Professor Emeritus of Economics

Thomas R. Brown Professor in Economics Education

GOOD NEWS – OUR ECONOMY IS GROWING

WE ARE NOT IN A RECESSION

WE HAVE A LONG WAY TO GO TO A FULL RECOVERY

WORST RECOVERY SINCE GREAT DEPRESSION

October 2009 unemployment rate = 10.0 %

September 2013 unemployment rate = 7.2%

STILL 2.2 MILLION FEWER WORKERS THAN BEFORE THE FINANCIAL CRISIS

Number unemployed Sept 2013 = 11.3 million

NEW NORMAL

Participation rate = % population over age of 16 in labor force

January 2001 67.2%September 2013 63.2%

136,000 left the labor force in September 2013

515,000 left the labor force in August 2013

NEW NORMAL

Employment rate =% of population over the age of 16 employed

January 2001 64.4% September 2013 58.6%

September 2013 Population 25 years and over

Participation Rate Employment RateLess than H.S. 44.5% 39.9%H.S. no college 59.0% 54.5%Some college 67.2% 63.2%Bachelor’s Degree 75.3% 72.5%

or higher

REASONS FOR UNEMPLOYMENTSeptember 2013Job Losers 3.8% Job Leavers 0.6% Reentrants 2.0% New Entrants 0.8% Total unemployment = 7.2%

Government Payroll

Decline since 2006Federal Government - 74,000State Government -161,000Local Government -560,000

State and local governments are starting to hire again

WH0 HAS BEEN HIRING?RETAILHEALTH CAREPROFESSIONAL & BUSINESS SERVICESMANUFACTURING

WHO IS STARTING TO HIRE? GOVERNMENT CONSTRUCTION

Those with homes and jobs are

on the road to recovery

Those who lost jobs and/or homes

are stalled - No recovery

UNDERPERFORMING 2009 GDP 2010 GDP 2011 GDP 2012 GDP

Q1 -6.4% Q1 3.7% Q1 0.4% Q1 3.7% Q2 -0.7% Q2 1.7% Q2 1.3% Q2 1.2% Q3 1.6% Q3 2.5% Q3 1.8% Q3 2.8% Q4 5.0% Q4 2.3% Q4 3.0% Q4 0.1%

GROWTH FOR Q1 2013 = 1.1% GROWTH FOR Q2 2013 = 2.5%

NEW NORMAL

GDP AVERAGE GROWTH 1950 – 1999 3.6 %

GDP AVERAGE GROWTH 2007 – 2012 2.0%

HOW IMPORTANT IS THE CHANGE IN GROWTH?

3.6% GR0WTH - GDP DOUBLES IN 20 YRS 2.0% GROWTH – GDP DOUBLES IN 36 YRS

2013 INFLATION RATE = 1.5%

AGGREGATE DEMAND

C+I+G+XCONSUMER SPENDINGINVESTMENT SPENDINGGOVERNMENT SPENDINGNET EXPORTS (EXPORTS-IMPORTS)

PENT UP DEMAND – BUYING CARS & TRUCKS

SAVINGS RATE UP = 4.6%

NET WORTH OF HOUSEHOLDS UP

CONFIDENCE UP & DOWN

REAL WAGES STAGNANT

ECONOMY WORKED THROUGH FISCAL DRAG

INCREASE IN PAYROLL TAX JAN 2013

4.2% to 6.2%

TAX INCREASE ON AVERAGE WAS$40 PER BI-WEEKLY PAYCHECK

CUT TAKE-HOME PAY BY $125 BILLION

HOUSING MARKET IS STABILIZING

CONSTRUCTION IS SLOWLY PICKING UP

BUSINESS PROFITS ARE STRONG

BUSINESSES HAVE LOTS OF CASH

BUSINESSES ARE READY TO SPEND

UNCERTAINTY IS A MAJOR PROBLEM

EXPORTS HAVE BEEN A DRIVING FORCE IN OUR ANEMIC RECOVERY

EXPORTS ARE SLOWING DOWN EXPORTSACCOUNT FOR 14% OF OUR GDP

BRIC Nations 2012 2013 est

BRAZIL 2.4% 8.9%RUSSIA 1.8% 3.4%INDIA 4.2% 3.4%CHINA 8.0% 7.8%

40% OF WORLD POPULATION

EUROZONE UNEMPLOYMENT AT RECORD HIGH

17 COUNTRIES THAT USE THE EURO HIT THE HIGHEST UNEMPLOYMENT RATES IN THE HISTORY OF THE CURRENCY. =

12.2% MAY 2013

CURRENT UNEMPLOYMENT RATE = 12.1%

SEPTEMBER 2013 UNEMPLOYMENT

GREECE 27.9% SPAIN 26.2% ITALY 12.2% FRANCE 10.5% GERMANY 6.9% UK 7.7%

SCHADENFREUDE!

