37th Annual Economic Outlook Symposium

SPEAKER 1: I'm going to introduce our next presenter now. So please have a seat. We're running a little bit late, which hopefully won't mean that it's too late for you to get lunch. But I'm so glad we're having a great conversation. And I hope we can have some more good conversation over lunch. So what we're doing next is kind of a different thing than we've done before at these meetings. We're bringing in some experts from our Research Department at the Chicago Fed.

I've got three great speakers lined up who are going to talk to us in depth about some topics that are really important and that are also a way to showcase our great expertise that we have here at the bank. So first, I'm going to have Jonas Fisher talk about inflation in depth and how the macro team here thinks about inflation.

And then we're going to turn to Kristin Butcher, who's going to talk to us about, who's in our micro group, going to talk to us about some work she's been doing on immigration. And then we're going to close off with another Kristin from our regional group, who is going to talk to us about the auto industry. And so since we're-- I'm going to stop there and turn it over to Jonas. And thank you all for your attention.

JONAS FISHER: Thanks, Tom. Well, it's really a pleasure to be here to discuss the inflation outlook.

Much of what I'll say will reinforce what Austin was talking about, although I think we disagree on at least one thing. So before I get myself into more trouble, just let me start with the usual disclaimer, especially since I'm talking about inflation. So obviously, these are my own views and not those of anyone else in the Fed system, including the Chicago Fed.

So I'm going to start off with some historical context. Here we see, so what I have here, I've plotted core PCE inflation since 1968 until today along with a measure of 10 year average inflation expectations. So what do we see in this picture? The blue is the core CPE data. What we see is, of course, the explosion of inflation in the '70s followed by the initial very painful decline toward 2% over the '80s and '90s. And this of course, was followed by a period of 20 years of to or below inflation. And then we had, of course, the post-pandemic blow out.

So when inflation surged in '21 and '22, many rang the alarm bells invoking the '70s experience. And indeed, that wasn't a crazy thing to do. The recent surge in inflation in the '70s are indeed quite similar in many respects. Bad supply shocks were important back in the '70s as they were today. And they both share backdrops of expansionary fiscal and monetary policy. Monetary policy in particular was highly expansionary in the '70s despite rampant inflation. Inflation adjusted interest rates rarely if ever rose above zero.

So of course, there are many differences as well. But the biggest difference from an inflation perspective are the perceptions about the commitment and ability of the Fed to contain inflation. So the pattern of long-term inflation expectations here in red makes this abundantly clear. So during the '70s, long-term inflation expectations, the red there, just kept rising. And essentially, the public didn't either trust the Fed to bring inflation down or think they were able to do it.

Today, even though the surge in inflation was sort of in the same ballpark, inflation expectations, long-term inflation expectations hardly budged. In fact, the only reason they go up at all at the end there is because the very short horizon expectations went up. If you look at five to 10 year expectations, they've been flat as a pancake. So if people believe inflation is going to return to 2%, they're going to make decisions that are consistent with 2%. And this is why having inflation expectations anchored is central to the outlook for inflation.

So now, let's focus on the current episode. So here, I've got core and total PCE. And liftoff means when the Fed started raising rates. And this goes all the way to October, which was released yesterday. So since the Fed started raising rates, we've seen both total and core trend down. And the trend in core was initially quite gradual. But now, as we've had some good numbers, and I should emphasize this is 12 month percent changes. We've had some good numbers, and the trend down in core has steepened.

But we're still, at least on a 12 month basis, quite a distance from our target here. It's 150 basis points above target. So there's some way to go there. We find it helpful or I find it helpful, many of us find it helpful to divvy up core inflation into 3 components to gauge our progress toward 2, so inflation for goods in blue, housing services in orange, and for all other services, core services, x housing.

We like to divvy inflation up in this way because the factors driving inflation or that we think are driving inflation are hitting these components differently. So core inflation, core goods inflation, particularly for durable goods, like cars, furniture, and appliances has fallen sharply since we started raising rates. Housing services inflation has recently turned the corner. But core services, excluding housing have only recently shown signs of persistent moderation. They were, for quite some time, essentially going sideways.

Note, and this is what Austin emphasized. We don't need all these components to go back to to achieve the 2% objective for the Fed. As you see before the pandemic, these were individually hovering around different levels. So progress would be getting those back to where they were pre-pandemic. I'm now going to describe the components, sorry, the factors driving these components starting with core goods.

So here, I have again, the picture of core goods that was on the previous slide, plus I have the one month percent change is annualized. So as we know, supply challenges and hot demand drove goods inflation up as we recovered from the pandemic. The decline in goods inflation since liftoff has been due to the unwinding of supply and demand imbalances. So obviously, high interest rates have constrained demand, and supply chains have improved. But we think supply chains are the primary reason why core goods have fallen.

