Economic Outlook

March 3, 2021

Slides

LARRY FORSSBERG: Good morning. My name is Larry Forssberg. I'm with the Westmont Chamber of Commerce and Tourism Bureau. I serve as their executive director, and we serve as a coordinating chamber for this event today. Welcome to the 2021 Multi-Chamber Economic Outlook Presentation. It's exciting to have businesses and elected officials from-- participating from 29 chambers of commerce around the region. So we've got a great representation and a great example of teamwork. So welcome to the presentation. We also have some chambers that are here for the very first time. So a special warm welcome to you for participating.

This has been an annual event for over 20 years now. And this outlook presentation has always been highly anticipated by Chamber members. It's more than vital and stays fluid business climate where the word pivot is being used so often. The presentation today offers an opportunity to access up to date information. The data and messages will provide valuable insights into our rapid evolving economy. We can use this information to better manage our budgets, our resources, and help reach business goals. We can also use this information to better mesh with the business environment that has been one of the most unusual and challenging in which to manage just about everything due to the global COVID-19 pandemic.

Looking back for just a moment, the 2020 Economic Outlook Presentation was held in mid February of 2020. That in-person gathering was our last major face-to-face multi-chamber gathering. And obviously, we've had to shut everything down since then for face-to-face gatherings, because of the pandemic. We had over 300 guests at that event. We had the business expo, the luncheon, and a great presentation. So it's good to have everybody here today in this forum. In contrast to our setting today-- Here we are very different environment.

Our chambers have been working throughout the past year setting a pace to help our members keep informed and aware of different resources and information to help to basically better manage the pandemic challenges. Chambers of commerce have been very effective in communicating the availability of grants, incentives, loans from local, county, state, and even federal governmental entities. So seize the many resources that are available through your chamber as you navigate today's business environment.

Providing information resources is why we moved forward with this presentation today, and why we didn't skip it. It's also why we're so grateful to have a speaker from the Federal Reserve Bank of Chicago presenting today and the technology to connect us. It's really very helpful. Today, we can update our knowledge on factors that drive our economy and help connect with each other as well as with our speaker.

So let's make the most of the presentation today. To maximize our time together, please be aware that there will be an opportunity to ask questions. We're going to ask that you please email any questions you have to wcctb@westmontchamber.com. Again, that's wcctb@westmontchamber.com. And we will hold those questions till the very end. Also, we will have a hard stop at 11 o'clock, so that you can continue on with your business as we had scheduled in the-- for the program today.

So let's now carry forward. And part of the tradition of having this event is we've always had our good friend John Quigley, president and CEO of the Elmhurst Chamber of Commerce and Industry, introduce our guest speaker. So I will turn it over to Mr. John Quigley. John?

JOHN QUIGLEY: Thank you, Larry. And good morning, everybody. It's my pleasure to introduce for the first time Anna Paulson, who is an executive vice president and director of research at the Federal Reserve Bank of Chicago, where she leads the research and policy analysis work overseeing the department that provides analytical support for monetary policymaking.

And she conducts research on banking and financial matters, macroeconomics, microeconomics, and regional economics and also has a responsibility for the bank's public affairs, and community development, and policy studies departments. She attends meetings of the Federal Open Market Committee, which is the group responsible for formulating the nation's monetary policy. And she serves on the bank's executive committee. Anna is an expert on financial markets and institutions, with particular expertise on the insurance industry.

Published in leading scholarly journals, including the Journal of Political Economy, The Review of Economics and Statistics, and The Review of Financial Studies, her research investigates how households and firms adapt to incomplete financial markets and how household financial decision making is influenced by exposure to institutions and economic events, including financial crises such as, say, I don't know, a worldwide pandemic.

Paulson-- Anna joined the Chicago Fed as an economist way back in 2001, after serving as an assistant professor of finance at the Kellogg School of Management at Northwestern University. During my years of this event, we had Carl Tannenbaum presenting for five years and a fellow Fed member Bill Strauss presenting for 13 years. Bill presented in February of 2020, did not predict a worldwide crisis and pandemic, retired quickly and went to Florida. Anna, tell us some good news for 2021.

