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

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

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?

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)

Will the jobs/workers come back?

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

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

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?

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

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%)

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

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

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

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

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