And you see here in the inset to the right, we've started seeing negative monthly numbers that are in line with the numbers we've seen before the pandemic. And why do we think, as I said, why do we think core goods have been falling? Is the supply chain healing? So what I have here is this supply chain index that the New York Fed constructs. And the 0 line there, the line above 0 is supply chain is disrupted and less so when below zero.

So what you see here is the supply chains getting a lot worse over in the post-pandemic period. But since 2022, things have been getting a lot better. But it doesn't look like there's much more to come from this. So we think we've run the course on the supply chain stuff.

So now, let's turn to housing. So housing services, remember, for both rental units and owner occupied housing, and they're derived from market rents. House prices can influence market rents, but they do not enter directly into housing services inflation. So you see here the big run up in housing services inflation. And we think that's essentially due to work from home and the new and a very strong household formation.

So strong demand meeting limited supply where limited supply was both due to supply chain issues making it difficult to build, and then it just takes time to build multi-family units. So limited supply and strong demand caused rents to rise coming out of the pandemic. Now, multifamily construction was really strong in '21 and '22. And over the last year multi record numbers of units have come online. And that's relieved pressure on rents and you can see this on this picture.

This has the PC housing and orange again and then the Zillow rent index. This rent index is an index for rents on new leases. Now, there's some issues with this that some people have brought up. But generally, it does reflect the pattern of rents on new leases. Now, the core services inflation is for average overall units. And the Zillow rent is just for new units. So it takes time for the new leases, the new rents to show up in housing in the actual official inflation numbers.

But what you've seen is, and this was the discussion I just finished, is we saw this great increase in rents and that's shown here with the new leases, but that turned the corner as new multi-families came on the market and some other factors as well. And as I said, it takes time for the new leases to get into the overall price index. And we have indeed seen the housing inflation turn the corner due to that. And as you see that the Zillow rent index has come down a lot, so we think there's more to come. There's more to come from this.

Now, let's look at where I think is more challenging. This is the services ex housing. So supply chain problems are less important for services. So their resolution has not played much of a role here. However, services are generally more labor intensive than goods production and so are more directly impacted by a tight labor market. So as tighter financial conditions have cooled the labor market, both the cost for producing and the demand for services should moderate and has been moderating, and that should help bring this measure of inflation down.

But it's only recently that we've actually seen a very persistent moderation. It was going sideways for some time. But the new numbers, despite a couple of in the inset there, you see a couple of nasty numbers in the last few months, but the general trend is down. And that shows up in the year-over-year rate. So there's progress here.

But I do want to emphasize, and this might be where I differ from Austin a bit is we're a long way on this measure from the pre-pandemic rate, which was around 2. And core services ex housing is 50% of PC. So this is a big deal, and there's a long way to go. And so we're watching this really closely.

Now, the supply chain and other pandemic related distortions, we think are mostly resolved. So going forward, I think monetary policy has to do the heavy lifting. So what are we looking for monetary policy to do? We're looking for further softening in the labor market and below trend growth. That should bring down aggregate demand and put less pressure on prices.

And then there's this other factor that I brought up at the outset, which is stable long-term inflation expectations. That's essential, is a precondition for getting inflation down. So in terms of monetary policy, of course, you all know about the rapid rise of the Fed funds rate, 525 basis points since the beginning of 2022. So that's here. And then I also have here the market implied path derived from financial markets overnight interest rate swaps.

The markets think that the high rates are going to stay high for some time and stay above what the FOMC participants or the median FOMC participants think the long run should be. So the sharp rise in the Fed funds rate has tightened financial conditions substantially. So on the left here, I have inflation adjusted interest rates. So 5 and 10 year rates here on the left are lying around 2%. So these are safe assets.

There's a general understanding what the neutral rate for these inflation adjusted interest rates is hard. But the consensus is it's around 50 basis points. So from this perspective, interest rates are really quite restrictive. And of course, you know nominal rates, the rates you want to get a mortgage, it's a nightmare. They're really high, but they're also high, of course, for businesses here I have the BBB new issues. And they're much higher than they've been for a long time. So that's constraining demand, which is exactly what monetary policy is intended to do.

At the same time, we've seen the labor market come into balance. And this is shown in this picture here. So I think Austin mentioned this. On the left, we have job openings per unemployed worker. This is still higher than pre-pandemic, but it's been trending down. And of course, so this is the demand for workers. And the big issue with the tight labor market has been this imbalance between supply and demand. So demand is getting more in line.

And then there's a labor force participation that a number of people have spoken about today. Here, I've put the male and female. Prime age labor force participation rates, men are back to where they were pre-pandemic even though the long run trend is down. But again, this is prime age. So demographic issues are less of an issue. Now, labor force participation is a record at the highest level it's ever been. And both have recovered from lows during the pandemic.

