Paul Traub

Senior Business Economist

Federal Reserve Bank of Chicago

February 9, 2017

Economic UpdateInternational Council of Shopping Centers

Billions Chained $2009, % Change Q/Q at SAAR

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

12,000

13,000

14,000

15,000

16,000

17,000

18,000

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

$ Billions

Q4 ‘16

$16,805

1.9%

February 9, 2017 1Federal Reserve Bank of Chicago

U.S. Real GDP

Percent

Source: U.S. Bureau of Economic Analysis

Billions Chained $2009, % Change Q/Q at SAAR

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

7,500

8,000

8,500

9,000

9,500

10,000

10,500

11,000

11,500

12,000

12,500

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

$ Billions

Q4 ‘16

$11,640

2.5%

February 9, 2017 2Federal Reserve Bank of Chicago

Real Personal Consumption Expenditures

Percent

Source: U.S. Bureau of Economic Analysis

February 9, 2017 3Federal Reserve Bank of Chicago

U.S. Real GDP

Source: U.S. Bureau of Economic Analysis, September 2016 Blue Chip Economic Indicators.

Percent

GDP and Contribution to Percent Change, Q/Q at SAAR

-1.2

4.0

5.0

2.32.0

2.62.0

0.9 0.81.4

3.5

1.9

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Q1 '14 Q2 Q3 Q4 Q1 '15 Q2 Q3 Q4 Q1 '16 Q2 Q3 Q4

PCE Private Investment Net Exports Government GDP

Index, Q4 2007 = 100

80.0

90.0

100.0

110.0

120.0

130.0

140.0

150.0

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Durables Nondurables Services

Index

Q4 ’16

142.5

112.7

112.4

Source: Author’s calculations using data from the BEA

Real Personal Consumption Expenditures

February 9, 2017 Federal Reserve Bank of Chicago 4

February 9, 2017 5Federal Reserve Bank of Chicago

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

SAAR Annual Average

Aug ’0914.6

Jan ‘1717.5

S.A.A.R – Millions of Units

Millions

U.S. Light Vehicle Sales

Cash for Clunkers

Source: Ward’s Automotive and BEA

Note: Total 2016 Light Vehicle Sales: 17,465,020 / Including M/H: 17,866,260.

February 9, 2017 6Federal Reserve Bank of Chicago

0.0

1.0

2.0

3.0

4.0

5.0

6.0

'14 M M J S N '15 M M J S N '16 M M J S N

% Chg Yr/Yr Annnual Average % Change

Real Retail Sales

Excluding Food Services - % Change Yr./Yr.

2016

2.7%

2015

1.6%

2014

3.9%

Dec ‘16

4.3%

Source: Bureau of the Census

Percent

February 9, 2017 7Federal Reserve Bank of Chicago

Real Retail Sales – Non-store Sales

Index 2000 = 100 and Share of Growth

45.3%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Non-store % of Growth (RHA) Total Less Food Services (LHA) Non-Store Sales (LHA)

Source: Bureau of the Census

Index Percent

309.0

162.2

Billions Chained $2009, % Change Q/Q at SAAR

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

1,000

1,250

1,500

1,750

2,000

2,250

2,500

2,750

3,000

3,250

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

$ Billions

Q4 ’16

$2,805

10.7%

February 9, 2017 8Federal Reserve Bank of Chicago

Real Gross Private Domestic Investment

Percent

Source: U.S. Bureau of Economic Analysis

Billions Chained $2009, Index – 2005 = 100

20

40

60

80

100

120

140

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Fixed Investment Nonresidential Residential

Index

Q4 ‘16

128.4

107.5

68.4

February 9, 2017 9Federal Reserve Bank of Chicago

Real Domestic Fixed Investment

Source: U.S. Bureau of Economic Analysis

February 9, 2017 10Federal Reserve Bank of Chicago

Source: U.S. Bureau of Economic Analysis, September 2016 Blue Chip Economic Indicators.

Percent

Contribution to Percent Change, Q/Q at SAAR

-1.1

1.81.5

0.5

1.6

0.20.4

-0.4-0.6

-1.3

0.5

1.7

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Q1 '14 Q2 Q3 Q4 Q1 '15 Q2 Q3 Q4 Q1 '16 Q2 Q3 Q4

Nonresidential Residential Inventories GPDI

Real Gross Private Domestic Investment

February 9, 2017 11Federal Reserve Bank of Chicago

I/S RatiosTotal Business and Light Vehicles - SA

1.00

1.50

2.00

2.50

3.00

3.50

4.00

1.20

1.25

1.30

1.35

1.40

1.45

1.50

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Total Business (LHA) Light Vehicle (RHA)

Percent

Nov ‘16

1.38

Jan ‘17

2.69

Source: U.S. Census Bureau and WardsAuto.

