1. US Economy Forecast 2014, 2015 Till Schreiber Senior Lecturer Professor College of William & Mary September 26 th 2014 Nafa Annual Convention, Aspen, CO

2. Looking back to Savannah My forecast a year ago: – Slow (below long-term average) growth in 2014 – Unemployment falls slowly – Disappointing recovery continues – Government muddling through instead of implementing pro-growth policies Unfortunately, this turned out to be about right

3. Realistic forecast must make assumptions about some factors No ideological agenda Based on current and historical data, facts (and some theory) Where is the economy now? What do some leading indicators suggest about the near future?

4. Snapshot of the economy Unemployment rate 6.2% (ticked up recently) – Labor force participation still really low GDP growth disappointing – FELL 2.1% in first quarter (at annual rate), then went up by 4.2% second quarter Economy slowed down by multiple “headwinds” – Cold winter in first part of the year – Government deadlock – Slowdown in Europe and emerging markets Inflation expected to be about 2% each year going forward over the next decade (based on bond yields)

5. Will the jobs/workers come back?

6. Share of workers claiming social security disability (Mueller et al, 2013)

7. Government regulation How much does ‘too much regulation’ reduce growth? – Talk of secular stagnation, permanently lower growth – Can US economy return to 20 th century trend growth? Immigration Not just you. Talk to Virginia Credit Union League some month ago, very similar issues Assume Assume: No reduction in red tape imminent

8. Investment, Investment, Investment Main issue of disappointing “recovery” – Private sector investment (spending by businesses on R&D, new machines etc.) fell of a cliff in late 2008, early 2009 – It has recovered somewhat, will it now continue to increase or flatten out?

9. Investment as share of GDP (blue) vs. Unemployment rate (red)

10. Business Sector You guys! High levels of uncertainty – Regulations and Taxes – Consumer and Industry demand going forward Purchasing Managers’ Index (ISM) – High last summer/fall. Then big fall in early 2014, now has regained the ground. Temporary blip or beginning of faster recovery??? Assume Assume: Resilient investment demand, total construction spending up over last year

11. Exports Questions about growth prospects in emerging markets – Dollar has recently appreciated versus many emerging market currencies Eurozone faces internal issues, so does Japan No export boom likely overall

12. What to make of all this? Growthin the second half of 2014 Growth in the second half of 2014 will likely be around 3%. But don’t be too optimistic (see below)

13. Forecast for 2015 Growth should pick up once the recovery really takes hold – Has been predicted since late 2009, many businesses and households have now paid down debt substantially Crucial market: Investment! Both residential (housing) and other fixed investment No government policies in sight to address regulation mess boldly – Muddling through continues

14. Forecast for 2015 If economy grows fast, interest rate hikes may slow down recovery of housing market and investment generally somewhat – Federal Reserve scheduled to raise rates next year “Disappointing” economy may continue Growth of 3% Growth of 3% unlikely to be topped next year Unemployment comes down further very, very slowly if at all