The 2010 Economy: What Can We Expect? What are the Challenges? When will Employment Recover? Which State are Leading the Recovery? What are the Risks?

Bruce Yandle January 22, 2010 Bruce Yandle

January 22, 2010

Date

May-9

1

Oct-9

1

Mar-9

2

Aug-9

2

Jan-

93

Jun-

93

Nov-9

3

Apr-9

4

Sep-9

4

Feb-

95

Jul-9

5

Dec-9

5

May-9

6

Oct-9

6

Mar-9

7

Aug-9

7

Jan-

98

Jun-

98

Nov-9

8

Apr-9

9

Sep-9

9

Feb-

00

Jul-0

0

Dec-0

001

M5

01M10

2-Mar

2-Aug

3-Ja

n3-

Jun

3-Nov

4-Apr

4-Sep

5-Fe

b5-

Jul

5-Dec

6-May

6-Oct

7-Mar

7-Aug

8-Ja

n8-

Jun

8-Nov

9-Apr

9-Oct

105000

110000

115000

120000

125000

130000

135000

140000

145000

150000

Total Employed, 16 and Over, Seasonally AdjustedHousehold Survey, with Trend

1/1991 - 12/2009

Th

ou

sa

nd

Date

May-9

1

Oct-9

1

Mar-9

2

Aug-9

2

Jan-

93

Jun-

93

Nov-9

3

Apr-9

4

Sep-9

4

Feb-

95

Jul-9

5

Dec-9

5

May-9

6

Oct-9

6

Mar-9

7

Aug-9

7

Jan-

98

Jun-

98

Nov-9

8

Apr-9

9

Sep-9

9

Feb-

00

Jul-0

0

Dec-0

001

M5

01M10

2-Mar

2-Aug

3-Ja

n3-

Jun

3-Nov

4-Apr

4-Sep

5-Fe

b5-

Jul

5-Dec

6-May

6-Oct

7-Mar

7-Aug

8-Ja

n8-

Jun

8-Nov

9-Apr

9-Oct

105000

110000

115000

120000

125000

130000

135000

140000

145000

150000

Total Employed, 16 and Over, Seasonally AdjustedHousehold Survey, with Trend

1/1991 - 12/2009

Th

ou

sa

nd

September 2003

2006

M1

2006

M3

2006

M5

2006

M7

2006

M9

2006

M11

2007

M1

2007

M3

2007

M5

2007

M7

2007

M9

2007

M11

2008

M1

2008

M3

2008

M5

2008

M7

2008

M9

2008

M11

2009

M1

2009

M3

2009

M5

2009

M7

2009

M9

2009

M11

0

10

20

30

40

50

60

70

Diffusion Index, 1/2006-12/2009271 Industries over 1-month Span

V U W

Recovery? What Shape?

20

01

M1

20

01

M4

20

01

M7

20

01

M1

0

20

02

M1

20

02

M4

20

02

M7

20

02

M1

0

20

03

M1

20

03

M4

20

03

M7

20

03

M1

0

20

04

M1

20

04

M4

20

04

M7

20

04

M1

0

20

05

M1

20

05

M4

20

05

M7

20

05

M1

0

20

06

M1

20

06

M4

20

06

M7

20

06

M1

0

20

07

M1

20

07

M4

20

07

M7

20

07

M1

0

20

08

M1

20

08

M4

20

08

M7

20

08

M1

0

20

09

M1

20

09

M4

20

09

M7

0

100

200

300

400

500

600

700

TOTAL PERSONAL SAVINGS: 2001-2009$Billion

What’s Real & What’s Stimulus?

TWO KEY U.S. INDICATORS

1991

q1

1991

q4

1992

q3

1993

q2

1994

q1

1994

q4

1995

q3

1996

q2

1997

q1

1997

q4

1998

q3

1999

q2

2000

q1

2000

q4

2001

q3

2002

q2

2003

q1

2003

q4

2004

q3

2005

q2

2006

q1

2006

q4

2007

q3

2008

q2

2009

q1

2009

q4

2010

q3

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Real GDP Growth, 1991-2010Ewith 4-quarter moving average

Recovery Signals

1. Equity markets move up.2. Hours worked go up.3. Firms become profitable.4. Employment increases.5. Personal Income rises.

