Transcript Presentation - Schaumburg Business Association

The 2016 Economic Outlook
for the U.S. and Issues Facing
Illinois
Rick Mattoon
Senior Economist and Economic Advisor
Federal Reserve Bank of Chicago
JLL Commercial Real Estate Summit
April 14, 2016
Themes
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Still struggling to get faster growth. While the U.S. economy is arguably the
strongest in the world, it sure doesn’t feel that way. Latest estimates suggest
U.S. GDP growth in 2016 will be around 2.0 to 2.5%.
Pockets of strength and pockets of weakness…Good news for 2-handed
economists.
Big question is where will aggregate demand come from? Consumer,
business, international, government? Need to answer this question to
determine where faster growth might occur.
Clashing world monetary policy…U.S. tightens (?) while much of the rest of the
world is moving into QE
First the good news…
The argument for why the economy will grow
faster in 2016
• Employment. Job gains have been strong (200K+)and
the job mix is improving.
• Tighter employment is finally lifting wages.
• Higher wages coupled with a sustained decline in
energy prices will lift household income and consumer
spending. A Mastercard report found that holiday retail
sales grew 7.9% vs 5.5% last year. However, December
retail sales were not good even when factoring in low
gas prices.
• Even after an essentially flat year for stocks, US
household wealth is near record levels ($83 trillion).
• Household debt levels are down, balance sheets are
better.
• Evidence….
Employment up, unemployment down
to 5.0%
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2016 has seen monthly net gains of 200,000+
Wages and salary cost increases, finally showing some
life, but is the labor market all the way back?
Is the consumer back? Low energy prices give a $500 to $700 boost
plus wage gains, car sales are up sharply and Christmas retail sales
were up almost 6%
Labor market participation—some of the reason for 4.9% unemployment rate.
Also underemployment is still high—the U-6 is 9.7%
The argument for why the economy will
disappoint in 2016
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Very weak foreign markets…both developed and emerging
economies. Europe is either pushing QE or negative interest rates to
spur consumption and there is still little lift. China is slowing to under
7% growth (probably even less than what is said publically) as it shifts
away from a high investment/construction model to a more
consumer economy. Emerging markets often dependent on
commodity prices are getting hammered. Who is going to buy our
stuff?
Continued strong dollar makes exporting harder.
Rising interest rates will cut into consumer purchases for items like cars
or anything that was benefiting from cheap financing.
The previously strong parts of the U.S. economy, manufacturing and
agriculture are under serious pressure. Unlikely to get much lift here.
Continued fiscal stress and policy uncertainty.
In addition to headwinds for
manufacturing, all is not well on the farm
Manufacturing index went negative for 4 months, but turned positive
in March (the future order index was up to 58.3)
What might tip the balance?
• Housing. Case-Schiller index showed some life as prices
have begun to improve. Last Case-Schiller index saw
prices up 5.7% (20 city composite) over previous year.
However, gains are uneven…Denver, Seattle and SF up
10%, Chicago at 2.1% was the worst of the 20 city index.
In aggregate, prices are still 11 to 13% below peak.
• Infrastructure investment. State and local governments
started increasing construction toward the end of last
year after sitting on the sidelines
• Business spending. Do they do more than just stock buybacks, dividend increases and mergers?
• Does the service sector, particularly business and
professional services, take up the slack from
manufacturing?
Better Public Construction Numbers?
(% change year over year)
The Current Forecast
• Last FOMC (March, 2016) central tendency projection for GDP
growth in 2016 is 2.1 to 2.3%. Long-run 1.8% to 2.1%. More
plodding growth in 2017 at 2.0 to 2.3%
• inflation is running well below target. CPI and core have seen
either declines or minimal growth, although gas/food prices
might cause a blip. FOMC forecast has PCE at 1.0% to 1.6% in
2016. Long-run estimate is at 2%, with 2017 projected at 1.7%
to 2.0%.
• FOMC forecast has unemployment 4.6% to 4.8% (2016). Longrun—4.8% to 5.0%
• Fed policy. December was the first quarter point increase
since 2008. Big issue will be the pace of potential future
increases to get to “normalization” (3 to 3.5%). Inflation rising
to 2% was a significant justification in the statement. Latest
meeting suggests slower pace of rate hikes in 2016 than
originally projected.
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Turning to Illinois
• State has had a slow recovery…underperformed both US and
the Midwest.
• Recent evidence shows a shift in growth. Chicago and the
metro area has accelerated while downstate is slumping.
• The big story is still fiscal conditions.