ISM Purchasing Managers IndexManufacturing and Composite, SA - Greater than 50 = Expansion

40.0

45.0

50.0

55.0

60.0

Jan-16 Apr-16 Jul-16 Oct-16 Jan-17

Manufacturing Composite

Source: Institute for Supply Management , Haver Analytics and FRED

Index

February 9, 2017 Federal Reserve Bank of Chicago 12

Jan ’17

56.0 56.4

February 9, 2017 13Federal Reserve Bank of Chicago

U.S. Housing Starts & Household Formation

In Thousands of Units – Averages by Decade

1,407

1,758

1,498

1,372

1,537

837

1,046

1,512 1,550

1,104

1,3311,234

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1960's 1970's 1980's 1990's 2000's 2010's

Starts Formation

Source: U.S. Census Bureau – Single Family Starts and Households by Age

February 9, 2017 14Federal Reserve Bank of Chicago

In Thousands of Units (SAAR) – November Average YTD Data

(000)’s

Source: U.S. Census Bureau

U.S. Housing Starts

2,073

1,812

1,342

900

554 586 612

784

9281,001

1,1081,168

0

400

800

1,200

1,600

2,000

2,400

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Note: The United States averaged 1.5 million housing starts per year 1990 to 2004.

February 9, 2017 15Federal Reserve Bank of Chicago

80.0

90.0

100.0

110.0

120.0

130.0

140.0

'10 '11 '12 '13 '14 '15 '16

The U.S. Dollar & The Trade Deficit

Trade Weighted Dollar- Index 2010 = 100, Trade Deficit – Index 2010 = 100

Source: Federal Reserve Board and Haver Analytics

Jan 25, ‘17

125.1

Index

75.0

85.0

95.0

105.0

115.0

125.0

135.0

'10 '11 '12 '13 '14 '15 '16

Q3 ‘16

130.7

Index

Stronger

Weaker

Trade Weighted Dollar Trade Deficit

February 9, 2017 16Federal Reserve Bank of Chicago

Fiscal Stimulus Remains Uncertain

• President elect’s plan includes large tax cuts and increased spending- Details still lacking in many areas- Final package depends on Administration and Congressional

priorities

• Estimates of fiscal impact range from 0.5 to 1.0 percent on level of GDP by end of 2018, falling to zero by 2020

• Potential offsets to long-run growth from other policies- Trade restrictions- Immigration legislation- Affordable Care Act- Federal Reserves response to stronger demand and higher

inflation

• Some analysts have elected not to change previous projections

February 9, 2017 17Federal Reserve Bank of Chicago

NAFTA Foreign Direct Investment PositionIn Billions of Dollars – 1994 to 2015, Historical Cost Value

$352.9

$269.0

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

'94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14

U.S. Investment Foreign Investment

$92.8

$16.6

0.0

20.0

40.0

60.0

80.0

100.0

120.0

'94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14

U.S. Investment Foreign Investment

$Billions $BillionsCanada Mexico

Source: Bureau of Economic Analysis and Haver Analytics.

2.1% of GDP 17.2% of GDP 0.6% of GDP 1.5% of GDP

February 9, 2017 18Federal Reserve Bank of Chicago

Economic Potential by DecadeReal GDP Percent Change – Annual Average

Percent

Source: U.S. Congressional Budget Office

4.3

3.2 3.23.3

1.71.8

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1960's 1970's 1980's 1990's 2000's 2010's

Dec '15 Projection

February 9, 2017 19Federal Reserve Bank of Chicago

Labor and Productivity Growth

Labor Force and Real Output Per Hour – Average Annual Growth

Source: U.S. Department of Labor: Bureau of Labor Statistics

Percent

2.8 2.8

1.9

1.5

2.1

2.6

0.9

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

50's 60's 70's 80's 90's 00's 10's

Percent

1.1

1.7

2.7

1.7

1.21.0

0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

50's 60's 70's 80's 90's 00's 10's

Real Output Per HourLabor Force

February 9, 2017 20Federal Reserve Bank of Chicago

Labor Force Participation Rate

Percent of Noninstitutionalized Civilian Population – Annual Average

54.0

56.0

58.0

60.0

62.0

64.0

66.0

68.0

'60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Jan ‘17

62.9

Source: U.S. Bureau of Labor Statistics

February 9, 2017 21Federal Reserve Bank of Chicago

Working Age Population by Age

Select Age Categories, Percent of Total, Index – 1960 = 100

60.0

80.0

100.0

120.0

140.0

160.0

1960 1970 1980 1990 2000 2010

16 to 24 25 to 39 40 to 64 65 and Over

Index

Index

137.7

100.7

88.888.1

Percent

20.2%

35.9%

16.7%27.2%

2015 Values

Source: U.S. Census Bureau – Table HH-3, Households by Age

February 9, 2017 22Federal Reserve Bank of Chicago

Labor and Productivity Growth

Labor Force and Real Output Per Hour – % Change Yr./Yr.

