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ESSAYS ON ISSUES
	

	 THE FEDERAL RESERVE BANK	
OF CHICAGO

AUGUST 2012
	 NUMBER 301

Chicag­ Fed Letter
o
Economy to keep rolling along in 2012 and 2013
by William A. Strauss, senior economist and economic advisor, and Norman Wang, associate economist

According to participants in the Chicago Fed’s annual Automotive Outlook Symposium,
solid economic growth is forecasted for the nation this year and in 2013. Inflation is
expected to fall in 2012 and remain unchanged in 2013, and the unemployment rate
is anticipated to move lower but remain high by historical standards through the end
of 2013. Light vehicle sales are forecasted to improve in 2012 and 2013.

The Federal Reserve Bank of Chicago

held its nineteenth annual Automotive
Outlook Symposium (AOS) on May 31
and June 1, 2012, at its Detroit Branch.
More than 70 econo1. Median forecast of GDP and related items
mists and analysts
from business, aca	
2011	2012	 2013
demia, and govern	
(Actual)	 (Forecast)	(Forecast)
ment attended the
Real gross domestic product 	1.6	
2.3	2.6
AOS. This Chicago Fed
Real personal consumption expenditures 	1.6	 2.5	2.5
Real business fixed investment 	8.2	
4.0	5.3
Letter reviews the foreReal residential investment 	3.5	
12.2	13.0
casts from last year’s
Change in private inventories 	52.2	
60.6	55.5
Net exports of goods and services 	–410.8	
–412.0	–395.0
AOS for 2011, and
Real government consumption
then analyzes the
expenditures and gross investment 	–2.8	
–1.3	–0.7
Industrial production 	4.0	
3.2	2.4
forecasts for 2012 and
Car and light truck sales (millions of units)	
12.7	
14.5	15.0
2013 (see figure 1)
Housing starts (millions of units)	
0.61	
0.71	0.85
Unemployment rate 	8.7	
7.9	7.6
and summarizes the
Consumer Price Index 	3.3	
2.1	2.1
presentations from
One-year Treasury rate (constant maturity) 	0.11	
0.20	0.25	
Ten-year Treasury rate (constant maturity) 	2.05	
2.21	2.52
this year’s AOS.1
a

a

a

a

b

b

a

a

c

a

c

c

J. P. Morgan Trade-Weighted Dollar Indexa	0.0	 –0.4	0.2
Oil price (dollars per barrel of
West Texas Intermediate)c	94.06	
103.57	104.25

The U.S. economy
continued to expand
Percent change, fourth quarter over fourth quarter.
from the longest and
Billions of chained (2005) dollars in the fourth quarter at a seasonally adjusted annual rate.
Fourth quarter average.
deepest drop in ecoNote: These values reflect forecasts made in May 2012.
Sources: Actual data from authors’ calculations and Haver Analytics; median forecast from
nomic activity since
Automotive Outlook Symposium participants.
the Great Depression.
During the eleven
quarters following the end of what has
been called the “Great Recession,” the
annualized rate of real gross domestic
product (GDP) growth was 2.4%—near
what is considered the historical trend
rate of growth for the U.S. economy. This
GDP growth rate is very disappointing
given that real GDP fell from its peak
a
b
c

by more than 5% during the Great
Recession. Generally, the pace of economic recovery is quite sharp following
a deep recession. For example, consider what happened after the deep drops
in economic output experienced during
the mid-1970s and early 1980s; during
the first eleven quarters of positive output following these two recessionary
periods, the annualized rate of real GDP
growth was 5.3% and 6.0%, respectively
(significantly higher than that of the current recovery). That said, unlike the
deep recessions of the mid-1970s and
early 1980s, the Great Recession was
accompanied by a major financial crisis.
Recoveries both in the United States
and in other countries that follow recessions associated with financial crises
tend to be quite restrained, and it appears that the current business cycle is
following this pattern of tepid growth.
Employment losses that began in February 2008 continued to mount following
the end of the recession until February
2010. Since then, the economy has been
adding jobs, but the number of jobs
added is just under 3.8 million—around
43% of the 8.7 million jobs lost. In addition to making up for these lost jobs,
the U.S. economy needs to generate jobs
to accommodate all the new entrants
into the labor force. During the ten
years before the Great Recession, the

labor force in the U.S. economy increased by an average of 1.7 million
individuals each year, according to the
U.S. Bureau of Labor Statistics. Thus,
over 7.5 million potential workers have
been added since the start of the recession. All of these factors are reflected
in the very high unemployment rate,
which has been above 8% since February
2009. At 8.2% in May 2012, the current
unemployment rate illustrates the significant output gaps that persist.
With such slack in production, labor
markets, and other parts of the economy,
inflation has stayed low for the most part.
Inflation, as measured by the Consumer
Price Index (CPI), was 1.2% in 2010.
However, inflation increased to 3.3%

