Welcome to the Oswego/Yorkville Economic Outlook Breakfast
January 27, 2011
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1 Economic Outlook for U.S., and Illinois in 2011
Oswego/Yorkville Economic Outlook Breakfast January 27, 2011 Rick
Mattoon Senior Economist and Economic Advisor Federal Reserve Bank
of Chicago * The views expressed herein are my own and do not
necessarily represent those of the Federal Reserve Bank of Chicago
or the Federal Reserve System.
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Presentation Road Map Understanding The Great Recession What is
the recovery looking like? What is lagging? Any good news? What
about Illinois/Chicago? 2
Slide 4
Economic Activity Chicago Fed National Activity Index (standard
deviation from trend, 3-month average) Shading corresponds with
NBER recession periods
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Financial Conditions Financial Conditions Index Adjusted for
Economic Conditions (deviation from trend) Shading corresponds with
NBER recessionary periods
Slide 6
Credit spreads between Corporate High Yield securities and
Corporate Aaa securities have been edging lower
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GDP is forecast to grow around trend in 2010 and slightly above
trend in 2011 and 2012
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Why was this recession so different? One wordleverage Why will
the recovery be so different? One hyphenated wordde-leverage Big
issuerepricing risk The New Normal 7
All adds up to a slower climb out Financial recessions are
different Still lots of slack in labor and housing and soft demand
Everyone is still repairing their balance sheet 9
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The big hangoveremployment, housing and the government sector A
jobless recoverywhen will hiring pick up? Housingstill working
through foreclosures, inventory is too high and lack of demand even
with record low mortgage rates Government sector is out of money
and debt is piling up
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The unemployment rate only edged lower during 2010
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The unemployment rate is forecast to edge lower
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The forecast calls for a very slow recovery in housing
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Home price declines have been large, but appear to be close to
a bottom
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Homeowners equity stake has been trending lower
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Government sector to the rescue? Not likelydebt as a share of
GDP it is just over 80 percent
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Any good news? We are saving again Large banks have
recapitalized No inflation on the horizon Consumer is coming
backsort of Manufacturing has been doing well Large firm profits
have been strongbut not necessarily from orderssmall firms are
another story
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Removing the volatile food and energy components from the PCE,
core inflation remains very low
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Inflation is anticipated to have increased by 1.1% in 2010and
then rise 1.8% this year and 2.0% in 2012
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Industrial output in manufacturing fell quite sharply during
the recession, but has risen strongly over he past seventeen
months, averaging 7.9% and has recovered 53.7% of the loss during
the recession
Slide 22
Manufacturing capacity utilization has been rising since June
of last year
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Industrial production is forecast to rise at a strong pace
through the end of 2012
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Corporate profits have been rising
Slide 25
Illinois and Chicago Common themeboth have done worse than the
national average in this recession and so far in the recovery
Performance appears to be related to underperforming Midwest region
Biggest looming problem is public finance. Structural deficits and
significant pension problems Both have significant assets but can
they be leveraged? For Chicago a special issuereplacing da Mayor.
Turning to Illinois first 24
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Midwest Unemployment Rates Have Been getting better in 4Q
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The Chicago area is steeped in services, Downstate steeped in
farm, goods, and govt
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Slide 29
Production and Retention of Graduates Compiled of the New
Economy Index, IPEDS, ACS, and the 2000 Census, this quartile chart
divides the production and retention level of educated capital. The
New Economy Index is described in later slides. It consists of a
scoring that rates each states performance in categories that are
part of the main drivers of the current economy. Source:
Census/NCES/ITIF/NCHEMS High Production-Capital ExporterLow
Production-Capital Exporter High Production-Capital ImporterLow
Production-Capital Importer New Economy Index (2002) Top Tier
Middle Tier Low Tier Import/Export Ratio of 22- to 29-Year-Olds
with an Associate's Degree or Higher Production of College Grads
(Undergrad Credentials Awarded per 1,000 residents ages 18 44 with
HS Diploma or some college but no degree)
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Turning to Chicago City finances are a big questiontax revenues
are soft and impact of declining property values are still working
its way into the system. Running out of things to sellparking
meters and Midway Airport Like most places all sectors of the
Chicago economy have seen declines. This was a broad-based
recession. Even sectors that normally dont shed jobs didhealthcare,
education. Labor recovery has been poor. Did Chicago lose its mojo?