Source: U.S. Department of Labor: Bureau of Labor Statistics

0.2

0.0

0.3

0.8 0.8

1.0

0.60.7

1.3

1.0

1.6

1.3

0.3

1.0

1.6

0.2

1.4

1.2

0.7

0.4

0.0

-0.3

0.1

1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2014 Q2 Q4 Q4 2015 Q2 Q3 Q4 2016 Q2 Q3 Q4

Labor Force Output Per Hour

Percent

February 9, 2017 23Federal Reserve Bank of Chicago

Business Confidence Surveys

Conference Board, Vistage, and NFIB , Index 2004 = 100

60.0

70.0

80.0

90.0

100.0

110.0

120.0

'14 Q2 Q3 Q4 '15 Q2 Q3 Q4 '16 Q2 Q3 Q4

CB Vistage NFIB

Percent

Source: Author’s calculations using Conference Board CEO Survey, Vistage Mid-size & Small Business Survey, National Federation of

Independent Business Survey data.

Q4 ‘16

110.7

106.6

101.8

February 9, 2017 24Federal Reserve Bank of Chicago

U.S. Real GDP Blue Chip ForecastAnnual Percent Change – Chained $2009

-1.2

5.0

3.5

1.92.4 2.4

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

'14 '15 '16 '17 '18

Actual (SAAR) Fcst (SAAR) Actual (Y/Y) Fcst (Y/Y)

Source: BEA and January Blue Chip Economic Indicators

Percent

February 9, 2017 25Federal Reserve Bank of Chicago

Billions Chained $2009 and Percent of Actual

U.S. Real GDP – Actual and Potential

-8

-6

-4

-2

0

2

4

6

8

12,000

13,000

14,000

15,000

16,000

17,000

18,000

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18

Gap (Right) Actual (Left) Blue Chip (Left) Potential (Left)

Source: Bureau of Economic Analysis and the U.S. Congressional Budget Office

Percent$Billions

Q4 ‘16

$17,026

$16,805

-1.3%

$221

U.S. Consumer

February 9, 2017 Federal Reserve Bank of Chicago 26

Income and Savings Rate

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

'00 '02 '04 '06 '08 '10 '12 '14 '16

Percent

Percent Change and Percent of DPI

Nov ‘16

2.3%

Source: U.S. Bureau of Economic Analysis

February 9, 2017 Federal Reserve Bank of Chicago 27

Post Recession 2.0%

Pre-recession 3.1%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

'00 '02 '04 '06 '08 '10 '12 '14 '16

Percent

Nov ’16

5.5%

Post recession Average 5.9%

Pre-recession average 4.0%

Real DPI - % Chg. Yr./Yr., $2009 Personal Saving Rate - % of DPI

February 9, 2017 28Federal Reserve Bank of Chicago

Real DPI & Personal Savings Rate

As Percent of Personal Income

Source: U.S. Bureau of Economic Analysis

11.111.8

9.3

6.7

4.3

5.9

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

'60's '70's '80's '90's '00's '10's

Percent

4.6

3.43.3

3.1

2.6

2.1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

'60's '70's '80's '90's '00's '10's

Real Disposable PersonalIncome - $2009

Personal Savings RatePercent of DPI

Percent

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

26.0

28.0

'59 '63 '67 '71 '75 '79 '83 '87 '91 '95 '99 '03 '07 '11 '15

Total Credit Total Less Government Held Student Loans

Consumer Credit

29Federal Reserve Bank of Chicago

Percent

February 9, 2017

Revolving & Non-revolving CreditDec ‘16

26.4%

19.0%

Source: Federal Reserve Bank - Board of Governors

As a Percent of Disposable Personal Income

Interest Payments

30Federal Reserve Bank of ChicagoFebruary 9, 2017

Source: Federal Reserve Bank - Board of Governors

1.0

1.5

2.0

2.5

3.0

3.5

'59 '63 '67 '71 '75 '79 '83 '87 '91 '95 '99 '03 '07 '11 '15

As a Percent of Disposable Personal Income

Percent

Dec ’16

2.0%

February 9, 2017 31Federal Reserve Bank of Chicago

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16

All Items Core

Source: U.S. Department of Labor: Bureau of Labor Statistics data.

