U.S. Economic Outlook and Monetary Policy: Challenges, Resiliency, and Opportunities
PAUL TRAUB: Well, I guess I want to start by welcoming everybody to the-- I think we're live now, is what I've been told. So we're first going to open up with a special guest, Bill Strauss. I want to immediately kind of turn the microphone over to Bill Strauss. He's going to say a few remarks. Bill?
WILLIAM STRAUSS: Good morning. Thank you, Paul. Good morning, everybody, from not so sunny Florida today.
As Paul mentioned, my name is Bill Strauss. I'm a recently retired from the Research Department at the Federal Reserve Bank of Chicago after more than 38 years working at the bank. This year has certainly been one for the books. In fact, January 13, 2020 seems much longer ago than just one year. We witnessed large parts of economies all around the world close their doors with devastating impacts.
One of the challenges of the COVID-19 is the issues surrounding having large gatherings. The Fed certainly has not been immune from this. However, like many dark clouds, this one has a silver lining. Because of remote technology, we were able to get together without needing to worry about physical group constraints.
And as of this morning, we have over 500 attendees that have been registered from all around the globe. So that certainly is an advantage. So it's my pleasure to welcome everybody to the Automotive Insights Symposium.
This symposium came about by combining two separate events that were hosted at the Detroit branch of the Federal Reserve Bank of Chicago. Last June should have been the 27th Annual Automotive Outlook Symposium. That was a symposium that was traditionally held on the Friday following Memorial Day. That conference was largely focused on the near-term outlook for light vehicle and medium and heavy duty truck side of the industry. We would, on occasion, offer an additional program on Thursday that would include either a tour of a facility or a special program focused on different aspects of the industry.
The other event being combined in today's symposium is the Chicago Fed's Automotive Insight Conference, which for the past four years was held in the middle of January in Detroit. This conference focused on more medium and longer term issues for the automotive industry as well as more technical issues. So this newly reorganized symposium will combine aspects of both the Automotive Outlook Symposium and the Automotive Insights Conference. After hosting the Automotive Outlook Symposium for the past 26 years, I was honored to be asked to welcome the group to this event, and I am pleased to see that the numbering has carried on, recognizing this as the 27th Annual Automotive Insights Symposium.
So today's program is exceedingly interesting with fantastic speakers, and I, like you, are looking forward to hearing them speak. We're going to start off the morning with the US economic outlook that Paul Traub will cover, followed by a session that will put the North America economy more in a global context. We're then going to shift to analyzing the North American sales and production outlook, and then, of course, over the past year, given the massive government spending to help support the economy, part of that impacts the automotive sector. So we're going to have a session that will look at the prospects for infrastructure industry incentives under the federal recovery policy.
Another topic that has become a bit more important with the incoming administration will be US fuel economy standards, and both federal policy as well as the California's directive will be analyzed. Our final topic of the day is one that is also deeply related to the changing of the administration, and that is looking at the industry perspectives on trade dynamics. So as you can see, we have an exceedingly exciting program that is going to be very timely for what the automotive industry is facing, both in the near term as well as medium and longer term aspects.
As a technical thing, one of the challenges of being remote is that you can't recognize people raising their hands as easily and having questions asked directly by attendees. So the process to ask questions will be to select on the Q&A box on the right side of your screen and to type in your question, and our moderators will be then asking many of the questions that are submitted. So it is now my pleasure to hand the baton off to my dear friend, Paul Traub, Senior Business Economist with the Chicago Fed, who will be hosting today's program and will be our opening speaker.
PAUL TRAUB: All right. Thank you so much, Bill. It's great to see you back in the saddle again after all the years of running the AOS, and I'm sure there's a lot of people in the audience right now that remember you from there, so I wanted to thank you for taking that time to open up.
I've been at the Fed now for 10 years. I've never seen anything like this. When I started in the auto industry way back, and I don't want to date myself, but back in the 1980s, things were so much different than they are now. And things are constantly changing.