So both supply and demand in the labor market have moved the labor market into better balance, which again, is what we're hoping for it to constrain to put less pressure on prices. So indeed, we are seeing signs of cooling. So here on the left, I have total hours worked. And there was a sharp growth coming out of the pandemic, but it's growing much less now. So that's an indication of cooling.

And then there's on the right, I have average weekly hours. And so what happened when firms couldn't find workers? The existing workers had to work longer hours. And so now, this measure is back to pre-pandemic levels. So that also suggests cooling. But at the same time, growth has come in really strong. And we had this really big number that is actually not as big as it was just revised to in this picture, but it's 5% is a massive number.

But it has slowed down overall. And now casts of this quarter are below trend growth. How do we think about things going forward? And as I said, we're looking for below trend growth to bring inflation down the last mile to 2%. Consumers have been really important with this. And Diane talked a bit about this. I don't think she mentioned the excess savings.

So during the pandemic, there was not as much to spend money on. So and at the same time, the government was shoveling money into people's pockets. So savings were much higher than they were previously. And so this is a measure of the stock of so-called excess savings that the San Francisco Fed has put together. So this rose a lot to $2 trillion in early 2021. But it's come down quite almost essentially to 0, meaning we're at the stock of savings that we would have expected pre-pandemic.

So to the extent that this is boosted consumption and has been a force for growth in the economy, this seems to have run its course. So that's one reason to expect slowing going forward. And then, of course, the high interest rates have had a big impact on the interest rate sensitive sectors. And here on the left, I have industrial production with the growth has fallen a lot and is now negative and other measures of activity in the manufacturing sector like the PMIs are pointing to weaker activity there.

And then of course, there's residential investment that is always hit hard by sharp rises in interest rates. And that's been shrinking. And growth fell a huge amount as we raise rates. So these are indications of moderating activity that we think will help bring in growth below trend, which again, as I said, is important for getting inflation down.

So having said all of this, the labor market is still really strong. So and that's great. I mean, people are getting jobs. And this is a source of strength, is a source of demand, but it does lead many people to think that we can actually achieve a soft landing. I mean, here, we have, I show here the trend job growth, which we estimate here at the Chicago Fed to be around 85,000 a month. We're still above that. Further slowing should bring that below trend.

But generally, the labor market is strong, and that's a positive, if we can keep that strong as the overall economy doesn't grow as fast, that's beneficial for everyone out there and does in fact lead many forecasters in this room as well I'm sure, well, Tom's showed us showed us that has many people thinking about a soft landing. So this year to date, we've had really strong growth, above trend growth, the unemployment rate is only moved up a little bit. Inflation has come down from where it was in '22 and '21 as I've already shown.

And the blue chip median forecast for next year is for significant slowing, but it's not for recession like numbers, particularly when you look at the unemployment rate. That's only forecasted by the median blue chip forecaster to go up 40 basis points. And then again, we have the inflation expected to come down further and within touching distance of our target. And that's exactly what a soft landing is. We avoid a recession, and we get inflation back to target. So that's encouraging that people think that way.

And yeah, I won't speak for what Austin thinks, well I guess he did already say that he was looking for us to follow the golden path. But I want to finish off where I started, which is really just absolutely essential for achieving our objectives. It's the stable long-term inflation expectations. Now, in here I have just a couple of the kinds of measures we looked at. So we have the Michigan survey of consumers, inflation expectations that come from that here in the top plot.

I have the one year ahead, which is usually highly influenced by food and energy prices, particularly energy prices. But if you look at the 5 to 10 year ahead measure, that's hovering around a level that's consistent with our target. I should mention the actual levels of inflation on this picture are not directly comparable to PCE. In the Michigan survey, they just ask about inflation. They don't actually ask about a particular measure.

In the bottom, I have these inflation expectations derived from these inflation protected securities, treasuries. So these two indicate stable expectations and certainly not a dramatic increase. And again, both the 5 year ad and the 5 to 10 year ahead in this picture are looking really good. And why do I say that anchored inflation expectations are so important?

So households and firms make decisions that are based on their expectations for inflation. Financial market participants make their decisions based on their expectations for inflation. The financial market participants, particularly important because that's where your interest rates are going to come from. So if households and firms and financial market participants expect inflation to return to target, they're going to make decisions that are consistent with that.

So in this sense, anchored inflation expectations act like an attractor for inflation. And this ultimately is what's going to help the Fed achieve its inflation objective and why we look so closely at long-term inflation expectations. So let me conclude here. So inflation remains elevated, but progress has been clear. But there is some way to go, I mean, not quite as sanguine as Austin I think on this.

Monetary policy remains restrictive. And that's going to be beneficial. It's going to have to do the heavy lifting going forward. And it should be restrictive. At least the markets think it's going to be restrictive for some time. And we're seeing the cooling labor market we've been looking for and reasons that I spoke about and others that are out there to expect to slow down.

