1. Possible Tripwires for the Global Economy: 2005-06
Robert F. Wescott, Ph.D.
ISEO Conference
Bergamo
4 July 2005

2. Energy, Deficits, and Dollar Worry Financial Markets
Factors “Hurting” Investment Climate “A Lot”
Energy Prices
Outsourcing
Budget Deficits
Bad Accounting
Illegal Immigration
Iraq
Falling Dollar
Threat of Terrorism
Source: UBS Index of Investor Optimism, May 2005

3. Possible Global Tripwires
Removal of policy support: greater than realized?
Oil prices: more slowing than expected?
Can U.S. consumers keep driving the world economy?
Widening shift from labor to capital in industrial countries hurting growth?
Fracturing of international relations: Is Osama bin Laden winning?
Shoehorning China into the world economy and China’s international relations
George W. Bush: leadership challenges?

4. 2005: Economic Policy Floodgates Closing
Source: IMF WEO, Author’s calculations for China

5. Oil: A Growing Burden on the World Economy
Source: EIA

6. $20 per Barrel Higher Oil Prices Will Lower Economic Growth, Boost Inflation, and Raise the Unemployment Rate
Source: Average of model results from Macroeconomic Advisers, Global Insight, and the International Monetary Fund

7. Out of Control? The U.S. Trade Deficit
Source: BEA, OECD

8. First Main Cause: American Households Save Almost Nothing
Source: OECD

9. Second Main Cause: U.S. Budget Deficits
Source: BEA

10. Foreign Official Purchases of U. S
Foreign Official Purchases of U.S. Debt Have Declined for More than a Year
Source: U.S. Treasury Department

11. U.S. Debt, Total and Total Held by Private Sector
Source: U.S. Treasury, Federal Reserve

12. Despite Strong U.S. Investment, 20-Year Trend for Large Economies is Down
Source: IMF WEO

13. Historically, Rising Interest Rates Add Financial Pressures
Source: Federal Reserve

14. Financial Sectors to Watch Closely in 2005-06 as Interest Rates Rise
U.S. Housing
Airlines
Sub-prime
Loans
Corporate Governance Risks
Autos
Chinese Banking
AIG

15. Falling U.S. Real Wages for the First Time in a Decade
Source: Bureau of Labor Statistics

16. Profit Share Has Jumped under President Bush
Source: BEA

17. The Bush Legacy: Consumer Patterns Tilting Toward the Rich
How Spending Has Changed by Quintile in the Bush Administration
Bottom Quintile
2nd Quintile
3rd Quintile
4th Quintile
Top Quintile
Recreation, cultural events
+28.6%
+29.5%
-1.5%
-0.7%
+11.0%
Boats, recreational vehicles
+85.5%
-10.3%
+49.4%
+13.0%
-32.5%
Air travel, public transportation
+35.9%
+25.3%
+22.9%
+9.5%
+5.3%
-33.8%
-25.2%
-2.4%
+4.8%
-55.8%
+14.6%
+16.2%
-2.3%
+49.6%
-27.4%
-7.1%
-25.0%
-1.4%
-3.9%
Source: BLS, Consumer Expenditure Survey 2003

18. Returns to Capital Continue to Increase Faster than Wages
Percent change 2004 Q1 to 2005 Q1
Source: BEA and BLS

19. Income Inequality Affecting Consumer Spending?
Same-store Sales, April 2005 vs. April 2004
Source: International Council of Shopping Centers-UBS

20. Germany: A Decade without Wage Growth
Source: OECD, IMF WEO

21. German Wage Share Falling: A Shift from Labor to Capital
Down 5% points since re-unification
Source: OECD

22. A Fracturing of International Relations?
(Percent reporting favorable view of the United States)
Pre-9/11 (2000)
After Fall of Saddam (2003)
Today (2005) UK 83 70 55
France 62 43
Germany 78 45 41
Russia 37 36 52
Turkey 15 23
Source: Pew Research Center for the People and the Press, June 2005

23. Do You Support the U.S.-Led War on Terror?
(Percent responding “yes”)

24. Should Western Europe be more independent from the U.S.?
(Percent saying “yes”)

25. Big differences between U.S. and most other countries
Source: Pew Research Center for Public and Press, June 22, 2005

26. (Share of world economy, PPP basis)
China’s Trend Has Been Sharply Upward
(Share of world economy, PPP basis)
U.S.
China
Japan
Germany
Italy
Source: IMF WEO

27. China’s Exports Are Increasing as a Share of World Trade
1990
2003
Others
Source: World Bank, World Development Indicators 2005

28. GDP, % of World Total, PPP Basis
U.K.,
U.S.,
Japan,
China,
Source: Angus Maddison, The World Economy: A Millennial Perspective and International Monetary Fund

29. Steel Production, Millions of tons
U.S.,
Japan,
19% of
world (1974)
36% of
world (1900)
<5% of
world (1950)
<10% of
world (1843)
China,
29% of
world (2005)
<4% of
world (1980)
Sources: International Iron and Steel Institute, Japan Iron and Steel Federation, Barraclough: Steelmaking, Hogan: The Economic History of the Iron and Steel Industry in the U.S, Hudson & Sadler: The International Steel Industry

30. George Bush’s Political Capital
Source: Gallup

31. Among Presidents Early in Their Second Terms, Bush is Quite Unpopular
Positive
Negative
Differential
Date
Johnson
66%
21%
+45%
24-29 June 1965
Eisenhower
64%
22%
+42%
6-11 June 1957
Truman
57%
26%
+31%
11-14 June 1949
Reagan
58%
32%
+26%
7-10 June 1985
Clinton
55%
35%
+20%
26-29 June 1997
Nixon
44%
45%
-1%
22-25 June 1973
GW Bush
47%
51%
-4%
16-19 June 2005
Source: Gallup Presidential Approval Ratings

32. Are U.S. Casualties in Iraq Worth It?
Source: Washington Post, June 8, 2005

33. Americans Feel the Country is “Losing Ground” on Most Issues
Making Progress
Budget deficit
65% 6%
Social Security’s finances
63%
Health care system
62% 9%
Medicare’s finances
56% 5%
Job availability
55%
15%
Illegal immigration
52%
11%
Quality of education
50%
20%
Illegal drugs
46%
16%
Political corruption
41%
10%
Environmental pollution
37%
21%
International Terrorism
31%
36%
Source: Pew Research Center, May 19, 2005