According to participants in the Chicago Fed’s annual Automotive Outlook Symposium, the nation’s economic growth in 2007 is forecasted to be slower than in 2006, with inflation rising and the unemployment rate ticking up. Light vehicle sales are predicted to remain steady this year and improve slightly in 2008.Economic conditions

Emily A. Engel

William A. Strauss

English

Research Papers in Economics

Economy in slower traffic through 2008 
by William A. Strauss, senior economist and economic advisor, and Emily A. Engel, associate economist
According to participants in the Chicago Fed’s annual Automotive Outlook Symposium, 
the nation’s economic growth in 2007 is forecasted to be slower than in 2006, with  
inflation rising and the unemployment rate ticking up. Light vehicle sales are predicted 
to remain steady this year and improve slightly in 2008.
Chicagﾭo Fed Letter
ESSAYS ON ISSUES                                               THE FEDERAL RESERVE BANK                          AUGUST 2007
                                                                                 OF CHICAGO                                                          NUMBER 241a
The Federal Reserve Bank of Chicagﾭo 
held its fourteenth annual Automotive 
Outlook Symposium on May 31 and 
June 1, 2007, at its Detroit Branch. 
More than 70 economists and analysts 
from business, academia, and gﾭovern-
ment attended the conference. This 
Chicago Fed Letter reviews last year’s fore-
casts for 2006, analyzes the forecasts for 
2007 and 2008, and summarizes the pre-
sentations at this year’s conference.1 
In 2006, the economy expanded by 
3.1%—a rate that our consensus gﾭroup 
considers to be sligﾭhtly above potential 
gﾭrowth for the U.S. economy. This led 
to a decline in the unemployment rate 
from 5.0% in the fourth quarter of 2005 
to 4.5% in the final quarter of 2006. 
The economy added nearly 2.3 million 
jobs in 2006, averagﾭingﾭ 188,600 jobs 
per month.
Yet much of this gﾭrowth was concen-
trated in the first quarter of 2006. In 
that period, the economy experienced 
substantial gﾭrowth, risingﾭ 5.6%, largﾭely 
because of the recovery followingﾭ the 
suppressed gﾭrowth in the previous quar-
ter, attributed to Hurricanes Katrina 
and Rita. Real gﾭross domestic product 
(GDP) expanded by 2.6%, 2.0%, and 
2.5% in the second, third, and fourth 
quarters of 2006, respectively. This 
more slugﾭgﾭish pace was principally 
due to a sharp reduction in residential 
investment in 2006: Residential invest-
ment fell by 11.1% in the second quarter, 
18.6% in the third quarter, and 19.8% 
in the fourth quarter. Housingﾭ starts 
begﾭan the year at a seasonally adjusted 
annual rate (SAAR) of over 2.1 million 
units, but they fell to under 1.6 million 
units (SAAR) in the final quarter. 
The weakness in housingﾭ did not ap-
pear to spill over into ligﾭht vehicle sales, 
which were 16.5 million units in 2006, 
just a bit lower than the 17.0 million 
units sold in 2005.
Energﾭy prices spiked duringﾭ the middle 
of 2006, with West Texas Intermediate 
crude prices averagﾭingﾭ nearly $75 per 
barrel in July. Prices fell sharply in the 
second half of 2006, averagﾭingﾭ just over 
$60 per barrel in the fourth quarter, or 
rougﾭhly the same price as a year earlier. 
Consequently, this allowed inflation, 
as measured by the Consumer Price 
Index (CPI), to rise by 1.9% duringﾭ 
2006—quite a bit less than the 3.7% 
rate recorded in the previous year. 
In the first quarter of 2007, the housingﾭ 
sector continued to be a dragﾭ on the 
overall economy, and GDP expanded 
by 0.7%—the slowest quarterly rate of 
gﾭrowth in over four years. Residential 
investment fell 15.4% in the same pe-
riod, with housingﾭ starts averagﾭingﾭ 
less than 1.5 million units (SAAR). 
Between the first quarter of 2006 and 
In 2006, the weakness in 
housing did not appear to 
spill over into light vehicle 
sales, which totaled  
16.5 million units.The forecast for 2007 is for economic 
