Economic outlook
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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

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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.

  • BUT MOST OF IT IS:

    • 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


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