2012 Economic Forecast Presentation

William Strauss, Senior Economist and Economic Advisor

Federal Reserve Bank of Chicago

Economic Outlook 1

Economic Outlook

William StraussSenior Economistand Economic AdvisorFederal Reserve Bank of Chicago

Aurora Regional Chamber of CommerceAurora, ILFebruary 1, 2012



Economic Outlook 2

The “Great Recession” ended in June 2009,but the economy expanded by just 1.6% over the past year

6

8

10

Real gross domestic product

percent

Quarterly change (saar)

-10

-8

-6

-4

-2

0

2

4

6

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11


Percent change from a year earlier



Economic Outlook 3

1.0

2.0

Chicago Fed National Activity Index

The Chicago Fed National Activity Index3-month average is just below zero

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Monthly

Three month average



Economic Outlook 4

2,500

3,000

Liabilities of the Federal Reserve

Billions of dollars

The liabilities side of the Fed’s balance sheetshows large amount of excess reserves

0

500

1,000

1,500

2,000

Treasury Balance

Currency in Circulation

2007 2008 2009 2010

Deposits of Depository Institutions

2011



Economic Outlook 5

80

100

Senior Loan Officer Opinion Survey

net percentage of domestic respondents tightening commercial and industrial loan standards

Lending standards for commercial and industrial loa nshad begun to loosen

-40

-20

0

20

40

60

80

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

medium and large firms

Small firms



Economic Outlook 6

50

60

70


net percentage of domestic respondents tightening credit card and other consumer loan standards

Lending standards for credit cards andother consumer loans have also begun to loosen

-30

-20

-10

0

10

20

30

40

50

1996 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

other consumer loans

credit cards



Economic Outlook 7

60

80


net percentage of domestic respondents tightening mortgage loan standards

Lending standards for mortgage loans remain relativ ely tight

-20

0

20

40

60

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12



Economic Outlook 8

Personal savings rate has recently moved lower

12

14

16

Personal savings as a percent of disposable personal income

percent

0

2

4

6

8

10

12

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10



Economic Outlook 9

Existing home prices fell by over 30%

$210,000

$230,000

$250,000

Median sales price - existing single family home

3-month smoothed

$90,000

$110,000

$130,000

$150,000

$170,000

$190,000

$210,000

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11



Economic Outlook 10

1,200

1,400

1,600

S&P 500 stock index

Index: 1941-43 = 10

The stock market has improved since March 2009,but remains well below previous levels

0

200

400

600

800

1,000

1,200

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12



Economic Outlook 11

23

24

25

Consumer credit as a percentage of disposable income

percent

Consumer credit as a share of disposable incomeappears to be ticking higher

after moving lower over the past several years

16

17

18

19

20

21

22

23

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11



Economic Outlook 12

6

8

10


percent


Blue Chip GDP Forecast

Actual Forecast

2011 2012 2013

GDP is forecast to grow near trend in 2012and slightly above trend in 2013

-10

-8

-6

-4

-2

0

2

4

6

2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13



Q4-2011

1.6 2.4 2.8



Economic Outlook 13

116

118

120

122

Business cycle recovery path

index - business cycle trough = 100

1981-82

The forecast path of the current recovery is relati vely muted compared with past deep recession recovery cycles

average annualized growth: 5.4%

98

100

102

104

106

108

110

112

114

116

-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14

2008-09

Blue Chip forecast recovery path

1974-75

quarters before trough quarters after trough





Economic Outlook 14

2.4

2

3

Contributions to real GDP growth during the current recovery

percentage points (annual rate)

The recovery has been led by theconsumer and business sectors

1.5

0.6

0.0

0.8

-0.2 -0.2

-1

0

1

2

GDP Consumption Business

Fixed

Investment

Residential

Investment

Change in

Inventories

Government Net Exports



Economic Outlook 15

The FOMC participants see real GDP improving over t ime

4

5

6


percent change from a year earlier

-5

-4

-3

-2

-1

0

1

2

3

4

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

FOMC



Economic Outlook 16

Employment fell by over 8.7 million jobsbetween December 2007 and February 2010,but it began to rise beginning in March 2010

and added 1.64 million jobs during 2011

2

3

4

Total employment

percent

-7

-6

-5

-4

-3

-2

-1

0

1

2

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11





Economic Outlook 17

9

10

11

Unemployment rate

percent

After peaking in October 2009,the unemployment rate has fallen by

1.5 percentage points

3

4

5

6

7

8

9

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11



Economic Outlook 18

10

12

Unemployment rate

percent

Unemployment rate

percent

Q4-2011

Blue Chip Forecast

The unemployment rate is forecast to tick lower

0

2

4

6

8

10

2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13



Economic Outlook 19

The FOMC participants expect theunemployment rate to gradually fall

9

10

11

Unemployment rate

percent

3

4

5

6

7

8

9

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

FOMC



Economic Outlook 20

12

14

16MI

Unemployment rate

percent

Unemployment rates have been movinglower in many states in the Midwest -

however, Illinois’ unemployment rate hasincreased by 0.6 percentage points over the past ye ar

