the 2020 economic outlook for the u.s., illinois and chicago · growth (only 1.4% annual rate from...
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The 2020 Economic Outlook for the U.S., Illinois
and ChicagoRick Mattoon
Senior Economist and Policy Advisor
Federal Reserve Bank of Chicago
ILCMA Financial Forecast Forum
January 24, 2020
The views expressed in this presentation are my own and do not necessarily reflect those of the Federal Reserve Bank of Chicago or of the Federal Reserve System.
Themes for 2020
• 2019 was a solid year—growth was above long-run trend
• Economic recovery is over 10 years old—longest in U.S. history
• Still, the pace of growth has been slowing. Why?• Uncertainty (in the form of trade issues, Brexit, politics, election year,
etc) has slowed business investment.• The speed of economic growth throughout the world has declined.• Tax cut stimulus has faded, although spending stimulus has remained.• Structural headwinds to US growth are unabated—poor productivity
growth (only 1.4% annual rate from Q1 2017 to Q3 2019) combined with demographics (boomers are retiring, labor force participation is hovering around 63%, fertility rates have fallen to 1.8 births per woman).
• Consensus outlook—further slowdown in the pace of growth but recession unlikely. However, most forecasts have downside risks.
• Final, concern—the consumer. Can they carry the economy if business spending stays depressed?
Components of GDP—Consumer leads the way
Q3 2019 Q2 2019 Q3 2018
GDP 2.1 2.0 2.9
--personal consumption expenditures
2.12 3.03 2.34
--gross private domestic investment
-0.17 -1.16 2.27
--net exports -0.14 -0.68 -2.05
--government 0.30 0.82 0.36
----federal 0.22 0.53 0.19
----state and local 0.08 0.29 0.17
Unemployment rate continues to suggest tight labor conditions—3.5%, but U-6 (part-time and marginally employed) is at 6.7%
In the consumer we trust?
Government spending…CBO isn’t optimistic • Deficits. In CBO’s projections, the federal budget deficit
is $960 billion in 2019 and averages $1.2 trillion between 2020 and 2029. Over the coming decade, deficits fluctuate between 4.4 percent and 4.8 percent of gross domestic product (GDP), well above the average over the past 50 years. Although both revenues and outlays grow faster than GDP over the next 10 years in CBO’s baseline projections, the gap between the two persists.
• Debt. As a result of those deficits, federal debt held by the public is projected to grow steadily, from 79 percent of GDP in 2019 to 95 percent in 2029—its highest level since just after World War II
IMF World Economic Growth Projections—World output continues to be trimmed(reduced by 0.5 for 2019, October forecast)
2017 2018 2019 2019 revised
World Output 3.8 3.6 3.5 3.0
Advanced Economies
2.4 2.2 2.1 1.7
--U.S. 2.4 2.9 2.5 2.4
--EU 2.4 1.8 2.0 1.2
--UK 1.7 1.4 1.5 1.2
--Japan 1.0 0.8 0.8 0.9
--Germany 2.5 1.5 1.0 0.5
Emerging Economies
4.8 4.5 4.7 3.9
--Russia 1.5 2.3 1.7 1.1
--China 6.9 6.6 6.2 6.1
--India 6.7 7.1 7.7 6.1
--Latin America 1.3 1.0 1.7 0.2
--Middle East 2.2 1.8 3.0 0.9
Stock market has been happy
Volatility was muted in 2019 vs previous years
The Current Forecast• Last FOMC public forecast had (December, 2019) central tendency
projection for GDP growth in 2019 was 2.1% to 2.2%. Long-run 1.8% to 2.0%. Growth in 2020 at 2.0% to 2.2%. Median for 2020 is 2.0%, 2021, 1.9%.
• Inflation continues to miss the 2% target for PCE. FOMC forecast has PCE at 1.4% to 1.5% in 2019. Long-run estimate is at 2%, with 2020 projected at 1.8% to 1.9%. Median is 1.9% for 2020, 2.0% in 2021.
• FOMC forecast has unemployment at 3.5% to 3.6% (2019). Long-run—3.9% to 4.3% Median for 2020 is 3.5%, 2021 is 3.6%.