So throughout this program, I think we're going to start seeing those changes as they're discussed. I'm going to take and share my screen so that we can work from here, and I'll move quickly. Now, I'm going to make some comments. I tend to say some things that are my personal opinions. They may not necessarily represent all the opinions of the Federal Reserve or the Open Market Committee or Charlie Evans, the President of our bank. That's one of the great pleasures of being at the Fed is that we share opinions, and I think the Fed, it's not recognized for the amount of power that it has in that regard.
My first slide is basically to kind of show you where we started with the overall economy. You can see that it fell pretty radically, dramatically, at the start of the pandemic. When things were kind of chunking along and doing quite well, normal growth rate somewhere around 2%, 2% to a half percent.
The pandemic hit. Things bottomed, and it cratered, and it came back quite quickly. And everybody was talking about this V-shaped recovery and how quickly it would recover.
I'm using the blue chip analysis. This is from the earlier blue chip, which indicates that, given their forecast, we would not get back to full recovery, our previous peak, until sometime in the third quarter of this year. We'll discuss that as we move through. I think that that decision may be up to discussion as we go forward, as we see how things work out with the pandemic.
When you break it down into C plus I plus G, which I always like to talk about, Consumption, Investment, net exports, Government spending, you can see the contributions in the last quarter was mostly personal consumption. We have consumed ourselves through this. So this V-shaped recovery, you hear the talk a lot of times about a more of a K-shaped recovery. It's doing better for some than it is for others. And we'll touch on that a bit. But consumption seems to be going unabated for those that have jobs and are continuing to earn income. Private investment picked up by almost 12% or contributed 12% to the growth rate of overall GDP. And as you can see, we had net exports, negative in government, negative in that number.
On the personal consumption side, 25.4% contribution. What's important to this is the fact that durable goods, nondurable goods did quite well. Services fell drastically at the start of the pandemic, and you can see that they were down considerably at the start. Nondurable goods held up that first quarter of the pandemic, and then durable goods now and nondurable goods have come back pretty strong. We are consuming our way out of this pandemic in a lot of ways, although services did jump its way back in this last quarter and is starting to return to where it was prior to the pandemic.
Real disposable income growth was struggling around 3 and 1/2%, 3%, leading into the pandemic, and of course it started to fall, but then we came up with our first major package, and that's why you see that big jump in real disposable income. That's part of it, but also part of that jump is, who is left working? A lot of the jobs that were lost were low-paying jobs so that you take that mix split, and you add in the incentive monies that were put out there. You can see that helped. Because it wasn't ranges in salary disbursements, as they continued to fall and still are not back to where they were in growth rates prior to the pandemic.
When you look at the amount of money that was thrown from the government into the economy, it's almost chilling in some ways. You can see personal income. So what this slide does is it compares all of these components, income compensation, proprietor's income, rental income, transfer payments, and compares them to where we were when the economy stepped off. And you can see that personal income was up $1.5 trillion, and most all of that is transfer payments. So those are transfer payments, including pandemic relief, other kinds of money that was given for payroll protection, paycheck protection, relief funds, Medicare reimbursements, those types of things.
And in the following quarter, it's up another $1 trillion. So those are seasonally adjusted annualized rates, but in those terms, you're looking at over $3.5 trillion in stimulus. That helped the auto industry tremendously.
Consumer sentiment fell. It's bouncing back, but it seems to be coming back slowly. It's up and down.
80's not that bad, I think, when you look at where it was in 2012, 2013. That's kind of where we are when we were digging out of the Great Recession. You can see that 80's not that bad, but we like something closer to 100, but that's not that bad.
Retail sales bounced back quickly. It had a big trough. As I said, we kind of consumed ourselves out of this. Retail sales bounced back, but most recent numbers were down on a month over month basis, as the economy seems to be starting to lose a little of the steam from the stimulus package. Now, there's another package coming out, and that'll probably help.
Non-residential investment on the investment side, you can see, fell pretty strongly and is nowhere near where it was where we left off, and this could take a while before it gets back. You break that down into non-residential-type investment. A great way to look at it is what the purchasing managers are thinking.
Whenever this index is above 50, they're looking at positiveness growth in manufacturing and the overall composite. The manufacturing index at 60 is quite strong as manufacturing is coming back online and people are starting to go back to work in that arena. This, again, remains to be seen how that holds up.