And again, we need a cooler labor market and growth below trend, we believe, to bring to get to our inflation goal. So everything seems in place for a soft landing. But hey, shocks happen.

[LAUGHTER]

So.

SPEAKER 1: All right, that's it.

[APPLAUSE]

All right Jonas, we've got time for one question. And it's going to be a based on one that came in on Pigeon Hole, of course. And that is in your view, do you feel like jobs growth has to go below trend to reach the inflation target? How slow does the labor market have to get for inflation to go where we want it to?

JONAS FISHER: So that's a really tough question to answer. it's a great question. We have estimates of we need a softer labor market. I mean, there's no doubt about that. Estimates of what trend growth should be are uncertain and especially with these high rates of labor force participation that could affect what the underlying trend growth in inflation is. So even if we do get inflation, get job growth falling below trend, it doesn't have to necessarily go below 0.

There's plenty of distance between 0 and 85,000. But we shouldn't be alarmed when people expect 100,000 or 150,000, 200,000 jobs created every month. That is stronger than we think the economy can generally sustain over long periods of time. So we do expect to see to finish off to see employment growth fall, but I don't think it's necessarily the case that we have to see declining levels of employment.

SPEAKER 1: All right, great. Well, let's thank Jonas again, and we'll have Kristin.

JONAS FISHER: Thank you.

[APPLAUSE]

I'll let you figure that out, though. [LAUGHS] Actually, I'll give you a help. Yeah, the clicker works. you're going to get some help

KRISTIN BUTCHER: I have a lapel mic, so we have to wait for that transition to happen. OK, Thank you very much. I'm Kristin butcher I'm Vice President and Director of Microeconomic Research here at the Chicago Fed. And I'm going to talk to you a little bit about some work we've been doing on immigration and the pandemic recovery. So if you haven't heard enough about this by the end of my talk, you can find this ChicagoFedLetter on our website and its work with some colleagues of mine here.

So let me take you back to the pandemic and to 2022. So this is trend immigration over time from the current population survey. And this purple line is the trend from 2010, OK? And we saw this big dip, this decline. And it's a decline and it's also a break in the trend during the pandemic. And so when we were talking to people in early 2021, a lot of the discussion about the supply chain repair that needed to happen was about we need to have immigration come back, OK?

And then very quickly, people said problem solved. They're all here. Great. That's a lot of people to come short period of time. And you can see that slope there is about twice as much. So it's saying we got twice as many people coming in the post pandemic era. So we were trying to think about this in the context of places where we're seeing a lot of labor market tightness and, stay with me, survey design and non-response bias, OK?

You thought I was going to talk about something exciting like immigration. I'm going to talk about survey weights. So there's this really interesting paper out of the census that has a wonderful title, which is Coronavirus Infects Surveys, Too. And what they found was a really odd pattern of non-response or a really different pattern of non-response. So going back to this picture, obviously, the Bureau of Labor Statistics does not go out and talk to 50 million people and find out if they're foreign born or not.

It contacts 60,000 households every month. And some of those households answer, and some don't. And then based on what they know about the population and what it should look like, they adjust survey weights to come up with a nationally representative sample. But if you're in a period of real change, which the pandemic was, then those can be off. , And this paper finds, for example, that the non-response patterns changed by education, Hispanic origin, citizenship, and nativity.

And in this paper, they find that using the regular survey weights, you get about 2% to 3% higher income growth from 2019 to 20-- sorry, post 2019 than you do if you use their preferred survey weights that adjust for this non-response bias. So we thought, well, could this affect the total size of the immigrant population that the CPS is counting? And so we thought about, well, what happened to non-response by foreign born status, and then what happened to the weights?

And here's what we find. So this looks a little bit complicated, but we've got months across the horizontal axis. And then we've got the number of respondents but scaled by what we found right before the pandemic. So that's scaled is one. And what you can see, and this is well known, is that responses have been declining to the current population survey. This is a problem with a lot of the surveys that we rely on is that people are responding less than they did in the past.

But boy, did people not respond during the pandemic. And in particular, they did not respond a lot if they were foreign born, OK? But then after the pandemic, we see a little rebound in this. But the pattern sort of changes by foreign born status and sort of flattens for the foreign born, OK? But it continues. It's sad and depressing slide for the native born there. And so correspondingly, when we knew that we tragically lost people in the pandemic, but we didn't lose that many.

And so the weights had to respond and go up to compensate for that loss in sample. And what you see here in contrast is that the weights for the foreign born and the Native born really mirror each other, OK? And so we said, well, can we explain this with the information that the BLS says that it uses to construct these weights? And the answer is not very well for the foreign born. And, it looks like something really changed over here, OK?

And the upshot of this is for every foreign born person who they find, they're weighting them a lot more than they are weighting the native born, OK? That could be the right thing to do, but it's confusing because they don't take foreign born status into account when they're constructing these weights. And so we don't have exact insight into why this happens, OK? So we thought, well, let's do this exercise. What if the weights for the foreign born responded to this non-response similarly to the weights for the native born, OK?

