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ESSAYS ON ISSUES

THE FEDERAL RESERVE BANK
OF CHICAGO

FEBRUARY 1998
NUMBER 126

Chicago Fed Letter
Where have all the workers
gone?—A summary o f the
1998 Economic Outlook
Symposium
In 1997, the econom y exp an d ed with
gusto in the first quarter, rising by
nearly 5%, and then m oderated in the
secon d an d third quarters, gaining
3.3% and 3.5%, respectively. Observers
feared that such high growth was un­
sustainable without causing the econ­
omy to overheat an d inflation to rise.
However, the year witnessed a down­
ward trend in both the unemployment
rate an d inflation. Still, the lag struc­
ture between strong econom ic growth
an d inflation is not clearly defined
and concern about inflation rem ained
even as the inflation rate dipped below
2%, its lowest level in over ten years.
T he Asian econom ic crisis in O ctober
led to increased stock market volatility,
strengthen ed the dollar, an d ad d ed
a new wrinkle to the U .S. econom ic
horizon.
Against this backdrop, the Federal
Reserve B an k of C h icago held its
eleventh annual Econom ic O utlook
Sym posium on D ecem ber 5, 1997.
M ore than 50 econom ists an d analysts
from business, academ ia, an d govern­
m ent attended the conference. T he
focus o f this year’s conference was on
the labor market and whether an econ­
omy operating at full em ploym ent can
continue to expan d when it is running
out o f workers. This Fed Letter reviews
the accuracy o f last year’s conference
forecasts an d sum m arizes the 1998
Econom ic O utlook Sym posium .
Looking over our shoulders
Generally, participants in last year’s sym­
posium underestimated the strength of
the economy. They expected real gross
domestic product (GDP) to increase
by ju st over 2% in 1997; for the first

1. M edian fo recasts fro m the 1998 Econom ic O utlook Sym posium
1996

1997

1998

Real GDP

2.8%

3.8%

Personal co n su m p tio n expenditures

2.6%

3.3%

2.6%
3.0%

Business fixed investm ent

9.2%

10.6%

9.2%

Residential construction

5.9%

2.3%

2.1%

Change in business inventories (bil. constant $)

$25.0

$60.5

$38.5
-$176.0

-$114.4

-$145.4

G overnm ent purchases o f goods and services

Net e xports o f goods and services (bil. constant $)

0.5%

1.0%

1.1%

Industrial p ro d u ctio n

2.8%

4.6%

3.5%

Car and lig h t truck sales (m illio ns)

15.0

15.0

14.8

Housing starts (m illio ns)

1.47

1.46

1.41
4.9%

U n e m p lo ym e n t rate

5.4%

5.0%

In fla tion rate (Consum er Price Index)

2.9%

2.4%

2.4%

8.27%

8.44%

8.70%

3.6%

10.5%

1.0%

Prime rate
Federal Reserve trad e -w e ig h te d d o lla r

Note: Data are actual for 1996 and forecast for 1997 and 1998.
Sources: U.S. Bureau of Economic Analysis; Federal Reserve Board of Governors, various releases;
U.S. Department of Commerce, Bureau of the Census; U.S. Department of Labor, Monthly Labor
Review , various years; U.S. Department of Labor, Bureau of Labor Statistics; and Federal Reserve
Bank of Chicago, Economic Outlook Symposium.

three quarters, it averaged ju st under
4%. This underestim ation tendency
held for m ost o f the subcategories
o f GDP. The 5.2% growth rate of
industrial production for the first
three quarters o f 1997 was m ore
than twice the forecast. Light vehicle
sales averaged 406,000 m ore units
than forecast a year ago. H ousing
starts were expected to m oderate to
1.39 million units in 1997 after a very
strong year in 1996; instead, 1.46 mil­
lion annualized units were ad d ed in
the first three quarters. T he tradew eighted dollar was anticipated to
increase a slight 0.9% during 1997;
however, the dollar appreciated near­
ly 17% for the year. An overestim a­
tion of 0.4 percentage points occurred
for the unem ploym ent rate forecast.
T he inflation rate was expected to
soften in 1997 to a 2.8% rate, follow­
ing the 2.9% average o f 1996. Howev­
er, it ended half a percentage point
lower than the forecast at 2.3%.