ANNA PAULSON: Good morning, everyone. And thank you for that very kind introduction and the opportunity to talk a little bit about the economy with you all today. Bill Strauss is very much enjoying his well-deserved retirement in Florida. And Keith and Carl have left big shoes to fill. So I'll do my best to live up to their example. And before I jump in, I just want to remind everyone that the views that I'm going to share today are my own and not necessarily those of the Federal Reserve Bank of Chicago or the Federal Reserve System.

So one year ago today, an article on the front page of The New York Times asked, when is it going to end? Referring, of course, to the coronavirus. And at that point, there had been four deaths in a nursing home in Seattle, and we were at the very beginning of what has been a truly awful year for the nation. And the question, when it is-- when is it going to end, is still very much on everyone's minds.

In my talk today, I'm going to review the events from last year with an eye towards understanding what they mean for the future. I'll discuss the relationship between the virus and economic activity, ways in which economic activity has suffered, and some areas where it has proved surprisingly resilient, and discuss the outlook for 2021 and factors that will be important in the coming year. Let's go to the first slide and get started.

Since March of last year, the virus has been a key determinant of economic activity. And it's difficult to underestimate the toll that the virus has taken on the country, with the almost unimaginable benchmark of 514,000 deaths. And in addition to the pain and suffering of the families who've lost loved ones and were coping with illness and profound and long lasting disruptions to their lives, the virus has, of course, reached global economic devastation.

When we focus our attention on the last few weeks or so, the trends are encouraging, however, with cases and deaths falling sharply and vaccinations ramping up. We definitely aren't out of the woods yet, but things look much better than they did even a couple of months ago. Let's go to the next slide.

I think it's really important to remember that the-- that COVID has been particularly devastating for Black and Hispanic communities. This chart shows COVID death rates by race for the city of Chicago, and similar patterns are observed throughout the country, with Black and Hispanic family suffering disproportionately from the impact of the disease as well as the economic fallout from the pandemic. Next slide, please.

The virus is driving economic activity. As just one example, this graph shows weekly visits to non-auto retail and food locations. And you can see that these visits continue to be well below pre-pandemic levels. And there's now considerable research that shows that the pattern of individual activity like this are driven by concerns about the virus rather than by official restrictions on activity. It's hard to underestimate the extent to which economic activity over the past year and into the future depends on the path of the virus. Next slide, please.

And of course, the path of the virus depends on vaccines. The rapid development of a suite of very effective vaccines has justifiably created a lot of optimism among individuals and businesses. And after some initial hiccups, shots are now getting into arms at a pace of about 1.5 million shots per day.

This is an enormous logistical challenge for individuals and for the public health and medical community. So there are definitely issues. But the overall trends are very promising. And as of last week, doses have been administered to about 8% of the adult population, and vaccines undoubtedly play a role in the declines we've seen in cases, deaths, and hospitalizations. Next slide, please.

So the gold standard that I think we're all anxious for is a return to normalcy. And there are certainly many conversations about what exactly the new normal will look like. But for me and I suspect for many others, it means that we would be having events like this one in person, that my kids would go to school five days a week, that I can invite friends over for dinner. And then, I could take the train downtown, and go to my office, and interact with my co-workers face-to-face, and without needing to wear a mask or social distance. And the key to achieving this, of course, is herd immunity. This chart provides one estimate of when the country might achieve herd immunity.

There are a number of factors that go into these estimates-- the share of the population that has immunity because they had COVID, the share of the population that has immunity from the vaccine, what share of the population actually needs to be immune in order to achieve immunity which is indicated by the green area in the chart, the pace of vaccines, people's willingness to get them, and of course, the ongoing spread of the disease, including new varieties that appear to spread more easily, and the efficacy of the vaccine against these new varieties.

Taking this all together, this estimate suggests the country could get just barely into the pale green part of the graph by mid July. So there's a strong case for cautious optimism. I'd feel more comfortable if that blue line was more deeply in the green space, and we had a little bit more cushion. And my concerns really center on the willingness of individuals to take the vaccine, the development of vaccines for children, and the new strains that seem to be more infectious.

