US Economy Forecast 2015, 2016

1. US Economy Forecast 2015, 2016 Till Schreiber College of William & Mary August 28th 2015 NAFA Annual Convention, Key West

2. Looking back to Aspen • My forecast a year ago: • Growth not above average • Unemployment falls, but labor market participation stagnates • No interest rate hike yet, but will come later this year • Government muddling through instead of implementing pro-growth policies • (Unfortunately?), this turned out to be about right

3. Realistic forecast must make assumptions about some factors • No ideological agenda • Based on current and historical data, facts (and some theory) • Where is the economy now? • What do some leading indicators suggest about the near future?

4. Snapshot of the economy • Unemployment rate 5.3% (that’s good news) • BUT: labor force participation still really low • GDP growth disappointing • FELL 0.2% in first quarter (at annual rate), also disappointing at end of 2014 • Economy slowed down by multiple “headwinds” • Cold winter in first part of the year • Government deadlock • Slowdown in Europe and emerging markets • Inflation expected to be about 2% each year going forward over the next decade (based on bond yields)

5. Will the jobs/workers come back?

6. Share of workers claiming social security disability (Mueller et al, 2013)

7. Government regulation • How much does ‘too much regulation’ reduce growth? • Talk of secular stagnation, permanently lower growth, seems to be here… • Can US economy return to 20th century trend growth? • Immigration • Not just you. Talks to other business groups since last year, very similar issues • Assume: No reduction in red tape imminent

8. Investment, Investment, Investment • Main issue of explaining both short term fluctuations and long term growth • Private sector investment (spending by businesses on R&D, new machines etc.) fell of a cliff in late 2008, early 2009 • It has recovered somewhat, will it now continue to increase or flatten out?

9. Investment as share of GDP (blue) vs. Unemployment rate (red)

10. Business Sector • You guys! • High levels of uncertainty • Regulations and Taxes • Consumer and Industry demand going forward • Purchasing Managers’ Index (ISM) • Currently above 50 signaling expansion (53.5). • Assume: Resilient investment demand, total construction spending up over last year (up 8.2%)

11. Stock market ‘crash’? • Not that surprising given high returns of previous years. • Very different from crisis time in 2008/09

12. Exports • Questions about growth prospects in emerging markets • Dollar has recently appreciated versus many emerging market currencies and the Euro and the Yen. • Eurozone faces Greece crisis, China a stock market drop • No export boom likely overall

13. What to make of all this? • Growthin the second half of 2015 will likely be around 3%.But don’t be too optimistic (see below)

14. Forecast for 2016 • Growth will remain below long term average of 3% • Don’t be too optimistic for a return to boom times • Crucial market: Investment! Both residential (housing) and other fixed investment • No government policies in sight to address regulation mess boldly • Muddling through continues

15. Forecast for 2016 • If economy grows fast, interest rate hikes may slow down recovery of housing market and investment generally somewhat • Federal Reserve scheduled to raise rates later this year • Growth of 3% per year unlikely to be topped in the near future • Unemployment comes down further very, very slowly if at all, watch labor force participation