E i U d tEconomic UpdateCFA West Michigan Society

Paul TraubFederal Reserve Bank of ChicagoDetroit BranchApril 13 2011April 13, 2011

Overview

• Economy - GDP

• The U.S. Consumer

E P i• Energy Prices

• Employment Situation

• Housing Market

• Japan Earthquake and Tsunami

• State of Michigan Budget Proposal

April 11, 2011 1Federal Reserve Bank of Chicago

Real Gross Domestic Product grew 3.1 percent in Q4 ‘10 pushing total real output slightly above its previous peakReal GDP - Billions Chained $2005, % Change Q/Q at SAAR

ea output s g t y abo e ts p e ous pea

40 014 000$ Billions Percent

30.0

35.0

40.0

13,000

13,500

14,000Q4 ‘07

$13,364Q4 ‘10

$13,381

Q2 ‘09

15.0

20.0

25.0

11,500

12,000

12,500 Q2 ‘09$12,810

Percent Change (Peak to Trough) ‐4.1%

0.0

5.0

10.0

10,000

10,500

11,000Q4 ‘10

3.1%

‐10.0

‐5.0

9,000

9,500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

April 11, 2011 2Federal Reserve Bank of Chicago

Growth in Q4 2010 was led by PCE and Net Exports. Improvements in nonresidential fixed investment were offset by declining inventorieso es de t a ed est e t e e o set by dec g e to esContribution to % Change Q4 ‘10 GDP – Q/Q at SAAR, Billions $2005

PercentagePoints

3.0

4.0Points

2.8$92.3

3.1%$102.2

3.2$107.3

1.0

2.0

(2.6)($93 8)

(0.3)($10 8)

‐1.0

0.0($93.8) ($10.8)

‐3.0

‐2.0

GDP Personal Consumption

Investment Net Exports Government

April 11, 2011 Federal Reserve Bank of Chicago 3

Consumption

Personal Consumption Expenditures grew at 4.0% in the 4th quarter marking the strongest growth since the 4th quarter of 2006a g t e st o gest g o t s ce t e qua te o 006

20.010,000

$ Billions Percent

Q4 ‘07$9 342

Q4 ‘10$9 423 150 0

180.0

2 300

2,500

$ Billions PercentQ1 ‘06$2,265

Personal Consumption Expenditures Private Domestic Investment

0.0

5.0

10.0

15.0

8,000

8,500

9,000

9,500 $9,342 $9,423

Q4 ‘104.0%

30.0

60.0

90.0

120.0

150.0

1,500

1,700

1,900

2,100

2,300

Q4 ‘10$1,761

‐10.0

‐5.0

7,000

7,500

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

‐60.0

‐30.0

0.0

900

1,100

1,300

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Q4 ‘10(18.7%)

400 0

900.0

1,400.0

1 800

2,000

2,200

2,400

$ BillionsBillions

5 0

10.0

15.0

20.0

2 4002,5002,6002,7002,800

$ Billions Percent

Q4 ‘10$2,579

Imports and Exports Government Consumption

Imports

1 600 0

‐1,100.0

‐600.0

‐100.0

400.0

800

1,000

1,200

1,400

1,600

1,800

Q4 ‘10(398)

20 0

‐15.0

‐10.0

‐5.0

0.0

5.0

1 8001,9002,0002,1002,2002,3002,400

Q4 ‘10(1.7%)Exports

Net Exports

April 11, 2011 4Federal Reserve Bank of Chicago

‐1,600.0800

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

‐20.01,800

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Prospects for 2011 declined slightly in the March consensus as global events have added a degree of uncertainty to the forecast

Real GDP Growth, Percent Change 4Q / 4Q

3 6Consensus of the Blue Chip by Month

3.4

3.6

3.43.3

3.5

3.33.4

3.3

3 2 3 2

3.0

3.23.2 3.2

2.8

2.6Jan Consensus Feb Consensus Mar Consensus Apr Consensus

2011 2012

April 11, 2011 5Federal Reserve Bank of Chicago

Consumers have continued to see improvements in income growth, their balance sheet and job prospects

