Professor Emeritus of Economics February 25, 2015 REMNANTS OF THE GREAT RECESSION

GOOD NEWS OUR ECONOMY IS GROWING WE ARE NOT IN A RECESSION BAD NEWS WORST RECESSION SINCE GREAT DEPRESSION WORST RECOVERY SINCE GREAT DEPRESSION 2

October 2009 unemployment rate = 10.0 % January 2015 unemployment rate = 5.7% Number employed exceeds high hit in Jan million Number unemployed Jan = 9 million 3

Unemployment rate – including marginally attached workers and part-time workers Jan % Jan % 4

NEW NORMAL Participation rate = % population over age of 16 in labor force January % January % If we had the same participation rate today as we did in million more people would be in the labor force 5

Why the change in the participation rate? 1. Boomers ( ) retiring 2.Worker’s skills not meeting employers needs 3. Increase in workers claiming disability 4. Expanded safety net 5. Mothers staying home with children 6. Obama care 7. Criminal record 6

NEW NORMAL Employment rate = % of population over the age of 16 employed January % January % If we had the same employment rate as we did in million more people would be working today 7

January 2015 UNEMPLOYMENT BY LEVEL OF EDUCATION  Less than H.S. 8.5 %  H.S. no college 5.4%  Some college 5.2%  Bachelor’s degree 2.8% or higher EDUCATION MATTERS! 8

January 2015 Population 25 years and over Participation Rate Employment Rate Less than H.S.46.0% 42.1% H.S. no college57.9%54.8% Some college 67.2%63.8% Bachelor’s Degree74.4%72.3% or higher STRUCTURAL UNEMPLOYMENT 9

REASONS FOR UNEMPLOYMENT September 2014 Job Losers 2.7% Job Leavers 0.5% Reentrants 1.8% New Entrants 0.7% Total unemployment = 5.7% 10

Those with homes and jobs On the road to recovery Those who lost job and/or homes Stalled - minimal recovery 11

UNDERPERFORMING 2009 GDP 2010 GDP 2011 GDP 2012 GDP Q1 -6.4% Q1 3.7% Q1 0.4% Q1 3.7% Q2 -0.7% Q2 1.7% Q2 1.3% Q2 1.2% Q3 1.6% Q3 2.5% Q3 1.8% Q3 2.8% Q4 5.0% Q4 2.3% Q4 3.0% Q4 0.1% 12

GDP 2013GDP 2014 Q1 2.3%Q Q2 1.8%Q2 4.6% Q3 4.3% Q3 5.0% Q4 3.3%Q4 2.6% GROWTH ESTIMATE FOR 2014 = 2.4% 13

NEW NORMAL GDP AVERAGE GROWTH 1950 – % GDP AVERAGE GROWTH 2009 – % HOW IMPORTANT IS THE CHANGE IN GROWTH? 3.6% GR0WTH - GDP DOUBLES IN 20 YRS 2.3% GROWTH – GDP DOUBLES IN 31 YRS 14

BRIC Nations GDP Growth est. BRAZIL 8.9%0.5% RUSSIA 3.4%0.2% INDIA % CHINA 7.8%7.4% 40% OF WORLD POPULATION 15

GROUP OF SEVEN – SLOW TO NO GROWTH GDP GROWTH 2014 est. U.S. 2.4% JAPAN.9% GERMANY 1.5% BRITAIN 2.6% FRANCE 0.3% CANADA 2.2% ITALY-1.9% 16

2014 INFLATION RATE = 1.4% 17

AGGREGATE DEMAND C+I+G+X CONSUMER SPENDING INVESTMENT SPENDING GOVERNMENT SPENDING NET EXPORTS – EXPORTS-IMPORTS 18

PENT UP DEMAND – BUYING CARS & TRUCKS SAVINGS RATE UP NET WORTH OF HOUSEHOLDS UP CONFIDENCE UP REAL WAGES STAGNANT GASOLINE PRICES DOWN 19

HOUSING MARKET IS STABILIZING CONSTRUCTION IS SLOWLY PICKING UP BUSINESS PROFITS ARE STRONG BUSINESSES HAVE LOTS OF CASH BUSINESSES ARE READY TO SPEND UNCERTAINTY IS A MAJOR PROBLEM 20

EXPORTS HAVE BEEN A DRIVING FORCE IN OUR ANEMIC RECOVERY EXPORTS ARE SLOWING DOWN EXPORTS ACCOUNT FOR 13% OF OUR GDP 21

ANNUAL BUDGET DEFICIT 2009 $1.4 TRILLION 2010 $1.3 TRILLION 2011 $1.3 TRILLION 2012 $1.1 TRILLION 2013 $ 680 BILLION 2014 $483 BILLION TOTAL DEBT = $17.8 TRILLION + 22

FACT FISCAL 2014 Tax revenues are up 8.6% 2013 = $2,775 trillion 2014 = $3,013 trillion Government spending up 1.6% 2013 = $3,455 trillion 2014 = $3,512 trillion. 23

GOOD NEWS DEFICIT AS A PERCENT OF GDP IS SHRINKING DECEMBER % GDP DECEMBER % GDP DECEMBER % GDP DECEMBER % GDP DECEMBER % GDP DECEMBER % GDP 24

CENTRAL BANKS HAVE FLOODED THE WORLD FINANCIAL SYSTEM WITH MORE THAN $11 TRILLION IN CASH 25

MOST EXPANSIVE MONETARY POLICY IN THE HISTORY OF THE FEDERAL RESERVE PRINTING TONS OF MONEY FEDERAL RESERVE BALANCE SHEET HAS INCREASED BY $3.5 TRILLION SINCE AUGUST

UNCONVENTIONAL QE1 NOVEMBER 2008 QE2 NOVEMBER 2010 QE3 SEPTEMBER 2011(operation twist) QE4 SEPTEMBER 2012 ( print $85B/mth) 27

BANKS CURRENTLY HAVE $2.3 TRILLION IN EXCESS RESERVES THESE RESERVES COULD CREATE $23 TRILLION IN NEW MONEY OVER TWICE THE AMOUNT OF MONEY CURRENTLY IN OUR ECONOMY 28

TREASURY YIELD CURVE INTEREST RATES TO MATURITY SEPTEMBER 2000 FEBRUARY MTH RATE = 5.8% 0.06% 1YR RATE = 6.0% 0.11% 5YR RATE = 6.5% 1.50% 10YR RATE = 6.6% 2.08% 30YR RATE = 6.6% 2.71% NEGATIVE REAL SHORT-TERM INTEREST RATES 29

OVER SIX YEARS WITH ZERO SHORT-TERM INTERST RATES WHAT NEXT? PATIENCE! 30

HEADWINDS FOR SLOW GROWTH IN EUROPE 2. U.S. STRUCTURAL UNEMPLOYMENT RATE 3. STOP- AND START NATURE OF CONSUMER SPENDING 4. ISIS 5. RUSSIA/UKRAINE 6. CONTINUED POLITICAL BRINKSMANSHIP 7. FEAR THAT IT ALL COULD HAPPEN AGAIN 8. MOTHER NATURE 31

SIX REASONS TO BE SLIGHTLY OPTIMISTIC 1. BALANCE SHEETS HAVE IMPROVED 2. INFLATION IS TAME 3. WE ARE GROWING FASTER THAN MOST OF OUR COMETITORS 4. MONEY IS CHEAP 5. DEFICIT IS DECLINING 6. WE ARE GAINING ENERGY INDEPENDENCE 7. BOOMERS ARE GETTING OLDER 32