GROUP OF SEVEN: SLOW TO NO GROWTH

GDP GROWTH 2013 est

U.S. 2.2%JAPAN 1.9%GERMANY 0.9%BRITAIN 1.3%FRANCE -0.1%CANADA 1.6%ITALY -1.0%

WE WENT OVER THE FISCAL CLIFF AND LIVED TO TALK ABOUT IT

WE DID GET HIGHER TAXES

WE DID GET SEQUESTRATION

2009 $1.4 TRILLION2010 $1.3 TRILLION2011 $1.3 TRILLION2012 $1.1 TRILLION

2013 $642 BILLION est.

TOTAL DEBT = $17 TRILLION +

FACT

FISCAL 2013 Tax revenues are up by $383 billionGovernment spending is down

$75 billion

GOOD NEWSDEFICIT AS A PERCENT OF GDP IS

SHRINKING

DECEMBER 2009 10.1 % GDPDECEMBER 2010 9.0% GDPDECEMBER 2011 8.7% GDPDECEMBER 2012 7.0% GDPDECEMBER 2013 4.0% GDP est.

Three Reasons for Deficit Decline

!. Recession is over - economy is growing2. Sequestration remains in effect3. Govt health care costs lower than

expected

DEBT AS A PERCENT OF GDP IS GROWING

2000 57.7%2005 64.6%2008 71.1%2010 95.1%2012 101.7%2013 103.0% est.

December 13, 2013 Conference Committee Fiscal 2014 Budget Due

January 15, 2014Second Round of Sequester Budget

Cuts

February 7, 2014Reach New Debt Ceiling

MOST EXPANSIVE MONETARY POLICY IN THE HISTORY OF THE FEDERAL RESERVE

FEDERAL RESERVE BALANCE SHEET

INCREASED BY

$2.9 TRILLION SINCE AUGUST 2007

UNCONVENTIONALQE1 NOVEMBER 2008

QE2 NOVEMBER 2010

QE3 SEPTEMBER 2011(operation twist)

QE4 SEPTEMBER 2012 (print $85B/mth)

UNCONVENTIONAL

FEDERAL RESERVE IS PRACTICING TRANSPARENCY

INFLATION TARGET 2.5%

UNEMPLOYMENT TARGET 6.5%

KEEP INTEREST RATES AT ZERO INDEFINITELY

PUMP $85 BILLION PER MONTH INTO ECONOMY

TAPER TANTRUMSeptember 2013FED ANNOUNCES IT IS GOING TO TAPER DOWN

THE AMOUNT OF MONEY IT IS PRINTING EVERY MONTH

Stock market fallsWorld currencies devalueMortgage interest rate jump

October 2013 FED REVERSES POSITION – WILL KEEP PRINTING INDEFINITELY

FUTURE EFFECT OF MONETARY POLICY IS VERY LIMITED

PUSHING ON A STRING

WE HAVE HAD 58 MONTHS OF ZERO INTEREST RATES

SEPTEMBER 2013

BANKS HAD $2.2 TRILLION IN EXCESS RESERVES

HEADWINDS FOR 2013-14

1. DEBT CRISIS PLAGUING EUROPEAN GOVERNMENTS

2. HIGH U.S. UNEMPLOYMENT RATE3. STOP-AND-START NATURE OF CONSUMER

SPENDING4. LACK OF CONFIDENCE AMONG CEO’S5. LACK OF CONSUMER CONFIDENCE6. CONTINUED POLITICAL BRINKSMANSHIP7. FEAR THAT IT ALL COULD HAPPEN AGAIN

FIVE REASONS TO BE SLIGHTLY OPTIMISTIC

1.BALANCE SHEETS HAVE IMPROVED2. INFLATION IS TAME3.WE ARE GROWING FASTER THAN MANY

OF OUR COMPETITORS4.DEFICIT IS DECLINING5.WE ARE GAINING ENERGY

INDEPENDENCE

IF WASHINGTON DOES NOT GET ITS ACT TOGETHER --

2014 WILL LOOK A LOT LIKE 2013

OUR ECONOMY WILL CONTINUE TO GROW AT A SLOW PACE

OUR UNEMPLOYMENT RATE WILL REMAIN UNACCEPTABLY HIGH