the downturn. The two industries that
fell by the largest percentage—automotive manufacturing and primary metals—
are the two industries that have shown
the strongest growth since the end of
the recession through May 2012, with
annualized growth rates of 30.6% and
15.5%, respectively.
Light vehicle sales (car and light truck
sales) improved from 11.6 million units
in 2010 to 12.7 million units in 2011—
a 10% gain. This increase in light vehicle sales was much larger than the 1.6%
increase in real personal consumption
expenditures for 2011. Light vehicle
sales continued to improve in 2012, with
the annualized selling rate rising to
14.3 million units in the first five months.

Light vehicle sales are expected to rise to 14.5 million units in
2012 and then improve to 15.0 million units in 2013.
in 2011, largely because of higher oil
prices associated with the Middle East
uprisings during the spring. Concerns
about Iran’s nuclear program pushed
oil prices up in early 2012. But given
the recent signs of economic weakness
around the world, oil prices had moderated and inflation had fallen to 1.7%
by May 2012.
The weakest sector of the economy remained housing. There were 0.61 million housing starts in 2011, well below
the nearly 1.4 million annual housing
starts that the United States averaged
during the 1990s. Residential investment
normally plays a major role during an
economic recovery. However, since the
start of the recovery from the Great
Recession, residential investment has
contributed very little to the moderate
growth of the overall economy.
The manufacturing sector, whose level
of production fell by more than 20%
during the Great Recession, has been
increasing its pace of production rapidly
since the end of the downturn. From
June 2009 through May 2012, manufacturing output grew at an annualized
rate of 6.3%, recovering nearly threequarters of the loss experienced during

Forecasts versus results

At last year’s AOS, participants forecasted
the economy’s real GDP growth rate to
be 2.6% in 2011, a full percentage point
more than the actual rate of 1.6%. The
unemployment rate was predicted to
average 8.5% in the final quarter of
2011—a bit lower than the actual average of 8.7%. Inflation, as measured by
the CPI, was predicted to average 2.6%
in 2011—0.7 percentage points lower
than the actual 3.3% increase in prices
that occurred during 2011. Light vehicle
sales were expected to rise substantially,
from 11.6 million units in 2010 to
13.2 million units in 2011, which was
higher than the 12.7 million units actually
sold. Housing starts were forecasted to
tick up from 0.58 million units in 2010
to 0.59 million units in 2011, but they
actually gained a bit more, reaching
0.61 million units.
Outlook for 2012 and 2013

The economy is forecasted to grow at a
solid pace in 2012 and 2013. The growth
rate of real GDP is predicted to be 2.3%
in 2012 and 2.6% in 2013. The quarterly
pattern shows the annualized rate of
real GDP growth to be between 2.1%
and 2.8% over the forecast horizon

(2012:Q2–2013:Q4). The projected rates
of growth for 2012 and 2013 are considered to be near the historical trend.
The unemployment rate is predicted to
edge lower through the end of 2013: It
is expected to fall to 7.9% by the fourth
quarter of 2012 and then ease to a still
very high 7.6% by the final quarter of
2013. Inflation, as measured by the CPI,
is expected to remain contained at 2.1%
in both 2012 and 2013. Real personal consumption expenditures are forecasted
to expand at a solid rate of 2.5% this year
and in 2013. Light vehicle sales are expected to rise to 14.5 million units this
year and then improve to 15.0 million
units next year. Real business fixed investment is predicted to record solid
growth rates of 4.0% in 2012 and 5.3%
in 2013. Industrial production is forecasted to grow at a rate of 3.2% this year
and at a slower pace of 2.4% next year.
The housing sector is predicted to improve over the forecast horizon. Real residential investment is anticipated to surge
at a rate of 12.2% in 2012 and at a rate
of 13.0% in 2013. Housing starts are expected to increase to 0.71 million units
in 2012 and 0.85 million units in 2013.
The long-term interest rate (ten-year
Treasury rate) is forecasted to increase
16 basis points in 2012, to 2.21%, and
31 basis points in 2013, to 2.52%. The
short-term interest rate (one-year Treasury rate) is expected to rise 9 basis points
this year, to 0.20%, and 5 basis points
next year, to 0.25%. The trade-weighted
U.S. dollar is predicted to edge down
this year, at a rate of –0.4%, and then
tick up in 2013, at a rate of 0.2%. The
trade deficit (net exports of goods and
services) is predicted to remain virtually
unchanged this year and next.
Auto sector outlook