Industrial production, as you can tell, is still well below where it was when we came into the pandemic. So while manufacturing looks like it's doing quite well, we aren't outputting in industrial production what we were, although new orders are up. But this is great.
I broke this into all manufacturing as transportation, and then I look at what is brought about in these vehicles. So what's the auto industry doing? And I guess this bodes again to how well the auto industry bounced back. When you look at overall manufacturing less transportation, it's still slightly below where we were coming in to the pandemic.
When you look at gross private domestic investment, this is nonresidential structures. They were starting to slow even in the fourth quarter of last year. Then the pandemic hit, and they're starting to come back. I think this is one of the concerns is what's going on in the commercial market.
This parameter shows people entering buildings. So Kastle Systems, this is a brand new index. I must say that it hasn't been around long enough to do any seasonalizing of it, so you take it with a grain of salt. But it shows how much activity in office buildings has declined.
The Kastle Index is for top 10 cities. It uses a Wednesday of the last week each time to give a number. You can see that it's fallen tremendously.
And this is a concern is, what's going to happen when the pandemic ends with office space and commercial property? Are we going to be able to see that return? And what's going to happen with that kind of real estate?
On the residential side, it's the complete opposite. It bounced back very strongly and is doing quite well. And you can see that when you look at overall housing starts and permits, way up, $1.5 million on both. You look at sales of existing homes. They're near levels we haven't seen since the 2005 pre-pandemic when during the housing bubble, that was a concern. Look at home prices. They've jumped way up.
So the housing market on this side, if you've got a home on the market and it's in good shape, it usually sells at or above asking price quite quickly. The problem with the availability is stock because there's not a lot of stock in that mid-range or lower range. It seems like the upper-range homes seem to be moving quite quickly.
And that's being helped by what the Fed did to lower interest rates. So if you haven't refinanced your mortgage yet-- I've already did mine. You can see that it's being helped greatly by the interest rates.
One of the big concerns, though, and was kind of alleviated a little bit in the last fiscal package is the moratorium on delinquencies. So you can see delinquencies have shot way up. However, foreclosures are down, and a lot of that has to do with the fact that banks are holding off on foreclosures. So there's a big concern what happens if that moratorium is taken off with the housing market.
On the trade side, you can see that overall trade fell precipitously, and the deficit expanded pretty strongly. Over $1 trillion in deficit. I want to point to the way that the trade deficit is starting to expand. It starting, in say, in 2018. The deficit is starting to grow.
And I'll point to the customs and duties receipts. This was the tariffs that were put on a lot of goods that the rise in the tariffs follows the rise in the trade deficit quite closely. A lot of research will be done on what impact these tariffs actually had on trade overall in the US economy.
Real government consumption was quite strong, the strongest in the second quarter that it had been, contribution to overall GDP since the third quarter of 1986 and fell off pretty strongly. And the problem that continues is what's happening with the deficit. So now we're starting to hear a lot of talk about the deficit being bad. It wasn't so bad when the tax cuts were first put into place, and you can see the deficit was continuing to grow.
There were concerns and some of the Congressional Budget Office forecast that we would see the overall, by 2050, deficit be over 200% of GDP. And we're adding to that pretty strongly. I did hear Biden say the other day on TV about the fiscal stimulus plus infrastructure spending that while interest rates are so low, these might be the time to do it. And he's the first time I've heard that said by a politician. I've heard it by a lot of economists, but so we might see some infrastructure packages out of this going on.
It's not my job to talk a lot about the auto industry. You have a lot of other experts here. But I just want to talk about how quickly it bounced back. You can see how it cratered in April, and by December, we're selling over 16 million units again on a SAAR basis.
The reason why, in my mind, is that the buyer is not hurt. A lot of the people that buy automobiles are older. Almost a third of them are over 65 years old.
The average salaries-- or this is a 2015 study by NADA. I've actually heard Christian Zajac use a number of over $100,000 now. So you can see that these are not the people that need to be left out of the economy. So they came back strong.
And at the same time, prices grew, not only on new, but used. You can see the December year over year up 15%. When you look at overall CPI in November, it was just 1.2%. So we're seeing a big jump in prices as incentives were taken down.