And then finally, there's this question about whether or not the vaccine prevents someone from getting symptoms or but also prevents the spread of disease. Resolving this issue seems really important for all of us. Currently, the guidance is that after having the vaccine, individuals should continue to wear a mask and socially distance. That's not really my definition of normality.

There's some encouraging small studies that indicate that the vaccine does in fact prevent the spread of the disease. And I certainly hope we get more information on this, because if getting vaccinated means you can safely, both for yourself and for your community, resume normal activities, that's going to really impact people's willingness to take the vaccine. So let's go to the next slide and start talking about how the virus has impacted the economy over the past year or so and how it's likely to impact it going forward.

So there's a lot going on on this slide. So let me start with the big picture. 2020 was not a good year for overall activity, as you all know. But the economy proved to be more resilient than we had thought in the middle of the year. So let's break it down starting with the solid black line, which is actual GDP in 2020 compared to its level at the end of 2019. GDP ended 2020 2.3 percentage points below its 2019 level, so not good.

And it was well below 4.4 percentage points below what we thought it was going to be at the end of 2019. That's the dashed green line. But 2020 could have been much worse. If you look at the dashed red line, that's the median FOMC participants projection for GDP from June of last year. At that point, the expectation was that 2020 would have-- was-- would it be much worse than it actually ended up being, and that we'd be 6.5 percentage points below 2019 levels of GDP.

I want to spend some time discussing the factors that account for the resiliency of the economy in 2020, what took us from the red dashed line to the blue dashed line which is the FOMC's December projection for GDP, and-- because I think these factors are likely to be important going forward as well. And I'll also highlight some risks. Let's go to the next slide. So what accounts for the resilience we've seen over the past year? For one thing, we've seen a strong recovery in wage and salaries. And this graph doesn't take into account the impact of fiscal support. Next slide, please.

This slide provides one indication of the size and importance of fiscal support. The blue line is wages and salaries, the same as from the previous chart. And the red line adds in other benefits paid to households, like regular and pandemic related unemployment insurance, and direct payments to households from the CARES Act and other fiscal policy.

At its peak, CARES Act payments made up 80% of this figure. And the spike in the red line at the beginning of this year reflects the $600 payments to households that were part of the fiscal package passed in late December. The bottom line is that fiscal support has been a large and critical part of the resilience of the economy. Next slide, please.

This slide shows retail sales. And again, you can see the importance of fiscal policy in the recovery of fiscals-- of retail sales in May and June after households received relief funds in April. And you see this again in the bump up at the end of the chart in January, which, again, reflects the $600 payments that many households received early in January. Next slide, please.

Monetary policy has also played an important role in the resilience of the economy, with the Fed's emergency actions in March-- in March and April, and the FOMC bringing rates to 0 and providing forward guidance that rates will stay low, and ongoing purchases of $120 billion of Treasuries and agency debt each month, first to support markets and now to provide additional accommodation.

You can see the impact of monetary policy in the fall of the 30 year mortgage rate on the left and in the strength of the housing market on the right. Next slide, please. The impact of monetary policy can also be seen in overall financial conditions, the red line in this chart, and is partially reflected in the robust performance of the stock market, which can be seen in blue on the chart. Next slide, please.

Another way that the economy has demonstrated resilience is through the ability of consumers to shift their spending from elevated-- from services with elevated virus risks to goods with lower risks. I might not want to get on a plane or go to a restaurant, but I can safely buy a couch or a car. And as a result, spending on services, the red line, was down about 7% in 2020, relative to the end of 2019.

And spending on goods, the blue line, was up about 7% over the same period. Low interest rates, as a result of monetary policy actions, undoubtedly helped facilitate this shift as well. And since the service sector is about twice the size of the goods sector, in aggregate, spending is still down. Next slide, please.

One interesting sign of resilience that we saw in 2020 was a surge in new business applications. This chart shows total applications in red and what are called high propensity applications in blue for 2019 and '20. The high propensity applications are from businesses with a high likelihood of hiring workers. You can see that new applications are much higher in 2020 than they were in 2019.