Mustafa Mohatarem, chief economist,
General Motors (GM), presented the
light vehicle sales outlook. He said that
light vehicle sales have been one of the
few bright spots during the lackluster
recovery from the Great Recession; auto
production accounted for approximately
one-half of the United States’ annualized
GDP growth rate in the first quarter of
2012. Mohatarem said he expected the
automotive industry to remain a source

of strength for the U.S. economy and
noted several trends that bode well for
light vehicle sales in the future. Vehicle
age has risen dramatically as consumers
have held on to their cars and delayed
purchases of new cars during the downturn. The decline in the supply of used
cars has also increased used cars’ value
by nearly 30% since the end of the recession, providing consumers with more
equity when they trade in their vehicles.
He also noted that consumer, business,
and government spending on new vehicles are all well below their historical

by 2013. Because of the rising demand
for trucks to haul freight, truckers have
reaped greater profits, which have improved their creditworthiness and thus
increased their ability to borrow funds.
Many truckers have also put off buying
new vehicles in recent years because of
the poor economy, raising the average
age of the commercial fleet and generating pent-up demand for new heavy-duty
trucks. To close, Vieth explained that
medium-duty truck sales are not expected
to experience the same strong growth
because they are highly dependent on

Light vehicle sales have been one of the few bright spots
during the lackluster recovery from the Great Recession.
trends. Given such patterns, Mohatarem
contended that in the United States,
there is now a lot of pent-up demand
for new vehicles. Outside of the United
States, however, the outlook for light
vehicle sales is far less rosy, Mohatarem
noted. For instance, light vehicle sales
growth has been slowing in the rapidly
developing countries of Brazil, Russia,
India, and China over the past one to
two years. Mohatarem said he is skeptical
about this trend reversing quickly. The
declining economic performance of
these four nations will constrain their
governments from being able to provide any significant stimulus to vehicle
sales, stated Mohatarem.
Kenny Vieth, partner, Americas Commercial Transportation (ACT) Research
Co., delivered the outlook on commercial vehicles (medium- and heavy-duty
trucks). Vieth said that despite the recent decrease in orders for heavy-duty
trucks, many factors point to higher truck
sales on the horizon. The underlying
demand for commercial vehicles indicates that the market for heavy-duty
trucks will be healthy for several years
to come. Freight tonnage in the United
States has been growing steadily since
the end of the recession, and there is
now too much freight for too few trucks.
Indeed, the demand for trucks to haul
freight was 3% higher than the supply
of trucks in 2011; and according to Vieth,
this shortfall is projected to reach 6%

the government and construction sectors. Sales of medium-duty trucks will
remain disappointing until spending
in these two sectors comes back from
depressed levels.
Paul Taylor, chief economist, National
Automobile Dealers Association, presented the light vehicle sales outlook
from the dealers’ perspective. Taylor
said that auto dealerships have continued to improve their performance this
past year as light vehicle sales recover
from the recession; e.g., in the first quarter of 2012, average net pretax profit
for dealerships grew 8% relative to its
year-ago value. Part of this improvement
is attributable to dealerships doing more
with less: Even though sales volumes
have climbed significantly since 2009,
a typical dealership today only has 53
employees, not much higher than the
49 employees dealerships averaged during the recession. Taylor also highlighted several indicators affecting the light
vehicle industry. The value of houses
(a key source of wealth for the middle
class) has stabilized, with a year-over-year
increase of 0.5% in the first quarter of
2012, according to the Federal Housing
Finance Agency’s House Price Index.
The employment situation has also improved. Taylor said that while the unemployment rate remains high, individuals
who are still employed are less uncertain
about their economic future. Additionally, Taylor argued that low interest rates,