And what would we estimate the size of the foreign born population to be under that circumstance? Please don't think, OK, the Chicago Fed says this is the number because this is sort of a bounding exercise. And I should have said at the beginning, of course, these views only are my own and do not reflect those of the Fed or the Chicago Fed. But so this is just a bounding exercise to say how consequential would this be?

And the answer is pretty darn consequential. If the weights had responded similarly to the non-response changes for the foreign born, we would have gotten about 1.3 million more foreign born. We would have counted that as opposed to the 4 and 1/2 million more that we see using the regular current population survey weights. So and then we did some other things to try to say, well, does that seem plausible?

So this counts up data from the Department of Homeland Security about visas and things like that. This is even more of a bounding exercise because we have to make assumptions about for every border encounter, for example, how many of those people were actually successful and stayed in the US, how many, et cetera. But under some reasonable assumptions, we've been doing that. So these official counts, we find about 2.1 million people as opposed to the 4.2 in the CPS, OK?

And then finally, we do have other data sets besides the current population survey. This is the American Community Survey. It's a much bigger sample. It only comes out once a year. But they go talk to about a million or so people, right? And what we see, this is the ACS who are not in institutions. And we count up the number of immigrants who say they came in a particular year and that and compare it to what we have in the current population survey.

If those were giving us exactly the same number, everybody would be on the 45 degree line. Obviously, most years are not. So it's not uncommon for these things to get different counts. But you can see in the post-pandemic years this distance from that line is very high, OK? So this particularly changed in this period. So why might you think this matters? Well, I'm going to tell you about some current issues and some future issues.

So for current issues, immigrants have very high labor force participation rates. And some sectors have very high shares of immigrant workers. And these sectors have been particularly tight in recent years. And so while Jonas showed you numbers about labor force participation being up, which I think is true, if this is right, we may be missing some people who have particularly high labor force participation rates. And that's going to affect certain sectors, quite potentially could affect certain sectors.

So this is just the labor force participation rates. This dashed one there is for the foreign born. I'm giving it to you for the 16 plus population and the working age population. And the thing you should take away is that the foreign born always have higher labor force participation rates than the native born. Some industries have particularly high shares of immigrants. So this horizontal dashed line is the overall percent of the labor force that's foreign born. And then these bars are for these different sectors.

So if it's above that, then it has a disproportionate share of the foreign born labor, construction, food, and the arts, so restaurants, a lot of leisure, hospitality, these are places that we might be particularly likely to see a lot of labor market tightness if we're missing immigrants, assuming immigrants do the same thing now as they did before. Health care is pretty high. It's not disproportionate here. But that's masking some things that a bunch of jobs like home health aides and health care aides in particular are really high, and I'm going to talk about that in just a second.

This is a picture of labor market tightness measured as vacancy yields on the vertical axis. And this is foreign-born share pre-pandemic. So this is a measure of current tightness. The lower it is, the tighter the labor market in that sector. And this is pre-pandemic foreign-born share, so the fact that this is downward sloping tells us that places that have historically relied on immigrant labor are places that have a lot of labor market tightness in the current period. OK, so those were the current issues that I think might why you might care about this.

For future issues, the baby boom is approaching 80. I could talk about this all day. This is a projection about what the population in the US is going to look like in 2050. And this horizontal line is the expected fraction over the age of 80 in 2050, OK? And nationally, that's going to be 8.4%. Along here is what it is in different counties now. And you can see that only some of the oldest counties in Florida look like what the US average is going to look like in a few years, OK?

2050 might seem a long way off, but the oldest boomers are just turning 78 this year. And the youngest are just turning 60. This is a graph that shows you age and fraction with some kind of disability. The gray bars are summing up all of these different kinds that one could have. And what we can see is that while disability prevalence increases with age kind of takes a sharp turn here, right? So we really haven't seen the health implications, the societal health implications of the aging of the baby boom. And we will see it in a few years.

And going back to drilling down into the different sectors, again, these horizontal lines are what is the overall fraction immigrant in these different years. And this is the share immigrant in these different industries or occupations. And you can see that immigrants are pretty heavily involved in things like being practical nurses, et cetera, but super high shares in health aid in home health aid.

And particularly, this isn't health care, but these are things that might be complementary to aging in place as opposed to going to a nursing home. And so these groups are going to be pretty-- this is going to be pretty important going forward. This is health diagnostics, where there are also a lot of foreign-born doctors that's imaging and things like that.

OK, the effects of the aging of the baby boom, 87% of the elderly reported that they'd rather age in place than go to an institution. That was measured pre-pandemic. One can only imagine that would have gone up because institutions were quite dangerous places to be during the COVID-19 pandemic. And as I said, difficulties with things like self-care really go up quite quickly between as people age and particularly that crossing the 80 mark.