25.0

28.0

t e ba a ce s eet a d job p ospects

6.0

8.0% Chg. Y/Y Real Disposable Income Percent Consumer Credit to Real DPI Ratio

Apr ‘05 24.4

16.0

19.0

22.0

0 0

2.0

4.0 Feb ‘112.8% Jan ‘11

20.7

10.0

13.0

'59 '64 '69 '74 '79 '84 '89 '94 '99 '04 '09

‐2.0

0.0

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Initial Unemployment Claims(000)’sIndex S & P 500 Monthly Average Initial Unemployment ClaimsMonthly Average

(000) s

500.0

600.0

700.0

800.0

Mar ‘11

Mar ‘09 643

1,400.0

1,600.0

1,800.0Index S & P 500 – Monthly Average

Mar ‘111,326

100.0

200.0

300.0

400.0 393

800.0

1,000.0

1,200.0

6Federal Reserve Bank of ChicagoApril 11, 2011

0.0

'82 '86 '90 '94 '98 '02 '06 '10

600.0

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Even though the consumer’s situation continues to show improvement, U of M’s consumer sentiment index still remains lowU o s co su e se t e t de st e a s o

U of M Consumer Sentiment

Index

120

140

January ‘00112.0

80

100

40

60 Mar ‘1167.5

20

'82 '86 '90 '94 '98 '02 '06 '10

7Federal Reserve Bank of ChicagoApril 11, 2011

The Yield curve based on the 10 Year minus the 1 Year Treasury remains very supportive of borrowing and growthe a s e y suppo t e o bo o g a d g o t

% Points

Yield Curve10 Yr Minus 1 Yr Treasuries

3.0

4.0

5.0% Points

Mar ‘11315 BPS

10 Yr Minus 1 Yr Treasuries

0.0

1.0

2.0

3 0

‐2.0

‐1.0

‐4.0

‐3.0

'59 '64 '69 '74 '79 '84 '89 '94 '99 '04 '09

8Federal Reserve Bank of ChicagoMarch 14, 2011

Although consumer prices rose slightly in February, they still remain significantly lower than their long-run averages g ca t y o e t a t e o g u a e ageConsumer Price Index

% Chg. Y/Y

12.0

14.0

16.0

CPI All Items

4 0

6.0

8.0

10.0 CPI ‐ All Items Feb ’11

2.2%

‐2.0

0.0

2.0

4.0

CPI – All Items Less Food & EnergyFeb ’11

‐4.0

2.0

'80 '85 '90 '95 '00 '05 '10

Feb 111.1%

9Federal Reserve Bank of ChicagoApril 11, 2011

Spending on items less food and energy accounts for almost 80% of total consumption with housing being the largest contributortota co su pt o t ous g be g t e a gest co t buto

CPI Basket Weights

Apparel, 3.6

Other Goods & Services, 3.5

Communication, 3.3

Education, 3.1

Food and

Housing, 41.5Medical Care, 6.6

Recreation, 6.3 Food and Energy,

22.8

Food & Beverage, 14.8

Care, 6.6

Core, 77.2

Transportation, 17.3

March 14, 2011 10Federal Reserve Bank of Chicago

Over long periods of time Core inflation actually tracks very closely to CPI All Items

16.0

CPI All Items and Core Percent Change Y/Y - Annual Average% Chg. Y/Y

8.0

10.0

12.0

14.0CPI - All Items

0 0

2.0

4.0

6.0

CPI - Less Food and Energy

-2.0

0.0

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

Consumer Price Index '60's '70's '80's '90's '00's Average

Averages by Decade

Consumer Price Index 60 s 70 s 80 s 90 s 00 s AverageAll Items 2.33 7.09 5.56 3.01 2.57 4.11All Items Less Food & Energy 2.49 6.53 6.00 3.20 2.16 4.08All Items H/(L) than Core (0.16) 0.56 (0.45) (0.19) 0.41 0.03

