.0 – 2.2
Longer run 2.0
0
1
2
3
4
5
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22
Personal consumption expenditure - less food and energy -
chain price indexpercent change from a year earlier
FOMC
The FOMC anticipates that “core” PCE inflation
will also remain around two percent through 2022
FOMC Central Tendency (December 2019)
2020 1.9 – 2.0
2021 2.0 – 2.1
2022 2.0 – 2.2
Inflation Exchange Rate
Real GDP % change Against Interest Rates
% change Annual US Dollar 3-Month
Annual Consumer Prices End of Year End of Year
2019 2020 2021 2019 2020 2021 2020 2021 2020 2021
United States 2.3 1.9 1.9 1.8 2.2 2.0 - - 1.53 1.44
Canada 1.6 1.6 1.7 2.0 1.9 2.0 1.32 1.29 1.61 1.68
Mexico 0.2 1.1 1.8 3.6 3.4 3.4 19.73 19.44 6.55 6.12
Japan 0.9 0.4 0.8 0.6 0.7 0.7 108.1 107.7 -0.09 -0.07
South Korea 1.9 2.0 2.3 0.4 1.1 1.4 1,168 1,150 1.33 1.48
United Kingdom 1.3 1.0 1.5 1.8 1.7 1.9 1.34 1.37 0.73 0.83
Germany 0.6 0.7 1.2 1.4 1.4 1.5 1.14 1.17 -0.44 -0.47
France 1.3 1.2 1.3 1.3 1.2 1.4 1.14 1.17 -0.44 -0.47
Euro Zone 1.2 1.0 1.3 1.2 1.3 1.4 1.14 1.17 -0.44 -0.47
Brazil 0.9 2.0 2.3 3.6 3.6 3.7 4.04 3.93 4.54 5.34
Russia 1.1 1.7 1.7 4.5 3.8 3.9 63.80 63.19 6.54 6.35
China 6.1 5.8 5.7 2.9 3.1 2.3 7.03 7.01 2.57 2.64
India 5.4 6.0 6.5 3.4 4.0 4.2 71.46 71.13 5.31 5.26
Blue Chip Economic Indicators Forecast January 10, 2020
Blue Chip International Consensus Forecasts
Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug19 Sep19 Oct 19 Nov 19 Dec 19 Jan 20
Globa l 50.6 50.6 50.4 49.8 49.4 49.3 49.5 49.7 49.8 50.3 50.1 50.4
United Sta tes 53.0 52.4 52.6 50.5 50.6 50.4 50.3 51.1 51.3 52.6 52.4 51.9
Canada 52.6 50.5 49.7 49.1 49.2 50.2 49.1 51.0 51.2 51.4 50.4 50.6
Mexico 52.6 49.8 50.1 50.0 49.2 49.8 49.0 49.1 50.4 48.0 47.1 49.0
Eurozone 49.3 47.5 47.9 47.7 47.6 46.5 47.0 45.7 45.9 46.9 46.3 47.9
Germany 47.6 44.1 44.4 44.3 45.0 43.2 43.5 41.7 42.1 44.1 43.7 45.3
France 51.5 49.7 50.0 50.6 51.9 49.7 51.1 50.1 50.7 51.7 50.4 51.1
Ita ly 47.7 47.4 49.1 49.7 48.4 48.5 48.7 47.8 47.7 47.6 46.2 48.9
Spa in 49.9 50.9 51.8 50.1 47.9 48.2 48.8 47.7 46.8 47.5 47.4 48.5
UK 52.1 55.1 53.1 49.4 48.0 48.0 47.4 48.3 49.6 48.9 47.5 50.0
Russia 50.1 52.8 51.8 49.8 48.6 49.3 49.1 46.3 47.2 45.6 47.5 47.9
Japan 48.9 49.2 50.2 49.8 49.3 49.4 49.3 48.9 48.4 48.9 48.4 48.8
China 49.9 50.8 50.2 50.2 49.4 49.9 50.4 51.4 51.7 51.8 51.5 51.1
India 54.3 52.6 51.8 52.7 52.1 52.5 51.4 51.4 50.6 51.2 52.7 55.3
Brazil 53.4 52.8 51.5 50.2 51.0 49.9 52.5 53.4 52.2 52.9 50.2 51.0
Manufacturers’ Purchasing Managers Indexes
More open countries have had better growth
Tariffs: U.S. versus other countries
Tariffs: U.S. versus other countries
Tariffs: Recent threatened tariffs
could push the U.S. much higher
0
500
1,000
1,500
2,000
2,500
1980 '85 '90 '95 '00 '05 '10 '15 '20
Housing starts
thousands
Blue Chip Housing StartsForecast (thousands)
Actual Forecast 2019 2020 20211,298 1,306 1,323
The Blue Chip Forecast calls for a continuation
of the very gradual recovery in housing
Manufacturing output growth is just below zero
-25
-20
-15
-10
-5
0
5
10
15
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
Industrial production - manufacturing
percent
Quarterly change (saar)
Percent change from a year earlier
62
64
66
68
70
72
74
76
78
80
82
84
86
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20
Capacity utilization - manufacturingpercent
The decline in capacity utilization may have bottomed
The Midwest Economy Indexes manufacturing component
is below its trend and doing worse than
the nation’s manufacturing sector
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
Midwest Economy Index (MEI)
Midwest Economy Index: Manufacturing
Relative MEI
-25
-20
-15
-10
-5
0
5
10
15
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20
Manufacturing employment
percent
Monthly change (saar)
Percent change from a year earlier
Manufacturing employment increased by
26,000 workers over the past 12 months
Manufacturing jobs gains in the Midwest states
were below the nation’s pace in December 2019
-30
-25
-20
-15
-10
-5
0
5
10
15
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
MI
Manufacturing employmentpercent change from a year earlier
US
IL
INIA
WI
Light vehicle sales were 16.9 million units in 2019,
1.7% below the comparable period from a year earlier
89
10111213141516171819202122
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20
Light vehicle salesmil lions of units (saar)
2019 light truck sales were 2.4% higher,
while 2019 passenger car sales were 10.7% lower
3
4
5
6
