SLOW AND STEADY MAY WIN THE RACE 10/26/13 10/11/2017 THE U.S. ECONOMY SLOW AND STEADY MAY WIN THE RACE GERALD J SWANSON,PH.D. Professor Emeritus of Economics University of Arizona 4

10/26/13 10/11/2017 GOOD NEWS OUR ECONOMY IS GROWING BAD NEWS SLOWEST RECOVERY EVER RECORDED! EIGHT YEARS AND COUNTING 4

labor market WE HAVE ADDED 1.5 MILLION JOBS—2016 10/26/13 10/11/2017 labor market October 2009 unemployment rate = 10.0% September 2016 unemployment rate = 5.0% Number unemployed hit high in October 2009 15.4 million Number unemployed September 2016 7.9million WE HAVE ADDED 1.5 MILLION JOBS—2016 4

labor market November 2009 17.1 % September 2016 9.7 % 10/26/13 10/11/2017 labor market Unemployment rate—including marginally attached workers and part-time workers November 2009 17.1 % September 2016 9.7 % 4

labor market September 2000 67.5% September 2015 62.4% 10/26/13 10/11/2017 labor market NEW NORMAL Participation rate = % population over age of 16 in labor force September 2000 67.5% September 2015 62.4% September 2016 62.9% 4

labor market Employment rate = January 2000 67.1% September 2016 59.3% 10/26/13 10/11/2017 labor market NEW NORMAL Employment rate = % of population over the age of 16 employed January 2000 67.1% September 2016 59.3% If we had the same employment rate as we did in 2000, 17.1 million more people would be working today. 4

Labor market 353,OO0 2015 9% THE UPSCALING OF MANUFACTURING 10/26/13 10/11/2017 Labor market THE UPSCALING OF MANUFACTURING AVERAGE NUMBER OF JOB OPENINGS PER MONTH—2016 353,OO0 MANUFACTURING WORKERS WITH NO EDUCATION PAST HIGH SCHOOL 2000 53% 2015 9% 4

Factory Utilization Rate 10/26/13 10/11/2017 Labor market Factory Utilization Rate SEPTEMBER 2009 66.7% SEPTEMBER 2016 75.4% 4.6% below (1972-2015) Average 80% High 85.3% 1988 4

10/26/13 10/11/2017 LABOR MARKET SEPTEMBER 2016 5.8 MILLION CURRENT JOB OPENINGS THIS IS A JOBS NON-RECOVERY 4

Less than H.S. 8.5 % Bachelor’s degree 2.5% or higher TWO WORLDS 10/26/13 10/11/2017 September 2016 UNEMPLOYMENT BY LEVEL OF EDUCATION Population 25 years and over TWO WORLDS UNEMPLOYMENT RATE Less than H.S. 8.5 % Bachelor’s degree 2.5% or higher 4

EDUCATION MATTERS STRUCTURAL UNEMPLOYMENT September 2016 10/26/13 10/11/2017 EDUCATION MATTERS September 2016 Population 25 years and over TWO WORLDS Participation Rate Employment Rate Less than H.S. 45.7% 41.8% Bachelor’s Degree 74.2% 72.3% or higher STRUCTURAL UNEMPLOYMENT 4

10/26/13 10/11/2017 unemployment REASONS FOR UNEMPLOYMENT SEPTEMBER 2016 Job Losers 2.5% Job Leavers 0.5% Reentrants 1.5% New Entrants 0.5% Total Unemployment = 5.0% 4

10/26/13 10/11/2017 GROWTH GLOBAL GROWTH CONTINUES TO SLOW POST WWII–2007 AVERAGE GROWTH 3.5% SINCE 2008 AVERAGE GROWTH 2.0% NO REGION OF THE WORLD IS GROWING FASTER TODAY THAN IT WAS BEFORE THE GLOBAL CRISIS! 4