0

2

4

6

8

10

12

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

US

IL

IN

IA

WI



Economic Outlook 21

5

6

Personal consumption expenditure - chain price index


Inflation has risen

-1

0

1

2

3

4

5

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11



Economic Outlook 22

120

140

Real West Texas Intermediate oil price

dollars per barrel. 2011 dollars

In large part due to the movement of oil prices.However, adjusted for inflation,

current oil prices are belowthe levels that existed thirty years ago

0

20

40

60

80

100

1970 '75 '80 '85 '90 '95 '00 '05 '10



Economic Outlook 23

12

14

16

Real natural gas price

dollars per mmbtu (2011 dollars)

Natural gas prices remain low

0

2

4

6

8

10

12

1994 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12



Economic Outlook 24

Expenditures on energy arejust below the historical average

9

10

Energy goods and services expenditures as a share of

total consumptionpercent

9

10

Energy goods and services expenditures as a share of

total consumptionpercent

3

4

5

6

7

8

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10

3

4

5

6

7

8

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10

60s 70s80s

90s 00s

1960-2010

10s



Economic Outlook 25

4

5

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 low

0

1

2

3

4

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11



Economic Outlook 26

6

8

Consumer price index

percent


Inflation is anticipated to rise 2.1 percent this y earand 2.2 percent next year

-10

-8

-6

-4

-2

0

2

4

2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13


Q4-2011

Blue Chip CPI Forecast

Actual Forecast

2011 2012 2013

3.3 2.1 2.2



Economic Outlook 27

Inflation is anticipated to remainbelow the target of many policy makers

5

6

Personal consumption expenditure - chain price index


-1

0

1

2

3

4

5

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14

FOMC



Economic Outlook 28

Core inflation is anticipated to remainbelow 2 percent through 2014

4

5

Personal consumption expenditure - less food and energy -

chain price indexpercent change from a year earlier

0

1

2

3

4

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14

FOMC



Economic Outlook 29

10

15

Industrial production - manufacturing

percent


Industrial output in manufacturing fell quite sharp lyduring the recession, but has risen strongly overthe past thirty months, averaging 6.1% and has

recovered 62.6% of the loss during the recession

-25

-20

-15

-10

-5

0

5

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11





Economic Outlook 30

80

82

84

86

Capacity utilization - manufacturing

percent

Manufacturing capacity utilization has been rising since June 2009

62

64

66

68

70

72

74

76

78

80

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11



Economic Outlook 31

Declines in manufacturing output werebroad-based during the Great Recession –

especially in primary metals and vehicle manufactur ing

-60 -50 -40 -30 -20 -10 0

ManufacturingDurable GoodsWood Products

Industrial output: December 2007 - June 2009

percent change

Wood ProductsNonmetallic Mineral Products

Primary MetalsFabricated Metal Products

MachineryComputer and Electronic Components

Electrical Eqpt, Appliances & ComponentsMotor Vehicles and Parts

Aerospace & Miscellaneous Transport EquipFurniture and Related Products

Miscellaneous Durable GoodsNondurable Manufacturing

Food, Beverages, and TobaccoTextile and Product Mills

Apparel and Leather GoodsPaper

Printing and Related Support ActivitiesChemicals

Petroleum and Coal ProductsPlastics and Rubber Products

Other Manufacturing



Economic Outlook 32

The recovery has also been broad-based withprimary metals and automotive manufacturing