Memo:Food and Beverage 7 21 5 10 3 16 2 90 4 59

11Federal Reserve Bank of ChicagoApril 11, 2011

Food and Beverage 7.21 5.10 3.16 2.90 4.59Energy 1.29 10.54 4.40 1.38 7.12 4.95

If the increase in the price of oil is permanent, it could have a negative effect on the path of the current economic recovery

Oil’s Effect on the Price of Gasoline

e ect o t e pat o t e cu e t eco o c eco e yPCE and WTI Oil in current dollars, 2005 - 2010

Oil’s Effect on Personal Consumption

y = 0.023x + 0.98

3 00

3.50

4.00

4.50

Per G

allo

n

Dollars

y = 2.5x + 168.3

400

500

600

nd E

nerg

y

p$ Billions

1.00

1.50

2.00

2.50

3.00

solin

e –

Dol

lars

P

100

200

300

400

PCE

–G

asol

ine

an

30 60 90 120 150Gas

Dollars Per Barrel of Oil - WTI

For every $10 increase in the price of a barrel of oil:

30 60 90 120 150

P

Dollars Per Barrel of Oil - WTI

• The cost of a gallon of regular unleaded gasoline increases by about $0.25

• On an annualized basis, consumers spend an additional $25 billion on gasoline and other energy goods

Oil imports account for roughly 65% of U S oil consumption

April 11, 2011 12Federal Reserve Bank of Chicago

• Oil imports account for roughly 65% of U.S. oil consumption

The most recent surge in oil prices is not something that we haven’t seen previouslyWTI – Dollars Per Barrel

see p e ous y

160.0

120.0

140.0

160.0Jun ‘08$133.9

Mar ‘11$

80.0

100.0$102.9

20 0

40.0

60.0

Feb ‘09$39.1

0.0

20.0

'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10

April 11, 2011 13Federal Reserve Bank of Chicago

The unemployment rate fell more in Michigan than in the rest of the nation due to gains in auto related manufacturing employment

Percent

U.S. and Michigan Unemployment Rate

16.0

20.0

8 0

12.0

Michigan Unemployment Rate

M ‘11

Feb ‘1110.4%

4.0

8.0

U.S. Unemployment Rate

Mar ‘118.8%

0.0'82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10

14Federal Reserve Bank of ChicagoApril 11, 2011

Household survey data indicated that 291,000 jobs were added in March, at this rate full employment would be reached in 2013a c , at t s ate u e p oy e t ou d be eac ed 0 3

155 0 5 0%Millions

Total Household Employment

150.0

155.0 5.0%

6.0%

7.0%

8.0%

9.0%

Unem

ployment

Nov ‘13

Apr ‘16

140 0

145.010.0%

11.0%

Rate

135.0

140.0

'00 '02 '04 '06 '08 '10 '12 '14 '16 '1800 02 04 06 08 10 12 14 16 18300K / Mo. 200K / Mo. 100K / Mo.

2011 2012 2013 2014 2015 2016 2017 2018

100 Jobs Per Month 9.1 9.2 9.2 9.1 8.9 8.8 8.6 8.4

Year End Unemployment Rate at Different Rates of Job Growth

15Federal Reserve Bank of ChicagoApril 11, 2011

100 Jobs Per Month 9.1 9.2 9.2 9.1 8.9 8.8 8.6 8.4200 Jobs Per Month 8.4 7.8 7.0 6.2 5.3 5.0 5.0 5.0300 Jobs Per Month 7.8 6.4 5.0 5.0 5.0 5.0 5.0 5.0

The actual unemployment rate will depend on how quickly the labor force returns to the job marketq y jLabor Force Participation Rate

