Midwest Agriculture Conference: Who Owns Midwest Farmland? And Why?

LESLIE MCGRANAHAN: We're going to get started with our lunch speaker. I know everyone's having wonderful conversations, but we are in for a treat. So good afternoon. I am Leslie McGranahan. I'm the senior vice president of regional analysis and community development here at the Chicago Fed. And I have the pleasure of introducing our keynote lunch speaker, Anna Paulson, who is going to talk about the economic outlook.

Anna is an executive vice president at the Chicago Fed and our director of research. In this capacity, she leads our research, policy analysis, and public engagement areas and heads up our work preparing President Goolsbee for his monetary policy role at the Federal Open Market Committee. Anna has been the Fed's research director since 2019.

Prior to that, she was an assistant professor of finance at the Kellogg School of Management at Northwestern, the vice president of the Chicago Fed's financial markets group, and the associate director of research. She joined the Fed in 2001. Anna has her PhD in economics from the University of Chicago and has written about a number of subjects, [AUDIO OUT] markets, financial institutions, and household financial decision making. And we're really fortunate to have her here with us today to talk about the economic outlook.

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ANNA PAULSON: Thanks, Leslie. And it's great to be with all of you today. And I've been learning a lot about wind turbines in my lunch conversation. And I hope everybody had a great Thanksgiving, and I am guessing that somewhere on that Thanksgiving table were ag products from the seventh district, the Chicago Fed district.

So we're all very interested and proud of our agricultural tradition here and this conference, which, David tells me, is the 19th year is an important way for us to engage with all of you to learn about important trends and to share information and to keep those relationships going because it's a really important part of our global economy.

So I'm going to talk to you a little bit today about what's going on in the economy at the aggregate level. And a lot of the things I'll talk about also have implications for agriculture. So I'll weave that in a little bit as we're going along. And so let me-- whoops, OK. So my theme here is back to the future. And I'll explain why as we go along.

But if we take a step back to about this time a year ago, you could pick up almost any newspaper and see a headline that said there was going to be a recession in 2023. Things are going to take a downturn. It's inevitable. Almost all forecasters were expecting there to be a recession.

And that was even before we got to March when we had a few big regional banks fail. And that certainly had an implication for the broader stock market but especially for banks. And that's been something banks have been dealing with for the rest of the year, for sure. So things were looking gloomy when we were at this time last year.

And maybe that seemed logical. We'd seen monetary policy tighten a lot. And so interest rates had gone up a lot over a short period of time. Housing starts were slowing. Production indicators-- this is a manufacturing index-- were suggesting a big slowdown. Consumer confidence was low. All of these things are associated with slowing economic trends. And often when you see that constellation of data patterns, you would think, hey, maybe things are going to come to a screeching halt here.

Labor market was super strong. But it, too, was slowing. And then when we look at what actually happened this year so far, it's been really kind of good. So in December, the blue chip consensus outlook for this year was that we were going to get 0.3% growth. So we were going to grow below potential, super close to zero, the kind of economic conditions where any little shock is going to send you into a recession.

And instead, so far we've been growing at a 3 percentage point annual rate, so above what we think economic potential is and really great. And we've seen the unemployment rate, it's 3.9%. That's historically low. It has come up a few tenths over the year. But it's but it's still historically low.

And we've also seen inflation come down over the year. And so that's kind of a weird combination of factors to have strong growth, strong labor market, and inflation go down. So I'm going to talk a little bit about why and then talk about what that means for this coming year. So the big question here is, how did we get this constellation of data?

So a huge part of this was that supply pressures eased. So 2022-- '21, '22 had all been a year of disruptions in supply chains from the pandemic, from Russia's invasion of Ukraine, a whole series of shocks that meant that ships and train cars and ships were not where they needed to be in order for production to happen. And we heard about that over and over and over again.

And what we've seen this year is that supply pressures, supply chain issues have kind of gotten back to normal. So this is an index that the New York Fed makes. It takes a whole bunch of data, and you can see that zero is kind of normal. And we're down a little bit below zero. But you can see that run up that happened over '21 and '22, so big improvement in supply chains.

And labor force participation increased too. So labor supply also increased. So we saw-- so the way you get inflation to come down and the economy to do well is because there's more supply. So there's more people in the labor market, and there's more people-- and there's more stuff getting to where it needs to go. And so this was surprising from the vantage point of 2022 at this time, that there was going to be this much improvement in labor force participation.

So, I mean, this is really good news for the economy. I'm sure all of you have talked to people or have experienced yourselves the struggle to hire and find workers or that turnover has been high. And so one factor that's been behind an improvement in some of those trends is this labor supply trend.

So we got a lot of progress on inflation. And it's still too high. There's still work to be done here. But over this past year, we saw core goods inflation, which had peaked above 12%, come down nearly to zero. And the historical pattern or the pattern over the last 20 years or so has been that goods inflation has been about minus 0.2.

