1. US Economy Forecast 2013, 2014 Till Schreiber College of William & Mary September 26 th 2013 Nafa Annual Convention, Savannah, GA

2. Forecast for 2013, 2014 What would we like to happen? – Deficit and debt ceiling deal – Entitlement and health care reform agreements – Fewer but smarter regulations and tax reform – Less uncertainty – …. What’s actually going to happen? – Not all of that.

3. Realistic forecast must make assumptions about some of these 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 7.4% – Mediocre job creation, people dropped out of labor force – Government sector shedding jobs GDP growth disappointing – 1.1% in first quarter (at annual rate), just 1.7% for the second quarter Economy slowed down by multiple “headwinds” – Political uncertainty – Sequester – Slowdown/crisis in Europe and China Inflation expected to be about 2-3% each year going forward over the next decade (based on bond yields)

5. Will the jobs/workers come back?

6. Government spending cuts Absolutely necessary over the long term – Unless you are ok with living in a country like France; most Americans don’t seem to be Big cuts right NOW will slow the economy down for the rest of the year and next year – Higher unemployment than otherwise – Reduction in growth – All bets are off, if debt ceiling is not increased. This would lead to a massive reduction of spending right NOW. How nasty will the political fight be? Assume Assume: No reversal of spending cuts this year, no “stimulus” from government sector

7. Investment, Investment, Investment Main issue of disappointing “recovery” – Private sector investment fell of a cliff in late 2008, early 2009 – Has recovered only very slowly since 2009 and is still quite a bit away from levels before 2007

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

9. Housing Market Residential fixed investment (People building houses, or major remodel/improvements) – According to latest numbers still way below 2005 level. For every $100 spend on housing construction in 2005, now only $56 are spent. But up a bit from two years ago. Assume Assume: Housing market continues to slowly recover.

10. Business Sector You guys! High levels of uncertainty – Regulations and Taxes – Consumer and Industry demand going forward Consumer Confidence Measures still low compared to 2003-07 – Slow recovery of confidence Purchasing Managers’ Index (ISM) – Big jump up in July. New Orders in manufacturing for capital goods are also up. Temporary blip or beginning of faster recovery???

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 last part of 2013 Growth in the last part of 2013 will likely be at most around 3%, maybe lower. – Not enough to make major progress in terms of reducing unemployment; no surprise if rate remains above 7% over the rest of the year – Combined with growth of about 1.5% in the first half, overall growth for the year of 2013 will be way below 3%

13. Forecast for 2014 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 If economy grows fast, interest rate hikes may slow down recovery of housing market somewhat

14. Forecast for 2014 Households and many businesses are still paying down debt from the bubble years – Will continue in 2014 – Debt levels have come down but not nearly to pre-bubble levels “Disappointing” recovery may continue Growth of 3% Growth of 3% unlikely to be topped next year Unemployment comes down very, very slowly

15. Forecast for 2014 Assumes no major new “headwinds” Also no miracles Assumes no major policy changes – Safe assumption for Congress – Also unlikely that the Federal Reserve will be willing to do something dramatic, if anything expect a return to “more normal” policies and a bit higher long term interest rates Forecast consistent with forecast from Federal Reserve, economists at Goldman Sachs, PIMCO etc. – Sorry, I am not more cheerful but I have good company…