Larry D. Sanders February-March 2010. 1. Recession is technically over, but… 2. Inflation,...

THE NATIONAL ECONOMY:COMING OUT OF THE SWAMP

Larry D. SandersFebruary-March 2010

THE “MICROWAVE” BRIEFING ON THE ECONOMY…

1. Recession is technically over, but…

2. Inflation, deflation and unemployment fears…

3. Some cautious optimism, but it won’t be back to “normal” for a long time.

4. Oklahoma’s economy may get worse, but not as bad as the US

5. OK: Oil, Natural Gas, Ag key roles in improvement, especially for rural OK.

6. Watch for double-dip 2

AGRICULTURE & THE MACROECONOMY

1. Nominal interest rates & loanable funds matter: Commercial ag is capital-intensive

2. Value of the $: agriculture is trade-dependent

3. Nonfarm employment: most farm family income comes from off-farm

4. Macroeconomic uncertainty: increased need for effective risk management tools in agriculture

5. Macroeconomic policy impact on Federal budget: much of primary crop agriculture relies on federal support

SO, THE ECONOMY’S IN THE TANK.WHAT’S THE SOLUTION?

Output = Consumption + Investment + Govt. spending + Net exports Consumption is

down, but… Investment is

down Net exports down,

but… Government

spending is propping up the economy

4

US ECONOMIC ACTIVITY, GDP, 1980-2010

5http://www.economagic.com/em-cgi/charter.exe/var/rgdp-qtrchg

THE ECONOMY, POLITICS AND PERCEPTION

US Budget Surplus/Deficit ($b.)

-330-225-177-151-5070 124232268

-157.8-374-413-331-314

-162

-455

-1800

-1400

-2000

-1500

-1000

-500

0

500

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

e

2009

p

2010

p

Source: US Bureau of Economic Analysis, 2009 (www.bea.gov)

http://zfacts.com/p/318.html6

7http://www.usgovernmentspending.com/federal_deficit_chart.html

US UNEMPLOYMENT RATE, MONTHLY, 1980-2010

8http://data.bls.gov/PDQ/servlet/SurveyOutputServlet

9.7%

[OK:6.8 %]

Note: US—Feb 2010OK—Dec 2009

9http://www.economagic.com/blslf.htm

U.S. JOB GAINS & LOSSES, ALL EMPLOYEES, THOUSANDS, 1-MO. NET CHANGE

10http://data.bls.gov/PDQ/servlet/SurveyOutputServlet

TOTAL COMPENSATION, US, 12-MO. CHANGE, ALL WORKERS

A cartoon about demand-side economics. From "'Right to Work' Laws--Low Wage Scheme," Economic Outlook, January 1955, CIO Education Department. http://www.flickr.com/photos/higbie/2554254376/

11

12http://www.census.gov/cgi-bin/briefroom/BriefRm

ECONOMY IN PROCESS OF SHIFTING FROM DEFLATION TO INFLATION IN US PRODUCTION & CONSUMPTION SECTORS

13

Producers are beginning to clear inventories & excess capacity.

Consumer buying is picking up, but still below prior times; may besaving more, & may be waiting for “better deals” on big ticket items.

http://www.economagic.com/

14

TRADE & TRADE DEFICIT: US TRADE BALANCE, 1990-2010 ($ MILLION)

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

-1200000

-1000000

-800000

-600000

-400000

-200000

0

Trade Balance

Trade Balance

1991: -$31 bil.

NOTE:

1991: $31.1 b.

2009: -$651.3 b.

(China: 35%)

US BANKING HEALTH, MARKET CAPITALIZATION, 1/07-9/09

2007: $1.87 trillion Top 10: 72% of total Top 10: lost average

of 46% market cap. Range of change: -100% to

+4%

1. Citigroup2. Bank of America3. JP Morgan Chase4. Wells Fargo5. *Goldman Sachs

2009: $947 billion (-50%)

Top 10: 86% of total1. JP Morgan Chase (+4%)2. Bank of America (-37%)3. Wells Fargo (+3%)4. Citigroup (-56%)5. Goldman Sachs (-11%) Govt take-over

AIG Fannie Mae Freddie Mac 16

OK, WE’RE HERE. HOW LONG BEFORE IT GETS BETTER, OR BACK TO “NORMAL”?

1-6 years OK likely sooner than

US Next 2-6 months critical “New Normal”

Sanders is Short term pessimist Long term optimist General dismal

economist17

ECONOMIC MELTDOWN FALLOUT: WHERE ARE WE HEADED?

US economy is vulnerable to the following forces in 2010-2012: Deflationary trend:

Falling wages, retail prices & spending, leading to both lower local government tax revenue and fewer employment opportunities

Potential inflation Persistent

unemployment Increase in oil prices 18

SO, WHERE’S THE ASPIRIN???