The caregiving burden is going to increase. And there's research by Frimmel et al that shows that a parental health shock, heart attack, or stroke is what they looked at had quite profound impacts on the labor supply of their adult children. And that's going to be particularly for daughters and particularly for those who live close to their parents, OK? This paper finds that, this was based in Europe, and they found that when there was an expansion in guest worker programs for caregivers for the elderly that ameliorated the impact of those shocks on the labor force participation of adult children.

The other thing to keep in mind is that if some of that this is going to eat up a lot of health care spending in the United States. In 2019, about 8% of total US health care was on nursing home facilities, which eventually typically get paid for out of Medicaid. People spend down their assets and then qualify for Medicaid, and that pays for their nursing home. So it's everybody who's going to share in that eventually.

And then so just summing up why I think this matters, well, if we are missing some immigrants, then we are missing people who have very high labor force participation. That's going to impact certain sectors. And maybe there's more supply side repair to come if those workers eventually come. And then finally, if we're missing some workers, and that continues, then this is one industry that's going to be particularly affected, which is the elder care industry.

And that's going to have effects on the labor force participation of adult children and on health care costs and costs of associated with nursing homes. Thank you very much

[APPLAUSE]

SPEAKER 1: All right Kristin, we got time for one question, which is going to be my question, so.

[LAUGHTER]

Well, I have two. But I'm going to limit to one. So I'm curious whether you, so this is an issue where there's a supply side issue in terms of labor. I'm curious whether you can think of where you could increase the supply of labor. That would help keep costs down and help deal with this, all the new people who are going to need care. Is there any scope for supply side improvements on the capital side, where we have-- I understand these are labor intensive jobs.

But I'm wondering are there ways you can imagine where we can do better on the non-labor side in terms of providing care for elderly people?

KRISTIN BUTCHER: Well, robotics is not my area of expertise. But there are people who are working on elder care robots and things like that. I would point out that the skills needed to care for the elderly are not missing in the world. They're just missing here. And so whether we want to invest a lot of work and effort and ingenuity in solving hard problems, like how do you make sure a robot can gently lift your 90-year-old mother as opposed to solving it through a labor supply is an interesting question, I tnink, OK.

SPEAKER 1: All right, great, thanks.

KRISTIN BUTCHER: All right, thanks.

SPEAKER 1: All right, thanks, again, Kristin.

[APPLAUSE]

I'm going to invite the next Kristin up to talk about the auto industry. And then we'll have lunch and more conversation, so.

KRISTIN DZICZEK: I definitely avoided saying [INAUDIBLE]

SPEAKER 1: G check.

KRISTIN DZICZEK: Woo!

SPEAKER 1: All right. I've been--

KRISTIN DZICZEK: I've got to load my slides here. I'm going to get my timer going because I stand between you and the lunch. [INAUDIBLE]

SPEAKER 1: Yes, with permission of the presenters, yes, we'll make our slides available on the website.

KRISTIN DZICZEK: It shows in my slides. Great. Thank you. And I'll do the standard disclaimer I'm

[INAUDIBLE] on policy advisor. I'm in the Detroit branch of the Chicago Fed [INAUDIBLE] I'm going to quickly cover production sales, prices, and inventory in the light vehicle market, dive into electric vehicles for a little bit and the economic impact of the UAW strikes.

2023 started with a forecast of a pullback, how high could prices climb with consumers continuing to buy. Were the supply chain disruptions most notably chips, most like were they behind us, or were we still going to be mired in plants shutting down randomly all over the place? The Inflation Reduction Act went into effect in January. Would that really spur those investments and the full forces of the consumer coming to electric vehicles and the producers putting in place the plants to make those vehicles?

And as most people expected, the UAW might wage a strike. Would it be lengthy and damaging in the fall? There was a lot to be worried about in January. Auto is important to the nation, but it's particularly important to the seventh district. The US auto is about 2.8% of employment in GDP. But it's about 9% and 11% in the seventh district, and in my state in Michigan, employment about 8% and GDP about 26%, so really particularly impactful. So things that are good are particularly good in our district and things that go bad in the auto industry are particularly bad here.

In the production, sales prices, and inventory, quick turn, US light vehicle production in 2023 has been fairly strong, above 2022 for much of the period. This is month by month overlay, certainly beating 2021, where we were mired in those chip shortages. October fell off a bit for the strikes. But the recovery has been going OK. We know the data is a little bit lagged. On sales, sales have been remarkably strong.

And the November numbers are not quite in yet, but the early read was pretty good month in November, particularly for retail, retail SARs reading in about 15.3 to 15.5. It was about 14.4 last year, so that's year-over-year pretty good. So that's where we are in looking at the last few years of sales in the post-pandemic world.

