The Economy 2010 and How We Got Here Steven L. Cobb, Ph.D. UNT Center for Economic Education

The U.S. Economy is on a Trajectory of Slow, but Improving Growth for 2010

Guitar-string theory: Deeper recessions are followed by stronger, more rapid recoveries. -Milton Friedman

The aftermath of deep financial crises shows deep and lasting effects on asset prices, output and employment. Unemployment and house price declines extend out for five and six years. Output declines last two years on average. Even recessions sparked by financial crises do eventually end, albeit almost invariably accompanied by massive increases in government debt. -Reinhart and Rogoff(Dec. 08)

The Current Situation GDP: 2-3%, more likely close to 3% Absent the financial crisis: 5-6% Headline inflation: 3.0% Core inflation: 1.5% Unemployment: 10.4% peak in 2010 Q2 Sustained employment growth to begin after Feb. 2010

What have we experienced? High unemployment Actual deflation Negative wealth shock Bursting of multiple bubbles Near-demise of banking/financial system

Unemployment and Deflation

High Unemployment

Deflationary Fears

Negative Wealth Shocks

The Bursting of the Housing Bubble

A Softening of the Housing Market As A Result Of Higher Interest Rates (04 – 07)

The Inevitable Was Delayed By New Mortgage Instruments

By 2006 Real Estate Prices Were No Longer Rising

Sales of New and Existing Homes Fall Rapidly

Construction Falls As Well

The Consumption Bubble Also Burst

GDP Growth Was Fueled By Consumption Expenditures

As Long As Home Prices Were Rising, Consumers Were Using Equity To Finance Their Purchases

Real Estate Concerns Negatively Impacted Consumer Confidence

Falling Confidence Led To Falling Sales

Consumption Fell in Both Nominal and Real Terms

Falling Consumption Led to Declines In Retail Sales

Global Shocks

The Downturn Was Global

The Largest Economies Were All Hit Hard

The Trend Was Similar In Established and Rising Stars

The US Experiences a Rise in the Value of the Dollar

But the Stronger Dollar Is Very Hard On Exporters

The Result of All This Is the Near Demise of the Financial System

What have we experienced? This Recession is the most painful since the Great Depression Longest, Deep, and Wide It followed 25 years of growth interrupted by two short, mild recessions Bottom Line: Relative to a generation of experience, this was a truly traumatic event.

Headwinds Credit to households and small businesses Banking system –Capital, Commercial Real Estate losses Anticipated taxes Policy uncertainty Higher energy prices

Crosswinds Monetary policy Fiscal policy Regulatory policy

Tailwinds Growth in temporary employment Declining initial unemployment claims Declining layoff announcements Employment gains in 11 states 11 sectors showing employment gains Synchronized global recovery Industrial production bounce-back

Positives

U.S. GDP Growth

Low to Moderate Inflation

Year-end inflation? Given fears of deflation at year-end 2008, economists thought a 1% deflation over 2009 was the most likely outcome. Federal Reserve Policy averted that outcome, and thats a prediction were very happy to have been wrong about. Credit Chairman Bernanke and the FOMC

Consumer Behavior After a number of years where the U.S. saving rate was negative, there is an indication that Americans are beginning to save again. This has the potential to be one of the more positive impacts of the recession.

Remaining Concerns

Unemployment May not have peaked – some expect it to hit 10.4% in the second quarter of this year. Doesnt measure discouraged workers and part-time workers that want full time jobs (may currently be as high as 16.3%) Some economists still fear a jobless recovery

Budget Deficits The spending measures may have been critical to avoiding a much larger crisis, but our national debt is rising rapidly. It is now over $12 Trillion (more than $40,000 per citizen) Current deficits are adding to this number at record rates

Long-term concerns have been put on the back burner Social Security Medicare

Lessons Learned Only traumatic events, not hiccups, produce behavior modification.

What is the Bottom Line? The circulation of confidence is better than the circulation of money. -James Madison