1. 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

2. 10/26/13
10/11/2017
GOOD NEWS OUR ECONOMY IS GROWING BAD NEWS SLOWEST RECOVERY EVER RECORDED! EIGHT YEARS AND COUNTING 4

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

4. labor market November 2009 17.1 % September 2016 9.7 %
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labor market
Unemployment rate—including marginally attached workers and part-time workers
November %
September % 4

5. labor market September 2000 67.5% September 2015 62.4%
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labor market
NEW NORMAL
Participation rate =
% population over age of 16 in labor force
September %
September %
September % 4

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

7. Labor market 353,OO0 2015 9% THE UPSCALING OF MANUFACTURING
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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 % % 4

8. Factory Utilization Rate
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Labor market
Factory Utilization Rate
SEPTEMBER %
SEPTEMBER %
4.6% below ( ) Average 80%
High 85.3% 1988 4

9. 10/26/13
10/11/2017
LABOR MARKET
SEPTEMBER MILLION CURRENT JOB OPENINGS THIS IS A JOBS NON-RECOVERY 4

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

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

12. 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

13. 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

14. U.S. ANNUAL GDP GROWTH 2006 2.7% 2011 1.6% 2007 1.8% 2012 2.3%
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10/11/2017
% %
% %
% %
% %
% %
% est.
U.S. SETS RECORD
10 STRAIGHT YEARS WITHOUT 3% GROWTH . 4

15. CHINA’S ANNUAL GROWTH RATE
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CHINA’S ANNUAL GROWTH RATE
% %
% %
% %
% %
% %
% est 4

16. JAPAN’S GROWTH RATE 2006 1.7% 2011 -0.5% 2007 2.2% 2012 1.7%
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JAPAN’S GROWTH RATE
% %
% %
% % %
% %
% est. 4

17. 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

18. 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

19. INFLATION RATE (CORE = INFLATION EXCLUDING FOOD AND ENERGY)
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INFLATION RATE
SEPTEMBER 2016
ANNUAL INFLATION RATE = 1.5%
ANNUAL CORE INFLATION = 2.2%
(CORE = INFLATION EXCLUDING FOOD AND ENERGY) 4

20. C+I+G+X CONSUMER SPENDING INVESTMENT SPENDING GOVERNMENT SPENDING
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AGGREGATE DEMAND
C+I+G+X
CONSUMER SPENDING
INVESTMENT SPENDING
GOVERNMENT SPENDING
NET EXPORTS = EXPORTS-IMPORTS 4

21. 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

22. INVESTMENT SPENDING UNCERTAINTY IS A MAJOR PROBLEM
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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

23. 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) -$624,7O $745, $735, $689, $ 4

24. 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

25. 10/26/13
10/11/2017
EXPORTS
FIVE LARGEST EXPORT NATIONS—2015 (BILLIONS) 1. CHINA $2, U.S. $1, GERMANY $1, JAPAN $ NETHERLANDS $ 567 4

26. Government spending up 6.0% 2015 = $3.69 trillion
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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

27. 2016 $587 BILLION 34% INCREASE FROM 2015 FISCAL POLICY
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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

28. FISCAL POLICY BAD NEWS DEFICIT AS A PERCENT OF GDP IS GROWING AGAIN
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FISCAL POLICY
BAD NEWS
DEFICIT AS A PERCENT OF GDP IS GROWING AGAIN
% GDP
% GDP
% GDP
% GDP
% GDP
% GDP
% GDP
% GDP 4

29. 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

30. MONETARY POLICY RISKS OF RAISING INTEREST RATES
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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

31. MONETARY POLICY RISK OF NOT RAISING INTEREST RATES INFLATION
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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

32. Monetary policy THE GOOD OLD DAYS FEDERAL RESERVE’S TOOLS
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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

33. MONETARY POLICY FED HAS BEEN PUSHING ON A STRING! BIG QUESTION!
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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

34. MONETARY POLICY OPTIONS TO STIMULATE THE ECONOMY
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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

35. UNCONVENTIONAL Monetary policy
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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

36. 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

37. UPSIDE DOWN WORLD Central banks with negative interest rates
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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

38. 10/26/13
MONETARY POLICY
10/11/2017
TREASURY YIELD CURVE INTEREST RATES TO MATURITY SEPTEMBER 2000 SEPTEMBER 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

39. 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%

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

41. 10/26/13
10/11/2017
HEAD WINDS
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

42. REASONS TO BE “cautiously OPTIMISTIC”
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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