And this is debt by category, and I kind of wanted to show this because it shows how, if you look at the auto line, in 2000 and 2005, it's declining down. So as a percentage of overall debt, auto loans were starting to decline. But starting in 2010, 2012 as more and more vehicles turned to being trucks and SUVs, you can start to see that, as a percentage of overall debt, it started to rise.
But the big non-surprise is what's happened, though, to student loans. Now they account for 10.8% of overall debt. Now, mortgages are still around 70% of that debt.
But so these are all debt categories less mortgages. But you can see that now this is one of the things that is very concerning as younger people come into the marketplace. Are they going to be able to buy automobiles, or are they going to be paying down debt?
Incentive spend has fallen in the recent months, and that's one of the things that's pushing that transaction price. But you look at overall annual rate of spending. It's 11.8% in 2020, very close to 2018, 2019. So overall for the year, they spent pretty close as a percentage of transaction price.
US light vehicle production cratered tremendously, and you can see that in this chart. I don't have December numbers yet, and I know Haig Stoddard will go into this in a lot more detail. I don't want to talk about it, but we're still about 3.3 million down vehicles in March to June compared to the same three months last year. We don't look like we've made that up, if you look at the inventory to sales ratio. So in some segments of the economy, it is very tight.
We also, when we look at what's going on with the overall trend, I'm a big trend believer that sales will always revert to trend. What is trend? I've spent decades studying trend, and you can look at in the '70s, '80s, and '90s, on an average from peak to peak, growth was about 135,000 a year. Since 2000, from peak to peak, it grew 6,250 per year. And this falldown to 14.5 million is about a 15% drop from that 17 million trend, and that's consistent with the way we've always analyzed the industry when I was in the industry.
I think we could go a long time with peaks in the 17 millions. If my forecast from the 1990s were still being shown, we'd be in the 18 millions by now, and that doesn't seem to be happening. And a lot of that, I think, has to do with price, our companies giving up volume for margin.
Household formation, another thing that's driving it down where I think that the trend is going to stay below that 18 million level for quite some time as percent change in households is declining. And even the number of persons in each household is going down. So the population growth is quite slow.
Licensed driver growth has declined pretty strongly, and from 1951 to 1984, we added 93.2 million drivers. For that same period, '85 to 2019, we added just 72 million, so over 20 million fewer drivers added.
And people aren't driving as far. I highlighted in red the six years, seven months that it took to get back to vehicle miles traveled that we lost in the Great Recession. You could see it started to decline in 2007. It took quite a while, and with this decline, it's going to be remaining to see how long it takes us to get back to vehicle miles traveled that are consistent with where we were when we left, and this too will add to, I think, vehicles lasting longer.
This chart here is a sales weighted age index that I created, and if we follow this pattern, even if we do, say, 16 million next year, I think it's going to be, could be three to five years before we get back to the peak again and sales start to get back to that 17 million range, but that's my perception. On the labor side, or the monetary policy side, you can see markets, how high the unemployment rate shot. It fell back down. Right now, it's two months in a row 6.7%.
But the participation rate is way down, and that's helping to keep the unemployment rate down. If you leave your job and leave the labor force, you're not considered unemployed. So you can see the labor force down considerably. From its peak, it fell 8.1 million from peak to April and has clawed some of that back but has been moving sideways for the last number of months as people are not coming back into the labor force.
So the unemployment rate, when you break it down by race and gender, this is what I was talking about, the K. You look at African-Americans, Hispanics, they're not doing as well as whites, and women aren't doing as well as men. But when you look at the reason why, it's because more women left the labor force than men.
There's still this bias that maybe women need to stay home and take care of the children. I'm not sure. But you can start to see that even though the unemployment rate for women is the same as men, a lot more of them have left the labor force.
On the job losers, temporary job losers were starting to trend down in the last month. It actually went up. So people that are unemployed persons expecting to return to work, that jumped up by 277,000, while permanent job losses fell by 348,000, so unemployed persons who employed was ended involuntarily that lost their job. So these numbers seem to be kind of flattening out. Some switch between temporary and permanent job loss.