U.S. ANNUAL GDP GROWTH 2006 2.7% 2011 1.6% 2007 1.8% 2012 2.3% 10/26/13 10/11/2017 2006 2.7% 2011 1.6% 2007 1.8% 2012 2.3% 2008 -0.3% 2013 2.2% 2009 -2.8% 2014 2.4% 2010 2.5% 2015 2.4% 2016 1.7% est. U.S. SETS RECORD 10 STRAIGHT YEARS WITHOUT 3% GROWTH . 4

CHINA’S ANNUAL GROWTH RATE 10/26/13 10/11/2017 CHINA’S ANNUAL GROWTH RATE 2006 12.7% 2011 9.5% 2007 14.2% 2012 7.8% 2008 9.6% 2013 7.7% 2009 9.2% 2014 7.3% 2010 10.6% 2015 6.9% 2016 6.6% est 4

JAPAN’S GROWTH RATE 2006 1.7% 2011 -0.5% 2007 2.2% 2012 1.7% 10/26/13 10/11/2017 JAPAN’S GROWTH RATE 2006 1.7% 2011 -0.5% 2007 2.2% 2012 1.7% 2008 -1.1% 2013 1.4% 2009 -5.5 2014 0.3% 2010 4.7% 2015 0.5% 2016 0.6% est. 4

10/26/13 THE LARGEST ECONOMIES 10/11/2017 GDP GROWTH 2016 est. 1. U.S. 1.7% 2. CHINA 6.6% 3. JAPAN 0.6% 4. GERMANY 1.7% 5. BRITAIN 1.8% 6. FRANCE 1.3% 7. INDIA 7.6% 8. BRAZIL -3.2% 9. ITALY 0.8% 10. CANADA 1.3% 3104

10/26/13 10/11/2017 GROWTH WESTERN COUNTRIES FACE STRUCTURAL CHALLENGES 1. DEMOGRAPHICS 2. AUTOMATION 3. GLOBALIZATION 4. INCREASING DEBT BURDENS 5. BREXIT— U.K. LEAVING E.U. 4

INFLATION RATE (CORE = INFLATION EXCLUDING FOOD AND ENERGY) 10/26/13 10/11/2017 INFLATION RATE SEPTEMBER 2016 ANNUAL INFLATION RATE = 1.5% ANNUAL CORE INFLATION = 2.2% (CORE = INFLATION EXCLUDING FOOD AND ENERGY) 4

C+I+G+X CONSUMER SPENDING INVESTMENT SPENDING GOVERNMENT SPENDING 10/26/13 10/11/2017 AGGREGATE DEMAND C+I+G+X CONSUMER SPENDING INVESTMENT SPENDING GOVERNMENT SPENDING NET EXPORTS = EXPORTS-IMPORTS 4

10/26/13 10/11/2017 CONSUMER SPENDING SAVINGS RATE AT 5.7% NET WORTH OF HOUSEHOLDS AT RECORD LEVEL CHOPPY SPENDING PATTERNS REAL WAGES FINALLY HAVE INCREASED CONSUMER CONFIDENCE IS SLIPPING 4

INVESTMENT SPENDING UNCERTAINTY IS A MAJOR PROBLEM 10/26/13 10/11/2017 INVESTMENT SPENDING HOUSING MARKET IS STABILIZING—PRICES UP CONSTRUCTION IS SLOWLY PICKING UP BUSINESS PROFITS ARE SOFT BUSINESSES HAVE LOTS OF CASH BUSINESSES ARE HESITANT TO SPEND UNCERTAINTY IS A MAJOR PROBLEM 4

10/26/13 10/11/2017 TRADE DEFICIT U.S HAS THE WORLD’S LARGEST TRADE DEFICIT EXPORTS-IMPORTS YEAR TRADE DEFICIT(MILLIONS) 2016 (8MTHS) -$624,7O7 2015 - $745,660 2014 -$735,193 2013 -$689,490 2012 -$730.446 4

10/26/13 10/11/2017 EXPORTS EXPORTS HAVE BEEN A DRIVING FORCE IN OUR ANEMIC RECOVERY EXPORTS ARE SLOWING DOWN! STRONG DOLLAR WEAK GLOBAL GROWTH 4