• Both Illinois and Chicago have been running structural budget
deficits since before the Great Recession. The recession only
exposed the depth of the problem.
• Common to both has been borrowing from the future to pay
for current services. Mostly this has come in the form of
underfunding pension liabilities.
• This has not gone unnoticed. Illinois and Chicago bond ratings
are rock bottom. Both governments have to pay a significant
premium to issue debt. Moody’s has lowered Chicago to Ba1
in May which represents junk status. Soon after CPS status was
also reduced.
Employment growth by MSA
(11/2015 to 11/2016 IGPA)
MSA
Growth Rate
Number of
jobs
Sector with
highest growth
rate
Sector with
lowest growth
rate
BloomingtonNormal
0.17 to 0.22
160 to 210
GOV (3.85%)
Information
(-14.02%)
Champaign/
Urbana
0.51 to 0.59
600 to 650
Education (3.09%)
Leisure (-1.33%)
Chicago
1.51 to 1.62
60,600 to 65,000
Construct (4.21%)
Manuf ( -1.37%)
Davenport/
Rock Island
0.00 to 0.64
0 to 1,200
Leisure (1.65%)
Information
(-4.19)
Decatur
-1.61 to -1.08
-800 to -500
Prof/bus (1.41%)
Information
(-7.01%)
Kankakee
-0.28-to 0.48%
-100 to 100
Construct (2.58%)
Leisure (-1.92%)
Peoria
0.12%-0.32%
200 to 600
Transport, trade,
utilities (2.21%)
Leisure (-5.50%)
Rockford
-0.11 to 0.26
-200 to 400
Education (2.78%)
Construct (-6.67%)
Springfield
-0.25 to -0.10%
-300 to -100
Education (2.33%)
Information (10.69%)
Illinois Job Recovery By Sector
(University of Illinois, IGPA, Illinois Economic Review)
Job changes
during the
recession
(12/2007-12/2009)
Job changes
1/2010 to 12/2015
Recovery rate
Forecasted job
changes 1/2010
to 12/2016
Forecasted
recovery rate
Construction
-63,800
11,100
17.40
14,400
22.57
Manufacturing
-114,600
12,200
10.65
10,600
9.25
Trade,
transportation
and utilities
-97,700
49,700
50.87
17,000
17.40
Information
-11,300
-8,700
-76.99
-13,200
-116.81
Financial
-33,000
4,200
12.73
3,300
10.00
Professional and
business services
-92,200
148,200
160.74
134,900
146.31
Education and
Health
32,600
78,400
--
91,400
--
Leisure,
hospitality
-22,300
51,200
229.60
55,000
249.33
Other service
-5,900
-1,700
-28.81
-1,900
-32.20
Government
6,000
-25,700
--
-30,000
--
Illinois Fiscal Climate
• On paper, Illinois has not been a particularly high
tax state. Measures of taxes to GDP are better than
most of our neighboring states
• However, keep rates down has come at a cost.
Illinois borrows from the future to keep rates low and
services available.
• 2 big issues—uncertainty and paying for services
already consumed
• Issue for all municipalities is contagion. Credit
agencies are worried about the level of future state
transfers and shifting costs to local governments.
Average tax rates by neighboring states—all were
within .5 % pt. of U.S. average except Wisconsin
Tax Revenues as a Percentage of GDP FY1995-FY2010
12.00
10.00
8.00
6.00
4.00
2.00
0.00
Illinois
Indiana
Iowa
Kentucky
Average
Michigan
Missouri
Wisconsin
US Average
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How big is the gap?
• U of I Fiscal Futures project
o Estimates all funds spending and revenues
o Forecasts future absent any policy changes
Illinois ran deficits since 2000
“Legacy Costs” in their projections: Liability = $159 billion
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Impact of adjusting taxes to close the gap Scenario 1, current law:
Filling the annual budget gap with new tax revenue
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Scenario 2:
Additional taxes to meet “recognized” unfunded
obligations on a 30–year basis
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Can Illinois be fixed?
• Issue 1—we are not a fast growth state. Demographics
are against us so we won’t grow our way out of the
problem.
• Issue 2—adjustment will take many years. We need a
multi-year plan and it needs to be binding.
• Issue 3—expenditures and revenue changes are likely
necessary, but they should be done in the context of
what is economically the least disruptive.
• Issue 4—who pays? Revenue hills, capacity vs
willingness.
• How to prevent this from happening? Better fiscal rules
including all funds reporting, multi-year budgeting,
identifying one-time revenues, adequate reserves.
Move to more rules based approach.