Annual Economic Outlook Symposium: A Summary
The Chicago Fed’s 36th annual Economic Outlook Symposium was held on December 2, 2022, where participants provided their insights and perspectives on the health of the economy in 2022 and forecasts for 2023. Charles Evans, president of the Chicago Fed, kicked off the event by highlighting the long history of the symposium and describing some of the notable economic challenges facing the Midwest and the entire country over the years. Thom Walstrum, senior business economist with the Chicago Fed, reflected on the 2022 consensus forecast received at last year’s symposium and presented the consensus forecast for 2023. Thomas Klier, senior economist and economic advisor with the Chicago Fed, moderated a panel on the key regional industries, and Thom Walstrum moderated a panel on households and the labor market. The keynote speaker, Northern Trust chief economist Carl Tannenbaum, and panel participants, comprising economists and sector specialists, provided their views on the state of economy and societal well-being. These invited speakers’ perspectives and forecasts submitted by participants make up the basis for this summary, and, thus, the information provided does not necessarily represent the views of the Federal Reserve System.
The main takeaways as communicated by the symposium’s speakers include that real GDP growth is currently weak, but the U.S. economy is not in recession, and a “soft landing” is not out of the question for 2023. Inflation remains high to the detriment of consumers, but price growth is beginning to cool in line with Fed policy actions taken in 2022 to raise the federal funds rate. The labor market remains tight, with demand for workers outpacing supply in most industries. Labor market imbalances are keeping upward pressure on wages, which makes the fight to control inflation more challenging for the Fed. The supply chain woes of the past couple of years are easing, though not yet eliminated, with shipping costs coming down, benefiting both businesses and consumers. Symposium participants spoke of elevated inflation, geopolitical challenges (including Russia’s invasion of Ukraine, China’s Covid-19 policies, and tensions between China and Taiwan), and energy costs as risks to their forecasts in 2023
There is good news on the inflation front, Tannenbaum explained, resulting from lower housing prices, declining transoceanic shipping costs, higher inventories on the part of businesses, and fewer delays receiving materials through supply chains. Kanlaya Barr, director of corporate economics at John Deere, reiterated that supply bottlenecks are easing from her vantage point, noting that conditions are the best they have been in two years and are likely to improve further in 2023. Many commodity prices are also coming down, she said, including for wheat, steel, oil, and lumber. General Motors’ chief economist Elaine Buckberg reported that while the auto industry as a whole contributed significantly to inflation in the last couple of years, “our contribution has gotten smaller as prices have stabilized,” and used car prices are moderating as well. Nevertheless, tight labor market conditions and the resulting upward pressure on wages continue to challenge policymakers in their efforts to control inflation, as noted by various panel members. Conference Board chief economist Dana Peterson explained that “many businesses are throwing money at the problem by raising wages to not only attract workers but to retain workers.” Despite the continued wage pressure, the consensus forecast is for inflation to lessen, falling to 3.7% (Q4 2023 over Q4 2022) compared with 7.6% for the corresponding period last year.
With labor shortages continuing in many sectors following the Covid-19 supply shock, “one of the mysteries continues to be how the labor markets will evolve,” Tannenbaum said. Thousands of working-age people lost their lives during the pandemic, others are out of the workforce because of long Covid, and still others remain out of the workforce with lingering concerns about Covid-19, including many workers age 55 and older, all contributing to low labor force participation, he added. Peterson explained that labor market participation among older workers has not rebounded from the early days of the pandemic, and labor shortages are the greatest in professions where you have to physically show up for work, including in healthcare, professional and business services, hotels and restaurants, manufacturing, and transportation. Susan Dunseth, vice president of business development at Skills for Chicagoland’s Future, explained that women and African American workers have remained disproportionately out of the workforce since the start of the pandemic. Labor shortages across industries are also partially a result of stricter immigration policies, which were put in place before the pandemic, Peterson added. Furthermore, worker productivity data is “disappointing,” Tannenbaum said, and he questioned whether working remotely may be a contributing factor. Notwithstanding the currently tight labor market, the consensus forecast is for the unemployment rate to rise from 3.7% in Q4 2022 to 4.4% in Q4 2023.
In an effort to lessen labor market imbalances and improve productivity, Dunseth’s organization, Skills for Chicagoland’s Future, acts as a business intermediary by understanding the workforce needs of its business clients and supplying them with workers with appropriate skills in a quick and efficient manner. Dunseth noted that, in response to the limited supply of workers, she witnessed that employers are expanding efforts to invest in their employees through various types of trainings at all levels—including for entry level workers—to demonstrate that “they are a value to the organization.” Working against some of these efforts, Dunseth explained that there are some disincentives in place for some individuals to seek out higher paying jobs as it may mean they lose some public assistance benefits, for which she suggested further dialogue to address this important issue.
