Dec 31, 2015
U.S. Economic Update: Current and Future Trends
A Presentation to the National Association of Wholesaler Distributors
Billion Dollar Company CFO RoundtableChicago, June 5-6, 2012
Tassos MalliarisQuinlan School of BusinessLoyola University Chicago
My Plan
• Review current data and trends.
• Offer forecasts
• Discuss how we ended up where we are.
• Offer 3 possible scenarios moving forward
Where are we now?
• Slow economic growth• High Unemployment• Inflation remains low• Financial System is unstable• Fiscal and monetary policies are extremely
stimulative
GDP Growth
Components of GDP Chart
Taylor graph
Taylor graph
Trend GDP
Employment
2009 to Present Payrolls and Unemployment
Payroll declines and recoveries following recessions
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23-7.0%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
Job Losses as Percentage Off of Peak Employment in Post WWII Recessions
19481953195819601969197419801981199020012007
Japan vs. U.S.
Interest Rates since 1987
S&P 500 Index
CPI
PPI
U.S. Debt
Foreign holdings of U.S. debt
Country Amount (billions)
China 1169.9
Japan 1083.0
Oil Exporters 254.5
Brazil 237.4
Caribbean Banking Centers 224.8
Taiwan 184.4
Switzerland 147.8
Russia 146.7
Hong Kong 138.8
Luxembourg 136.8
Source: U.S. TreasuryData as of end of march
The Fed’s Balance Sheet
Household Housing Debt
Housing sales and starts 2000-12
2000-01-01
2001-01-01
2002-01-01
2003-01-01
2004-01-01
2005-01-01
2006-01-01
2007-01-01
2008-01-01
2009-01-01
2010-01-01
2011-01-01
2012-01-01
0
200
400
600
800
1000
1200
1400
1600
0
500
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new home sales (left) starts(right)
From Review to Forecasts
• GDP• Unemployment• Consumer Prices• Interest Rates• Government Deficits
GDP Forecast
Unemployment Forecast
PCE Forecast
2012 and 2013 GDP Growth Forecasts
Deficit projections
Economic Projections
Fed’s Projections
Historically low long-term rates
William Dudley - President, New York FedMay 30, 2012
• Expects slow recovery• Regarding the 2013 “Fiscal Cliff”
– If no solution found, GDP growth will decline by 3%
• In that scenario further easing is necessary
How did we get here?• Success of Great Moderation• Risk Management Approach• Price Stability implies Financial Stability• Clean vs. Lean Against Bubbles (Also called the
Jackson Hole Consensus)• Very low interest rates during 2003-2005• Housing boom and bust• Financial crisis
Lessons Learned from the Crisis• Price Stability Does Not Imply Financial
Stability
• The Cost of Cleaning up After a Bubble Bursts is Very High
• Financial Instability Seriously Impacts the Real Macroeconomy
Where Are We Now?
• 15 million Unemployed in the U.S.• 13 trillion of wealth lost in the U.S.• Slow Growth in the U.S. and Europe• Significant Increases in U.S. Deficits• Sovereign Debt Crisis in the EU• Unbalanced Growth in China
Why are we at a crossroad?
• Monetary (primarily) and Fiscal Policies Have Contributed to Stopping the Decline of the Real Economy
• Zero Bound Policies Contribute Modestly• Fiscal and Political Uncertainty• Sovereign debt crisis• Global inter-dependencies
Moving Forward
• Reinhart and Rogoff: Recovery from Financial Crises takes Long Time
• Additional Difficulties from the EU• The Instability of the Euro and Eventually of
the Dollar• Emerging Countries and Mild Global Inflation
Beyond the Crossroad: Three Choices
Ranges of Inflation and Deflation
Three Scenarios
• Slow growth 2.0 to 3.0% and slow inflation (CONSENSUS FORECAST)
• Deflation
• Inflation above 2%
• Above will be influenced by components of UNCERTAINTY
Uncertainty
• Fiscal Cliff – U.S. Elections• European Sovereign Debt and Insolvent Banks• Global Deleveraging• Volatility in Equity and Bond Markets• Future of the US dollar and euro• Degree of Fragility of Consumer and Business
Confidence• Unknown unknowables
Current Scenario
• GDP Growth 0 to 2.5%; inflation 0 to 2%• Moderate uncertainty • Fed funds stay close to zero till 2014• US Firms and Banks are doing well• Protracted deleveraging• Partial response to US and EU sovereign crises• 50% chance
Variables Euroa USAa Japana
Gov’t Debt 90 107 236
Household Debt 70 88 74
Non-Financial Corp 138 87 143
Financial Institutions 142 87 177
Total Debt 440 269 630
a % WEO projection of GDP 2012. * April 2012 Global Financial Stability Assessment, IMF
• Euro area countries differ significantly in their individual debt problems. • Ireland and Spain are examples of a private debt overhang, whereas in Italy
and Greece high public debt is balanced by strong household balance sheets
Debt Burden by Sectors: Euro, US and Japan*
Deflation / Recession
• GDP -2% to 0; prices decline between 0 to -2%• Higher uncertainty: bond market?• Fed funds remain close to zero beyond 2014• Additional QE but velocity is flat• Contrast to the 1982-2007 leverage driven
growth• Wealth volatility • Worse case scenario for the Fed: 20% chance
Faster Growth and Mild Inflation
• GDP Growth above 3%; inflation 2 to 5%• Uncertainty is reduced; bold fiscal solutions• Confidence is improved• Velocity increases• Fed restrains from increasing Fed funds• Wealth increases rapidly • 30% chance