William Strauss, Federal Reserve Bank of Chicago senior economist and economic advisor

William Strauss, senior economist and economic advisor with the Federal Reserve Bank of Chicago

When Fed advisor William Strauss provided a snapshot of the nation’s economy, it was nothing to shout about, but wasn’t doing badly.

The senior economist and economic advisor with the Federal Reserve Bank of Chicago was speaking in advance of a Sept. 19 presentation at Indiana Tech’s Talwar Leadership Center, the day before the Labor Department released its August jobs report, which he said could be one of the most important indicators for how the economy is doing.

The report showed payroll employment increased by 130,000 in August, below expectations for an increase of 160,000. In addition to providing insight on those figures, the outlook presentation will review what happened with rates during the Federal Open Market Committee meeting scheduled for Sept. 17.

“I’ll be able to share the latest economic projections with the audience there that will be hot off the press, so to speak,” Strauss said. “As much as you don’t think two weeks can make a difference, over the next couple of weeks we’re going to get a lot more information.”

However, at that moment “the best guess assessment of where we’re heading is that growth is likely to continue. We’re in a record expansion now, having completed an August that appeared to continue to grow,” he said. “We got auto sales numbers that look very positive, so one can only assume that August has continued to do relatively well.”

The 122 months of growth the economy has seen is a record expansion, but it also has been the slowest paced expansion the country has seen since the Great Depression of the 1930s, Strauss said.

The economy is likely to continue to expand at a deep but unimpressive growth rate. Concern about U.S.-China tariff and trade discussions and slower growth for the world’s economy caused businesses to delay capital investment during the second quarter and that weakness could continue, he said.

“It probably has reduced our growth rate by some degree, but I don’t think to a degree that gets us from growing at a growth path that is around trend, or around this 1.8 to 2% pace, to actually going negative,” he said.

“That being said, there’s a lot of additional proposed tariffs that have not been enacted, and if in fact we see those come about, at least the numbers that have been thrown around would alter that equation, and I think put us at a potential for being more concerned about the growth path.”

Economic growth is stronger in the United States than it is globally, and there has been particular concern about the health of the European economy, Strauss said.

“Germany now for six months has been in a reading that would correspond with a recessionary environment for their manufacturing,” he said. “That could pose some real risks for the European economy as a whole, given that Germany is kind of their main engine for growth.”

In the United States, the gross domestic product grew 2.3% during the 12 months that ended June 30, a little better than the trend rate of 1.8% to 2%.

The Fed’s latest summary of economic projections from June predicted the GDP would grow at a pace a little lower than 2.3% for the full year. Strauss said his outlook session would be able to include updates of the summer’s projections.

“Industrial production had a very solid year last year, growing at a pretty good pace, partly I think assisted by the tax reform that took place in December of 2017. But, as the year came to an end, I think some of that sugar high of the tax reform was wearing off,” he said.

A more aggressive trade policy then materialized last year, and “we saw greater concern about growth around the world slowing down, and that really kind of put the brakes on industrial production and we saw basically a decline that occurred for the first seven months of this year,” Strauss said.

“It has brought the (industrial production) growth rate on a year-to-year basis down to zero,” he said. “I don’t think that what we’ve seen at this point will warrant talking about that sector being in a recession. I think it’s more just a weakness that we’ve witnessed to some degree during the first part of this year.”

Strauss expects housing starts to tick higher without growing much, reaching 1.2 million for the year, coming in once again well below the historic levels of 1.4 million to 1.5 million the nation saw prior to the Great Recession, which started in December 2007 and ended in July 2009.

The industry has found it challenging to provide homes people can afford. Starter homes have become more expensive and they are in shorter supply. And views on the value of owning a home may have changed since the recession, he said.

The nation added 2.2 workers during the past 12 months, which is twice what it should have added, given the demographics of the labor force, Strauss said. The data shows employers have been finding workers that previously were not engaged in the work force.

“It’s a true bright spot for the economy, where we’re seeing unemployment rates that are below 4%,” he said.

“And when we look at it across the board by either racial groups or you look at it from the standpoint of educational attainment, we’re seeing very significant drops for the unemployment rates to a level that we haven’t seen in like 50 years.”

Wages have been increasing, but not as much as economists would expect for labor markets this tight, so Strauss said additional pressure could help push wages up further.

The slower-than-expected pace of pay increases has factored into the nation’s rate of inflation coming in below the Fed’s 2% target, which Strauss theorizes was part of the reason it cut interest rates in July.

On track to reach 17 million vehicles sold this year, “auto sales continue to be relatively flat, edging down slightly, although I would say that for the first eight months of this year, auto sales are actually coming in probably less down than what the industry was thinking in December of last year,” he said.

Auto sales are important to the U.S. economy and particularly to the economy of the Midwest, where a disproportionate amount of vehicle production takes place.

The Federal Reserve Bank of Chicago serves the Fed’s Seventh District, which includes parts of Indiana, Michigan, Illinois, Wisconsin and Iowa that have a very heavy industrial and agrarian presence, Strauss said.

“Both of those sectors have struggled of late. As you are aware, the tariffs have put a burden on farmers as well as a burden on manufacturers,” he said.

“Indiana has the highest percentage in the country of manufacturing workers, so the burden … is probably being felt in Indiana more than other parts of the country.”

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