• Fed policy. October meeting announced third quarter point rate cut for 2019. Fed Funds rate range is 1.5% to 1.75%. December meeting held rates steady. Fed Funds Rate Projection—Median for 2019 1.6% and 2020, 1.6% and 1.9 in 2021. Long-run is 2.5%. Change in language. Previous cuts reflected a “mid-course correction”. New language suggests policy is currently appropriate.
11
The SEP (dot-plot), December 2018
The SEP, (dot-plot) December 2019
Metro Chicago/Illinois
• After a protracted period of underperformance, things showed some improvement.
• On balance, 2018/2019 were good years—personal income grew faster than much of the region and investment in Chicago continued to surge. (Chicago has won Site Selection magazine’s top location 5 years in a row).
• US News ranked Chicago as a top 9 MSA for high paying jobs.
• 2019 saw 1.8 million square feet of net office absorption in Chicago…best since 2007. (positive net absorption for 18 out of 20 quarters, 5.6 million square feet of new tenants over the last 5 years according to CBRE).
• However, the usual factors seem to be slowing potential…demographics/population loss and fiscal imbalance. Population loss is particularly acute in small and mid-sized industrial cities.
• Employment recovery in key industries shows more work needs to happen.
Performance in Key Industries has Lagged for Some Time• Illinois Industries with Location Quotients above 1
• Finance, Insurance and Real Estate (1.1)
• Manufacturing (1.2)
• Professional and Business Services (1.1)
90
100
11
0120
130
Finance, Insurance, and RealEstateIndex: January 2000=100
2000m1
U.S.
2005m1
Illinois
2010m1
Iowa
2015m1
Michigan
2020m1
Indiana Wisconsin
Sources: Data from the Bureau of Labor Statistics accessed via Haver Analytics. Last observation is March 2019.
50
60
70
80
90
100
ManufacturingIndex: January 2000=100
2000m1
U.S.
2005m1
Illinois
2010m1
Iowa
2015m1
Michigan
2020m1
Indiana Wisconsin
Sources: Data from the Bureau of Labor Statistics accessed via Haver Analytics. Last observation is March 2019.
80
100
120
140 Professional and Business Services
Index: January 2000=100
2000m1
U.S.
2005m1
Illinois
2010m1
Iowa
2015m1
Michigan
2020m1
Indiana Wisconsin
Sources: Data from the Bureau of Labor Statistics accessed via Haver Analytics. Last observation is March 2019.
The Biggest Uncertainty for Illinois and Chicago--Fiscal Outlook
• Illinois• Twin deficits…general operating and pensions--$6.5 billion in
unpaid bills and a 38% funded pension ($140 billion liability).• Inability to devise a binding plan to return to solvency.• To economists, the big problem is uncertainty.• Second problem is that new tax revenue is needed to pay for
services already consumed.• Further, the plan to solve the pension problem is
uncertain…graduated rate income tax? Change pension payouts? Both require a constitutional amendment.
• Chicago• Managed to pass a budget without “major” tax increases but still
relied on taking upfront savings on a bond refinancing and new fees on dining and Uber.
• Unresolved issues—Casino, pension funding, permission to expand service taxation?
The fiscal good news?
• The FY20 budget was passed on time and with bipartisan support. This means the state has a spending plan.
• A capital plan (funded in part by a 19 cent per gallon increase in gasoline taxes) was approved. Most importantly it establishes a sustainable stream of revenues to keep funding needed infrastructure work.
• Maybe good news? Cannabis sales became legal in 2020. Will provide a revenue boost. Also permitting sports betting. Increasing the use of sin taxes?
The less good news…
• The approved budget isn’t really balanced. The state still has $6.5 billion in unpaid bills even after issuing bonds last year to reduce the total.
• The capital plan is well structured on the revenue side, but could use some work on creating more transparency on what projects get funded and what the value is of specific projects. (see Virginia Smart Scale)
• Nothing really changed on reducing or addressing the unfunded pension liability. In fact, absent an April tax revenue surprise, the plan had been to extend the amortization period in order to limit the state’s annual contribution.
And of course there are pensions
Chicago’s Fiscal Position
• Ratings agencies report progress• No more “scoop and toss” bond practices.• City has built reserves equal to 4.3% of the Corporate Fund.• Revenue base is diverse (only 18.6% of total government
revenues from property taxes).• Home-rule authority gives flexibility.