Some of this is likely people who are formalizing activities, so that they are eligible for expanded pandemic unemployment assistance and PPP loans. But that probably plays less of a role in the high propensity applications which are up a lot too. These figures suggest the degree of dynamism in the economy that is encouraging, and it will be very interesting to see how this plays out going forward. Let's go to the next slide.

The business sector has also been a source of relative strength last year. And it is on track to continue this year as well. Manufacturing industrial production has been increasing at a solid pace in recent months, and factory output has returned almost to pre-pandemic levels. And as you can see in this chart, the manufacturing purchases-- purchasing managers index in blue and its nonmanufacturing counterpart in red point to continuing strength, as they have both been running well above the break even mark of 50 since last summer. Next slide, please.

We've talked about some of the ways in which the economy has shown resilience. Let's talk now about some of the risks. You can see one big risk in this chart, which shows aggregate employment. Employment has recovered a lot less than GDP or than wages and salaries. And there are about 10 million people-- fewer people working than there were prior to the pandemic. Some of these people have left the labor market, and many others are unemployed. Next slide, please.

In another sign of labor market weakness, the share of long term unemployment is quite elevated, with nearly 40% of those who are unemployed having been out of work for 27 weeks or more. The elevated share of long term unemployed poses a risk going forward, because in general, the longer you are unemployed, the harder it is to find a job. And the more likely it is that when you do find a job it pays less than the job that you left. Next slide, please.

Sticking with the labor market, it's important to know that the official unemployment rate, the blue line in this graph, which reached 6.3% in January, very likely understates the extent of labor market damage. It includes only people who are not working and who are actively looking for work. The official rate has been distorted, because some people who were absent from work due to the pandemic are misreported as being employed. The green line corrects for this and would lead to an unemployment rate that is about 0.6 percentage points higher.

In addition, the official unemployment rate does not capture the full extent of labor market weakness because of the large increase in the number of people who dropped out of the labor force during the pandemic. The red line shows one alternative unemployment rate to address this issue. It takes all the people who dropped out of the labor force since February and adds them to the official unemployment rate, again, adjusted for misreporting.

Another method would be to only add back people with more labor market attachment-- those who are out of the labor force but say they would like a job, and workers who have a job but aren't being paid. These alternative measures of labor market health are consistent with unemployment rates that are in the 8 and 1/4% to 9 and 1/2% range, so not great. Next slide, please.

In addition to the overall high level of unemployment, unemployment among African-Americans and Hispanics rose more sharply than for the rest of the labor force as a whole between February and April, reflecting their disproportionate representation in sectors severely impacted by the crisis. And unemployment for both of these groups is still quite high.

In the long expansion that followed the great financial crisis, which you can see between the two gray bars on this chart, the gap in unemployment rates between whites, African-Americans, and Hispanics shrunk. And one of the costs of the pandemic has been a rise in those gaps and a backpedaling on the progress that had been made towards a more equal labor market. Next slide, please.

So moving away from the labor market, another risk is a divergence in the outlook of small relative to large businesses. Large businesses, as represented by CEO optimism in the red line, are feeling very positive about the future, and a lot more so than they were even before the pandemic. But small businesses, the blue line, have seen optimism rise since last spring. But their level of optimism is still well below where it was prior to the pandemic. Next slide, please.

The lack of optimism on the part of small businesses likely reflects their increasing vulnerability as activity continues to be hampered by virus concerns. The chart on the left shows that many small businesses are closed, especially in the hard hit leisure and hospitality sector. While there is optimism about vaccines and a return to normalcy, some small businesses may not survive to the time when their customers feel comfortable returning.

The chart on the right looks at the vulnerability of households. The increasing share of households are concerned about their ability to make rent or mortgage payments. And food insecurity had been on the rise before the passage of the December relief package. These types of vulnerabilities have broad implications, for landlords and for rent-- and lenders, as well as for kids, as there's evidence that success in school is tied to adequate nutrition. Let's go to the next slide.