The symposium forecast was more accu­
rate on interest rates, with the actual rate
being only 28 basis points higher than
the forecast for 1997.
In summary, the econom y expan ded
faster, inflation was m ore benign, and
unem ploym ent rates were lower than
last year’s sym posium forecasts sug­
gested. With unem ploym ent rates now
below 5%, an d in many regions un der
4%, businesses are increasingly becom ­
ing co n cern ed about finding qualified
workers. This con cern raised the qu es­
tion that becam e the them e o f the
1998 Econom ic O utlook Sym posium ,
“W here have all the workers g o n e?”
Looking ahead
For 1998, the symposium forecasts show
the positive 1997 econom ic conditions
continuing, albeit at a much slower pace.
Figure 1 sum m arizes expectations for
1997 (fourth quarter num bers not
known) an d 1998. M ost forecasters

2. R eal GD P growth
percent change, annual rate

■

h

1

Forecast range

Actual

A J A, t v
\ J

____ i ■ ■ ■ ■ ■ ■ ■ i ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ i ■ ■ ■ ■
1992
’93
’94
’95
’96
’97
Sources: U.S. Bureau o f E conom ic A nalysis.
Dashed line represents Federal Reserve Bank o f Chicago,
E conom ic O u tlo o k S ym p o siu m m edian forecast.

believed that the growth rates exp eri­
en ced in 1997 are unsustainable and
that real output growth during 1998
will be lower than in 1997 for every
subcategory o f GDP. T he typical fore­
caster is expecting real GDP growth
to be 3.8% in 1997 an d 2.6% in 1998.
Given the situation in Asia, it is not
surprising that one o f m ost dram atic
changes anticipated during 1998 is on
the international front, with net ex ­
ports forecast to decline from -$145.4
billion in 1997 to -$176.0 billion in
1998. Only the governm ent sector is
expected to grow in 1998 at rates sim ­
ilar to 1997.
In term s o f the quarterly pattern for
real GDP, the forecast group is expect­
ing a downward trend. In the first
quarter, real GDP growth is forecast
at 2.8%, m oderating steadily to 2.2%
by the fourth quarter o f 1998 (see
figure 2). This downward pattern is
reflected in the growth outlook for
person al consum ption expenditures,
business fixed investment, an d resi­
dential investment. Som e weakening
is expected for change in business
inventories an d net exports. Govern­
m ent spen din g growth is forecast to
rem ain fairly flat over the four quarters
o f 1998.
T he quarterly patterns for the other
series forecasts— industrial p rod u c­
tion growth, car an d light truck sales,
an d housing starts— are expected to
decline over the forecast horizon. The
unem ploym ent rate (see figure 3),
inflation, and the prim e rate are antic­
ipated to rise over the four quarters of

1998. Finally, the
growth rate for the
trade-weighted dollar
should show a fairly flat
pattern in 1998. Below,
we sum marize the dis­
cussion o f tight labor
markets and forecasts
for individual sectors.
D ealing with tight
labor m arkets

A chief executive officer
(CEO ) from a tem po­
■ ■ ■ ■_______
rary help firm said that
’98
while jo b s are being
created at a fast pace,
there are major discrep­
ancies between jo b s an d individuals
available to fill them , both in term s
o f geography and education.
The speaker proposed several solutions
to the tight labor force problem :
1) O utsourcing o f positions to tem ­
porary help agencies to reduce the
cost o f mis-hiring, one of the more sig­
nificant costs that com panies incur.
2) T raining o f em ployees to keep
their skills current. Corporate training
has been one of the areas most affected
by cost cutting. 3) Bringing retirees
back into the work force. 4) U sing
exp an d ed hiring sources, such as the
Internet, networking through new
hires, looking at individuals ju st out
o f high school who are not sure what
jo b they want to hold, or creating alli­
ances with correspon dence schools.
5) R educing turnover through a
com bination o f nonm onetary and
m onetary incentives. 6) Preparing
students better for the working world.
Finally, the speaker asked whether, in
a full em ploym ent environm ent, cur­
rently unem ployed individuals are in
fact em ployable. Do they even have
basic jo b skills? What can be done
about this portion o f the unem ploy­
m ent group?
A ccording to the CEO, the labor
m arkets will continue to be very tight
an d the gap will persist between what
em ployers want an d what is available.
O utlook fo r individual sectors
Consumer—T he econom ic outlook
from the consum er side was discussed

