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The U.S. Economic Outlook
Jeff WerlingUniversity of Maryland
December 10, 2015
Inforum Annual Conference
Inforum Forecast Inequality and MobilityDeflators and GrowthModeling Energy and the Economy Washington Metro Economy
Inforum forecast
Domestic economic growth looks steadyInflation is still too lowMany risksRising interest rates -> strong dollar -> danger of importing foreign deflation
-60
-40
-20
0
20
40
60
0
50
100
150
200
250
300
Net Business Creation(Thousands of Establishments)
Net (Right Axis)
Births (Left Axis)
Deaths (Left Axis)
Source: BLS; Private sector establishment births and deaths, seasonally adjusted. Total private.
GDP steady moderate growth …
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
2009 2010 2011 2012 2013 2014 2015 2016
year on year quarter on quarter
Still Mostly Good News on Domestic Demand
Expanding employment will have positive spillovers, especially for wages and housing.
Oil prices low, interest rates low, consumers confident.
Government spending is stabilizing. Fiscal situation is improved especially for many states and localities.
Private business sitting on lots of cash. Non-financials wait for firmer expansion of demand.
Currently, foreign financial and security linkages pose the biggest threat to U.S. economic growth and stability.
Payroll employment is up 13.3 million jobs since the trough in Feb 2010
Source: Bureau of Labor Statistics
128
130
132
134
136
138
140
142
144
-1000
-800
-600
-400
-200
0
200
400
600
2008 2009 2010 2011 2012 2013 2014 2015
Mill
ions
Thou
sand
s
Net Change (Left) Employment (Right)
Is there any slack left? (See Yellen, FRB, Dec 2)
U6 Labor Underutilization“Involuntarily” part-time (4% of employed)Marginally Attached
Participation rate (~2 million)Wage Growth
Unemployment is Relieved Across the Board
Source: Bureau of Labor Statistics
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
U.S. Unemployment Rates
U3 Unemployment U6 Unemployment
7.2
3.8 4.9
Source: Council of Economic Advisors
Wage growth continues to struggle, though it has ticked up lately.
3.5
4.5
5.5
6.5
7.5
8.5
9.5
10.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2004 2008 2012Avg Hourly Earnings - All Employees (L)Avg Hourly Earnings: Production and Nonsupervisory Employees (L)Unemployment Rate (R)
Fiscal Policy Is Now BenignGovernment Consumption and Investment
Contribution to GDP Growth
-0.8-0.6-0.4-0.2
00.20.40.60.8
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Federal Defense Federal Nondefense State and Local
The GDP Gap is Closing, but only gradually.Real GDP – CBO Potential (% of Potential)
-8
-6
-4
-2
0
2
4
1990 1995 2000 2005 2010 2015
Inflation, Interest Rates STILLIndicate a Liquidity Trap
Remember: r = i - p
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2002 2004 2006 2008 2010 2012 2014 2016
Effective Federal Funds Rate Core PCE Inflation
Inflation expectations are less than forecasts.
Source: FRB and https://www.clevelandfed.org/our-research/indicators-and-data/inflation-expectations.aspx
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
PCE Inflation Q4/Q4
FRB
Expected (Cleveland Fed)
Why is low inflation damaging?
When the economy is especially weak and nominal interest rates fall to zero, real interest rates (r-i) become too high to sustain full employment aggregate demand.
Debt burdens are more persistent making deleveraging harder. (D/Y)
Wages and prices are sticky. Under low inflation, relative wages and prices cannot adjust easily. In some sectors or firms, real wages become too high. Markets become distorted.
Unconventional Monetary Policy:Fed Reserve Balance Sheet
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
Billio
ns of
Doll
ars
Total Federal Reserve Assets
Funds Besides Reserves
Bank Reserves With Federal Reserve
The end of ZIRP. What’s next?Monetary Policy with a Large Balance Sheet
New tools: IOER: Rate of Interest paid On Excess ReservesON RRP: Overnight Reverse Repurchase Agreement
Balance sheet “renormalization” (if?) when it occurs will be through maturation, not sales.
Much of the ROW is loosening. The dollar will rise, how much?