So education has been enormously disrupted by the pandemic with big implications for students and for their parents, with many kids, including my own, having not been inside a classroom since March of last year. And education is more likely to be remote in majority minority school districts. Achievement data are just beginning to trickle in, and they're a little difficult to interpret, given shifts in enrollment. But there appear to be big drops, especially in math achievement, among K through 12 students. And overall public school enrollment is down about 2%, with about 30% of that coming from a decline in kindergarten enrollment.

This graph shows college enrollment. And what I want you to particularly pay attention to is the far right where you see public two year enrollment is down considerably. Normally, in a recession, community college enrollment goes up, and people use the time with labor market-- when the labor market isn't so great to retool and invest in their human capital, and that helps with the recovery. But this time, we've seen a sharp drop in enrollments. And so that may have long-lasting implications. Next slide, please.

So turning to inflation and a risk that's particularly important for the Fed, inflation has been below the Fed's 2% average inflation target for some time. Weak demand during the pandemic has held down inflation. And while there were-- core prices did rise a little bit more in December and January, those gains reflected in part some idiosyncratic price moves. And even with these larger increases, the 12 month change of the PC price index that we focused on was just 1 and 1/2% in January, well below our 2% objective. Next slide, please.

Changes in spending patterns associated with the pandemic have led to some interesting price dynamics. For example, the relative prices of airfares, and hotels, and motels have fallen with reduced demand. At the same time, the price of motor vehicles and appliances have increased as spending has shifted to those areas. As demand recovers this year, sectors that were hard hit by the pandemic may see prices bounce up from their current depressed settings to more normal pre-pandemic levels.

And we could also see some cost pressures from strained supply chains or other supply side forces, especially if economic activity recovers very rapidly. And by simple arithmetic, the 12 month change in prices will rise as very low readings of inflation from last spring drop out of the average. So inflation readings are likely to be higher in 2021. But this won't boost underlying inflation unless they find their way persistently into price setting behavior and inflation expectations. Next slide, please.

So let's take stock. We made a lot of progress last year, and more than we expected last summer. Virus activity is lower. Vaccine development has been fantastic. And after some initial hiccups, vaccine distribution is picking up. And the economy has proved relatively resilient. And of course, activity was bolstered by monetary and fiscal policy.

Risks remain quite elevated, however, and we still have a lot to do to get back to pre-pandemic conditions in the labor market. And the virus remains a real threat, particularly with new more infectious varieties. And there's a concern that the economy will bear lasting scars from rising inequality, and the longer term implications of disruption to education and to business activity. Next slide, please.

So how does this all add up for the outlook for GDP this year? Looking at a variety of outside forecasts, the expectation is for growth of close to 6% this year with particularly robust activity in the second and third quarters. The forecast for 2021 has been marked up in recent months on the prospect of another fiscal relief package, as well as on the basis of strength in the incoming data.

And you can see the red line just shows the growth forecase-- the median growth forecast from a bunch of outside forecasters. OK. We're on the next-- oh, thanks. OK. And the blue bars show the quarterly expectations for the quarterly pattern of growth. All right. Now, we can go to the next slide. OK.

So expectations of another fiscal package play an important role in the graph on that previous slide and obviously for the outlook this year. And this chart provides a couple of examples. For example, the blue chip forecast from February 10 is for 5% growth this year. And the average stimulus anticipated by those forecasters is about $1 and 1/2 trillion and is projected to add about 1.6 percentage points to growth in 2021.

The Brookings Institution has another forecast, for 7.3% growth this year. They assume the passage of a $1.9 trillion package, which according to their estimates would boost growth by 3.6 percentage points this year. So fiscal policy is very important. There's obviously a range of possible estimates. And a lot depends on how the fiscal package is spent, how much is going to be spent versus saved, how quickly will it be spent, how will the spending reverberate through the economy, how will financial markets react, and how will the Fed react. Next slide, please.

This slide shows a range of forecasts for the unemployment rate. The median forecaster anticipates a lot of labor market progress next year-- or this year-- sorry-- with the official unemployment rate getting to 4 and 1/2% by the end of the year. This is still a full percentage point above pre-pandemic levels. And as we have discussed earlier, the official unemployment rate has underestimated the extent of labor market damage from the pandemic. Next slide, please.