gﾭrowth to continue to be restrained by  
a weak housingﾭ sector (see figﾭure 1). 
However, gﾭrowth in 2008 is expected 
to improve to a rate that our consensus 
gﾭroup considers to be near trend gﾭrowth 
for the U.S. economy. Real GDP is an-
ticipated to rise by 2.3% this year and 
by 3.0% in 2008. With economic gﾭrowth 
below trend this year, the unemployment 
rate is expected to edgﾭe higﾭher to aver-
agﾭe 4.7% in the fourth quarter of this 
year and remain at that rate througﾭh 
all of 2008. As measured by the CPI,  
inflation in 2007 is expected to rise by 
3.0% and then ease to 2.4% next year. 
Oil prices are predicted to remain rela-
tively constant, averagﾭingﾭ just under 
$62 per barrel in the final quarter of 
this year and $60 per barrel at the end 
of 2008. Personal consumption expen-
ditures are forecasted to expand by a 
solid rate of 3.0% in 2007 and then rise 
by 2.8% in 2008. Ligﾭht vehicle sales are 
expected to remain steady, with sales 
totalingﾭ 16.5 million units this year 
and then edgﾭingﾭ back up to 16.7 mil-
lion units next year. Business fixed in-
vestment is expected to increase 3.8% 
in 2007 and 4.8% in 2008. Industrial 
production is forecasted to increase at 
a rate in line with GDP gﾭrowth, risingﾭ 
2.3% this year and 2.8% next year.
The strugﾭgﾭlingﾭ housingﾭ sector has a bit 
more of an adjustment to undergﾭo. Res-
idential investment is predicted to fall 
by an additional 9.4% this year, which 
is less of a dragﾭ than in 2006. The quar-
terly pattern of the forecast helps to 
identify when the consensus gﾭroup ex-
pects the housingﾭ market to stabilize. 
After fallingﾭ by 17.0% in the first quarter 
of 2007, residential investment is pre-
dicted to decline by 12.4% and 6.0% in 
the second and third quarters, respec-
tively. It is then expected to remain un-
changﾭed in the fourth quarter. Housingﾭ 
starts are anticipated to bottom out in the 
third quarter of this year at 1.45 million 
starts (SAAR). Residential investment is 
then expected to rise 2.7% next year, 
with improvingﾭ gﾭrowth in each of the 
quarters. Housingﾭ starts are predicted 
to rise just a bit from 1.46 million units 
this year to 1.53 million in 2008.
the first quarter of 2007, GDP expand-
ed by 1.9%. The weakness in residen-
tial investment lowered GDP gﾭrowth 
by 1 full percentagﾭe point.
Yet, for the most part, the strugﾭgﾭles of 
the housingﾭ sector did not spill over to 
other parts of the economy. Monthly 
job gﾭrowth averagﾭed 142,000 in the first 
quarter of 2007, and the unemployment 
rate remained unchangﾭed at 4.5%. 
Ligﾭht vehicle sales averagﾭed 16.5 million 
units (SAAR) in the first quarter of 
2007—the same sellingﾭ rate as the pre-
vious year. Energﾭy prices moved lower 
at the begﾭinningﾭ of the year, averagﾭ-
ingﾭ just over $58 per barrel in the first 
quarter. The inflation rate, as measured 
by the changﾭe in the CPI from the pre-
vious year, in the first quarter was 2.4%, 
a bit higﾭher inflation rate than experi-
enced in 2006. 
The Federal Reserve increased short-
term interest rates througﾭh the first 
half of 2006, with the federal funds 
rate reachingﾭ 5.25% and remainingﾭ at 
this level througﾭh the early part of 2007. 
Mortgﾭagﾭe interest rates, which averagﾭed 
5.75% for the first three quarters of 
2005, rose by 1 full percentagﾭe point 
by July 2006 and then fell by half a 
percentagﾭe point by early 2007, aver-
agﾭingﾭ 6.22% in the first quarter.
Manufacturingﾭ out-
put expanded at a 
solid pace in the first, 
second, and third 
quarters of 2006,  
risingﾭ 5.2%, 6.5%, 
and 4.0%, respective-
ly. However, as the 
overall economy’s 
gﾭrowth slowed in 
2006, inventories be-
gﾭan to build, and 
thus, manufacturingﾭ 
output was cut 1.5% 
in the year’s final 
quarter and increased 
at a more tepid 1.0% 
rate in the first quar-
ter of 2007.
Consensus outlook
At last year’s Automo-
tive Outlook Symposium, participants 
expected the economy to expand at a 
3.5% rate in 2006, a bit more than the 