moderate gasoline prices, and high used
car values generally support higher new
car sales ahead. Given such factors, Taylor
predicted light vehicle sales to reach
14.4 million units by the end of 2012.
David Andrea, vice president, Original
Equipment Suppliers Association
(OESA), presented the outlook on the
auto parts supplier industry. Andrea
explained that suppliers have faced many
challenges in the past year. In addition
to growing concerns about Europe’s
economic slowdown, both natural and
industrial disasters—such as the 2011
earthquake in Japan and the 2012 explosion at a plant in Germany that produces
a key input for plastics manufacturing2—
have caused major supply chain disruptions. Through all of these challenges,
the industry has proven itself to be flexible
and adaptable, meeting all the increases
in production that their customers have
required while maintaining cost discipline and improving productivity. To
illustrate this, Andrea noted that North
American production of light vehicles
has increased from an annualized rate
of 8 million units in September 2009
to 14 million units in January 2012, while
U.S. auto parts manufacturing employment has only increased from around
Charles L. Evans, President  Daniel G. Sullivan,
;
Executive Vice President and Director of Research;
Spencer Krane, Senior Vice President and Economic
Advisor ; David Marshall, Senior Vice President, financial
markets group  Daniel Aaronson, Vice President,
;
microeconomic policy research; Jonas D. M. Fisher,
Vice President, macroeconomic policy research; Richard
Heckinger,Vice President, markets team; Anna L.
Paulson, Vice President, finance team; William A. Testa,
Vice President, regional programs, and Economics Editor ;
Helen O’D. Koshy and Han Y. Choi, Editors  ;
Rita Molloy and Julia Baker, Production Editors 
;
Sheila A. Mangler, Editorial Assistant.
Chicago Fed Letter is published by the Economic
Research Department of the Federal Reserve Bank
of Chicago. The views expressed are the authors’
and do not necessarily reflect the views of the
Federal Reserve Bank of Chicago or the Federal
Reserve System.
© 2012 Federal Reserve Bank of Chicago
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Prior written permission must be obtained for
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400,000 to around 450,000 over the same
period. More recently, however, the
recovery in sales volume and a record
number of vehicle launches have increased suppliers’ willingness to spend,
with many suppliers reporting accelerated capital expenditures and plans to
hire. According to Andrea, global vehicle
sales are projected to continue to grow,
reaching 104.5 million units in 2018, up
from 76.9 million units in 2011. Such
an increase in global sales should provide robust growth opportunities for
the supplier industry.
Kristin Dziczek, director, Center for
Automotive Research (CAR), provided
an analysis of past and future labor
negotiations between the United Auto
Workers (UAW) and the Detroit Three
(Chrysler, Ford, and GM). Dziczek
said that the landmark 2007 UAW–
Detroit Three contracts accomplished
a great deal, lowering average hourly
labor costs from $72–$78 per hour to
$52–$58 per hour. Most of the savings
came from transferring retiree health
care liabilities from the auto companies
to a voluntary employees’ beneficiary
association (VEBA)3 affiliated with the
UAW. By 2011, the average hourly labor
costs for Ford ($58 per hour), GM ($56
per hour), and Chrysler ($52 per hour)

had become much more competitive
with those for foreign companies, such
as Toyota ($55 per hour), Honda ($50
per hour), and Nissan ($47 per hour).
In contrast, the 2011 UAW–Detroit
Three contracts were more evolutionary than revolutionary, holding the line
on fixed labor costs while increasing
variable pay. According to Dziczek, labor
costs for the Detroit Three are expected
to grow by less than 1% annually through
2015, with Ford reaching $60 per hour,
GM $59 per hour, and Chrysler $53 per
hour. Looking ahead to the 2015 labor
contract negotiations, Dziczek said the
UAW will seek to raise entry-level pay,
increase benefits for retirees, and restore
the cost-of-living adjustments to compensation. The Detroit Three’s major goals
for the 2015 labor negotiations will be
to avoid any further pension liabilities
and pay raises (including cost-of-living
adjustments) and to increase employees’
cost-sharing responsibilities for their
health care benefits.

accompanied by a financial crisis and
because economic growth overseas is
weakening, the unemployment rate is
expected to remain high by historical
standards through 2013. Inflation is
anticipated to fall this year and remain
unchanged in 2013. Light vehicle sales
are forecasted to improve this year and
in 2013.

Conclusion

3	 A VEBA is an independently administered

The participants at this year’s AOS
predicted the economy to grow at a
solid pace in 2012 and 2013. However,
because U.S. economic growth is still
being restrained following a recession

1	 Some materials presented at the symposium
are available at www.chicagofed.org/
webpages/events/2012/automotive_
outlook_symposium.cfm.

2	 The plant is owned by Evonik Industries

AG and provides a significant portion of
the world’s supply of the chemical CDT
(cyclododecatriene), which is used to make a
nylon resin called PA12 (or nylon 12), critical for the manufacture of brake and fuel
system components. For details on the plant
explosion’s effects on the auto industry,
see Craig Trudell and Mark Clothier, 2012,
“Auto output threatened by resin shortage
after explosion,” Bloomberg, April 17, available at www.bloomberg.com/news/
2012-04-17/auto-output-threatened-byresin-shortage-after-explosion.html.
trust whose purpose is to provide employee
benefits. Under the 2007 UAW–Detroit
Three contracts, a VEBA to administer
retiree health care benefits was established
with funds from the Detroit Three automakers; for details, see www.uawtrust.org/
Home/about/history/history/sb.cn.