7
8
9
10
11
12
13
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20
Passenger car and light truck salesmil lions of units (saar)
light trucks
passenger cars
Light truck market share is at a record high
30
35
40
45
50
55
60
65
70
75
80
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20
Light truck share of light vehicle market salespercent
Alternative powered vehicles (including hybrids)
are a very small fraction of total vehicle sales
0
10
20
30
40
50
60
70
80
90
100
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20
Power-Typepercent of total sales
Alternative
Gasoline and Diesel
Alternative powered vehicles (including hybrids)
market share remains below 5%
0
1
2
3
4
5
6
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20
Alternative Powered Vehiclespercent of total sales
Blue Chip forecasts vehicle sales to continue moving lower
10
11
12
13
14
15
16
17
18
1980 '85 '90 '95 '00 '05 '10 '15 '20
Vehicle sales
mil lions of units
Blue Chip Light-VehicleSales Forecast
Actual Forecast 2019 2020 202117.0 16.6 16.5
30
35
40
45
50
55
60
65
70
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20
Chicago
Purchasing managers' index - compositenet percent reporting increases
United States
The Chicago supply managers’ composite index
is quite weak while the nation’s index has moved above 50
-25
-20
-15
-10
-5
0
5
10
2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21
Total industrial production
percent
Quarterly change (saar)
Percent change from a year earlierQ4-2019
Blue Chip IP Forecast
Actual Forecast 2019 2020 2021-0.9 1.1 1.5
Industrial production is forecast to
increase at a slow pace in 2020 and 2021
0
2
4
6
8
10
12
14
16
18
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Credit spreads between Corporate High Yield and Corporate Aaa
percent
Credit spreads between Corporate High Yield securities
and Corporate Aaa securities
have been relatively flat and low
-3
-2
-1
0
1
2
3
Yield curve - 10-year Treasury note yield minus
2-year Treasury bill yieldpercent
1980 '85 '90 '95 '00 '05 '10 '15 '20
The 10-year vs. 2-year Treasury yield curve is very flat
-1
0
1
2
3
Yield curve - 10-year Treasury note yield minus
2-year Treasury bill yieldpercent
2000 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20
The 10-year vs. 2-year Treasury yield curve is very flat
-2
-1
0
1
2
3
4
5
Yield curve - 10-year Treasury note yield minus3-month Treasury bill yieldpercent
1980 '85 '90 '95 '00 '05 '10 '15 '20
The 10-year vs. 3-month Treasury yield curve
is also very flat
-1
0
1
2
3
4
Yield curve - 10-year Treasury note yield minus3-month Treasury bill yieldpercent
2000 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20
The 10-year vs. 3-month Treasury yield curve
is also very flat
-1
0
1
2
3
4
2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21
10-year T-Note to 3-month T-Bill spread
percent
Q4 -2019
percent
Blue Chip Forecast
Blue Chip expects the yield curve to continue steepening
0
1
2
3
4
5
6
7
8
9
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20
Fed Funds ratepercent
The Federal Reserve reduced the Federal Funds rate
by 75 basis points in the second half of 2019
0
1
2
3
4
5
6
7
8
9
1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22
Target Federal Funds Ratepercent
FOMC
The Federal Funds Rate is expected to be
below the neutral range through 2021
and then increase to the bottom end
of the neutral range by the end of 2022
FOMC Central Tendency (December 2019)
2020 1.6 – 1.9
2021 1.6 – 2.1
2022 1.9 – 2.6
Longer run 2.4 – 2.8
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Assets of the Federal ReserveBi l lions of dollars
Term Auction Credit
Securities Held Outright
Central Bank Swaps
Maiden Lane II & III
Commercial Paper Facility
2007 '08 '09
Term Asset-Backed SecuritiesLoan Facility
AIG Support
Maiden Lane
'10 '11 '12 '13 '14 '15 '16 '17 '18 '19
The Fed’s balance sheet which had been falling since
October 2017, ended the balance sheet reduction
in August 2019 and has been increasing recently
•The outlook is for the U.S. economy to expand at a pace
around trend in 2020, 2021 and 2022
Summary
•Employment is expected to rise moderately with the
unemployment rate remaining very low
•Inflation is forecast be close to the Fed’s inflation target in
and 2020, 2021 and 2022
•Vehicle sales are anticipated to edge lower this year
•Manufacturing output is expected to increase at a slow pace
this year
•Housing is predicted to improve at a modest pace
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