Millions

66.0

68.0

62.0

64.0

66 0

67.0

68.0

58.0

60.0

63.0

64.0

65.0

66.0

56.0'48 '53 '58 '63 '68 '73 '78 '83 '88 '93 '98 '03 '08 '13 '18

Actual Trend Forecast

62.0'00 '02 '04 '06 '08 '10 '12 '14 '16 '18

March 14, 2011 16Federal Reserve Bank of Chicago

Actual Trend Forecast

Even though total household employment remains well below its previous peak, total output continues to increase GDP and Household Employment

p e ous pea , tota output co t ues to c ease

150 014 000$ Billions Millions

145.0

150.0

13,000

14,000

GDP (Left)

140.012,000

GDP (Left)

Employment (Right)

100.0O P E l

$(000)

130.0

135.0

10,000

11,000

85.0

90.0

95.0Output Per Employee

125.09,0002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

80.0'00 '02 '04 '06 '08 '10

March 14, 2011 17Federal Reserve Bank of Chicago

Nonresidential Structures and Residential Investment continue to hold total Gross Private Domestic Investment below pre-recession levels tota G oss ate o est c est e t be o p e ecess o e e s

120.0500

$ Billions PercentQ2 ‘08$471.2 80.01,200

$ Billions PercentQ1 ‘08$1,134

Nonresidential Structures Equipment and Software

0.0

40.0

80.0

350

400

450

Q4 ‘107.1%

0.0

20.0

40.0

60.0

800

900

1,000

1,100Q4 ‘10$1,105

Q4 ‘10

‐80.0

‐40.0

250

300

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Q4 ‘10$321.9

‐40.0

‐20.0

600

700

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Q4 107.7%

h

20 0

40.0

60.0

80.0

625

750

875

1,000

50

100

150

200

$ Billions

Q3 ‘10$121.4

Change in Inventories$ Billions Percent

Q3 ‘05$783.5

Q4 ‘103.3%

Residential Investment

80 0

‐60.0

‐40.0

‐20.0

0.0

20.0

0

125

250

375

500

625

250

‐200

‐150

‐100

‐50

0

Q2 ‘09(161.8)

Q4 ‘10$325.9

Q4 ‘10$16.2

‐80.00

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

April 11, 2011 18Federal Reserve Bank of Chicago

Q4 ‘10(398)

‐250

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

The major Institute for Supply Management indexes are positive for growth in manufacturingg o t a u actu g

40.070

Index % Chg M/M

Mar ‘11

Manufacturing: PMI

Manufacturing Indexes

60.080

Index

Mar ‘11

Manufacturing: New Orders % Chg M/M

10.0

20.0

30.0

40

50

60

Mar 1161.2

Mar ‘11 10.0

20.0

30.0

40.0

50.0

50

60

70

Mar 1163.3

‐10.0

0.0

20

30

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

‐o.3%

‐30.0

‐20.0

‐10.0

0.0

20

30

40

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Mar ‘11‐7.1%

20 0

30.0

40.0

60

70

80

Index % Chg M/M

Mar ‘1169.0

Manufacturing: Production

30.0

40.0

50.0

60.0

60

70

80

Index

Mar ‘1163.0

Manufacturing: Employment % Chg M/M

‐10.0

0.0

10.0

20.0

30

40

50

60Mar ‘11

4.1%

‐20.0

‐10.0

0.0

10.0

20.0

30.0

30

40

50

60

Feb ‘11‐2.3%

April 11, 2011 19Federal Reserve Bank of Chicago

‐20.020

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

‐30.020

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Senior Loan Officer Survey indicates that lending standards only slightly eased while loan demand remains weaks g t y eased e oa de a d e a s ea