The big news in financial markets recently has been the increase in the 10-year Treasury rate. The recent increase appears largely attributable to a more optimistic economic outlook, reflecting better data, improved vaccination rates, and the prospects for further stimulus. And some technical market factors may have also played a role in the past couple of weeks. Next slide, please.

The stronger economic outlook has also led financial market participants to increase compensation for inflation that is priced into nominal securities. The inflation compensation in Treasuries for 5 to 10 years ahead is now back over 2%. These inflation break even rates are about where they were before the slide that began when the economy weakened in the later part of 2018.

But they're still well below where they were in 2012 to 2013, which was a period where we thought they were more in sync with the FOMC's inflation target of 2% So this is a welcome development, in many ways consistent with stronger growth, and not something that suggests that inflation is getting out of hand. But it definitely bears watching. Next slide, please.

So what can we expect from monetary policy? Well, the FOMC has been clear that it intends to keep the Fed funds target rate very low for some time. This chart shows that in December, the median FOMC participant expected rates to be at 0 in 2021, 2022, and 2023. Of course, there's been a lot of news since December. And we will see new projections from the FOMC in a couple of weeks.

An important development from last year that we haven't discussed is the FOMC's revised monetary policy strategy statement, which was released in August and affirmed this January. I want to highlight two elements of the new strategy. First, it emphasizes that the FOMC will be concerned about shortfalls of employment from its maximum level, so unemployment that is too high.

Previously, the FOMC focused on deviations in employment from its maximum level. So it used to be concerned that unemployment could be either too high or too low. Now the committee has indicated that it won't worry about what might look like very tight labor market, so long as they aren't generating unwanted inflation or other risks.

Second, the new strategy says that following a period when inflation is below 2%, like we've been in for several years, monetary policy will seek to achieve inflation moderately above 2%, so that inflation averages 2% over time. The new strategy is reflected in the FOMC's January statement, which says that the FOMC will maintain rates at 0 until labor market conditions are consistent with its maximum employment goal and inflation has reached 2% and is on track to exceed 2% for some time.

In addition, the Fed will continue to increase its holdings of Treasury securities and mortgage backed securities until substantial further progress has been made towards its goals. So while the outlook is promising, the economy is still far from the FOMC's goals. And they have signaled that rates will stay at 0 until inflation is at 2% and on track to modestly exceed 2% and that employment has reached the Fed's assessment of its maximum level. Next slide, please.

So to sum up, we've been through an awful, awful year. And while we are not out of the woods yet, the outlook for growth in 2021 looks rosy, with growth projected to be in the neighborhood of 2%-- of 6%. Key ingredients to this forecast include progress on the virus and vaccines, fiscal support, continued monetary policy accommodation, and continued resilience from consumers and businesses.

And of course, risks and uncertainties remain elevated. The virus, the extent of labor market damage, and the impact of rising inequality and the disparate impact of the pandemic on individuals and also small versus large businesses that require-- are the specialty sectors that require social contact relative to those that don't. Thank you so much for your attention. And I look forward to your questions.

LARRY FORSSBERG: Anna, thank you very much. This is Larry Forssberg. We do have a couple of questions to start with. And for anyone else who would like to put a suggestion or a question up on the table for discussion, please email it at this moment to wcctb@westmontchamber.com.

Anna, the first question is regarding the residential housing market. There's a lot of factors that are going on at play there. And there seems to be sometimes, I guess, some confusion. We have this high unemployment rate. Yet, there's not-- people are struggling to find a home. What's your crystal ball saying about the housing market for the next year or two?

ANNA PAULSON: So there are a lot of factors that go into the strength of housing demand-- the strength of housing markets. Right? So low interest rates is one thing. That seems like something that's going to continue. We've seen robust building activity. And we saw a pretty rapid bounce back in the ability of-- for a while, sales were completely disrupted, because people couldn't figure out how to show a house or how to do a closing. And the market had-- has adjusted to those factors.

One thing that we're seeing is that supply is really short. And I think that you can imagine that people don't think that the middle of a global pandemic is a great time to move, or that they really want to have people looking at-- wandering through their house when there is a risk of infection.