The real change, the percent change in real new light vehicle prices, if we take 2017 as sort of the benchmark, they kind of had this seasonal pattern up and down up and down. And then the chip crisis happened. And zoom, light vehicle prices go up, and inventory changes, too, so with the pandemic. So we started to see that drawdown in inventory and the prices are staying very high, but in real terms, fairly flat. Inventory is still about 40% lower than it was pre-COVID.

Average monthly payments are still very high. Cox Automotive says it's about $767 in October. The interest rates are at an all time high at about 10.55%. The environment on car sales, especially for EVs is pretty tricky right now. And I a lot of folks are talking about EVs being starting to slow down. And EVs were also a really big concern with the UAW talks. But we'll dig into EVs a little bit.

The market share for plug-in vehicles, that's everything that's battery, electric, plug-in hybrid, and fuel cell rose to about 9% in 2023 so far this year and 5.3% in 2022. So that's 36% year-over-year growth for this category. The hybrid market share is 7.4%. But Ford, back in quarter two of financial results, Tesla, Honda, GM have all announced slower growth in their BEV plans in their financial results. And it might be that they have started to get some reality to their plans.

And the administration has set out this target of 50% of the market by 2050. And I've always said you can't get 50% of Americans to agree on anything, let alone that they're all going to start driving EVs. It is actually probably good that reality is setting in because this will give us time to build out the supply chain that's necessary here. EVs do not require fewer jobs. But the decision of where those jobs are could mean more jobs in the US or fewer jobs in the US.

So some of the policies that are in place are aimed at influencing those decisions. But EVs are the fastest growing segment in the market. Internal combustion engine, or ICE sales growth turned negative in October. BEVs and other electrified are still growing. BEV is growing at a 29% pace and other electrified growing at a 49% year-over-year pace. So they are still the fastest growing segments of the market. And here, we can see them zooming very, very high year-over-year growth.

Now, the UAW was pretty concerned about that net net job loss. They do have a lot of jobs. They're making engines and transmissions and internal combustion engine vehicles. Their wages had not really kept up with inflation and especially in the most recent years. And they had nine years where the top tier workers had no raises at all. The entry level workers were making $16.67 and would spend eight or more years to get to the top pay. And in this tight labor market, it just wasn't cutting it anymore.

So let's look at what they got. They went into these contracts looking for higher wages, 40% higher wages. They got 27% compounded. And a lot of that is make up for what they had in 2007. If you take their 2007 wage of $28 an hour and just take that at the CPI, it would be about $40 an hour, which is where they ended up at the end of this contract. But that would be $40 an hour in 2023. They're going to be 40 in 2028.

They asked to get rid of what was called tiers. Now in 2007, they agreed to, because I mean, things were bad in 2007. There were two companies on the brink of bankruptcy. They agreed to hire new workers at half the wage of the existing workers with a different set of benefits. They wanted to get rid of all of that, no tiers in benefits, no tiers in wages. What they got was going back to a three year grow in, where new workers start at 70% of the top wage and a range of responses on the benefits side of things.

They wanted cost of living adjustments back. They lost those in 2009. They got those back. And they got their first payouts this week. They didn't ask for a signing bonus, actually. But $5,000 signing bonuses in all the contracts. They wanted pensions for everyone. What they got was additional contributions to the 401(k) up to 10% contribution for workers who were hired after 2007 and increase in the pension multiplier and an increase to the 401(k) fund to fund retiree health care. So everyone in all of those categories got something for post-employment benefits.

And then that battery worker thing, they want all battery workers under their master agreement and that master agreement wages and benefits. They did get different at all three companies, depending on whether the plant is wholly owned or joint venture. But to some degree, they are all battery workers under the master agreement. It's difficult though, for joint ventures that are not yet built, workers not yet hired. You can't say those workers not yet hired are going to be union members. But the companies can pledge to neutrality, which they did.

And they can also say we will provide the employees for those plants, so they're leasing the employees to those places. So that's one way of doing it. They also got $39 billion of announced investments. Many of those were previously announced. In the end, the top wage is over $40 an hour. The starting wage is $28. The temp workers start at $21, and the battery workers start at $30.

But what was the economic impact of this strike? GM says it cost $1.1 billion in profits, Ford said $1.7 billion. Stellantis said-- it didn't say it in profits, they said it in revenue, $3.2 billion. Production patterns after previous strikes don't really suggest that there was a lot of impact to GDP. We looked back through 1967. At what was the impact. Now, strike is usually in the fall. The contracts usually expire in September. The new ones will expire on May Day because they've changed their expiration date.

But they hit, at the end of the third quarter, the strike is 30 to 60 days. It will come back up in the middle of the fourth quarter, so there's a dip. At the end of the fourth quarter, it comes back up. And at the end of the third quarter comes back up in the fourth quarter. And when you look at quarterly data, you don't see very much at all. We saw something in 1970. 1970, that strike at GM was 67 days. There were 400,000 workers out.