Europe, China, and emerging markets are all vulnerable in their own way, but the US could end up importing their deflationary conditions.
Outlook OverviewReal (Inflation-Adjusted) Quantities, Average Annual Growth Rates, Percent
13-14 14-15 15-16 16-17 17-18 18-20 20-30 30-40Gross domestic product 2.4 2.5 2.7 2.6 2.6 2.6 2.3 2.2
Personal consumption 2.7 3.1 2.8 2.5 2.4 2.2 2.1 2.0
Nonresidential structures 8.1 -0.5 6.5 7.0 5.4 5.2 3.1 2.9 Equipment & intangibles 5.6 4.4 4.5 3.5 3.6 4.1 3.7 3.9 Residential 1.8 8.3 8.8 5.4 6.0 6.4 3.0 2.8
Exports 3.4 1.2 1.9 3.0 3.7 4.3 4.1 3.6 Imports 3.8 4.9 3.0 2.6 2.5 2.5 3.0 3.2
Government -0.6 0.9 1.0 0.9 1.0 0.9 1.1 1.4
GDP deflator 1.6 1.0 1.8 1.9 1.9 2.1 2.1 2.2Consumption deflator 1.4 0.4 1.8 1.8 2.0 2.2 2.3 2.4
Outlook Overview13-14 14-15 15-16 16-17 17-18 18-20 20-30 30-40
Supply (percent growth) Population 0.7 0.8 0.8 0.8 0.8 0.8 0.7 0.6 Labor force 0.3 1.2 0.8 0.8 0.8 0.8 0.8 0.6 Employment 1.9 1.6 1.2 0.8 0.8 0.8 0.8 0.6 Labor productivity 0.3 0.7 0.9 1.3 1.7 1.7 1.3 1.5 Potential GDP 1.5 1.7 1.8 2.0 2.2 2.2 2.2 2.2
2014 2015 2016 2017 2018 2020 2030 2040 Unemployment Rate (%) 6.2 5.3 5.0 5.0 5.0 5.0 5.0 5.0
Treasury Bills, 3-month 0.0 0.1 0.8 1.7 2.8 3.4 3.4 3.4 Yield, 10 yr. Treasury bond 2.5 2.3 2.8 3.7 4.0 4.2 4.3 4.3
Nominal Quantities (billion $)Current account -546.3 -594.0 -623.7 -600.0 -638.9 -569.1 -639.5 -1137.3 (% of GDP) -3.1 -3.3 -3.3 -3.1 -3.1 -2.5 -1.8 -2.1
Federal net borrowing -681.4 -538.7 -468.0 -463.9 -483.2 -431.5 -191.3 -238.0 (% of GDP) -3.9 -3.0 -2.5 -2.4 -2.4 -1.9 -0.5 -0.4
National Health Care ExpendituresGrowth ticked up in 2014
-4.0
0.0
4.0
8.0
12.0
16.0
20.0
Annu
al Gr
owth
(%)
National Health Expenditure
Gross Domestic Product
Source: Center for Medicare and Medicaid Services
Recent NHE history is hopefuland affects current entitlement scores
1960-2014
1960-2000
2000-2014
2009-2014
Annual Percent ChangeGross Domestic Product (GDP) 6.6 7.6 3.8 3.8National Health Expenditures 9.1 10.3 5.8 4.0 NHE as percent of GDP 2.3 2.5 2.0 0.2
GDP Deflator 3.4 3.9 2.0 1.7Health Care Price Deflator 5.3 6.3 2.7 1.8
Real GDP 3.2 3.7 1.8 2.1Real Health Care Expenditure 3.8 4.0 3.2 2.2
Decompostion of "Excess Cost" of Health Care Excess Health Care Cost 2.5 2.7 2.0 0.2 Excess Health Care Inflation 1.9 2.3 0.6 0.1 Excess Real Expenditure 0.6 0.3 1.4 0.1
Oil and Natural Gas: Drilling and Production are Down
Year over year percent change
-60
-40
-20
0
20
40
60
2005 2007 2009 2011 2013 2015
Drilling oil and gas wells Crude petroleum and natural gas extraction
Risks are ManySecurity: DOMESTIC, Middle East, Central Europe, Asia
U.S. interest rates are set to rise: Can financial systems at home and abroad digest these increases without distress?