So I think that as the economy improves over the next year, one of the things that we'll see is that people will be more willing to show their home. So that should increase supply. The more robust economic activity should also mean that people are able to move and feel more comfortable moving and making-- using some of that savings to change homes or move to opportunity. So I think that outlook for the housing market looks pretty strong.

LARRY FORSSBERG: Thank you, Anna. We have another question that just came in. I'll read it word for word. It says, I've read that certain states such as Illinois have provided unemployment benefits at a level that's actually discouraging getting back to work. I was looking for a general comment and your thoughts on this issue going forward.

ANNA PAULSON: So that's one of those areas where-- so we talk to a lot of businesses as well. And we've been doing so since-- we've been doing so for years, but especially intensively over this last year. And we hear those comments too, that the $600 expanded pandemic employment payments were just-- were making it harder for employers to bring people back to work.

And then, there's also been some academic studies of this. And so the anecdotes and the anec-- and the academic studies are totally at odds here. So the anecdotes are-- and these are folks who are trying to hire workers. And so they're experiencing this on the ground. They're saying, look, this is making it tougher for me to bring folks back or to hire new workers.

And then, when you look at the academic studies, they suggest that at least in the aggregate that the extra unemployment benefits aren't discouraging workers from going back to work, and that's not playing a role in their decisions, because you might imagine that people are thinking about the long term, not the short term.

And so undoubtedly, the truth lies somewhere in between where for some people the extra unemployment insurance makes them think, you know what, I'm just going to wait this out a little bit longer, because it feels scary to go back to work. Plus I've got to look after my kids who aren't in school. So there are a whole bunch of factors that are keeping people out of the labor market, not just unemployment benefits.

So some people undoubtedly are responding to those payments by making decisions to stay out of the labor force longer, stay at home longer. But other people, I think, are-- the unemployment rate is elevated. People are eager to make ends meet and to find jobs.

Now, that doesn't mean that they're in the exact same locations or have the right skills for the jobs that are available. And I suspect that the pandemic makes that matching process trickier, because people are finding it more difficult maybe to move to where the opportunities are, and the labor-- and just the process of finding jobs is-- we're doing all of those things remotely rather than in person. And so that can make things tricky.

LARRY FORSSBERG: Thank you. We have another question. This question asks, currently there is a 3% rate cap bill waiting for the governor's signature. If this bill should pass, how do you think it will affect the local economy?

ANNA PAULSON: Sorry. Can you expand on that? I'm not sure I understood exactly what the 3% cap is.

LARRY FORSSBERG: It doesn't go into any detail here and quite frankly I'm not familiar with that bill that's apparently waiting for the governor's signature. So if it's not something that you've seen or aware of, we'll hold that question to the side.

ANNA PAULSON: Yeah. I think that would be best. Otherwise, I'll just be making stuff up.

LARRY FORSSBERG: Now, we don't want to do that. We also have a question from Mr. John Quigley.

JOHN QUIGLEY: Hi, Anna.

ANNA PAULSON: Hi, John.

JOHN QUIGLEY: Hopefully dig into you in person. We'll get that done. Elmhurst and Westmont are among a handful of municipalities in DuPage County that have very strong automotive sales industries, used cars new cars, and just service all around. Our communities have been booming.

Any idea-- I understand why the cars dealerships first came back as cars got to be 11 years old, and 12 years old, and 13 years old. That was expected several years ago. But at a time when people are working from home and doing way less commuting, any explanation why the auto industry is doing so strong?

ANNA PAULSON: Yeah. The auto sector has definitely been a bright spot from many different perspectives. And I think that one of those very first slides where I looked at where we talked about the forecast that we had in June and how that got upgraded between June and the end of the year, the large automakers similarly upgraded their outlook for auto sales over that time period. So they've found that they were able to get back to work and produce cars, which was encouraging, and that people wanted to buy them.

And so what's behind why are people buying cars when economic conditions are so uncertain? So there's a few things that are at play there. So one is it's-- the pandemic has had a really uneven impact on individuals. Some people are in sectors that have been hit really hard. And they've been laid off, and they're struggling.