Due to high inflation, many consumers are finding it difficult to afford basic necessities, as wages are typically not keeping up with inflation, reported Peterson. Overall, consumers are spending more on services, especially “experiences” over goods, which is the opposite trend that we saw at the height of the pandemic, she said. Consumers are also facing housing affordability challenges, with the rapid home price acceleration from earlier in the pandemic continuing to reflect in higher rents, although some relief for renters is in sight, she added. Moreover, potential home buyers face prices that are still very high and the inventory of homes for purchase is down considerably in 2022, Peterson said. Tannenbaum predicted that housing prices and rents should continue to soften over the next 12 months, helping to bring down the shelter inflation component. At the same time, general borrowing among households is on the way up, although “a strong labor market is usually the best guarantee against default in that sector,” he said.
The manufacturing sector has had bright spots as well as challenges in 2022, many of which can be traced back to the Covid-19 shock. In the auto industry, production was up overall in 2022 over 2021, but the industry is still hampered by chip shortages—although to a lesser degree than earlier in the pandemic, Buckberg explained. The industry also continues to be constrained by labor supply issues and high turnover rates, impacting productivity, she said. The easing of supply chain disruptions in 2022 benefited companies in the heavy machinery sector, Barr noted, reporting that John Deere’s sales were up 40% in Q3 2022 over Q3 2021. With respect to the transportation industry, Kenny Vieth, president of ACT Research, reported that freight costs are coming down, helping with the fight against inflation. In terms of freight market activity, ACT is forecasting a decline of 5% in 2023 (based on their freight composite, which applies weights for various GDP components because different segments create freight at different rates). Vieth attributes the freight market decline primarily to lower home-building activity (which is a freight-intensive industry) and consumers spending less on goods purchases. Container ship backlogs have also “largely dissipated,” he said, but the shortage of truck drivers remains a concern. Looking to 2023, the members of the panel suggested that supply chain issues are likely to continue but at a much lower level than in 2022.
Efforts to shift production to electric vehicles to address climate change are gaining speed, with Buckberg expecting the auto industry to increase its sales of electric vehicles from 17% of total U.S. sales in 2025 to 44% in 2030. Klier and Buckberg both acknowledged the challenges of building up charging infrastructure and accessing adequate amounts of critical material supplies for batteries. Buckberg also pointed out the important role government programs (notably, the infrastructure package and the Inflation Reduction Act) play in trying to address these obstacles. Vieth added that moving to electric heavy trucks is a greater challenge as they are more costly than electric cars, they take more time to charge, and the charging infrastructure for trucks is not widely available yet.
Tannenbaum said that “banks are in great shape,” with a lot of cash currently on their balance sheets, while at the same time, financial markets have been volatile in response to monetary policy tightening. The higher interest rates mean higher costs of credit card debt and mortgage debt for consumers, as well as higher costs to service the government debt, which creates potential risks in funding future government programs, he added.
Roy Ahn of NORC at the University of Chicago reported on polling that his organization conducted in the summer of 2022 using a representative sample of adults nationally. They found that while few people feel their lives are back to normal following the pandemic, the availability of vaccines, boosters, and the build-up of natural immunity have led many people to return to their old routines of going out and gathering with people. Among those who were social in the pre-pandemic period, eight out of ten people indicated they were likely to go to a bar or restaurant, travel, visit older relatives, or attend church, Ahn reported. When asked about their view of the health of the national economy, as of January 2020, about 60% described the national economy as “good,” but as of October 2022, only 23% thought so. Relatedly, “people’s mental health really suffered over the last few years,” Ahn added
Expectations for growth in GDP in 2023 hinge on a number of factors as expressed by conference participants, including the impact of the Federal Reserve’s monetary policy tightening measures on economic activity, geopolitical risks, and uncertainty over future energy prices. Peterson noted that consumer spending is slowing, including for big ticket items like appliances and cars, which she believes is in response not only to a shift in preferences to services but also in response to elevated prices and rising interest rates. On the flip side, the loosening of supply chain disruptions is helping manufacturers ramp up production, Buckberg explained. Tannenbaum sees a narrow path for a soft landing in 2023, and the consensus forecast among the conference participants is for 0.6% real GDP growth (Q4 2023 over Q4 2022) following a 0.2% increase in the previous corresponding period. Walstrum pointed out that this consensus growth rate forecast for real GDP for the coming year does not portray a recession, yet it does represent significantly slower growth than in 2021.