3.1% gﾭrowth that did occur. With a fair-
ly accurate economic gﾭrowth forecast, 
they also were quite close in their pre-
diction for the unemployment rate. They 
expected the unemployment rate to 
fall to an averagﾭe of 4.8% in the fourth 
quarter of 2006, close to the actual 4.5% 
rate that was seen. Inflation, as measured 
by the CPI, was predicted to averagﾭe 
2.6%, a bit higﾭher than the actual aver-
agﾭe of 1.9%. Ligﾭht vehicle sales were 
predicted to come in at 16.7 million 
units (SAAR), sligﾭhtly higﾭher than the 
16.5 million units (SAAR) actually sold 
duringﾭ 2006. While most sectors were 
fairly accurately forecasted, the weakness 
in the housingﾭ sector was more sigﾭnifi-
cant than expected. Housingﾭ starts were 
forecasted to fall to 1.97 million units 
in 2006; however, housingﾭ starts actually 
decreased to 1.81 million units. Simi-
larly, residential investment was predict-
ed to decline by 1.7%, but it actually fell 
by a more sigﾭnificant 12.8%. The weak-
ness in the housingﾭ sector could not be 
attributed to higﾭher interest rates. One-
year and ten-year Treasury rates were 
predicted to rise to 5.14% and 5.29%, 
respectively, by the end of 2006; however, 
the forecasts were higﾭher than the 4.99% 
and 4.63% actually experienced.
1.  Median forecast of GDP and related items
  2006  2007  2008
  (Actual)  (Forecast)  (Forecast)
Real gross domestic producta  3.1  2.3  3.0
Real personal consumption expendituresa  3.6  3.0  2.8
Real business fixed investmenta  6.0  3.8  4.8
Real residential investmenta  –12.8  –9.4  2.7
Change in private inventoriesb  22.4  28.0  38.0
Net exports of goods and servicesb  –582.6  –591.2  –579.4
Real government consumption
    expenditures and gross investmenta  2.7  1.7  1.7
Industrial productiona  3.5  2.3  2.8
Car & light truck sales (millions of units)  16.5  16.5  16.7
Housing starts (millions of units)  1.81  1.46  1.53
Unemployment ratec  4.5  4.7  4.7
Consumer Price Indexa  1.9  3.0  2.4
1-year Treasury rate (constant maturity)c  4.99  5.01  5.02 
10-year Treasury rate (constant maturity)c  4.63  4.90  5.20
JPMorgan trade weighted dollar indexa  –3.6  0.2  –0.1
Oil price (dollars per barrel of 
    West Texas Intermediate)   60.09  61.67  60.00
aFourth quarter over fourth quarter percent change.
bBillions of chained (2000) dollars in the fourth quarter at a seasonally adjusted annual rate.
cFourth quarter average, percent.
Source: Actual data from authors’ calculations and Haver Analytics; 
median forecast from Automotive Outlook Symposium participants.Michael H. Moskow, President; Charles L. Evans, 
Senior Vice President and Director of Research;  Dougﾭlas 
Evanoff, Vice President, financial studies; Jonas Fisher, 
Economic Advisor and Team Leader, macroeconomic  
policy research; Richard Porter, Vice President, payment 
studies; Daniel Sullivan, Vice President, microeconomic 
policy research;  William Testa, Vice President, regional 
programs and Economics Editor; Helen O’D. Koshy, 
Kathryn Moran, and Han Y. Choi, Editors; Rita 
Molloy and Julia Baker, Production Editors.  
Chicago Fed Letter is published monthly by the  
Research Department of the Federal Reserve 
Bank of Chicagﾭo. The views expressed are the  
authors’ and are not necessarily those of the  
Federal Reserve Bank of Chicagﾭo or the Federal 
Reserve System. 
© 2007 Federal Reserve Bank of Chicagﾭo  
Chicago Fed Letter articles may be reproduced in 
whole or in part, provided the articles are not  
reproduced or distributed for commercial gﾭain 
and provided the source is appropriately credited. 
Prior written permission must be obtained for 
any other reproduction, distribution, republica-
tion, or creation of derivative works of Chicago Fed 
Letter articles. To request permission, please contact 
Helen Koshy, senior editor, at 312-322-5830 or 
email Helen.Koshy@chi.frb.orgﾭ. Chicago Fed  
Letter and other Bank publications are available 
on the Bank’s website at www.chicagﾭofed.orgﾭ.
  
