Federal Reserve Bank of Chicago’s 26th annual Economic Outlook Symposium

Written by Martin Lavelle

The Federal Reserve Bank of Chicago hosted its 26th annual Economic Outlook Symposium on Friday, November 30, 2012. The symposium addressed the 2012 performance as well as the 2013 outlook for the U.S and Seventh District economies and their key sectors. William Strauss, Senior Economist and Economic Advisor, reported that real GDP forecasts submitted last year by attendees, economists, and other analysts were in line with actual figures. Light vehicle sales and residential investment were stronger than predicted, the unemployment rate fell more than anticipated, and consumer spending met expectations. Total inflation, business fixed investment, and industrial production was weaker than expected.

The group’s 2013 forecast calls for real GDP to grow at a faster rate than in 2012, a rate slightly above trend. Most of the major sectors are expected to see growth slightly accelerate in 2013. The pace of growth is projected to increase in consumer spending, business fixed investment, and industrial production. The housing and employment markets are expected to improve steadily, but still remain well off their respective long-run trend levels. Inflation expectations look to be consistent with the Federal Reserve’s goal of price stability.

Carl Tannenbaum, Chief Economist, Northern Trust, calls for the U.S. economy to continue growing slowly and steadily. The unemployment rate is expected to fall slowly as the labor market sorts through issues such as high levels of discouraged workers, increasing numbers of part-time workers, and workers’ increasing acceptance of lower wages. The housing market is projected to see increased activity, though headwinds remain; these include stubbornly tight lending standards, pending regulations, and high levels of student loan debt, making it harder for potential new home buyers to enter the market. Orderly resolutions of U.S. and European financial issues are expected, though both continue to represent significant downside risks to the growth forecast.

Mary D’Ascoli, Economic Analyst, Toyota, believes U.S. and global light vehicle sales levels will increase in 2013. The forecast of higher sales levels can be attributed to an ever aging fleet of vehicles and relatively high used vehicle prices. There is presently a mismatch between new and used vehicle inventory; there aren’t large numbers of slightly used vehicles, adding to the attraction of new vehicles. As a result, vehicle manufacturing capacity utilization rates are expected to remain around 80% throughout next year. Hurricane Sandy is deemed to have lowered sales levels between 300,000 and 400,000 units, which should be made up for by the first quarter of 2013.

Robert DiCianni, Marketing Manager, ArcelorMittal USA, indicated slow growth in the steel industry continued in 2012 with slower growth expected the rest of this year and in 2013. Even though residential construction’s recovery is underway, it is restricted by lingering high unemployment levels, tight credit conditions, and distressed property inventory. Nonresidential construction activity is expected to remain relatively unchanged. Overall construction activity is expected to improve enough to increase demand for construction machinery. Continued improvements in light vehicle, truck, and appliance sales will boost sales of electric motors. An expanding energy sector will require more steel; however, steel demand for rail cars, rail tank cars, and the rest of the infrastructure segment is expected to level out. Despite the presence of continued downside domestic and global risks, such as European financial stress, there is cautious optimism within the steel market for next year.

Dr. Loren Scott, President of Loren C. Scott & Associates, Inc., delivered the keynote presentation, which looked at the potential of natural gas. The supply of domestic shale natural gas could lead to great opportunities for a number of industries, including chemical production. Ethane is a major input in ammonia fertilizer used in agriculture, and ethylene is used in household goods, ranging from toys to clothing, and clean burning boiler fuel. The cost to make ethylene is in the U.S. is half that in Europe, where oil is used to produce ethylene. Another growing natural gas demand source is power producers. Natural gas is looked at as a lower-cost, lower-emission alternative to coal. With large shale deposits such as the Bakken, Eagle Ford, Marcellus, and Utica available for mining, severe downward pressures could be applied on utility bills and overall energy prices. An additional demand source could be exports of shale natural gas and shale oil. Over the past four years, the increase in shale oil exports equals 80% of Iran’s total oil exports before the imposing of sanctions on Iran. If domestic shale deposits are explored thoroughly, complementary infrastructure such as pipelines and rail cars will need to be added to accommodate increasing supply. There is great concern surrounding the hydraulic fracturing or “fracking” that allows natural gas to be extracted from shale. However, Scott noted that in 60 years of fracking, no scientific cases of drinking water contamination were reported.

Donald Johnson, Chief Economist, Caterpillar Inc., said developing countries will grow at faster rates than developed economies next year. Developed countries, including the U.S., continue to experience record low interest rates thanks mostly to central banks’ continued efforts to enhance bank liquidity. The U.S. construction sector should improve next year. Europe has fallen into recession and little improvement is expected next year. Economic growth in developing economies should improve more than half a percentage point as countries like China and Brazil adopt more accommodative monetary policies in order to further ease credit conditions. Commodity production is expected to increase, likely increasing prices slightly.

Presentations from the Economic Outlook Symposium can be found here.  Next year’s Economic Outlook Symposium will take place on Friday, December 6th.