U.S. Economic Outlook

U.S. Economic Outlook

Global Interdependence Center Keystone, CO July 16, 2019

William Strauss Senior Economist and Economic Advisor Federal Reserve Bank of Chicago

GDP expanded by 3.2% over the past year

The Chicago Fed National Activity Index 3-month average in May 2019 was below trend

The stock market is near a record high

The Federal Open Market Committee (FOMC) expects GDP to grow just above trend in 2019; and around trend in 2020 and 2021 FOMC Central Tendency (June 2019) 2019 2020 2021

2.0 – 2.2 1.8 – 2.2 1.8 – 2.0

Longer run

1.8 – 2.0

The Index of Leading Economic Indicators has continued to edge higher through May

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

The unemployment rate remained at a very low 3.6% in May, the lowest reading since 1969

The FOMC forecasts that the unemployment rate will be below the natural rate through 2021

FOMC Central Tendency (June 2019) 2019 2020 2021

3.6 – 3.7 3.5 – 3.9 3.6 – 4.0

Longer run

4.0 – 4.4

Wages and benefit costs continue to increase at a moderate rate

There is a very strong correlation between 9-month lead NFIB: planning to raise compensation and Employment Cost Index: wages and salaries

Slow productivity growth over the past nine years helps explain why relatively strong employment growth has not translated into higher wages

A large part of the weakness in productivity growth has been the weak pace of investment, although it has been increasing at a strong pace beginning in 2017

This may help explain the productivity growth improvement over the past couple of years

Improving productivity growth is helping to keep unit labor cost growth down even with compensation rising

Corporate profits continue to improve

Inflation is below the Fed target of 2%

In large part inflation has been following the pattern of energy prices

Expenditures on energy remain well below the historical average

Removing the volatile food and energy components from the PCE, “core� inflation is below 2%

The FOMC anticipates that PCE inflation will be around its two percent target in 2020 and 2021

FOMC Central Tendency (June 2019) 2019 2020 2021

1.5 – 1.6 1.9 – 2.0 2.0 – 2.1

Longer run

2.0

The FOMC anticipates that “core” PCE inflation will also remain around two percent through 2021

FOMC Central Tendency (June 2019) 2019 2020 2021

1.7 – 1.8 1.9 – 2.0 2.0 – 2.1

Blue Chip International Consensus Forecasts

United States Canada Mexico Japan South Korea United Kingdom Germany France Euro Zone Brazil Russia China India

Real GDP % change Annual 2018 2019 2.9 2.5 1.9 1.5 2.0 1.5 0.8 0.7 2.7 2.2 1.4 1.2 1.5 0.9 1.7 1.3 1.8 1.3 1.1 1.6 2.3 1.4 6.6 6.3 7.4 6.9

2020 1.8 1.7 1.8 0.5 2.4 1.3 1.4 1.4 1.4 2.3 1.8 6.1 7.2

Blue Chip Economic Indicators Forecast June 10, 2019

Inflation % change Annual Consumer Prices 2018 2019 2020 2.4 1.9 2.1 2.3 1.9 2.0 4.9 4.0 3.7 1.0 0.8 1.1 1.5 0.9 1.6 2.5 1.9 2.0 1.9 1.5 1.6 2.1 1.3 1.5 1.8 1.4 1.5 3.7 4.0 4.0 2.9 4.9 4.0 2.1 2.3 2.4 3.9 4.1 4.7

Exchange Rate Against US Dollar End of Year 2019 2020 1.31 1.30 19.88 20.11 108.8 107.6 1,137 1,112 1.33 1.37 1.15 1.20 1.15 1.20 1.15 1.20 3.86 3.82 65.86 64.64 6.82 6.73 70.36 70.21

Interest Rates 3-Month End of Year 2019 2020 2.37 2.20 1.83 1.98 7.99 7.53 -0.03 -0.01 1.85 1.90 0.86 1.08 -0.24 -0.14 -0.24 -0.14 -0.24 -0.14 6.31 6.74 7.36 6.97 2.84 2.87 6.50 6.49

Manufacturers’ Purchasing Managers Indexes J ul-18

Aug-18

Sep-18

Oct-18

Nov-18

Dec-18

J an-19

Feb-19

Mar-19

Apr-19 May-19

J un-19

Global

52.8

52.6

53.2

52.0

52.0

51.5

50.8

50.6

50.6

50.4

49.8

49.4

United States

55.3

54.7

55.6

55.7

55.3

53.8

54.9

53.0

52.4

52.6

50.5

50.6

Canada

56.9

56.8

54.8

53.9

54.9

53.6

53.0

52.6

50.5

49.7

49.1

49.2

Mexico

52.1

50.7

51.7

50.7

49.7

49.7

50.9

52.6

49.8

50.1

50.0

49.2

Eurozone

55.1

54.6

53.2

52.0

51.8

51.4

50.5

49.3

47.5

47.9

47.7

47.6

Germany

56.9

55.9

53.7

52.2

51.8

51.5

49.7

47.6

44.1

44.4

44.3

45.0

France

53.3

53.5

52.5

51.2

50.8

49.7

51.2

51.5

49.7

50.0

50.6

51.9

Italy

51.5

50.1

50.0

49.2

48.6

49.2

47.8

47.7

47.4

49.1

49.7

48.4

Spain

52.9

53.0

51.4

51.8

52.6

51.1

52.4

49.9

50.9

51.8

50.1

47.9

UK

53.8

53.0

53.6

51.1

53.6

54.2

52.8

52.1

55.1

53.1

49.4

48.0

Russia

48.1

48.9

50.0

51.3

52.6

51.7

50.9

50.1

52.8

51.8

49.8

48.6

J apan

52.3

52.5

52.5

52.9

52.2

52.6

50.3

48.9

49.2

50.2

49.8

49.3

China

50.8

50.6

50.0

50.1

50.2

49.7

48.3

49.9

50.8

50.2

50.2

49.4

India

52.3

51.7

52.2

53.1

54.0

53.2

53.9

54.3

52.6

51.8

52.7

52.1

Brazil

50.5

51.1

50.9

51.1

52.7

52.6

52.7

53.4

52.8

51.5

50.2

51.0

The Blue Chip Forecast calls for a continuation of the very gradual recovery in housing

Industrial production is forecast to rise at a slower pace this year and in 2020

Credit spreads between Corporate High Yield securities and Corporate Aaa securities increased towards the end of last year, although it has pulled back this year

The yield curve inverted in June

Blue Chip does not expect the yield curve to remain inverted

The Federal Funds Rate is expected to be just below the neutral range in 2019 and well below the neutral range in 2020 before returning to just below the neutral range in 2021 FOMC Central Tendency (June 2019) 2019 2020 2021

1.9 – 2.4 1.9 – 2.4 1.9 – 2.6

Longer run

2.5 – 3.0

Summary • The outlook is for the U.S. economy to expand at a pace just above trend in 2019 and close to trend in 2020 and 2021 • Employment is expected to rise moderately with the unemployment rate remaining very low • Inflation is forecast be below the Fed’s inflation target this year and close to it in 2020 and 2021 • Housing is predicted to improve at a modest pace • Manufacturing output is expected to increase at a slow pace in 2019 and 2020

www.chicagofed.org www.federalreserve.gov