Academic journal article Chicago Fed Letter

Economic Outlook Symposium: Summary of 2016 Results and 2017 Forecasts

Academic journal article Chicago Fed Letter

Economic Outlook Symposium: Summary of 2016 Results and 2017 Forecasts

Article excerpt

The Federal Reserve Bank of Chicago held its 30th annual Economic Outlook Symposium (EOS) on December 2, 2016. More than 100 economists and analysts from business, academia, and government attended the conference. This Chicago Fed Letter reviews the forecasts for 2016 from the previous EOS, and then analyzes the forecasts for 2017 (see figure 1) and summarizes the presentations from the most recent EOS.

The U.S. economy entered the eighth year of its expansion in the third quarter of 2016. While the nation's real gross domestic product (GDP) is at its highest level in history, the rate of economic growth since the end of the Great Recession in mid-2009 has been very restrained. During the 29 quarters following the second quarter of 2009, the annualized rate of real GDP growth was 2.1%-just slightly above what is considered the long-term rate of growth for the U.S. economy. Additionally, the annualized rate of real GDP growth over the first three quarters of 2016 was 0.2 percentage points below the average of the current expansion.

The biggest drags on economic growth during 2016 were weak investment (both business and residential) and government spending. Real business fixed investment decreased at an annualized rate of 0.4% in the first three quarters of 2016. Possible culprits for this anemic performance were moderate growth in the overall economy; excess capacity remaining in the industrial sector; the collapse of energy prices lowering investment in this sector; the strong international value of the U.S. dollar; and economic uncertainty during this past presidential election year. Real residential investment decreased at an annualized rate of 1.6% during the first three quarters of 2016, after increasing at an annualized rate of 9.4% between the third quarter of 2010 and the final quarter of 2015. Even though residential spending declined, the annualized rate of housing starts increased to 1.16 million units for the first 11 months of 2016-up 5.4% relative to the same period in 2015. Real government spending grew at an annualized rate of 0.2% during the first three quarters of 2016-well below the 1.2% it has averaged over the past 20 years.

Energy prices remained quite low in 2016. Specifically, the price of West Texas Intermediate oil averaged $49 per barrel in the final quarter of 2016-above the $42 it averaged in the fourth quarter of 2015, but still well below the nearly $80 per barrel it averaged in the ten years before the collapse of oil prices in the middle of 2014.

Consumer spending expanded at a solid pace last year: Real personal consumption expenditures grew at an annualized pace of 3.0% during the first three quarters of 2016. In particular, light vehicle sales (car and light truck sales) remained very strong in 2016, edging higher to a new record of 17.5 million units. Given energy prices continued to stay low in 2016, more consumers chose to purchase larger and less fuel-efficient vehicles than in the year before: Sales for light trucks (including sport utility vehicles) were up 7.1% in 2016 compared with the previous year, while sales for passenger cars were down 8.5%. This dramatic shift in consumer demand led to a record-setting share for light trucks of 60.6% of overall light vehicle sales in 2016.

Against this backdrop, the economy continued to increase employment in 2016: 2.16 million jobs were added last year. Moreover, in the final quarter of 2016, the unemployment rate stood at 4.7%-a rate that would normally be associated with full employment. However, other measures of the labor market suggest that slack is still present. For instance, by historical standards, there remains an outsized number of part-time workers who desire full-time employment and a large percentage of unemployed workers who have been out of work for more than six months.

Inflation, as measured by the Consumer Price Index (CPI), had increased from an extremely low 0.4% in 2015 to a still quite low year-over-year rate of 1. …

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