by an econom ist who has worked with
consum er surveys extensively for many
years. C onsum ers typically decide to
stop spen din g only if som e m ajor
econom ic or political event changes
the economic horizon and, at this
time, they generally expect the current
expan sion to last anoth er five years.
T he consum er has not been this opti­
mistic about conditions since 1965.
Indicative that consum ers expect low
rates o f inflation to continue is that
the inflationary mentality that they
should buy now before prices go up no
longer exists. There does not appear to
be any significant pent-up dem and,
so consum ers now feel they can shop
elsewhere if prices are high. This view
has placed increased competitive
pressures on som e producers, m aking
it difficult to pass on higher m anufac­
turing costs to consum ers. B ased on
the surveys, consum ers are not as
con cern ed about becom ing un em ­
ployed as they were a short tim e ago
and, as a result, they are m ore willing
to ask for wage increases.
Autos—An econom ist from an auto
produ cer expects light vehicle sales
(seasonally adjusted annual rate) to
be 14.7 m illion to 15.2 m illion units,
which is in the range o f the con sen ­
sus forecast of 14.8 million units. This
econom ist felt that there does not
ap p ear to be a large am oun t o f pentup dem and. Feeling con fiden t about
the economy, consum ers have con ­
tinued to m ake large purchases, such
as vehicles, in the past year. The
econom ist expects core inflation to be
un der 2% in 1998 an d interest rates
to be stable, which should lead to good
retail sales and vehicle sales. The risks
to dom estic vehicle produ cer sales
are con tin ued com petition from
E u ropean producers and increased
com petition from Asian producers,
in particular Japan and South Korea.
Having lost sales in the Far East due
to the Asian econom ic crisis, Japan
an d South Korea will probably try
to ship m ore product to the U.S. to
keep their production levels up. This
increased com petition will lead to
even lower vehicle prices for consum ­
ers in 1998. With reduced production
an d consum ption dem an d in Asia,
this economist expects crude oil prices
to be down by 20% in 1998. This is

the consultant felt
that wages in this in­
dustry do not accu­
rately represent the
total compensation
that employees receive.
Front-end or perfor­
mance-based bonuses,
as well as profit sharing
plans, add to total com ­
pensation.
Banking—The con­
cern over rising con ­
sum er credit card debt
was discussed by an
econom ist from a
Sources: U.S. D e partm ent o f L a b o r, Bureau o f Lab or S tatistics.
large com m ercial
Dashed lin e represents Federal Reserve Bank o f C hicago,
E conom ic O utlo o k S ym p o s iu m m edian fo re c a s t.
bank. D espite improv­
ing econom ic conditions, debt levels
good news for light truck sales, as these
have increased to record levels.
vehicles tend to be less fuel efficient
However, the speaker felt that co n ­
than passenger cars.
sum ers are getting smarter about
m anaging debt. M ore aggressive
Home building—An executive who
credit card m arketing by issuers ex­
represents the hom e building industry
plains part of the debt buildup. In ad­
presented a very favorable outlook
dition, consum ers are feeling m ore
for the housing industry in 1998.
confident an d are m ore willing to
Com petition has increased for hom e
extend their credit obligations.
builders with m ore builders com pet­
ing for m arket share. It has been quite
In 1998, the banking industry faces
a buyers’ m arket with incentives being
som e challenges. While short-term
offered by builders. Builders are not
interest rates have rem ain ed fairly
having trouble finding labor, and wages
steady, long-term interest rates have
have not increased significantly over
com e down since the m iddle of
the past year. With the strong sales
1997, leadin g to a flattening o f the
pace of the past several years, there
yield curve. This will hurt the profit
does not appear to be any pent-up
m argins o f banks, which m ake their
dem and in the housing market. This
m oney by borrow ing short an d len d­
executive expects housing starts to
ing long. Consolidation in the bank­
ease to 1.39 million units in 1998. The
ing industry will continue. There are
consensus forecast for 1998 is slightly
25% fewer banks in the U.S. now
m ore optimistic at 1.41 million units.
than in 1990.
Steel—A consultant to the steel indus­
Heavy equipment—A ccording to a
try said that many m ajor projects will
director o f the economics department
be undertaken in 1998 an d that given
of a heavy equipm ent manufacturer,
the am oun t o f steel bein g shipped,
the industry is heavily reliant on how
the construction num bers being
well the construction industry does
reported are too low. Steel con sum p­
during 1998. T he industry is current­
tion is projected to increase nearly
ly in an upsurge. While tightness in
2% in 1998. Engine an d parts plants
the labor m arket continues to be a
and assembly plants in the automotive
concern, this industry has been less
industry are the m ost active sectors for
affected than other industries. Pro­
investm ent in this industry. T here
ductivity gains have allowed the
do not ap p ear to be any capacity con ­
speaker’s company to reduce employ­
straints, with the possible exception
ment, while increasing both sales and
o f high-perform ance products. Com ­
shipments. For new hires at this com ­
pensation is generally high in the
pany, there were 25 applicants for
steel industry, m aking it relatively
every open in g and, o f those hired,
easy to attract workers. Furtherm ore,
m ore than 70% had college degrees.

