The Economy 2010 and How We Got Here
Steven L. Cobb, Ph.D.
UNT Center for Economic Education
The U.S. Economy is on a Trajectory of Slow, but Improving Growth for 2010
Guitar-string theory:Deeper recessions are followed
by stronger, more rapid recoveries.
-Milton Friedman
“The aftermath of deep financial crises shows deep and lasting effects on asset prices, output and employment. Unemployment and house price declines extend out for five and six years. Output declines last two years on average. Even recessions sparked by financial crises do eventually end, albeit almost invariably accompanied by massive increases in government debt.”
-Reinhart and Rogoff(Dec. ‘08)
The Current Situation
GDP: 2-3%, more likely close to 3%Absent the financial crisis: 5-6%
Headline inflation: 3.0%
Core inflation: 1.5%
Unemployment:
10.4% peak in 2010 Q2
Sustained employment growth to begin after Feb. 2010
What have we experienced?High unemploymentActual deflation
Negative wealth shock Bursting of multiple bubbles
Near-demise of banking/financial system
Unemployment and Deflation
High Unemployment
High Unemployment
Deflationary Fears
Negative Wealth Shocks
The Bursting of the Housing Bubble
A Softening of the Housing Market As A Result Of Higher Interest Rates (’04 – ’07)
The Inevitable Was Delayed By New Mortgage Instruments
By 2006 Real Estate Prices Were No Longer Rising
Sales of New and Existing Homes Fall Rapidly
Construction Falls As Well
The Consumption Bubble Also Burst
GDP Growth Was Fueled By Consumption Expenditures
As Long As Home Prices Were Rising, Consumers Were Using Equity To Finance Their Purchases
Real Estate Concerns Negatively Impacted Consumer Confidence
Falling Confidence Led To Falling Sales
Consumption Fell in Both Nominal and Real Terms
Falling Consumption Led to Declines In Retail Sales
Global Shocks
The Downturn Was Global
The Largest Economies Were All Hit Hard
The Trend Was Similar In Established and Rising Stars
The US Experiences a Rise in the Value of the Dollar
But the Stronger Dollar Is Very Hard On Exporters
The Result of All This Is the Near Demise of the Financial System
What have we experienced?
This Recession is the most painful since the Great Depression
Longest, Deep, and WideIt followed 25 years of growth interrupted by
two short, mild recessions
Bottom Line:
Relative to a generation of experience, this was a truly traumatic event.
HeadwindsCredit to households and small
businesses Banking system –Capital, Commercial
Real Estate lossesAnticipated taxesPolicy uncertaintyHigher energy prices
Crosswinds
Monetary policyFiscal policyRegulatory policy
Tailwinds Growth in temporary employment Declining initial unemployment claims Declining layoff announcements Employment gains in 11 states 11 sectors showing employment gains Synchronized global recovery Industrial production bounce-back
Positives
2007 2008 2009
U.S. GDP Growth
2007 2008 2009
Low to Moderate Inflation
Year-end inflation?Given fears of deflation at year-end 2008,
economists thought a 1% deflation over 2009 was the most likely outcome.
Federal Reserve Policy averted that outcome, and that’s a prediction we’re very happy to have been wrong about.
Credit Chairman Bernanke and the FOMC
Consumer Behavior
After a number of years where the U.S. saving rate was negative, there is an indication that Americans are beginning to save again. This has the potential to be one of the more positive impacts of the recession.
Remaining Concerns
UnemploymentMay not have peaked – some expect it
to hit 10.4% in the second quarter of this year.
Doesn’t measure discouraged workers and part-time workers that want full time jobs (may currently be as high as 16.3%)
Some economists still fear a jobless recovery
Budget DeficitsThe spending measures may have
been critical to avoiding a much larger crisis, but our national debt is rising rapidly.
It is now over $12 Trillion (more than $40,000 per citizen)
Current deficits are adding to this number at record rates
Long-term concerns have been put on the back burner
Social SecurityMedicare
Lessons Learned
Only traumatic events,
not hiccups,
produce behavior modification.
What is the Bottom Line?
The circulation of confidence is better than the circulation of money.
-James Madison