EQUATION OF EXCHANGE

MV = PQ

M: Money SupplyV: Velocity

P: Price Level (CPI)Q: Output (GDP)

2000M1 2000M11 2001M9 2002M7 2003M5 2004M3 2005M1 2005M11 2006M9 2007M7 2008M5 2009M3-40

-20

0

20

40

60

80

Annual Growth of Industrial Production on 9-month Lagged M-1 Growth: 1/1990-9/2009

Ann

ual G

row

th R

ate

Money Supply Growth

2000M1 2000M11 2001M9 2002M7 2003M5 2004M3 2005M1 2005M11 2006M9 2007M7 2008M5 2009M3-60

-40

-20

0

20

40

60

80

100

Annual Growth of Industrial Production on 9-month Lagged M-1 Growth: 1/1990-9/2009

Ann

ual G

row

th R

ate

Money Supply Growth

Industrial Production Growth(lagged nine months)

1990

Q1

1990

Q4

1991

Q3

1992

Q2

1993

Q1

1993

Q4

1994

Q3

1995

Q2

1996

Q1

1996

Q4

1997

Q3

1998

Q2

1999

Q1

1999

Q4

2000

Q3

2001

Q2

2002

Q1

2002

Q4

2003

Q3

2004

Q2

2005

Q1

2005

Q4

2006

Q3

2007

Q2

2008

Q1

2008

Q4

-25

-20

-15

-10

-5

0

5

10

15

20

Dow-Jones & GDP Growth: 1Q1990-2Q2009

Dow-Jones annual growth, 4-quarter moving average. GDP quarterly annuallized growth.

U.S. S&P 500

Japan Nikkei 2

25

China SSEA

Britain FT

SE 100

Canada S&P TSX

Austria A

TX

Belgium BEI 20

France

CAC 60

Germany D

AX

Italy FT

SEM18

Czech

PX

Denmark G

MXCB

Hungary BUX

Sweden DM

XS30

Australia

ALL

ORD

Hong Kong Hang Seng

India BSE

Parkist

an KSE

Singpore STI

South Kore

a KOSPT

Agentina MERV

Brazil

BVSPChile

Venezuela IB

C

Israel T

A100

Egypt CASE30

0

20

40

60

80

100

120

Financial Market Performance, Dec. 2007-Oct. 2009(in U.S. dollar terms)

Perc

enta

ge C

hang

e D

ec. 3

1 th

roug

h O

ctob

er 2

8

19731974

19751976

19771978

19791980

19811982

19831984

19851986

19871988

19891990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

2009

-10

-5

0

5

10

15

Industrial Production & S.C. Total Personal Income Growth: 1973-2009

Industrial Production

Grow

th R

ate

19731974

19751976

19771978

19791980

19811982

19831984

19851986

19871988

19891990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

2009

-10

-5

0

5

10

15

Industrial Production & S.C. Total Personal Income Growth: 1973-2009

Industrial Production Real TPI

Grow

th R

ate

What about brains?

U.S. Unemployment Rate by Educational AttainmentDecember 2009

Less than High School Education 15.3%

High School Graduates 10.5%

Associate Degree Holders 9.0%

Bachelor Degree Holders 5.0%

Constraints on Hiring Less Educated People

• Workers have to produce enough wealth to earn their keep.

• This includes all fringe benefits that must be provided by employers.

• Higher minimum wage means entry level workers must be even more productive.

• Mandated fringe benefits require even more productivity.

Unemployment among teenage workers rises each time the minimum wage rate is raised.

