CCAC Hears the Economic Outlook for 2017

CCAC would like to thank Tyler Meyr, Principal, Forum Studio for hosting CCAC’s first luncheon of 2017 on Tuesday, January 10th. The membership heard from Rick Mattoon, Senior Economist and Economic Advisor for the Federal Reserve Bank of Chicago. Mattoon's primary research focuses on issues that face the Midwest regional economy. Rick Mattoon kicked off the 2017 speaker series with insight into the economic forecast for United, States, Illinois, and Chicago, and the United States. The recovery from the Great Recession has been marked by slow, but steady economic growth. With a new administration in office, fiscal policy options are being considered as well as how structural changes and economic growth will weigh on the economy.

Mattoon started his presentation with a joke and began providing themes for 2017. He said the Congressional Budget Office has the US economy growing at 2% and the trend growth has downshifted. Why is faster growth hard to come by? Mattoon gives several reasons while answering this question. One reason is demographics.  We are getting older, prime-work age population is declining as a share of population. Also, productivity is in a rut, the boost from higher educational attainment has peaked, and all of these structural factors can mute the impact of cyclical policies.

There are certain factors that will not change from 2016 and Mattoon predicts those are employment gains, consumers, U.S. household wealth, and rising interest rates. Those factors will still face headwind from loose monetary policy in the rest of the world. Employment continues to improve while unemployment falls to 4.6%. 

(L:R) Todd Meyer, Principal, Forum Studio; Greg Hummel, Partner, Bryan Cave LLP and Chairman of CCAC; Rick Mattoon, Senior Economist and Economic Advisor, Federal Reserve Bank of Chicago; and Tyler Meyr, Principal, Forum Studio and CCAC Board Member.

Mattoon provided the current forecast for the U.S. economy. The Federal Open Market Committee (FOMC) projected GDP growth in 2016 was 1.8 % to 1.9%.  Faster growth is projected in 2017 with rates of 1.9% to 2.3%. Currently, inflation is running below target. The FOMC projects in 2017 the range will be 1.7% to 2.0%. The FOMC forecast has the 2016 unemployment rate being 4.7% to 4.8%, and the current forecast for 2017 is a rate of 4.5% to 4.6%,a slight decrease of the numbers for 2016. According to Mattoon, the big issue will be the pace of potential future increases to get to “normalization”, which is now 2.9 %. The latest meeting suggests a possibility of 3 hikes in 2017. Mattoon quoted, Federal Reserve Bank of Chicago President Charles Evans by saying, “the way we should get the economy going is to overshoot on the inflation as a way to jumpstart the economy with the idea we have been undershooting for such a long time. This will help restore our principal tool for dealing with the downturn. There will be flexibility and the model will change with the current updates."

Turning to Illinois, Mattoon provided an outlook for the state of Illinois. The state has underperformed for both the U.S. and the Midwest region during the last recession and recovery. The Illinois unemployment rate has been higher than the U.S. average and the growth has been slower. The big question is the impact of poor fiscal conditions on future growth. Mattoon highlighted the issues of the fiscal problem. The first and most common problem is the State has not had a full year budget for over two years. The credit rating is the worst in the nation leading to higher borrowing costs. Debt is more than just underfunded pensions. It also includes a structural budget deficit where expenditures are exceeding revenues. 

Based on a study from the University of Illinois Fiscal Futures Project Analysis, it is estimated the deficit is $13 Billion with a projected gap of $14 billion per year for the next five years. Mattoon gave five options suggested by the Institute of Government & Public Affairs from the University of Illinois at Chicago for solving the budget gap within 10 years:  

• Spending cut of 2% for all discretionary spending which will result in a 32% reduction in gap;
• An income tax rate hike (4.75% for personal, 6.65% for corporate), and (40% reduction in gap);
• Expand income tax base by 10% which will result in a 12% reduction;
• Increase sales tax base by 15% (tax more services) which will result in a $2 billion revenue;  
• Get ½ of 1% faster personal income growth on the supply side that only produces $100 million in tax income.