Unemployment claims continue to stay around 700,000. That should be 778,000. It's a typo there. I apologize.
And you can see that last month, 778,000. But it's really right there. It's kind of stuck there at that near 800,000 number. And so when you look at the non-farm payroll jobs, you can actually lost 140,000 jobs in the most recent report, down from the previous month.
Average hourly earnings jumped way up. Again, I talked about earlier, this is the split, the mix of jobs, who's got jobs and who doesn't. That's part of it. But you can see that we hear a lot about-- this month over month. We hear a lot about wage growth.
It's starting to come back. You can see that, on a month over month basis, we're doing better now than we did prior to the recession as it's getting harder and harder. We hear from all employers, it's more and more and more difficult to find qualified people to take on the jobs that are open.
But you can see, when I talk about that wage, the people that have lost the jobs, 23% of all jobs lost-- or down 23% are leisure and hospitality. They're over a third of all jobs lost, and they only made $17 an hour. So this is one of the reasons why wages may be looking to be growing faster than they are. It's that mix again.
On inflation, you can see there is none from the perspective of the Fed. We're shooting for a target of 2% in the long run, but you can see that it's well below 2%. However, there has been an increase in food at home, prices rising, and it's causing food insecurity, and now we're starting to hear more concerns about housing insecurity. As we were coming closer to the end of the fiscal stimulus, a lot of people are behind in their home payments, and so this is now a rising concern.
The stock market volatility has leveled off from the work of the Fed. You can see that volatility during the prior to, during, and now following is pretty close to where we were as you look at the volatility in the stock market. However, this is interesting that the TIPS inflation expectation has risen to close to 2% in the most recent data. You can start to see that the market's starting to see areas of possible inflation.
Travel could be one. Service areas when things start to open, there's going to be a lot of constraint in getting workers back as the economy starts to open. So there are some concerns that inflation will come back.
The yield curve at over 100 is very good, so the work that the Fed has done to create liquidity in their lending system seems to be working with a yield curve, the 10 minus 1 and the 10 minus 3, well over 100 now, which is quite strong. Economic projections for the Federal Reserve. You can see we are looking this year will be down about 2.4% on a fourth quarter over fourth quarter basis, and you start to look at what's going to happen. It would be strong growth for '21, '22, but the long-run potential, still about 1.8%.
Unemployment rate could get back to, say, 4.2%, which would be considered close to NAIRU and lower than that, but not until 2022 or 2023. And inflation expectations remain below 2% throughout the long run. Core inflation below that. So right now, the stance of the Fed is to keep interest rates very accommodative, and right now, the position is they will stay very accommodative all the way through 2023.
All of this is going to depend on what happens to COVID. These are January 11 numbers. Daily death average, seven-day average, over 3,200 daily cases, over 244,000. So it's all going to depend on what happens with the virus, I think, going forward.
So I won't go into all of this. It's a high chart, but the economy's been very resilient. The labor markets are rebounding, but not for everybody, only for certain sectors with unemployment claims hovering around 800,000. Production declined sharply at the start of the rebound but has rebounded close to pandemic levels, but with sale levels near that, it's going to be hard for a while to make up some of those inventory shortfalls.
Federal Reserve, we took extreme actions. Stimulus package seem to have worked. However, we don't know how much more we're going to need. So what's going to be necessary in magnitude, timing, and duration?
And economic forecasts say we don't get back to the previous peak until sometime in 2021, depending on how well the vaccines get out. Right now, there's been a real delay in getting vaccines out. I'm eligible but can't get it, and so we'll see how that plays out.
So that's kind of what I wanted to open up with, kind of set the stage for the discussions that will be coming shortly. And at this point, I think we may have a couple minutes for questions, but we want to stay on task as much as possible. Do we have any questions, or do we want to take our short break as we get ready for Emily to come on stage?
Thank you for the time. I'm not seeing any Q&A at this point. If you have questions, you can send them in through the chat box. That's where we're taking questions.
And I'll be around all day. You can find me in the list of attendees, and you can send me a chat if you have a question. So at this point, we're going to take a short break and come back as we get ready to bring Emily on. Thank you very much.