Inflow of foreign capital could stoke domestic demand and further appreciate the dollar, hurting U.S. net exports. Big increase in external deficit would signal a new debt bubble.
Divided government perpetuates uncertainty and gridlock.
Secular stagnation.
Climate change makes natural catastrophes more probable.
Continued inequitable growth maybe unsustainable.
Trading Partner Growth Mixed Real GDP
Percentage change from previous year2013 2014 2015 2016 2017
Canada 2.0 2.4 1.2 2.0 2.3 Mexico 1.6 2.1 2.3 3.1 3.3 United States 1.5 2.4 2.4 2.5 2.4
France 0.7 0.2 1.1 1.3 1.6 Germany 0.4 1.6 1.5 1.8 2.0 Italy -1.8 -0.4 0.8 1.4 1.4 Spain -1.7 1.4 3.2 2.7 2.5 Euro area -0.3 0.9 1.5 1.8 1.9 United Kingdom 2.2 2.9 2.4 2.4 2.3
Japan 1.6 -0.1 0.6 1.0 0.5 Korea 2.9 3.3 2.7 3.1 3.6
Total OECD 1.2 1.9 2.0 2.2 2.3
China 7.7 7.3 6.8 6.5 6.2 Russia 1.3 0.6 -4.0 -0.4 1.7
Source: OECD Economic Outlook November 2015
But the Real Danger Rests with Low InflationOECD Private consumption deflators
2014 2015 2016 2017Germany 0.9 0.6 1.0 1.5 France 0.0 0.0 0.9 1.2 Italy 0.3 0.2 0.7 1.0 Spain 0.3 -0.1 0.7 0.9
Japan 2.0 0.3 0.9 2.3 China* 0.8 -0.4 -0.1 0.8
United States 1.4 0.3 1.3 1.7 Canada 1.9 1.2 1.9 2.1 Mexico 3.7 3.8 3.3 3.1 *GDP Deflator
Source: OECD Economic Outlook November 2015
Dollar Still Strengthening Federal Reserve Currency Indices (100=Jan 2010)
80
90
100
110
120
130
140
2010 2011 2012 2013 2014 2015
China/USD Japan/USD Broad Index Euro/USD
Manufacturing already diverging.
45.0
50.0
55.0
60.0
65.0
70.0
Nonmanufacturing Activity Manufacturing Production
ISM Business Activity/Production (Over 50 signals expansion)
Hopefully, the rise is about almost over.But don’t be too sure.
EXCHANGE RATE ASSUMPTIONS (Foreign currency per US Dollar)Positive means dollar appreciation.
13-14 14-15 15-16 16-17 15-20Euro 0.1 18.8 5.0 0.0 0.0Canadian dollar 7.3 15.1 5.0 0.6 0.7Mexican peso 4.2 18.9 5.0 0.5 1.4Japanese yen 8.5 14.0 0.5 0.3 0.5Chinese yuan 0.0 2.0 5.0 2.1 1.2British pound -5.2 7.6 5.0 0.0 0.0South Korean won -3.7 7.1 5.0 1.6 1.2
How do you spot a financial crisis?Current Account as a Percent of GDP
-2.5
-2
-1.5
-1
-0.5
0
1980 1981 1982 1983
Ghana
-4
-3
-2
-1
0
1
2
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
Spain
-10
-5
0
5
10
1519
8019
8219
8419
8619
8819
9019
9219
9419
9619
9820
0020
0220
0420
0620
0820
1020
1220
1420
1620
1820
20
Thailand-8
-6
-4
-2
0
2
4
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
Mexico
How do you spot a financial crisis?Current Account as a Percent of GDP
How do you spot a financial crisis?Current Account as a Percent of GDP
-12-10
-8-6-4-2024
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Spain
-7-6-5-4-3-2-101
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
United States
`
Deja vous all over again?(Y. Berra)
How do you spot a financial crisis?Current account balances as a percentage of GDP