Inflation – PCE & CPI Price Index

Percent Change Yr / Yr

PCE Price Indexes CPI Price Indexes

Nov ‘161.7%

1.4%

Nov ‘162.1%

1.7%

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16

All Items Core

February 9, 2017 32Federal Reserve Bank of Chicago

Initial Unemployment ClaimsMonthly Average as Percent of Nonfarm Employment

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

'67 '70 '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09 '12 '15

Percent

0.45

0.74

0.37

0.50

0.17

0.46

Source: U.S. Bureau of Labor Statistics

0.71

February 9, 2017 33Federal Reserve Bank of Chicago

Real Household Net WorthHome Equity and Financial & Other - Index 2007 = 100, $2009

Index

Source: Author’s calculations using Federal Reserve data.

40.0

60.0

80.0

100.0

120.0

140.0

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Home Equity Financial & Other Total

Note: Total Household Net Worth in Current Dollars is $87.0 Trillion.

Index

120.6

117.4

102.1

$Trillions

$66.7

$78.4

$11.7

Q3 ‘16

Consumer Sentiment

34Federal Reserve Bank of ChicagoFebruary 9, 2017

University of Michigan

Index

20

40

60

80

100

120

140

'82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16

January ‘00

112.0

Source: Thomson Reuters / University of Michigan

Jan ’17

98.5

U.S. Auto Industry

February 9, 2017 Federal Reserve Bank of Chicago 35

February 9, 2017 36Federal Reserve Bank of Chicago

U.S. Total Vehicle SalesMillions of Units

17.8 17.4

10.6

15.9

17.8 17.9 17.7 17.6

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18

Millions

Source: Ward’s Automotive and BEA

Note: Total 2016 Light Vehicle Sales: 17,465,020 / Including M/H: 17,866,260.

February 9, 2017 37Federal Reserve Bank of Chicago

U.S. Light Vehicle Incentives

7.0

8.0

9.0

10.0

11.0

12.0

13.0

'10 '11 '12 '13 '14 '15 '16 '17

As Percent of Transaction Price - SA

Source: Author’s calculation using Ward’s Automotive and J.D Power data.

Jan ’1712.1%

Percent

February 9, 2017 38Federal Reserve Bank of Chicago

Light Vehicle Transaction Price

1.5

0.5

1.51.8

2.4 2.32.8

-3.6

1.5

4.5

2.1

0.9

2.72.4 2.3

1.6

-4.0

-2.0

0.0

2.0

4.0

6.0

$22,000

$24,000

$26,000

$28,000

$30,000

$32,000

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

% Chg. Yr/Yr (Right) Transaction Price (Left)

Annual Average & Percent Change Yr./Yr.

Source: Author’s calculation using J.D Power data.

2016$31,151

PercentDollars

February 9, 2017 39Federal Reserve Bank of Chicago

Finance TermLength of Loan in Months

59.6

61.062.0

62.7

63.8 63.663.1

62.6 62.863.5

64.565.0

65.966.9

67.8

50.0

52.0

54.0

56.0

58.0

60.0

62.0

64.0

66.0

68.0

70.0

'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Source: J.D Power data.

Buying Conditions for Vehicles

40Federal Reserve Bank of ChicagoFebruary 9, 2017

University of Michigan

Index

80

90

100

110

120

130

140

150

160

'08 '10 '12 '14 '16

Jan ’17

147.0

Source: Thomson Reuters / University of Michigan

February 9, 2017 41Federal Reserve Bank of Chicago

3

1

5

4

5

11

3

16

4

18

8

23

0.0 5.0 10.0 15.0 20.0 25.0 30.0

Poor Selection

Gas Prices

Uncertain Future

Can't Afford

High Interst Rates

Prices High

Fuel Efficiency

Time's good

Rising Interest Rates

Low Interest Rates

Prices Will Increase

Low Prices

Good / Bad Reason: Why do you say so?

Source: University of Michigan Survey of Consumers

Reasons for Buying Conditions for VehiclesUniversity of Michigan

Note: May add to more than a 100 due to multiple mentions.

February 9, 2017 42Federal Reserve Bank of Chicago

North American Auto Production Facilities

1995 2015

U.S. Automation Alley

Source: Thomas Klier, FRB Chicago and Bureau of Economic Analysis

February 9, 2017 Federal Reserve Bank of Chicago 43

Monetary PolicyEmployment & Inflation

February 9, 2017 44Federal Reserve Bank of Chicago

F.O.M.C Statement

1. Information since the F.O.M.C. met in December indicates that the labor

market has continued to strengthened and that economic activity has been

expanding at a moderate pace.