80

100Tightening Standards – C&I LoansNet % Stronger Demand – C&I LoansNet %

40

60

Small Large & Medium

0

20

40

60Large & Medium

40

‐20

0

20Small Large & Medium

‐40

‐20

0

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Small

‐80

‐60

‐40

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

h d d d

40

60

80Tightening Standards – ConsumerNet % Stronger Demand – ConsumerNet %

20

40

60

Mortgages

‐20

0

20

Mortgages ‐60

‐40

‐20

0

Consumer Loans Consumer Loans

20Federal Reserve Bank of ChicagoApril 11, 2011

‐40

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Mortgages

‐80

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Existing home sales seem to have reached a bottom equal to 1998 levels, New home sales continue to fall

150 0

New and Existing Home Sales Index – 2001 = 100

Index

125.0

150.0

75.0

100.0

Existing HomesN H

201096.5

25.0

50.0New Homes

201030.4

0.0'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

Source: BLS, FRB

21Federal Reserve Bank of ChicagoApril 11, 2011

Home prices in the U.S. peaked in 2007 and are now at 2005 levels while prices in Michigan peaked in 2005 and are now at 1999 levels

250 0

FHFA House Price Index – 1990 = 100

2007Index

200.0

225.0

250.0 2007228.32005

215.7 USA

2010204.5

150.0

175.0

Michigan

2010170.5

75.0

100.0

125.0

50.0

75.0

'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10

Source: BLS, FRB

22Federal Reserve Bank of ChicagoApril 11, 2011

Exports as a percent of Gross Domestic Product have reached their highest level on recordExports as a Percent of Real GDP - Billions Chained $2005

g est e e o eco d

14Percent

13

14

Q4 ‘1012.8%

11

12

Q4 ‘09

9

10

Q4 ‘01

11.3%

8

9

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Q4 ‘019.3%

April 11, 2011 23Federal Reserve Bank of Chicago

Note: Data verified back to 1929.

U.S. exports have benefited from a rebounding global economy OECD 30 - Real GDP Percent Change Q/Q

y

2 0Percent

1.0

1.5

2.0

Q3 ‘100.6%

‐0.5

0.0

0.5

‐2.0

‐1.5

‐1.0

‐3.0

‐2.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Q1 ‘09(2.3%)

April 11, 2011 24Federal Reserve Bank of Chicago

Even China which has averaged over 9.6% in the last decade saw a resurgence of growth in 2010China - Real GDP Percent Change Yr / Yr

esu ge ce o g o t 0 0

40 012 0

30.0

40.0

10.0

12.0

wth

Rat

e

ate

10.3

11.4

10.0

20.0

6.0

8.0

n A

nnua

l Gro

w

ual G

row

th R

a

18.4

‐10.0

0.0

2.0

4.0

cent

Cha

nge

i

GD

P –

Ann

‐20.0

10.0

0.0

2.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Perc

(15.8)

April 11, 2011 25Federal Reserve Bank of Chicago

The impact of the Japanese earthquake and tsunami will most likely be felt throughout the worldy gJapan’s Trade Profile

Share in world total exports 4.64 Share in world total imports 4.34

Breakdown in economy's total exports Breakdown in economy's total imports By main commodity group (ITS) By main commodity group (ITS)

Agricultural products 1.4 Agricultural products 12.3Fuels and mining products 4.4 Fuels and mining products 34.0Manufactures 87.5 Manufactures 51.8

By main destination By main originy y g1. China 18.9 1. China 22.22. United States 16.4 2. United States 11.03. European Union (27) 12.5 3. European Union (27) 10.74. Korea, Republic of 8.1 4. Australia 6.35 Taipei Chinese 6 3 5 Kingdom of Saudi Arabia 5 35. Taipei, Chinese 6.3 5. Kingdom of Saudi Arabia 5.3

April 11, 2011 26Federal Reserve Bank of Chicago

Source: WTO

Japan is the fourth ranked trading partner with the U.S. in both imports and exportsU. S. Top Ten Trading Partners – Manufactured Goods

p p

Exports ImportsCountry $Billions Percent Country $Billions Percent

Canada 248.8 19.5 China 364.9 19.1Mexico 163.3 12.8 Canada 276.5 14.5China 91 9 7 2 Mexico 229 7 12 0