However…• Overlapping debt with other governments is high (KBRA
estimates at $8,671 per capita.• Pensions are woefully underfunded and hitting required ARC
will mean big increases in funding ($281 million more in FY20).
• One-time budget tools may be maxed out so future adjustments may be more painful.
Illinois GDP growth has lagged, but has recently improved…
0
0.5
1
1.5
2
2.5
2011 2012 2013 2014 2015 2016 2017 2018
Real estate recovery…yes for the U.S. 20 city average=218.48(Case-Shiller index, 12/2006=100)
Not so much for Chicago, 145.1
The Illinois Population challenge
• Illinois is estimated to have had a net population loss of -51,250 (-0.47%) in 2019. 6th straight year of declines.
• From 2010 to 2019, loss is estimated at -159,700 (-1.2%) dropping Illinois to 6 in population size.
• Great Cities Institute at UIC (July, 2019) found that:• From 2013 to 2018, only Illinois, Connecticut and West Virginia lost population.• California, Florida and Texas had population gains of 6%, 13.2% and 13.7% from
2010 to 2018.• Other states with large percentage gains were Utah (13.9%), Colorado (12.8%),
North Dakota (12.6%), Nevada (12.3%), Arizona (12%), Washington (11.8%) and Idaho (11.7%).
• 9 out of 109 Illinois counties gained population. 5 in metro Chicago, 2 in central Illinois and 2 in southern Illinois.
• Loss is particularly concentrated in counties with medium to small cities—Rockford, East St. Louis, Decatur, Peoria, Edwardsville, Quad Cities and Kankakee.
• Also reflects, larger US population movements. From 2010 to 2018, US population change was 5.77%. Northeast 1.32%, Midwest 1.99%, South 8.61% and West 8.17%.
The Net Migration Story is Interesting (2018)
Into Illinois Number of Migrants
Indiana 14,077
Texas 13,131
Missouri 12,678
Wisconsin 11,426
Florida 10,136
Iowa 7,427
Michigan 7,129
New York 6,323
Ohio 5,735
Total in-migration 169,018
From Illinois Number of Out-migrants
Florida 22,985
Texas 22,552
Indiana 22,300
California 20,326
Wisconsin 17,361
Missouri 13,434
Arizona 10,626
Michigan 9,683
Iowa 9,340
Georgia 8,747
Total out-migration
256,855
NET MIGRATION
-87,837
Metro-Chicago Advantages
• Highly-educated workforce.
• World-class city to attract investment (AT Kearney ranked Chicago number 8 on Global Cities Index (measures human capital, business activity, information exchange, cultural experience, political engagement).
• Transportation connectivity—O’Hare and Freight rail/logistics (a key for south metro suburbs).
• Chicago tourism—58 million in 2018.
• Higher Education.
• City is second largest financial center in the US and accounts for 20% of the world’s global derivatives trading. Also a top US city for foreign direct investment for 7 years.
• Chicago is cheap relative to other first tier cities.
Attraction of Being in Downtown—Urban agglomeration matters
The Human Capital Race—Chicago has to win this
Rank City College Graduates
1 Chicago 38.5%
2 New York City 37.0
3 Los Angeles 32.8
4 Houston 32.5
5 Philadelphia 28.6
6 Phoenix 27.9
7 San Antonio 26.0
Table 1College Graduates of the Population 25+, Seven Largest Cities, 2016
The continuing challenge for Illinois municipalities• Sluggish home value growth will crimp growth in the
property tax.• Factors impacting slow home price growth
• Lack of housing demand with population decline. (also maybe a demographic mismatch between buyers and sellers)
• SALT deduction cap at $10,000 is becoming meaningful in more affluent towns and most of metro Chicago.
• Capitalization of Illinois fiscal imbalance into property values (maybe?)
• Bottom line—tax price of local government services increases in many locations.
• Finally, reliance on a tax base that already has among the highest effective rates in the nation provides little flexibility.
Is there a fly in the ointment?
Conclusion/Questions
• Expansion seems ready to continue in 2020, although at a somewhat slower pace.
• Right now the consumer and to a lesser extent, government spending is leading growth.
• For Illinois and Chicago, 2019 saw some budget stabilization but pension underfunding remains the biggest uncertainty.