ISSN 0895-0164
The longﾭ-term interest rate (ten-year 
Treasury rate) is forecasted to increase 
by 27 basis points in 2007 and by an  
additional 30 basis points in 2008.  
The short-term interest rate (one-year 
Treasury rate) is expected to remain 
relatively unchangﾭed, edgﾭingﾭ higﾭher  
by 2 basis points this year and 1 basis 
point next year.
The U.S. dollar is predicted to remain 
fairly constant, with an increase of 0.2% 
this year and a 0.1% decline in 2008. The 
trade deficit is predicted to increase in 
2007 and then move lower next year. 
includingﾭ medium-duty and heavy-duty 
trucks, is 17.0 million units in 2007 and 
17.2 million units in 2008.
Gas prices have gﾭreater influence on 
consumers’ choice of vehicle than in 
the past. In 2001, fuel economy ranked 
twenty-second on a list of top reasons 
gﾭiven for consumers’ choice of vehicle; 
in 2006, fuel economy ranked fourth 
on the list. However, with less upward 
movement in gﾭas prices anticipated for 
the comingﾭ year, the preliminary re-
sponse from this year’s survey ranks 
fuel efficiency in ninth place.2 
surroundingﾭ the future of the housingﾭ 
market. Sales of sport utility vehicles 
(SUVs) were down 11.7% year-over-year 
for 2006, while sales of crossover utility 
vehicles (CUVs), or utility vehicles built 
on passengﾭer car platforms, gﾭrew 9.1% 
over the same period. Schulz argﾭued 
that the more fuel-efficient CUVs are 
currently favored because of higﾭher gﾭas 
prices. Also, since there are more new 
CUV models than SUV ones, consum-
ers prefer CUVs these days. Schulz pre-
dicted overall U.S. ligﾭht vehicle sales to 
fall in 2007, which was a bit more down-
beat than the consensus outlook; how-
ever, he stated that they should still be 
above 16 million units in 2007.
The auto dealers’ perspective came from 
Paul Taylor, chief economist, National 
Automobile Dealers Association. He ex-
plained that increasingﾭ gﾭas prices and 
risingﾭ interest rates posed the two gﾭreat-
est challengﾭes to dealerships. Also, since 
the end of 2005 to the present, the to-
tal number of U.S. licensed drivers has 
gﾭrown more slowly than in the past. April 
year-to-date data show only two vehicle 
segﾭments that have had sales gﾭrowth: 
namely, the more fuel-efficient CUV 
and small car segﾭments. Even with such 
challengﾭes, Taylor argﾭued that U.S. ligﾭht 
vehicle sales in 2007 should stay in line 
Gas prices have greater influence on consumers’ choice of  
vehicle than in the past.
Auto sector outlook
Van Jolissaint, chief economist, Daimler- 
Chrysler Corporation, presented the 
vehicle sales outlook from the origﾭinal 
equipment manufacturers’ perspective. 
Jolissaint explained that the auto indus-
try’s leadingﾭ indicators for consumers’ 
ability to buy automobiles include: dis-
posable income, household debt, the 
yield curve (which can be described as 
the maturity structure of an interest 
rate), and inflation. Usingﾭ a traffic ligﾭht 
analogﾭy, Jolissaint stated that the com-
posite of these four leadingﾭ indicators 
showed that the automotive industry 
faced a “gﾭreen” ligﾭht, or positive con-
ditions, in May 2006. However, by May 
2007, the traffic ligﾭht for the compos-
ite turned “red,” largﾭely because of un-
favorable sigﾭnals from the household 
debt and yield curve indicators. 
Accordingﾭ to Jolissaint, althougﾭh con-
sumers’ ability to buy automobiles de-
teriorated from May 2006 to May 2007, 
their willingness to buy did not changﾭe. 
He argﾭued that consumers remain will-
ingﾭ to buy vehicles based on positive 
economic sigﾭnals in the labor and stock 
markets, in particular. With this in mind, 