Exports Imports

China 91.9 7.2 Mexico 229.7 12.0Japan 60.5 4.7 Japan 120.3 6.3United Kingdom 48.5 3.8 Germany 82.7 4.3Germany 48.2 3.8 United Kingdom 49.8 2.6Korea South 38 8 3 0 Korea South 48 9 2 6Korea, South 38.8 3.0 Korea, South 48.9 2.6Brazil 35.4 2.8 France 38.6 2.0Netherlands 35.0 2.7 Taiwan 35.9 1.9Singapore 29.1 2.3 Ireland 33.9 1.8Total - Top 10 799 5 62 6 Total - Top 10 1 281 2 67 0Total - Top 10 799.5 62.6 Total - Top 10 1,281.2 67.0

2010 Totals 1,278.1 1,912.1

April 11, 2011 27Federal Reserve Bank of Chicago

It’s still too early to say what impact the Japanese earthquake will have on the U.S. economy, but Autos will most likely be effectedOESA Japan Earthquake Impact Survey Results

The area hardest hit from the earthquake and tsunami accounts for a relatively small part of the nation’s industrial output. But damage to infrastructure - roads rail lines and electricity is

y, y

more wide spread.

According to survey results:

• 55% of suppliers surveyed have operations in Japan, 78% receivet i l t t f Jsome material content from Japan.

• 13% experienced facility or equipment damage that will require increased levels of capital expenditure over the next 12 months..• 37% reported that their Japanese suppliers assured that they can meet 3 % epo ted t at t e Japa ese supp e s assu ed t at t ey ca eetrequired release schedules.• 67% have been able to assure required inbound/outbound transportation.• 47% of the OEMs surveyed have reduced their production schedules because f d ti i J hi l t d ti bilitof reductions in Japanese vehicle or component production capability.

• But, 66% of suppliers think their current production schedules will be adjusted over the next 45 days.• One of the biggest issues facing Japanese producers is rolling blackouts.

April 11, 2011 28Federal Reserve Bank of Chicago

gg g p p g

Source: Original Equipment Suppliers Association

U.S. Light Vehicle sales in March were down slightly from February but still well above the 12 MMA

U.S. Light Vehicle S.A.A.R.

Millions

y

16.0

18.0

Aug ’09

Cash for Clunkers

12.0

14.0

ug 0914.2 Mar ‘11

13.1

12 MMA

8.0

10.0

Apr ’099.4

12 MMA12.1

6.0Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

March 14, 2011 29Federal Reserve Bank of Chicago

United StatesAutomotive Industry - Capacity / Production / Utilization

90 018 0Millions Percent

60.0

70.0

80.0

90.0

12.0

14.0

16.0

18.0Utilization Rate (Right)

20.0

30.0

40.0

50.0

4.0

6.0

8.0

10.0

Forecast

0.0

10.0

0.0

2.0

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

Capacity Production UtilizationUnited States '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16p yCapacity 15.4 14.9 14.4 13.8 12.6 12.7 12.5 12.9 12.6 12.4 12.5 12.6Production 11.9 11.3 10.8 8.7 5.7 7.7 8.8 9.5 9.8 10.1 10.2 10.4Utilization 77.4 75.8 74.6 62.7 45.4 61.0 70.9 73.9 77.5 80.9 81.8 82.8

March 14, 2011 30Federal Reserve Bank of Chicago

Source: Ward’s Automotive

Michigang

100 04 0Millions Percent

Automotive Industry - Capacity / Production / Utilization

60 070.080.090.0100.0

2.5

3.0

3.5

4.0

Utilization Rate (Right)

20.030.040.050.060.0

1.0

1.5

2.0

Forecast

0.010.0

0.0

0.5

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

Capacity Production Utilizationp y

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16Capacity 3.4 3.3 3.3 3.1 2.8 2.8 2.9 3.0 2.9 2.9 3.0 3.1Production 2.5 2.3 2.3 1.9 1.1 1.6 2.0 2.6 2.6 2.7 2.8 2.9Utilization 73.3 69.8 70.6 60.1 41.6 57.2 70.7 87.8 91.9 93.4 93.8 94.9