Olympics, Oprah, loss of convention business. Even Daley is
retiring! The conundrum concerning Chicagos economic performance-
are we still the capital of the Midwest. Good news still a talent
magnet
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Specific areas of concern Labor recovery Housing market
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Chicago area labor market
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Chicago participated in the national house price bubble
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Financial serviceslittle relief here so far
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Tourism and convention
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Much like last time, manufacturing gives a boost from a very
low point
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Transportation/warehousing, too
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A Final Wordthe big problem Illinois Fiscal Landscape State had
a structural deficit prior to the recession Pension and OPEB
liabilities loom largestate pension funds are only about 40 to 45%
funded Reluctance to fix the problemlittle consideration of either
tax reform or expenditure restructuring New tax increase will help
with the operating deficit but not enough to deal with longer term
problems
Slide 39
What does the new tax law do? Increases the personal income tax
rate from 3% to 5% through 2015. Then 3.75% until 2025 when it
would be scheduled to reduce to 3.25%. A similar increase in the
corporate income tax rate from 4.8% to 7 percent until 2015. After
2015 it would fall to 5.25% and in 2025 would then fall to 4.8%. A
limit on state spending of 2% per year for the next four years. If
the 2% threshold is exceeded the higher income tax rates would
immediately revert back to the lower levels. This will be
determined by auditor general. Approval to issue $ 4 billion in
bonds to make pension contributions. However, several elements
failed to pass including issuing $8.75 billion in bonds to pay off
prior debts and a $1 increase in the cigarette tax. 38
Slide 40
39 State Individual Tax Rate GraduatedCorporateGraduated
Illinois5%No7%No Wisconsin 4.6-7.75% (at $225,000) Yes7.9%No
Michigan4.35%No4.95%No Indiana3.4%No8.5%No Iowa 0.36-8.98% (at
$63,316) No 6.0-12.0% (at 250,000) Yes California 1.25-10.55% (at
$1 million), however 9.55% kicks in at $47,055 Yes8.84%No
Massachusetts5.3%No8.75%No Minnesota 5.35-7.85% (at $74,780)
Yes9.8%No New Jersey1.4-8.97% (at $500K) however 6.37% kicks in at
$75,000 Yes9.0%No Source: Federation of Tax AdministratorsMarch
2010 (rates are as of January 1, 2010)
Slide 41
However.Current conditions For FY 11 the estimated deficit
ranges from $11 billion to $14 billion. This includes an estimated
$5 to $7 billion in unpaid bills Total indebtedness (including
pension obligations) range from $120 billion to $132 billion or
roughly $25,000 per household Pension deficit alone is between $60
and $80 billion Federal ARRA money will run its course in FY11
Slide 42
Illinois problems arent going un-noticed Moodys downgraded
Illinois GO bonds from A2 to A1 in June (4 notches below investment
grade) The Pew Center for the States has issued two reports noting
the states poor fiscal health. In Beyond California: States in
Fiscal Peril, Pew finds that Illinois is in the bottom ten in terms
of fiscal condition and has revenues and expenditures out of
alignment and a persistent history of shortfalls In Trillion Dollar
Gap, Illinois is identified with the second largest total unfunded
pension liability at $54 billion (California is largest at $59
billion) but the largest per capita liability in the nation.
Spillover to local governments might be harsh. Declining state
support coupled with poor property tax performance and continuing
declines in development related revenues.
Slide 43
Market indicator of perceived risk of default -Credit default
swaps Nation/StateCDS Spread (May 2010)CDS Spread June 10, 2010
Greece712.3 Germany49.8 Ireland216.5 California170.9
Illinois217.8283.0 Michigan166.7 New York147.3 New Jersey142.5 100
bps=$10,000 to insure $1 million in debt
Slide 44
Summary US recovery will be gradual but 2011 is looking like
stronger performance than 2010. GDP growth could be around 4% but
not enough for big labor market recovery. Still in the process of
deleveraging While Illinois and Chicago are starting to show some
improvement they are still performing below the US average is this
a Midwest issue? Big uncertainty is the fiscal picture. Neither
city nor state are in good shape. New state tax package will
improve operating picture but structural issues will still need to
be addressed. Pressure on local governments will increase. 43