2008 Economic Freedom & Knowledge Index Rankings

0

5

10

15

20

25

30

35

40

45

50

55

0 5 10 15 20 25 30 35 40 45 50 55

Knowledge Economy Ranking

Eco

no

mic

Fre

ed

om

R

an

kin

g

Kansas

Georgia

Colorada Utah

New HampshireVirginia

Delaware Arizona

Hawaii

NebraskaMinnesota

South Carolina

Montana

North Carolina

Alabama

Missouri

Iowa

Rhode Island

New York

CaliforniaNew Jersey

VermontMichigan

Washington

Maryland

Connecticut

Massachusets Oregon

S. DakotaIdaho

Wisconsin

N. Dakota

OklahomaNevada

Wyoming

Arkansas

Mississippi

Indiana

Maine

New Mexico

Alaska

Texas

FloridaTennessee

Louisiana

Kentucky

W. Virginia

OhioPennsylvania

Illinois

Employment Growth: 1996-2006

Unemployment Destroys Wealth &Creates Opportunity

Opportunity cost goes down for:• Education & Training

• Moving to a New Location• Starting a New Business

Policy Issues

Climate Change & CopenhagenBanker Bonuses & Bank Tax

Others???

2010 Outlook• GDP growth will range from 2.2% to 2.5% for both 2010 and 2011.• The unemployment rate will average 9.5% for 2010 and 8.4% for 2011.• Inflation will remain low, perhaps at 1% in 2010.• Interest rates will remain tame, with perhaps a 100 basis point increase at the

long end of the yield curve by the end of the year. There are four hazards or ghosts from the past that may disturb the outlook. • Fear-driven increases in personal savings, which means rebuilding consumer net

worth but further reductions in retail sales.• Rising energy prices.• A potential for massive inflation or credit market manipulation by the Fed to

avoid it.• Government entanglement in the economy that regulates and otherwise limits

economic freedom.

Next Three Months?1. We keep getting positive news, but there are new concerns about the exploding deficit.

Cash for Clunkers raises 3Q2009 GDP growth to plus 2.0%. The Dow continues to crawl ahead. We see 9900 in November. But the deficit prospects seem to be pushing interest rates higher as the government hits credit markets for more cash. Mortgage rates and bond yields are rising again. Consumer savings continues to augur for a slow recovery. It is surely not a Goldilocks economy, with everything beginning to feel just right, but we are at last on the recovery road.

122. While 3Q2009 GDP growth is artificially high, 2% or better, there is a soft under belly

developing in the economy. The unemployment rate is hanging high at 9%. People are not buying, unless huge government giveaways push them to buy. Construction spending is a bit better but still in the cellar. The Dow reflects this. A market correction has the Dow hitting 9,000. Once again, it begins to feel like a double dip.

53. This is no double-dip recession. It is a caterpillar economy. One month looks good; the

next not so good. But in spite of all the ups and downs, the economy does seem to be generating positive growth. But the world is flat. The Dow seems hung at 9500. The unemployment rate is stuck at 9.5%. Back to school spending was in the basement, and the prospects for Christmas spending are bleak. Banks are struggling with bad commercial debt. And bank failures continue to plague the economy. Forecasters are revising their 2010 forecasts….downward.

19

Next Three Months?1. Yes, it is a caterpillar economy, but a solid growth base is showing up in manufacturing.

Housing markets are firming, and retail sales are picking up a wee bit. GDP growth over the next quarter should exceed 2%. But unemployment will rise above 10.5% We should keep our money in the market…, that is , if we have any left. The Dow will rise above 10,900.

2. Caterpillar be damned. A double-dip is showing up. Stimulus comes and goes, but there is nothing to offset bankruptcies and defaults in the commercial property market. First and second quarter GDP growth will likely trend downward to less than 2%, and the Dow, still looking for profits, will be locked at about 10,500. Unemployment? Get ready to see 11%.

3. Everyone knew that China was keeping us afloat, but few wanted to admit it. Now that our great benefactor has decided to put a lid on GDP growth, there will be less Chinese demand for stuff we produce (they love our agricultural products) and less surplus there that needs to be invested in good old U.S. bonds. You guessed it. Interest rates will rise. The U.S. economy will get a case of the slows, and our GDP growth will begin to look awfully pale. Now, this won’t happen overnight, but the ugly edge will start showing up in March or April. Look for GDP growth here to get clamped at around 1.5%. Unemployment to head toward 12%, and the Dow to start looking for 9,800.