March 14, 2011 31Federal Reserve Bank of Chicago

Source: Ward’s Automotive

Michigang

120.040.0Percent Percent

Auto Capacity, Production & Utilization as Percent of United States

100.0

120.0

30.0

40.0

Utilization Rate Ratio (Right)

60.0

80.0

10.0

20.0

Forecast

40.00.0'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Capacity Production Utilizationp y

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16Capacity 22.3 22.0 22.9 22.3 21.9 21.9 23.1 23.1 22.8 23.1 23.8 24.3Production 21.1 20.2 21.7 21.4 20.1 20.5 23.0 27.4 27.0 26.7 27.3 27.9Utilization 94.7 92.1 94.6 95.9 91.6 93.8 99.7 118.8 118.6 115.5 114.7 114.6

March 14, 2011 32Federal Reserve Bank of Chicago

Source: Ward’s Automotive

The State of Michigan’s 2012 budget shortfalls began long before the start of the 2008 – 2009 national recession

8.0

10.0

380

400 2003377.7

$Billions Michigan GSP ‐ $2000 % Chg. Y/Y Michigan Total Tax Collections ‐ $2000

24.030.0

26.0

28.0

$ Billions Percent

2000$25.3

2009

0.0

2.0

4.0

6.0

280

300

320

340

360

2009340.5

‐12 0‐6.00.06.012.018.0

18.0

20.0

22.0

24.02009$21.6

‐6.0

‐4.0

‐2.0

240

260

280

'90 '94 '98 '02 '06

Per Capita Income ‐ $2005Thousands Percent Michigan PopulationMillions % Chg. Y/Y

Percent Change (Peak to Trough) ‐9.8%‐30.0‐24.0‐18.0‐12.0

12.0

14.0

16.0

1992 1996 2000 2004 2008

Percent Change (Peak to Trough) ‐15.0%

120.0

130.0

140.0

25.0

30.0

35.0Per Capita Income $2005

Michigan (Left) United States (Left) 0.05

0.10

0.15

0.20

9.8

10.0

10.3

10.5Michigan Population g

100.0

110.0

15.0

20.0

Michigan as % of U.S. (Right) ‐0.15

‐0.10

‐0.05

0.00

8.8

9.0

9.3

9.5

February 8, 2011 33Federal Reserve Bank of Chicago

90.010.0

1969 1974 1979 1984 1989 1994 1999 2004 2009

‐0.208.5

1969 1974 1979 1984 1989 1994 1999 2004 2009

State of Michigan: FY 2012 Budget Proposal

• Quote from Mitchell Bean, Director of the House Fiscal Agency“Michigan’s 2012 budget shortfalls were the result of ten years of decliningMichigan s 2012 budget shortfalls were the result of ten years of declining domestic auto share, failed tax policy, increasing cost of Medicaid and corrections and a chronic use of one-time fixes.”

• Michigan’s FY 2011 Budget is currently balanced but spending is offset by $900 g g y p g y $million of one-time fiscal stimulus dollars

• The Consensus Revenue Estimating Conference held in January projects a fiscal year 2012 general fund budget gap of $1.4 billion

• Governor Snyder’s approach to address the project general fund gap includes tax reforms together with spending cuts

• Governor Snyder’s priorities include reforming the budget process (two-year spending plan) and making state government more transparent (MiDashboard)

March 14, 2011 34Federal Reserve Bank of Chicago

The State of Michigan’s budget deficit ranks 38th in the nation when compared as a percent of total spending e co pa ed as a pe ce t o tota spe d gState Budget Deficits in Billions of Dollars – FY 2012

Projected Percent of Rank byTop 10 States Deficit 2011 Spending PercentTop 10 States Deficit 2011 Spending Percent

