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2011 Economic Outlook:
Recovery or relapse?
Lindsey Piegza
Economist
December 2010
22
The Economy is Growing,
but not Fast Enough to Create Jobs
33
Rapid productivity growth
mandates stronger GDP growth
44
The employment trend has collapsed
55
Job growth likely to reach 200-250k next year
66
Retail sales are encouraging…
77
…but consumption is not accelerating
88
Household borrowing grew for 70 yrs before 2008
99
It will be years before debt is balanced with income
1010
Housing is bouncing on the bottom
1111
Flat housing starts means little GDP
contribution from residential investment
1212
Business investment is cooling, too
1313
Investment in equipment and software
was driven by pent-up demand
1414
Inventories and imports will
play a smaller role next year
1515
Retail inventory to sales ratio
1616
Inventories are topping out
1717
Inventory contribution to GDP growth
1818
What went wrong last spring?
Oil Spill
The Stock Market Drop
Policy shock – policy mistakes killed momentum as stimulus ended
• Impending tax hikes.
• Worries about health care cost increases.
• Fin-reg’s chill on lending.
Externalities hurt confidence
• European sovereign/bank crisis.
• The oil spill.
Structural change may be the root problem
• Since 1990, recovery has followed this pattern:
1. Stabilize the economy and confidence with stimulus
2. Economy stalls and interest rates drop
3. The drop in rates ignites a mortgage refi wave (1994 and 2003)
4. Refinancing supplements income. Lifts recovery to sustainability
There will be no comparable refi wave this time…
1919
How bad is it?
2020
Transfer payments as % of income
2121
Relative job growth, 2000-2010Housing boom masked deep structural problems
2222
Relative job growth, 2000-2010Stimulus to save gov’t jobs ignores erosion of tax base
*excluding decennial census workers
2323
No room for fiscal stimulus
2424
State budget shortfalls are huge
2525
Private credit is not growing
*excludes financial debt to avoid double counting
2626
S&P 500 (real $, log scale)
Deregulation
Leverage cheap
Opportunities aboundLeverage ineffective, then
Leverage expensive
Regulation returns
Returns limited
Leverage ineffective, then
Leverage shrinking
Regulation returns
Returns limited
2727
There are still positives
2828
Manufacturing job growth fastest in over a decade
2929
…and the workweek is rising
3030
Equipment orders are recovering
3131
The savings rate is high
3232
Most states doing better-than-average
Above the nat'l rate by
2 points or more Below the nat'l rate by
1.5 up to 2 2 points or more
1 up to 1.5 1.5 up to 2
0.5 up to 1 1 up to 1.5
up to 0.5 0.5 up to 1
The same as the nat'l average up to 0.5
Hawaii
Alaska
3333
Interest rate and markets outlook
3434
The Fed will wait longer to hike than in 2004
3535
Cyclical components are deeply deflationary
3636
Deflation
• Deflation is sustained falling prices.
• Sustained deflation doesn’t happen without a loss of purchasing power.
• Hence, true deflation is sustained falling product prices and falling asset prices and falling incomes.
• Deflation turns credit on its head. Rather than growing into debt, as with inflation, debts grow in real terms over time.
3737
It still adds up to QE, which drives L-T yields
3838
Inflation outlookThe Fed can (and has) ignite faster food and energy inflation, but core
inflation is grinding lower. Consumers cannot accelerate gas and food
purchases. The effect is the equivalent of a tax hike. Not productive.
Growth outlook
The slowdown came earlier than it should have. Inventory building is not
necessary without sales growth, and sales growth stopped in April.
Hopefully the pause is temporary, but we have not had a rebound without a
mortgage refi boom since 1983 and QE may be counterproductive.
Without a refi boom, time is needed to rebuild household balance sheets.
Private sector jobs are key. Time could be the only path to recovery.
As you see data ebb and flow, ask yourself if it is consistent with 4%+
GDP. If not, the unemployment rate is likely to stay high.
3939
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