After providing an in-depth analysis of the five options, Mattoon said, “in order to close the gap, you would have to complete all five options together. But doing that would cause a political problem.”

Getting closer to home, Mattoon expressed that economic growth has recently picked up as business and professional services have roared back in Chicago. Real estate has been a positive that may be slowing into 2017. The big issue, according to Mattoon, is the fiscal headwind. The underfunding of pensions is bad especially at the state level. Based on various charts throughout Mattoon’s presentation, Chicago is ranked 26th in the U.S. market as improving for investment, development and homebuilding. He noted that driving the improvement is the urban core which includes headquarters moving downtown to attract smart, affluent workers which in turn drives multi-family housing. A quote about Chicago Real Estate from the Annual Urban Land Institute /PriceWaterhouseCoopers survey is as follows, “…the Chicago market offers a level of stability that a number of investors see as a benefit at this point in the national economic cycle. Chicago is still a core market with one of the top regional infrastructure systems in the United States."

There are some downside risks. Recovery is getting “a little long in the tooth," there are higher financing costs and real estate has been heavily built with more in the pipeline pertaining to hotels and office. Fiscal risk is looming. According to Mattoon, pensions are woefully underfunded and the city has already used questionable practices such as issuing taxable debt to cover judgements and operating costs and refunding debt. The partial solution is the $543 million property tax increase which will be phased in over 4 years. The further problem is Chicago Public Schools. Solving their pension problem will likely require another property tax hike.

Overall, a slow but long-term recovery keeps plodding along. For Illinois and Chicago, the continued uncertainty surrounding fiscal matters are acting as a drag on potential. Therefore its safe to say that 2017 will be a year of uncertainty.

Rick Mattoon, Senior Economist and Economic Advisor, Federal Reserve Bank of Chicago, addressing the CCAC Audience at Forum Studio

Tuesday, February 14, 2017 at Drinker, Biddle & Reath

Join us at Drinker, Biddle & Reath on Tuesday, February 14, 2017 for the next CCAC meeting hosted by Michael Csar, Partner, Drinker, Biddle & Reath.

	WHAT:	CCAC FEBRUARY MEETING
	GUEST SPEAKER:	Christine Dudley Director  Illinois Office of Film
	DATE:	Tuesday, February 14, 2017
	TIME:	12:00 -- 1:30 p.m.
	LOCATION:	Drinker, Biddle & Reath 191 North Wacker Drive Suite 3700  Chicago, IL 60606
	HOST:	Michael Csar Drinker, Biddle & Reath
	RSVP TO:	Kelly O'Brien at kobrien@ccac.org

Special Thanks!

Membership Tier for Next Generation of Civic Leaders

Last year's launch of the CCAC Young Leaders Tier was very successful and we are continuing this initiative in 2017. Our new 14 member Young Leader Executive Team is gearing up for a very eventful year. As you know, this initiative is geared toward young professionals, and includes dynamic programming and networking opportunities for Chicago’s next generation of leaders. Through its Young Leader initiative, CCAC is aiming to ensure that Chicago’s future continues to have thoughtful and civic-minded leaders to meet the future demands of a world-class city. 

Young Leaders with firms that are CCAC Members are automatically included and welcome to attend. Non-firm/Individual Young Leader Membership is $1,000.00 annually.   To download the below flyer please click on it for a version to distribute.

Thank You For Your Continued Membership 

CCAC remains committed to being at the forefront of creating the City’s identity, shaping the vision of a global destination and helping to set the right priorities to attract broad based investment. Your continued membership allows your voice to be heard.  Getting involved provides a unique opportunity to give back to the City you call home based on your professional expertise.  Your talents will help shape our tomorrow. 2017 membership invoices have been mailed and sent via e-mail. If you have any questions, please contact Executive Director, Kelly O'Brien at kobrien@ccac.org, (312) 602-5148.

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