Nevada 1.5 45.2 1New Jersey 10.5 37.4 2Texas 13.4 31.5 3California 25.4 29.3 4Oregon 1.8 25.0 5Minnesota 3.8 23.6 6Louisiana 1.6 20.7 7New York 10.0 18.7 8Connectic t 3 2 18 0 9Connecticut 3.2 18.0 9South Carolina 0.9 17.4 10

FRB 7th DistrictIllinois 4.9 14.6 16Wisconsin 1.8 12.8 21Michigan 1.3 5.9 38Iowa 0.2 3.5 42Indiana 0.3 2.0 43

March 30, 2011 35Federal Reserve Bank of Chicago

Source: www.stateline.org, The PEW Center on the States

State of Michigan: FY 2012 Budget ProposalTotal Budget Cuts of $1,520.9 Million

C ti ($51 2 illi )• Corrections ($51.2 million)

• Community Health ($212.6 million)

• Human Services ($109.5 million)($ )

• Higher Education ($222.4 million)

• Statutory Revenue Sharing ($143.9 million)

• State employee concessions ($180.0 million)

• School Aid reductions ($538.1 million)

• Other ($63 2 million)• Other ($63.2 million)

March 14, 2011 36Federal Reserve Bank of Chicago

State of Michigan: FY 2012 Budget ProposalBusiness Tax Changes

C t B i t $1 73 billi 86% t d ti• Cut Business taxes $1.73 billion – 86% net reduction

• Repeal the Michigan Business Tax

• Institute a 6% tax on business income for C corps onlyp y• Honor existing firm-specific credits including MEGA, film, next energy, battery credits, etc.• Maintain the ability to award more firm-specific credits until 2012y p

March 30, 2011 37Federal Reserve Bank of Chicago

State of Michigan: FY 2012 Budget ProposalPersonal Income Tax Changes

• Increase personal income tax $1.76 billion - 30% net increasep $ %

• Freeze the income tax rate at 4.25% - $171.0 million

• Eliminate private pension exemption - $699.5 million

• Eliminate non-military public pension exemption $209.7 million

• Eliminate state earned tax credit, EITC – 373.7 million

• Eliminate investment income exemption for seniors• Eliminate investment income exemption for seniors

• Eliminate special exemptions for seniors, UI and child deductions

• Eliminate credits and deductions for all voluntary contributions• Eliminate all other major refundable and non-refundable credits except for the homestead property tax credit, the home heating credit, and the farmland preservation credit

March 30, 2011 38Federal Reserve Bank of Chicago

State of Michigan: FY 2012 Budget ProposalOver 75% of Total FY 2012 Spending Devoted to Health, Human Services and Education

Government Services, 5%

Economic Strength, 11%

Quality of Life, 2%

Health and Human

Services, 46%

Education 30%Education, 30%

Public Safety, 6%

Total Spending: $45.9 billion

March 14, 2011 39Federal Reserve Bank of Chicago

p g

Summary

• The Blue Chip consensus forecast fell slightly in April in response to concerns about recent global events

• The consumer has seen gains in real disposable income, declining debt, rising stock market values and most recently, increased job prospects

• However, the surge in energy prices together with recent global events haveHowever, the surge in energy prices together with recent global events have pushed consumer sentiment back down to a level not seen since November of 2009

• Job gains in March have helped push the nation’s unemployment rate to 8.8 percent marking four consecutive months of decline

• Nonresidential and residential structure investment continue to be a drag on the economic recovery

• Although the total impact from Japan’s earthquake and subsequent tsunami still i k t bil f t l d t ti t l fis unknown, automobile manufacturers are already starting to see some loss of production

• Governor Snyder’s current budget plan attempts to address the project general fund gap through proposed spending cuts and the use of tax reforms

April 11, 2011 40Federal Reserve Bank of Chicago

fund gap through proposed spending cuts and the use of tax reforms

Thank You!