2004 2005 2006 2007 2008 2009 2010 2011Iceland -9.8 -15.8 -23.3 -14.0 -22.8 -9.7 -6.6 -5.3Latvia -12.3 -11.9 -20.9 -20.8 -12.4 8.1 2.3 -2.8Greece -5.6 -7.5 -11.0 -14.1 -14.4 -10.9 -9.9 -9.9Portugal -8.3 -9.9 -10.7 -9.7 -12.1 -10.4 -10.1 -6.0Spain -5.6 -7.5 -9.0 -9.6 -9.3 -4.3 -3.9 -3.2United States -5.2 -5.7 -5.8 -5.0 -4.7 -2.7 -3.0 -3.0Ireland -0.1 -3.3 -4.9 -6.1 -5.8 -4.1 -0.8 -1.2Italy -0.4 -0.9 -1.6 -1.5 -2.9 -1.9 -3.5 -3.1Japan 3.9 3.7 4.0 4.9 3.0 2.9 4.0 2.2Germany 4.4 4.6 5.7 6.8 5.5 5.7 5.4 6.0Netherlands 6.8 6.1 7.9 6.0 4.1 5.8 7.4 9.1China 3.6 5.8 8.5 10.0 9.2 4.8 3.9 1.8Euro area 1.0 0.4 0.4 0.3 -0.6 0.4 0.5 0.8Total OECD -0.9 -1.3 -1.5 -1.2 -1.7 -0.5 -0.4 -0.6
Source: OECD Economic Outlook 98 database.
Our forecast is sanguine.US Current Account as percent of GDP
-8.0
-6.0
-4.0
-2.0
0.0
1990 1995 2000 2005 2010 2015 2020 2025 2030 aca_gdp
Slow Supply Growth vs. Secular Stagnation Slow Supply Growth – Sluggish Technological Change and Slow Demographics (Gordon)
Secular Stagnation – Chronic Operation Below Potential Output (Summers)
Potential GDP: How much hysteresis from the Great Recession? Can we reach “full” employment?
Factors:Demographics and human capitalFederal Debt – Do high rates slow growth?Unequal income distribution and mobilityEntrepreneurial CrisisPolitical Dysfunction
Contribution of industry-specific productivity to aggregate productivity growth
Average MFP Growth and Percent Contribution toAggregate MFP growth 1987-2010 (BLS)
Multi-Factor Productivity Growth
NAICS CodeIndustry1987 -
2010Percent
ContributionProgressive
1 111,112 Farms 1.8 4.3
Total Manufacturing 1.5 47.421 334 Computer and electronic products 10.4 38.326 339 Miscellaneous manufacturing 2.0 2.3
27 42 Wholesale trade 1.9 14.228 44,45 Retail trade 1.6 14.842 523 Securities, contracts, and investments 4.3 12.0
Stagnant7 23 Construction -0.54 -5.27
41 521-522 Credit intermediation, and related -0.64 -3.0345 531 Real estate -0.38 -2.7846 532,533 Rental and leasing services -1.61 -3.03
50 55 Management of companies and enterprises -0.75 -2.0154 621 Ambulatory health care services -0.37 -1.7355 622,623 Hospitals, nursing and residential facilities -0.88 -2.7961 81 Other services, except government -0.29 -1.05
Private Business Sector 0.99 100.00
Composition of Productivity Growth May be Changing
Source: Integrated BEA/BLS Industry-level Production Account, Dumas, Howells, Rosenthal and Samuels
0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70
Total Economy
Information technology-producingindustries
Information technology-usingindustries
Noninformation technologyindustries
1998-2013
0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70
Total Economy
Information technology-producingindustries
Information technology-usingindustries
Noninformation technologyindustries
1998-2007
0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70
Total Economy
Information technology-producingindustries
Information technology-usingindustries
Noninformation technologyindustries
2009-2013
8000
12000
16000
20000
24000
1990 1995 2000 2005 2010 2015 2020 2025 a.gdpN09 a.potgdpN09 potgdp07
Potential GDP and GDP 1990-2025:“The future ain’t what it used to be.” (Y. Berra)
Current GDP forecast
Potential GDP, Dec. 2007
Billions of 2009 dollars
Potential GDP, Jan 2015
GDP Gaps: Did we permanently lose 6% of income?
