The U. S. Economy in May 2012. Where are we. How did we get here The U.S. Economy in May 2012 Where are we? How did we get here? Where are we going? Daniel M. Gropper, Ph.D. David and Meredith Luck Professor Associate Dean for Graduate & International Programs Department of Finance College of Business Graduate Assistant: Marc Ford, MBA Class of 2012

The National Bureau of Economic Research says this recession ended in 2009. Didn’t you notice? Is this the worst recovery in the USA...ever? Yes, says Ed Lazear (WSJ, 4.3.2012) So, where are we, and how did we get here?

Current Economic Situation Longer term up to 2012 Q2

How did we get here? Consider a few factors: The Federal Reserve returned to an actively interventionist monetary policy over the last decade….adjusting short-term interest rates to try to hit short-term objectives. Political objectives, manifested in regulatory changes, and imbalances in federal and state budgets cause short-term fiscal problems and long-term promises that appear unsustainable And we are not alone…keep an eye on the European PIIGS problems…

Federal Reserve Interest Rate policy through mid-year 2001 In 1999-2000 we had what many call the Tech Bubble – irrational exuberance in the stock market. The FED raised rates to squeeze credit conditions and cool things off, which they did with great effect. In late 2000, they started cutting rates again, hoping to avoid too much of a crash.

Federal Reserve Interest Rate policy through mid - 2003 The FED continued to cut rates through 2001, and “kept their foot on the gas” with low rates through 2002, 2003, and 2004.

Federal Reserve Interest Rate policy through mid - 2005 In mid 2004 the FED, worried that they had overshot again, started raising rates once more. They did that from mid-2004, through 2005 and 2006.

Federal Reserve Interest Rate policy: 2004 through mid - 2007 They kept squeezing the credit markets in 2006 and 2007, as they were worried that they had created too much price pressure in the housing market, and the housing market was “overheating”. People were flipping condos, and credit was abundant – too abundant.

Federal Reserve Interest Rate policy: 2005 through mid – 2009

Federal Reserve Interest Rate policy: 2008 through early - 2012 Here we are now – the FED is keeping their foot on the gas again – keeping rates low and trying to push credit out into the financial markets.

International Central Bank Interest Rate policy: 2005 through early - 2012

after the creation of the single currency system, many believed that a single currency also meant the risk of sovereign debt was the same across counties. The financial crisis revealed that the political and institutional difference between countries yielded widely differing performance.

Let’s take a closer look at the current situation, labor markets first Let’s take a closer look at the current situation, labor markets first. What is happening in the entire country, in the region, and then by industry.

National Data October 2012

Is there any good news in manufacturing?

What about real estate? Isn’t that a big cause of our current problems?

Where are consumers in this picture? Is there any good news there?

Is anyone worried about inflation? Why?

How do we do better – how do we get past this set of economic challenges? What are our strengths?

How do we get past this set of economic challenges How do we get past this set of economic challenges? Focus on what has made America great. - Education. - Innovation. - Creativity. - Working hard; working smart. - Reasonable government taxing /spending policy - Competition and free markets - Economic freedom Free enterprise needs champions: be one!

What are some things we have to worry about as we move forward in 2012 and beyond? The Euro zone countries and their problems Terrorism and economic problems around the world Short and long-term political trends here and abroad Philosophical and cultural approach to business Long-term demographic trends in the USA