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U.S. Economic Update: Current and Future Trends

U.S. Economic Update: Current and Future Trends. A Presentation to the National Association of Wholesaler Distributors Billion Dollar Company CFO Roundtable Chicago, June 5-6, 2012 Tassos Malliaris Quinlan School of Business Loyola University Chicago. My Plan.

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U.S. Economic Update: Current and Future Trends

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  1. U.S. Economic Update: Current and Future Trends A Presentation to the National Association of Wholesaler Distributors Billion Dollar Company CFO Roundtable Chicago, June 5-6, 2012 TassosMalliaris Quinlan School of Business Loyola University Chicago

  2. My Plan • Review current data and trends. • Offer forecasts • Discuss how we ended up where we are. • Offer 3 possible scenarios moving forward

  3. Where are we now? • Slow economic growth • High Unemployment • Inflation remains low • Financial System is unstable • Fiscal and monetary policies are extremely stimulative

  4. GDP Growth

  5. Components of GDP Chart

  6. Taylor graph

  7. Taylor graph

  8. Trend GDP

  9. Employment

  10. 2009 to Present Payrolls and Unemployment

  11. Payroll declines and recoveries following recessions

  12. Japan vs. U.S.

  13. Interest Rates since 1987

  14. S&P 500 Index

  15. CPI

  16. PPI

  17. U.S. Debt

  18. Foreign holdings of U.S. debt Source: U.S. Treasury Data as of end of march

  19. The Fed’s Balance Sheet

  20. Household Housing Debt

  21. Housing sales and starts 2000-12

  22. From Review to Forecasts • GDP • Unemployment • Consumer Prices • Interest Rates • Government Deficits

  23. GDP Forecast

  24. Unemployment Forecast

  25. PCE Forecast

  26. 2012 and 2013 GDP Growth Forecasts

  27. Deficit projections

  28. Economic Projections

  29. Fed’s Projections

  30. Historically low long-term rates

  31. 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

  32. 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

  33. 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

  34. 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

  35. 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

  36. 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

  37. Beyond the Crossroad: Three Choices

  38. Ranges of Inflation and Deflation

  39. 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

  40. 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

  41. 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

  42. Debt Burden by Sectors: Euro, US and Japan* VariablesEuroaUSAaJapana 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

  43. 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

  44. 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

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