10/26/13 10/11/2017 EXPORTS FIVE LARGEST EXPORT NATIONS—2015 (BILLIONS) 1. CHINA $2,274 2. U.S. $1,504 3. GERMANY $1,329 4. JAPAN $ 624 5. NETHERLANDS $ 567 4

Government spending up 6.0% 2015 = $3.69 trillion 10/26/13 10/11/2017 Fiscal policy FISCAL 2016 Tax revenues are up 1.0% 2015 = $3.25 trillion 2016 = $3.27 trillion Government spending up 6.0% 2015 = $3.69 trillion 2016 = $3.92 trillion 4

2016 $587 BILLION 34% INCREASE FROM 2015 FISCAL POLICY 10/26/13 10/11/2017 FISCAL POLICY ANNUAL BUDGET DEFICIT 2009 $1.4 TRILLION 2010 $1.3 TRILLION 2011 $1.3 TRILLION 2012 $1.1 TRILLION 2013 $680 BILLION 2014 $485 BILLION 2015 $438 BILLION 2016 $587 BILLION 34% INCREASE FROM 2015

FISCAL POLICY BAD NEWS DEFICIT AS A PERCENT OF GDP IS GROWING AGAIN 10/26/13 10/11/2017 FISCAL POLICY BAD NEWS DEFICIT AS A PERCENT OF GDP IS GROWING AGAIN 2009 10.1 % GDP 2010 9.0% GDP 2011 8.7% GDP 2012 7.0% GDP 2013 4.1% GDP 2014 2.8% GDP 2015 2.5% GDP 2016 3.2% GDP 4

10/26/13 10/11/2017 MONETARY POLICY THE FEDERAL RESERVE BANK IS BETWEEN A ROCK AND A HARD PLACE WHEN IT COMES TO CHANGING INTEREST RATES PROBLEMS IF IT INCREASES INTEREST RATES PROBLEMS IF IT DOES NOT INCREASE INTEREST RATES 4

MONETARY POLICY RISKS OF RAISING INTEREST RATES 10/26/13 10/11/2017 MONETARY POLICY RISKS OF RAISING INTEREST RATES STALL A FRAGILE ECONOMY INCREASE THE VALUE OF THE DOLLAR INCUR WRATH OF OTHER CENTRAL BANKS INCREASE THE SIZE OF THE FEDERAL GOVERNMENT DEFICIT 4

MONETARY POLICY RISK OF NOT RAISING INTEREST RATES INFLATION 10/26/13 10/11/2017 MONETARY POLICY RISK OF NOT RAISING INTEREST RATES INFLATION LOSE ABILITY TO FIGHT ANOTHER RECESSION SEND SIGNAL THAT ECONOMY IS STILL WEAK WEAKEN BANK’S BALANCE SHEETS DISCOURAGE BANKS FROM MAKING LOANS 4

Monetary policy THE GOOD OLD DAYS FEDERAL RESERVE’S TOOLS 10/26/13 Monetary policy 10/11/2017 THE GOOD OLD DAYS FEDERAL RESERVE’S TOOLS FIGHT A RECESSION 1. BUY SHORT-TERM TREASURY BONDS INTEREST RATES FALL-PEOPLE BORROW MORE 2. LOWER THE RESERVE REQUIREMENT OF BANKS BANKS HAVE MORE MONEY TO LEND-MAKE MORE LOANS 3. LOWER THE DISCOUNT RATE BANKS PAY LESS TO BORROW FROM THE FEDERAL RESERVE TO COVER REQUIRED RESERVES. BANKS BECOME AGGRESSIVE IN THEIR LENDING POLICY 4

MONETARY POLICY FED HAS BEEN PUSHING ON A STRING! BIG QUESTION! 10/26/13 10/11/2017 MONETARY POLICY BIG QUESTION! IS THE FED OUT OF AMMUNITION WHEN IT COMES TO FIGHTING A RECESSION? 1. CURRENT INTEREST RATES NEAR ZERO 2. BANKS ARE AWASH WITH CASH 3. DECREASING INTEREST RATES COULD HARM THE COMMERCIAL BANKING SYSTEM FED HAS BEEN PUSHING ON A STRING! 4

