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Economic Outlook. Winter 2013. US Economy Prevails .. Maybe. Gregory Miller Chief Economist. Economic Outlook. The US economy is on a tentative path toward sustainable expansion Cap Spending stalled for Presidential Campaign – Always Does!

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economic outlook

Economic Outlook

Winter 2013

US Economy Prevails .. Maybe

Gregory Miller

Chief Economist

economic outlook1
Economic Outlook
  • The US economy is on a tentative path toward sustainable expansion
    • Cap Spending stalled for Presidential Campaign – Always Does!
    • Consumer holding on, but resources stretched thin
    • Labor market: Housing is back but skills rule
    • Inflation is below 2%; gasoline prices no help
  • But, the economy confronts an overload of uncertainty
    • Government still has extensive agenda of unfinished and barely-started business
      • Failure to date
      • Fiscal Cliff Half Done
      • Debt Ceiling
      • Global recession is a real issue but export impact is minor
  • Inflation: On hold; risk of deflation
    • Energy: Shale boosts US/Canada above OPEC capacity
  • Monetary Policy: Bernanke, ZIRP, Guidance, QE.
      • Fed is Bailing Out “Do Nothing Right” Congress
economic performance back story
Economic Performance: Back Story
  • Since Great Recession, THREE sectors account for “all the BAD”:
    • Housing
      • Worst housing recession in history
    • Bank lending
      • Regulatory uncertainty is not the way to repair capital markets
    • Government/ Politics
      • The risk of committing ECONOMIC issues to POLITICAL solutions
      • Politics can stall; Markets never do
housing is back
Housing is Back
  • Still has plenty of warts, i.e. foreclosure backlog
  • Production is back
  • Prices are low but rising, and mortgage rates are historically low
  • Biggest problem is getting borrowers through underwriting
bank lending is half back
Bank lending is half back
  • Credit is the “grease.” All economies need access to capital
  • Not a LIQUIDITY problem! TRANSMISSION problem!
  • Government regulatory uncertainty in aftermath of financial meltdown leaves bank liquidity sequestered
  • And there’s plenty of liquidity in “reserve”: IOER from 3% to 93%
not everything wrong with the economy is the government s fault
Not everything wrong with the economy is the government’s fault.
    • Policy throwing good money after bad
    • Government still recession 3.5 years after recession ended
    • Fiscal Cliff/ Debt/ Taxes
    • Bad policy for the times
      • Higher taxes and spending cuts are correct policy, but stretched over 5 or 10 years.
    • Brinksmanship yields uncertainty
not everything wrong with the economy is the government s fault1
Not everything wrong with the economy is the government’s fault.
  • BUT MOST OF IT IS: Debt Ceiling
  • Brinksmanship yields uncertainty – probably the worst thing for business and households
  • The irony of the debt ceiling is, the level is not the problem -- Downgrade is.
  • US debt remains the global “safe haven”
  • Who owns it, anyway?
there is a recession out there somewhere
There is a recession out there somewhere
  • The prospect of near-term recession should not be a surprise
    • The US economy suffers cyclical recession on average about every five years
    • The current recovery is now over three years old
  • Year-to-date GDP = 1.7%
    • When the economy slows to 2.0%, it does not remain there long
    • Beneath 2.0%, we quickly resolve to either re-acceleration or recession
    • The probability is about 50/50
what bernanke knows
What Bernanke Knows
  • Bernanke will hold the funds rate at ZIRP (Zero Interest Rate Policy).
    • Effective zero, until 2015 unless something remarkable occurs – like rationality out of politics.
  • Bernanke sees his short-term goal as protecting economy from Fiscal Cliff/sequestration.
  • Part of Bernanke’s decision to deploy an open ended QE3 was a direct jab at Congress failure
  • Further, No support for rumors of Bernanke retirement
    • He can always go back to being a college professor
deterioration of household resources
Deterioration of Household Resources
  • The single biggest market-based risk to the economy:
  • deterioration of household resources.
    • No real wage increases for the past five years. Households are falling behind. And taxes have gone up.
    • Past 20 years = 2.8
    • Past 5 years = -0.6
labor market composition is the key
Labor Market: Composition is the key
  • Unemployment peaked at 10.2% but slowly recovered to 7.8%. Expect that is will accelerate downward from here. But there are constraints on improvement.
    • During the Great Recession, 30% of all jobs lost were in construction and mortgage finance..
    • With only a year of housing market recovery, housing accounts for 10% of job gains
    • Fed Chair Bernanke expects 6.5% unemployment in mid-2015
    • You should expect 6.5% in mid-2014
  • The underlying labor market weakness is skill complement.
  • Unemployment for college grads is 3.9%; for less-than-high school it is 9.9% -- 2.5 times higher
summary and looking ahead
Summary and looking ahead
  • The US economy weathered the Great Recession
  • Recovery and expansion is a tribute to the resilience of the Private Sector driven by US business and confirmed by relentless US consumers
  • Expansion continues through the next two years but risk is high
  • Consumer resources are stretched thin while taxes rise
  • Business investment should rebound in the short-run and corporate profits should continue