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