And then, there are other people, I would guess like me and many of the people in the audience who can safely work from home. And we work in the knowledge sector part of the economy. And my life has been disrupted, because I'm working from home. But my paycheck hasn't been disrupted. And I think that's true for many people. And you saw that in the figures for wages and salaries which have actually increased.

So there's a lot of people who were able to maintain their lifestyles even though they were very disrupted. Another factor has been low interest rates, which makes it easier to borrow to buy a car. The direct payments to households in the spring of last year and then again in January have also helped people who want to buy a car to finance a down payment. And then, there's been an increased demand for cars, because people have been reluctant to use public transportation. There's been a natural desire to want to be in a private vehicle rather than in a public space where virus risks are elevated.

And so that's one of the places where we've seen a shift in how people are organizing their lives and spending their money. And so that has meant that the auto market has been really quite strong and in fact is experiencing some supply disruptions. Supply has also been a little tight. So that also accounts for some of the-- some of the tightness in the auto market. We've got long global supply chains. We have things coming from Mexico, from China, from all over the world. And so virus activity in those economies has sometimes made it harder to get supplies.

Now the industry is grappling with a chip shortage, which also has at least some of its roots in the how bad we thought things were going to be and then how they turned out to be less bad, because there was a shift in chips towards consumer electronics and away from autos when the automakers thought they were going to be producing fewer cars. Or we have lower demand for cars. And as demand has returned, they're like, oh, wait, we want those chips. Now they're finding they don't have as many of them as they would like in order to meet their production plans.

LARRY FORSSBERG: Thank you, Anna. Our next question-- how much does the Fed worry about the national deficit and our global relationships, particularly China who holds a lot of our bonds?

ANNA PAULSON: So the Fed worries about everything all the time because everything has the potential to impact economic and financial conditions, which are key inputs into thinking about what appropriate monetary policy is. The deficit has expanded, because Congress has enacted a number of fiscal bills to try to provide relief to the economy. And that seems entirely appropriate.

And you saw in some of the slides that I showed how important that fiscal support was to the level of activity that we saw last year and that we're expecting to see this year. We are always keeping an eye on whether or not financial markets are behaving in ways that would be disruptive. So far, there don't seem to be signs that the level of the debt is in any way posing problems. But it's certainly something that we keep an eye on.

And our relationships with China as a trading partner play a big role in the economy. Changes in trade policy affect US businesses and US workers. And one of the things that we've seen over the past year or so is economies-- or companies trying to diversify their supply chains, and so if you might have bought input from China, and now you want to buy it from Vietnam.

And some of those things are-- that's making the supply chain more complicated. And places like Vietnam have less capacity to ship goods than China does. And so it adds to some of the complexities of the business environment, especially for people who rely on oversight-- seas inputs.

LARRY FORSSBERG: Thank you, Anna. Our next question is, what long term effects will the three massive stimulus programs have on the economy? Where has this money actually come from? And are we printing money or incurring debt in the process? It's a multifaced question there.

ANNA PAULSON: Yeah. So the question is what's the long term impact of the fiscal stimulus bills? So what I hope the long term impact is that households and businesses make it through this really devastating period in a way that allows them to continue to invest and grow, hire employees, make-- invest in their children's education, and so on, and for states and municipalities to fix the potholes, and invest in infrastructure, and do a whole bunch of things that are actually really, really good and enhance economic activity. So that's certainly the hope.

And then, that growth that is generated, or the less bad negative growth that is generated by the fiscal bills, in turn, is going to generate wages, and salaries, and profits, which will increase taxes and revenues for Treasury. And so it all works itself out. There are not long run problems. It's pretty accepted that it's a good role for the federal government to play to try to smooth through business cycle fluctuations and certainly events like a pandemic to help households and businesses survive and not to have undue damage from something that—

The pandemic has lasted longer than we all thought. But it would be worse if people aren't able to maintain employment relationships, if businesses can't stay in contact with customers, and if life is disrupted longer or more than it needs to be. And certainly, fiscal support has help maintain those relationships and gives us a base to recover from and to recover more robustly from.

LARRY FORSSBERG: Thank you, Anna. That concludes the questions that we received from our audience. So thank you for taking those right off the top.