GM was the largest employer in the world in 1970. This strike was 42 days, 55,000 workers and 22% of US production. The auto industry is a smaller share of the economy. The Detroit three are a smaller share of the auto industry. So this was pretty much a smaller impact than many people had thought. But going forward, and we haven't yet done this ourselves, the companies just recently announced what they think the new labor deal is going to cost them. So they've given a lot of benefits to these workers and higher wages.

GM estimates about $9.3 billion in higher costs, Ford $8.8 billion, Stellantis estimates at between $6 and $7 billion. They haven't said it themselves, but that's the analyst consensus of where the costs are going to come out. The pricing patterns and similar in past strikes, we can't see it either when we look at the quarterly data. And it shows very limited effects. But pricing has been wonky lately and not very typical.

So it's not very easy to tell whether there will be pricing impacts and we have seen prices start to level off and even come down, especially in the EV segment as Tesla, the market dominant provider has started lowering prices in EVs. EV prices have started to very quickly drop. So since our market's a little weird, this may not fit the previous mold on prices side.

What I'm concerned about is suppliers. That's my one remaining worry. Until 2020, suppliers were more profitable than automakers. Since 2020, that has flipped. And for the most recent quarter, automaker profits were about 9.2%, and supplier profits were 5.3% in EBIT. So suppliers were weaker financially. They make money on volume. Volumes have been low, so they've got this weird accounting liquidity that they get paid 30 to 60 days after they deliver the product.

So we had this disruption during the pandemic where we stopped making vehicles. They are still getting paid. And then when you need to start making vehicles, they don't have any liquidity to get the start up capital to start building again. So there was a little bit of that. They also had higher costs because they wanted to keep ordering things that they didn't want disruptions in, especially chips. They wanted to hold on to core workers in the labor force.

There were some factoring programs. The automakers provided some factoring for their receivables going forward. The federal government kind of gathered up all of the programs that they had, and said, here's the supports that are available to you. There was nothing new. But they did provide this list of here's where you can go. Their associations were lobbying very hard for them. But that might mean that in 2019, what we saw coming out of the GM strike was a sharp V. They went down and they came back up.

I'm from Flint, Michigan. And all of my friends and family were working on Christmas and New Year's and everything for that truck plant in Flint to keep producing and make as many trucks as they could to make up for that lost production. Suppliers aren't able to go hard like that right now. So is this an L? Is it an open L? Is it how big of an L is it? We don't yet know until we see some of the production data. But we're looking for it.

So that's what we still don't know, that strength of the production recovery. We don't yet how the companies are going to deal with the higher labor costs. They say they're going to offset them. Of course, offshoring and outsourcing come to mind. Automation, the flow through to other automakers that has already happened, Honda Hyundia, Nissan, Subaru, Toyota, Volkswagen, and Volvo have all announced that they've raised their wages miraculously either right away or January 1 in the range of 9% to 10% or 11%.

And the UAW announced that they have an organizing campaign against 13 automakers. So that's going to be a battle royale coming out in 2024. And that says that I'm done. And that's good because this is my last point, so. And we don't yet those longer term consequences for the future footprint investment or future negotiations. These were very contentious negotiations.

And this is a relationship business. And I don't think there's much of a relationship left after what they went through. So how does this come out in 2028 when they go back to the table. We'll have to wait and see. Ready?

SPEAKER 1: All right, let's Thank Kristin. All right, Kristin, I'm going to ask you one question before lunch here. I'm curious. It sounds like the supply chain, I want to go back to the chips stuff. It sounds like the supply chain stuff is over. Is that right? And then if it is over, have there been any lasting impacts on how the automakers do business related to that?

KRISTIN DZICZEK: I would not say it's over. What I would say is we got used to it. The order lead time for chips used to be 4 to 6 weeks. It's now like 4 to 6 months. These things had to be planned out much-- you had to have better planning. You had to have multiple sourcing. That's going to be very difficult as we go into this switch from internal combustion engines to electric vehicles.

Because there won't be as many suppliers on the internal combustion engine side because everybody wants to get out and get onto what they think is the growing side of the EV side. Investors want you to be on the green EV side. So there's going to be some difficulties in that. Even if we're still seeing random-- the companies don't say why they're shutting down. But they're taking off half a shift here or there because of rail logistic problems.

The rail cars aren't in the right places. There's some delays at the Mexican border. There's just wonkiness in the system all overall, but I think adjusted to the new normal is what I would say, not like what it was.

SPEAKER 1: Great, OK, so I see we had actually a bunch of questions, just come in on Pigeonhole. But we're going to let you take those over lunch, so.

KRISTIN DZICZEK: OK, I'll take them over lunch.

SPEAKER 1: So let me just say from here, thanks, everyone for being here. And thanks to all the presenters for I think a really great program, and look forward to seeing many of you next year.

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