T he N orth A m erican m arket for heavy
duty equ ipm en t is very m ature and
any expan sion in this m arket in 1998
an d beyond will be from foreign de­
m and. T he environm ent for m achine
sales for both the agriculture an d con­
struction industries during 1998 is
very favorable. T he heavy equipm ent
industry does well as lon g as housing
starts rem ain above a 1.3 m illion unit
pace. As lon g as the econom y d o e sn ’t
go into a recession an d as lon g as in­
terest rates rem ain som ew hat stable,
the speaker believes that the outlook
for the industry will rem ain bright.
C onclusion
T he econom ic outlook for 1998 calls
for slower econom ic growth than in
1997, coupled with a continued low
rate o f inflation an d a low unem ploy­
m ent rate. Both light vehicle sales and
housing starts are anticipated to be
down slightly from their 1997 levels,
but still at fairly high rates. If these
forecasts are realized, 1998 will be an ­
other in a series o f very g oo d years for
the U.S. economy.
—William Strauss
Sen ior econom ist
Keith Motycka
Associate econom ist

Michael H. Moskow, President; William C. Hunter,
Senior Vice President and Director ofResearch;
Douglas Evanoff, Assistant Vice President, financial
studies; Charles Evans, Assistant Vice President,
macroeconomic policy research; Daniel Sullivan,
Assistant Vice President, microeconomic policy research;
William Testa, Assistant Vice President, regional
programs; Vance Lancaster, Administrative Officer;
Helen O ’D. Koshy, Editor.
Chicago Fed Letter is published monthly by the
Research Department o f the Federal Reserve
Bank o f Chicago. T h e views expressed are
the auth ors’ and are not necessarily those of
the Federal Reserve Bank o f Chicago or the
Federal Reserve System. Articles may be
rep rin ted if the source is credited an d the
Research Department is provided with copies
o f the reprints.
Chicago Fed Letter is available without charge
from the Public Inform ation Center, Federal
Reserve Bank o f Chicago, P.O. Box 834,
Chicago, Illinois 60690-0834, tel. 312-322-5111
or fax 312-322-5515. Chicago Fed Letter and
other Bank publications are available on the
World Wide Web at http://w w w.frbchi.org.
ISSN

0 8 9 5 - 0 1 6 4

T racking M idwest m anufacturing activity
Manufacturing output indexes, 1992=100
132

Manufacturing output indexes
(1992=100)
Nov.

Month ago

Year ago

CFMMI

125.5

124.6

118.8

IP

130.2

129.0

122.5
122

Motor vehicle production
(millions, seasonally adj. annual rate)
Nov.

Month ago

Year ago

Cars

6.1

5.9

6.3

Light trucks

6.6

6.2

5.6
112

Purchasing managers' surveys:
net % reporting production growth
Dec.

Month ago

Year ago

MW

58.6

63.7

58.4

U.S.

55.4

58.6

58.5
102

____________________________________________________________________________________I__ I__ I__ I__ I__I__ I__ I__ I__ I__I__ I__I__ I__ I__ I__ I__I__ I__ I__ I__ I__I__ I__I__ I__ I__ I__ I__I__ I__ I__ I__ I__I__ I__I__ I__ I__ I__ I__I__ I__ I__ I__ I__I__ L

1994

1995

The CFMMI reached a record high o f 125.5 in November. The index gained
0.7% for the month, following a strong 1.1% increase in October. T he Federal
Reserve B o ard ’s IP for m anufacturing also set a record high o f 130.2 in Novem­
ber, gaining 1.0% for the m onth following a 0.6% increase in October.
The Midwest purchasing m anagers’ composite index for production decreased to
58.6% in Decem ber from 63.7% in November. Purchasing m anagers’ indexes de­
creased for the Chicago, Detroit, and Milwaukee surveys. The national purchasing
m anagers’ composite index decreased from 58.6% in November to 55.4% in De­
cember. Total motor vehicle production increased from 12.1 million units in Oc­
tober to 12.7 million units in November. Light truck production increased from
6.2 to 6.6 million units and car production increased from 5.9 to 6.1 million units.

1996

1997

Sources: The Chicago Fed Midwest Manufacturing
Index (CFMMI) is a composite index of 16 industries,
based on monthly hours worked and kilowatt hours.
IP represents the Federal Reserve Board’s Indus­
trial Production Index for the U.S. manufacturing
sector. Autos and light trucks are measured in an­
nualized units, using seasonal adjustments devel­
oped by the Board. The purchasing managers’
survey data for the Midwest are weighted averages
of the seasonally adjusted production components
from the Chicago, Detroit, and Milwaukee Purchas­
ing Managers’ Association surveys, with assistance
from Bishop Associates, Comerica, and the Uni­
versity of Wisconsin-Milwaukee.

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