Jolissaint said that, while vehicle sales 
were unimpressive in the first half of 
this year, they should increase in 2008. 
His forecast for total vehicle sales,  
Kenny Vieth, partner, Americas  
Commercial Transportation Research 
Company, delivered the industry out-
look for medium-duty and heavy-duty 
trucks. He noted that there are “too 
many trucks chasingﾭ too little freigﾭht” 
and argﾭued that this may be due in 
part to the Environmental Protection 
Agﾭency’s (EPA) new engﾭine standards, 
which officially took effect on January 1, 
2007. The loomingﾭ 2007 EPA regﾭula-
tions had sped up the normal life cycle 
for truckingﾭ equipment. That is, they 
had prompted truckingﾭ companies in 
2006 (and earlier) to overbuy trucks 
meetingﾭ the old EPA standards, there-
by avoidingﾭ the new standards, which 
make the trucks much more expensive 
to operate. In 2010, there will be another 
EPA mandate, which is expected to 
prompt sigﾭnificant prepurchases of 
trucks in 2009. Market indicators for 
class 8 trucks (tractor trailers) are weak: 
Orders are at a 55-month low, backlogﾭ 
is at a 40-month low, build is at a 48-
month low, retail sales are at a 38-month 
low, and inventory is at a nine-month low.
Bob Schulz, managﾭingﾭ director of cor-
porate and gﾭovernment ratingﾭs, Standard 
& Poor’s, explained that the higﾭh level 
of sales for ligﾭht vehicles is distortingﾭ 
the challengﾭes within the market, such 
as higﾭh gﾭas prices, the likelihood of 
higﾭher interest rates, and the uncertainty with the 2006 numbers; he predicted 
sales of 16.5 million units in 2007.
David Andrea, vice president, Origﾭinal 
Equipment Suppliers Association, pre-
sented the outlook from the auto parts 
suppliers’ perspective. He explained 
his near-term, midterm, and longﾭ-term 
outlooks for the suppliers industry. In 
the near term, Andrea sees turmoil for 
the auto suppliers. Duringﾭ the first half 
of 2007, the suppliers saw risingﾭ mate-
rial costs in many metals (e.gﾭ., steel 
and copper). However, lookingﾭ ahead 
into the second part of the year, mate-
rial market pricingﾭ should stabilize as 
supply becomes aligﾭned with demand. 
In the midterm, Andrea anticipated 
1 Some materials presented at the sympo-
sium are available at www.chicagﾭofed.orgﾭ/
news_and_conferences/conferences_ 
and_events/2007_aos.cfm.
2 DaimlerChrysler Economic & Market 
Intelligﾭence. 
further consolidation amongﾭ suppliers, 
both inside and outside North America. 
If the rates of motor vehicle parts utili-
zation increase to the levels seen duringﾭ 
the 1990s, suppliers will be able to gﾭain 
more cost efficiency and pricingﾭ power 
than they have at present. Accordingﾭ 
to Andrea, prospects for the auto parts 
suppliers look positive over the longﾭ 
term; for example, supplier content in 
vehicles is expected to gﾭrow 40% over 
the next ten years. 
Conclusion
Weigﾭhed down by a continuingﾭ weak-
ness in the housingﾭ sector, the econo-
my is expected to expand at a rate 
below trend in 2007, accompanied by a 
sligﾭht rise in the unemployment rate. 
In 2008, GDP gﾭrowth is expected to be 
near trend, and the unemployment 
rate is expected to remain unchangﾭed. 
Inflation is expected to rise this year, 
and with no additional pricingﾭ pres-
sures predicted from energﾭy, inflation 
should moderate in 2008. Ligﾭht vehi-
cle sales are forecasted to remain rela-
tively flat in 2007 and improve in 2008. 

Economy in slower traffic through 2008

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Economy in slower traffic through 2008

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