-10.0
-5.0
0.0
5.0
10.0
2000 2005 2010 2015 2020 2025 2030 gdpgap_hysteresis gdpgap_slope
GDP – GDP potential (% of potential)
hysteresissecular stagnation
For further discussion see: Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy, Reifschneider, et. al. (FRB)
Longer term forecast (to 2040):Potential GDP growth ~ 2.2%
Forecast assumes gradual rebalancing of private, government and external accounts.
Manufacturing outlook is challenging (real exchange rate).
Government services and transfers will expand. Health care spending (with/without reform) will dominant future of government spending and domestic production growth.
All roads lead to tax reform. To pay for entitlements, education and infrastructure, government revenues will have to rise. How this is accomplished is important.
-2.00
0.00
2.00
4.00
6.00
1990 2000 2010 2020 2030 2040 smdlgdpN smdllfc smdlprodlft
Long term potential growth is almost 2.2% Difference in logs, 5-year moving average
GDP
ProductivityLabor Force
Current account deficit: soft landingBillions of dollars
Current account
Net income
Net trade
Net Transfers
Current AccountCurrent Account
-1000
-750
-500
-250
0
250
500
2000 2005 2010 2015 2020 2025 2030 curr_acct net_trade net_income net_transfer
Debt Check! Federal Net and Gross Debt Accrued Debt Held by the Public plus Trust Funds (09/30/15)
Source: U.S. Treasury Department and Inforum Calculations
1,177 1,1771,258 1,258
3,667 3,667
7,487 7,487
5,238
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
Debt Held by the Public Debt Held by the Public + Trust Funds
Billio
ns of
Dolla
rs
Japan China Others U.S. Residents Trust Funds
$13,589
$18,827104.2% of GDP
75.2% of GDP
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Debt Held by the Public Debt Held by the Public + TrustFunds
Debt Held by the Public + TrustFunds + Unfunded Liabilities
Billio
ns of
Dolla
rs
Japan
China
Others
U.S. Residents
Trust Funds
NPV of Medicare Liabilities
NPV of Social Security Liabilities
Other Unfunded Liabilities
Notional Net Present Value of Unfunded Liabilities to 2089 under Current Law
…do not cover future obligations.Federal Debt + Trust Funds + Unfunded Obligations
Source: U.S. Treasury Department and Inforum Calculations
~ $69 trillion!!!!!
Perspective: This is 6-7% of Cumulated Notional PV of GDP, 2013-2089
-20.0
-10.0
0.0
10.0
20.0
30.0
2000 2005 2010 2015 2020 2025 2030 rev_gdp exp_gdp def_gdp
Federal expenditures, revenues and deficit(CBO/CMS on expenditures, tax rate increase)
Revenue
Expenditure
Deficit
Percent of GDP
Tax Reform: How can we tax labor and capital less and consumption more?
Reduce/Eliminate tax expenditures, especially:1. Convert health care premium income exclusion to tax
credit (voucher). (~0.85% of GDP 2016-26)2. Phase out mortgage interest deduction (~0.54% GDP).
Use proceeds to lower and flatten rates.
Lower Corporate tax rates (phase out eventually)
Unify rates across earned, dividends, capital.
Best time ever for Higher energy taxes/Carbon tax!
National Sales (RD) or Value Added Tax.
Federal Debt as percent of GDP(Debt held by the Public)
20.0
40.0
60.0
80.0
100.0
1990 2000 2010 2020 2030 2040 fdebt_gdp
Does Income Inequality Discourage Growth ?
Stiglitz, Deaton, Solow, Saez, Podesta, Kearney
It appears that both Inequality and Immobility are rising.
Potential Mechanisms:Lower consumer spending Leads to credit bubbles and crisisUnderinvestment in education and healthGovernment capture: Rent-seeking behaviorReduce risk-taking and entrepreneurs
Further reading: Journal of Economic Perspectives—Vol 27, No. 3—Summer 2013