MONETARY POLICY OPTIONS TO STIMULATE THE ECONOMY 10/26/13 MONETARY POLICY 10/11/2017 OPTIONS TO STIMULATE THE ECONOMY RESORT TO MORE UNCONVENTIONAL MONETARY POLICY ANOTHER ROUND OF QUANTITATIVE EASING ANOTHER OPERATION TWIST TAKE INTEREST RATES NEGATIVE BUY FOREIGN ASSETS—DEVALUE DOLLAR PERFORM A HELICOPTER DROP WHAT IN THE WORLD IS A HELICOPTER DROP? 4

UNCONVENTIONAL Monetary policy 10/26/13 UNCONVENTIONAL Monetary policy 10/11/2017 MOST EXPANSIVE MONETARY POLICY IN THE HISTORY OF THE FEDERAL RESERVE PRINTED TONS OF MONEY FEDERAL RESERVE BALANCE SHEET WAS INCREASED BY $3.5 TRILLION FED STOPPED PRINTING IN 2014 4

10/26/13 10/11/2017 CURRENCY WARS OTHER CENTRAL BANKS ARE STILL PRINTING MONEY LIKE NEVER BEFORE EUROPEAN CENTRAL BANK $87B/MTH JAPAN CENTRAL BANK $62B/MTH BANK OF ENGLAND $85B/MTH 4

UPSIDE DOWN WORLD Central banks with negative interest rates 10/26/13 10/11/2017 UPSIDE DOWN WORLD Central banks with negative interest rates BANK OF ENGLAND EUROPEAN CENTRAL BANK CENTRAL BANK SWITZERLAND CENTRAL BANK OF SWEDEN CENTRAL BANK OF DEMARK 4

10/26/13 MONETARY POLICY 10/11/2017 TREASURY YIELD CURVE INTEREST RATES TO MATURITY SEPTEMBER 2000 SEPTEMBER 2016 6 MTH RATE = 5.8% 0.47% 1YR RATE = 6.0% 0.60% 5YR RATE = 6.5% 1.18% 10YR RATE = 6.6% 1.57% 30YR RATE = 6.6% 2.23% NEGATIVE REAL SHORT-TERM INTEREST RATES 4

10/26/13 10/11/2017 MONETARY POLICY OVER SIX YEARS WITH ZERO SHORT-TERM INTEREST RATES TEN YEARS WITHOUT RATE INCREASE DECEMBER 2015 FED RATE INCREASED BY O.25%

FINGERS CROSSED! MONETARY POLICY WHAT NEXT? KEEP YOUR 10/26/13 10/11/2017 MONETARY POLICY WHAT NEXT? KEEP YOUR FINGERS CROSSED! 4

10/26/13 10/11/2017 HEAD WINDS 2016-17 1. GLOBAL ECONOMY IS SLOWING DOWN 2. U.S. STRUCTURAL UNEMPLOYMENT 3. STOP- AND START NATURE OF CONSUMER SPENDING 4. TERRORISM 5. CONTINUED POLITICAL BRINKSMANSHIP 6. FEAR THAT IT ALL COULD HAPPEN AGAIN 7. MOTHER NATURE 8. STRONG DOLLAR 9. BREXIT 4

REASONS TO BE “cautiously OPTIMISTIC” 10/26/13 10/11/2017 REASONS TO BE “cautiously OPTIMISTIC” 1. HOUSEHOLD ASSETS ARE AT A RECORD HIGH 2. CONSUMERS ARE STILL SPENDING 3. INFLATION IS TAME 4. WE ARE GROWING FASTER THAN MOST OTHER INDUSTRIALIZED COUNTRIES 5. MONEY IS CHEAP 6. THIS POLARIZING PRESIDENTIAL CAMPAIGN WILL END IN 16 DAYS 4