leading the way

-20 -10 0 10 20 30 40 50 60 70 80

ManufacturingDurable GoodsWood Products

Industrial output: June 2009 - December 2011

percent change

Wood ProductsNonmetallic Mineral Products

Primary MetalsFabricated Metal Products

MachineryComputer and Electronic Components

Electrical Eqpt, Appliances & ComponentsMotor Vehicles and Parts

Aerospace & Miscellaneous Transport EquipFurniture and Related Products

Miscellaneous Durable GoodsNondurable Manufacturing

Food, Beverages, and TobaccoTextile and Product Mills

Apparel and Leather GoodsPaper

Printing and Related Support ActivitiesChemicals

Petroleum and Coal ProductsPlastics and Rubber Products

Other Manufacturing



Economic Outlook 33

65

70

75

Chicago

Purchasing managers' index - composite

net percent reporting increases

The Chicago purchasing managers indexhas been significantly above the nation’s

30

35

40

45

50

55

60

65

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

United States



Economic Outlook 34

Midwest manufacturing has beenoutperforming the U.S. during the recovery

10

15

20Midwest

Industrial output - manufacturing


United States

-30

-25

-20

-15

-10

-5

0

5

10

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

United States



Economic Outlook 35

Industrial production is forecast to rise at a soli d pace

5

10

Total industrial production

percent


-20

-15

-10

-5

0

5

2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13


Q4-2011

Blue Chip IP Forecast

Actual Forecast

2011 2012 2013

3.7 2.8 3.3



Economic Outlook 36

19

20

21

22

Light vehicle sales

millions of units (saar)

Light vehicle sales have been improving following t he2011 Tōhuku earthquake and tsunami

9

10

11

12

13

14

15

16

17

18

19

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11



Economic Outlook 37

15

20

Consumer price index - new vehicles

percent

Monthly change (saar)

New vehicle prices rose sharplyfollowing the Japanese disaster

-15

-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




Economic Outlook 38

80

90

100

80

90

100

Share of light vehicle sales

percent

imports

percent

Increases in new domestic production sharehas offset losses in Detroit-3 market share

0

10

20

30

40

50

60

70

80

0

10

20

30

40

50

60

70

80

1980 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10

Detroit-3

new domestics



Economic Outlook 39

17

18

Vehicle sales

millions of units

Vehicle sales are expected to improve at a good pac e

10

11

12

13

14

15

16

1980 '85 '90 '95 '00 '05 '10

Blue Chip Light-Vehicle

Sales Forecast

Actual Forecast

2011 2012 2013

12.7 13.7 14.4



Economic Outlook 40

2,000

2,500

Housing startsthousands

Housing starts fell to a post WWII low

0

500

1,000

1,500

2,000

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10



Economic Outlook 41

2,000

2,500

Housing starts

thousands

The forecast calls for a very gradual recovery in h ousing

0

500

1,000

1,500

2,000

1980 '85 '90 '95 '00 '05 '10

Blue Chip Housing Starts

Forecast (thousands)

Actual Forecast

2011 2012 2013

607 708 873



Economic Outlook 42

14

16

18

Credit spreads between Corporate High Yield and Corporate Aaa

percent

Credit spreads between Corporate High Yield securit iesand Corporate Aaa securities have moved higher

0

2

4

6

8

10

12

14

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



Economic Outlook 43

7

8

9

Fed Funds rate

percent

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

0

1

2

3

4

5

6

7

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11



Economic Outlook 44

The Federal Funds Rate is anticipated to remainvery low over the forecast horizon

7

8

9

Target Federal Funds Rate

percent

0

1

2

3

4

5

6

7

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

FOMC



Economic Outlook 45

2,500

3,000

Assets of the Federal Reserve

Billions of dollars

Maiden Lane II & III

Term Asset-Backed Securities

Loan Facility

The asset side of the Fed’s balance sheethas expanded in size and in composition

0

500

1,000

1,500

2,000

Term Auction Credit Securities Held Outright

Central Bank Swaps

Maiden Lane II & III

Commercial Paper Facility

2007 2008 2009

AIG Support

Maiden Lane

2010 2011



Economic Outlook 46

300

350

Monetary expansion 2007-current period

index: Jan 2007 = 100

monetary base300

350

Monetary expansion 1929-1933

index: Jan 1929 = 100

The Fed’s expansion of the monetary base has allowed the money supply to continue rising,compared with what took place during the 1930s

50

100

150

200

250

2007 '08 '09 '10 '11

M2

CPI

50

100

150

200

250

1929 '30 '31 '32 '33

monetary base

M2

CPI



Economic Outlook 47

•The outlook is for the U.S. economy to expand at apace below trend this year and slightly above trend in 2013

Summary

•Employment is expected to rise moderately with theunemployment 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



Economic Outlook 48

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Documents

2012 Economic Forecast Presentation