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

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

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

4. 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)

5. 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

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

7. Unemployment and Deflation

8. High Unemployment

10. Deflationary Fears

11. Negative Wealth Shocks

12. The Bursting of the Housing Bubble

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

14. The Inevitable Was Delayed By New Mortgage Instruments

15. By 2006 Real Estate Prices Were No Longer Rising

16. Sales of New and Existing Homes Fall Rapidly

17. Construction Falls As Well

18. The Consumption Bubble Also Burst

19. GDP Growth Was Fueled By Consumption Expenditures

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

21. Real Estate Concerns Negatively Impacted Consumer Confidence

22. Falling Confidence Led To Falling Sales

23. Consumption Fell in Both Nominal and Real Terms

24. Falling Consumption Led to Declines In Retail Sales

25. Global Shocks

26. The Downturn Was Global

27. The Largest Economies Were All Hit Hard

28. The Trend Was Similar In Established and Rising Stars

29. The US Experiences a Rise in the Value of the Dollar

30. But the Stronger Dollar Is Very Hard On Exporters

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

32. 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.

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

34. Crosswinds Monetary policy Fiscal policy Regulatory policy

35. 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

36. Positives

37. 20072008 2009 U.S. GDP Growth

38. 20072008 2009 Low to Moderate Inflation

39. 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

40. 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.

41. Remaining Concerns

42. 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

43. 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

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

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

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