2. Job gains have been solid in recent months and the unemployment rate stayed

near its recent low.

3. Household spending has continued to rise moderately business fixed

investment has remained soft. Measures of consumer and business sentiment

have improved as of late.

4. Inflation increased in recent quarters but is still below the Committee’s 2

percent longer-run objective

5. Market-based measures of inflation compensation remain low; most survey-

based measures of longer-term inflation expectations are little changed, on

balance.

February 1, 2017

February 9, 2017 45Federal Reserve Bank of Chicago

Main Economic IndicatorsYear-over-year Comparison

Source: U.S. Bureau of Economic Analysis, Census Bureau and Bureau of Labor Statistics

2014 2015 2016

GDP – Annual Growth Rate 1 2.4% 2.6% 1.6%

Unemployment Rate 2 6.2% 5.3% 4.9%

Participation Rate 2 62.9% 62.7% 62.8%

Nonfarm Job Growth 3 2,558 2,876 2,493

PCE Core Inflation Yr. / Yr. 5 1.6% 1.4% 1.7%

1. Year-over-year

2. Annual Average

3. Annual Average Employment – Year-over-year change in thousands

4. Annual Average PCE Core – Percent change year-over-year

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

'09 '10 '11 '12 '13 '14 '15 '16 '17

Actual Target

February 9, 2017 46Federal Reserve Bank of Chicago

Unemployment Rate & PCE Inflation

Percent Unemployed, PCE % Change Yr./Yr.

Source: U.S. Department of Labor: Bureau of Labor Statistics , Bureau of Economic Analysis and the Federal Reserve

1.7

2.5

1.9

1.31.5

0.3

1.1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

'09 '10 '11 '12 '13 '14 '15 '16

Annual Actual Target

Unemployment PCE Inflation

2.0%

Dec ‘16

1.6%

Jan ‘17

4.8%

Percent Percent

February 9, 2017 47Federal Reserve Bank of Chicago

0

50

100

150

200

250

300

350

2015 2016 2017

Monthly Actual Annual Average

U.S. Nonfarm Payrolls

Monthly and Annual Average Job Change – In Thousands

Thousands

Source: U.S. Department of Labor: Bureau of Labor Statistics

2015

228.7 2016

186.8

Jan ‘17227

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

'00 '02 '04 '06 '08 '10 '12 '14 '16

February 9, 2017 48Federal Reserve Bank of Chicago

Underutilization of Labor

U6 Unemployment Rate - SA

Source: U.S. Department of Labor: Bureau of Labor Statistics , Bureau of Economic Analysis and the Federal Reserve

Jan ‘17

9.4%

Percent

Includes total unemployed plus marginally attached workers plus employed part-time for economic reasons.

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

'06 '08 '10 '12 '14 '16

5 Year Breakeven 10 Year Breakeven

February 9, 2017 49Federal Reserve Bank of Chicago

Inflation Compensation

5 Year and 10 Year Inflation Expectations

Source: U.S. Department of Labor: Bureau of Labor Statistics , Bureau of Economic Analysis and the Federal Reserve

Feb 3 ‘17

2.06%

1.93%

Percent

Source: Author’s calculation using Federal Reserve System data.

5 & 10 Year TIPS Minus 5 & 10 Year Treasuries- Constant Maturity Rate

February 9, 2017 50Federal Reserve Bank of Chicago

Yield Curve10 Year – 1 Year Treasuries in Basis Points

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

'12 '13 '14 '15 '16

10 Yr - 1 Yr T-Bill Spread 1 Year Treasury 10 Year Treasury

3-Feb-2017

248 bps

165 bps

83 bps

Percent

Source: Board of Governors – Federal Reserve System

February 9, 2017 51Federal Reserve Bank of Chicago

Inflation Expectations

Headline PCE Inflation – Yr./Yr. & Q4/Q4

Source: Bureau of Economic Analysis and FRB Philadelphia Q4 ‘16 Survey

Survey of Professional Forecasters – Q4 ‘16 ForecastPercent

1.4

1.92.0

0.9 1.01.0

1.91.8

1.9 1.92.0

0.0

0.4

0.8

1.2

1.6

2.0

2.4

Q1 '16 Q2 '16 Q3 '16 Q4 '16 Q1 '17 Q2 '17 Q3 '17 Q4 '17 2016 2017 2018

Actual Expectations

February 9, 2017 52Federal Reserve Bank of Chicago

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2016 2017 2018 2019 Long

Run

Appropriate pace of policy firming

Fed Funds Rate – Year End Projections

Thank You!