For unemployment, retirement accounts, and general economic stagnation, it may be years before we see much recovery

Couple that with the likelihood of a “double-dip” economic cycle in the next 1-3 years 19

APPENDIX

20

GUESS WHAT? VELOCITY HAS BEEN DECLINING…

21

22

AN UNPLEASANT DOSE OF DEFLATION . . .

So, is Deflation real? No increases in Social

Security With Medicare payments

going up, result is net reduction in retirement checks. 

Other benefits tied to CPI (union wages?  Others?)

The Fed has no tools to fight deflation. 

What is/will happen to real interest rates:  real i = nominal i –

 inflation.  http://www.inflationdata.com/inflation/Inflation/DecadeInflation.asp 23

WHAT’S NEXT—MORE DEFLATION OR RAMPANT INFLATION?

One view: “For inflation to supplant deflation as the

principal threat to price stability, we believe excess capacity would need to be removed.”

Dan Nevins, “SEI Economic Outlook, SEI Investment Management Corp, 2009.

24

US HOUSING MARKET: PRICES UP & FORECLOSURES UP

25

http://www.dailymarkets.com/economy/2009/08/25/case-shiller-home-price-index-rises-for-second-straight-month-first-time-in-almost-3-years/

http://blogs.reuters.com/felix-salmon/2009/07/29/foreclosure-chart-of-the-day/

CASE-SHILLER HOUSING INDEX, 1890-2015 PROJECTED

26http://www.ritholtz.com/blog/wp-content/uploads/2009/06/case-shiller-updated.png

US BANKING SECTOR BLUES TEMPERED BY FDIC; OK MOSTLY SPARED ( SO FAR) . . .

27http://www2.fdic.gov/hsob/

http://network.nationalpost.com/np/blogs/fpposted/archive/2009/08/29/challenge-for-the-fdic-bank-insurance-fund.aspx

CONSIDER POPULATION CHANGES, WHO HAS WEALTH & WHO’S LOST WEALTH IN DOWNTURN

28http://chartingtheeconomy.com/?page_id=27

1. Older groups typically have greater share of wealth.2. Wealth loss likely greater among

older pop.3. Suggests recovery will be incomplete & generational

transfer will be less.4. Suggests long time recovery.

OTHER ISSUES LIKELY TO AFFECT THE ECONOMY IN LONG RUN…

Growing economic power of China & India Climate/weather (OK, US, Global) Energy supply & demand Changing OK demographics (out & in-

migration) Crumbling infrastructure Technological change TBTF still w/us & likely even more so . . . Structural issues in Banking/Finance sector

unlikely to be resolved; suggests another crisis in the future (see S. Johnson)

Wild cards (wars, pandemics, etc.)29

SO, WHAT WILL THE FUTURE US ECONOMY LOOK LIKE?

US will be less dominant on world market China may be the world’s largest economy US labor market will be more ethnically

diverse and older US tax burden will be greater to fix

infrastructure, support seniors, invest in education & technology

Global/mass domestic markets will shift to the web

Niche local markets will thrive for Locavores Regional wars/conflicts, especially over water

and arable land will increase, reducing economic benefits

30

Who own US debt (2008)?

Foreign owners of US Treasury Securities (July 2008)

Nation billions of dollars percentage

Japan 593.4 22.17%

Mainland China 518.7 19.38%

United Kingdom 290.8 10.87%

Oil exporters 173.9 6.50%

Grand Total 2676.4

Total debt: $10,000(foreign 26%)(other public 22%)(Fed, intragovt 52%)

31

Foreign Holdings of US Treasury Securities

US Treasury/Federal Reserve Board

$764

$686

$205

$190

$153

$137

$126

$1002

$502

$589

$117

$154

$247

$60

$150

$768

China

Japan

Carib

Oil Exporters

UK

Russia

Brazil

Other

$0 $200 $400 $600 $800 $1000 $1200

April 2009

April 2008

-Billion Dollars-

STIMULUS STATUSSELECTED MEASUREMENTS OF HOW THE STIMULUS PLAN IS HAVING AN EFFECT, THROUGH SATURDAY 5 SEP 09.

33http://www.washingtonpost.com/wp-dyn/content/graphic/2009/09/04/GR2009090400764.html?sid=ST2009090401455

REFERENCES

For more on banking/financial sector see:

http://baselinescenario.files.wordpress.com/2009/09/recovery-and-crisis-presentation-for-glab-sept-14-2009.pdf

Jobs: http://tipstrategies.com/archive/geography

-of-jobs/ http://cohort11.americanobserver.net/latoy

aegwuekwe/multimediafinal.html 34