So we're still not back to regular trends, but we're very close. And we've also made progress on housing and then on services excluding housing. And the reason that we could get inflation to come down, the unemployment picture to be good-- or, sorry, the employment picture to be good, and growth to be good is because of these supply improvements.

So now you can look at a bunch of newspapers and see that people are like worried about 2024. Now maybe '24 is going to be the recession year. So this is the back to the future part. "UCLA economists foresee weak economy in '24, but no recession." "Recession Forecast Still Right for Late '23 or Early '24." And so now we're-- so it's kind of like, oh, it's just a slowdown delayed, is one consensus view.

So what do we see? Well, people are expecting 2024 to look kind of like what they expected '23 to look like. So GDP growth would be at about 0.8. That's below what we think potential is, a little better than what they thought '23 was going to be. The unemployment rate would rise to 4.3%. And people are expecting inflation to continue to come down. But this time, inflation would be coming down not because of supply improvements but because demand was slowing.

So one piece that underlies that perspective on the economy is, of course, that monetary policy has tightened a lot and remains restrictive. And so it's starting to put a dent on activity, and we're starting to see that happen. Of course, that leaves the puzzle of, like, well, how come that didn't happen in '23? Labor market is still strong. And I think this is going to be an important part of what we actually see happen in the sense that 70% of the US economy is consumption, is what people buy. If people have jobs and if wages are going up, then they have money to spend. And that's going to keep the economy strong. But it's kind of a question mark about whether or not we get to continue to enjoy this really strong labor market over the whole coming year. Because usually when things start to slow, employers get a little antsy about, is there going to be demand for my product? Should I try to cut costs? A big part of costs are often labor. And so that's one of the dynamics that could develop.

The other thing that I think is really important to have in the back of your head as you think about strength this year and then what might happen going forward is households had a lot of excess savings that they accumulated during the pandemic. Partly that was there was nowhere to spend your money. You were not going to get that haircut. And part of that was there were very-- the fiscal policy put a lot of money in a lot of people's pockets.

Same thing happened for businesses. Same thing happened for farms. So there were a lot of-- businesses were flush with cash. Households were flush with cash. Farms were flush with cash. And so businesses were able to term out loans when rates were really low. Farms did the same thing. So people kind of got their balance sheets into good shape and then also invested for the future when rates were low and when they had extra cash.

So what that means is as you go through this period, the amount of extra cash you have left over has come down. So you can see this really strongly here for households, where we think excess savings is about tapped out. So that's not a source of underlying strength that we would expect to see boosting demand as we go through 2024.

And it's a lot more expensive to buy a car if you need to finance that purchase. Well, actually, it's more expensive to buy a car regardless of whether you pay cash or borrow. Farm operating loans have much higher interest rates. Mortgage rates are much higher. It's more expensive to finance things for people, for families, for farms, for businesses. That tends to slow down investment.

So we've talked to people who-- as an economist, you love hearing people tell you things that resonate exactly with what you've learned in an economics class. But we've had people say things to us like, that project that priced out to be profitable at 4% interest rates does not price out to be profitable at 8% interest rates. And so we're going to delay that project. We're putting that on hold. And so that would certainly be a factor that would, over time, slow investment and be more consistent with this below trend growth.

Manufacturing has been slowing for a long time. All the indicators suggest that there's not going to be a big pickup in manufacturing. So if you put this all together, '23 was supposed to be a recession year, but it ended up being really good. Part of that was because we got these great supply chain improvements. And part of that we had really strong balance sheets-- households, businesses, farms, across the board. And we got good growth even though we had a banking crisis, auto strikes, and geopolitical risk. So despite these external shocks, which might have thrown a weaker economy into a recession, we really powered through. The third quarter had 5% growth on an annual rate, which is-- we haven't had that for a long time, except when we were accelerating out of the pandemic.

So what do we think is going to happen in '24? So if you put these things together, the current forecasts that you see from blue chip forecasters and the like and also from our own internal forecasts suggest that we're going to see below trend growth, a little uptick in unemployment. And then we're going to see inflation to continue to come down.

Now, of course, that's what we thought was going to happen in '23. So are we going to be right this time or not? Forecasting is kind of a mug's game. You're always going to be wrong. So could '24 end up looking like '23? Could we end up having much stronger growth. I think that there's two countervailing forces there. One is that I don't think you can expect the supply chain improvements to continue for forever. But we've been surprised.

And then I think we're starting to see higher rates affect decisions. We're starting to see businesses, households, farms re-evaluate their investment and spending plans, re-evaluate their growth plans in light of higher rates. So we're starting to see those things bite. And part of that is because the excess savings has come down. So now if I wanted get a car, I have to finance it. I can't just use cash that I have on hand. And that's kind of true throughout the economy.

On the other hand, the labor market is still super strong. And the economy has proved to be really resilient. So I'm going to be an economist. I get to be on the one hand and on the other hand. So those two things could-- I think that those things deliver a forecast that's below trend growth because you've got really restrictive monetary policy. But you don't go into a tailspin.