RIMS IDay 2012

U.S. and Washington State Economic Outlook

March 9, 2012

Fred DeKay, Ph.D.

Albers School of Business and Economics

The Economic Climate:

• Historical, Current, and Forecasts• GDP, Employment, and Inflation for the US and

Washington State• The US Housing Market• Global Conditions

Credits: Arun Raha, Former Chief Economist of the State of Washington Economic Forecast Council

http://www.erfc.wa.gov/

Conclusions:

• U.S. Output has recovered to previous levels. We are growing, but slower than expected. Recent evidence is positive, but uncertainty persists.

• Employment growth will lag the recovery in output. It may take two more years to get back to where we were in 2007, four or five to get to full employment.

• Downside risks are high but moderating.• Washington State Economy is hampered by

construction and state and local governments.

Three Questions:

• Where are we now?• Where are we going?• What risks do we face?

The Current Economic Climate

Output

Employment

Inflation

The Recession: How bad was it?

• Business Cycle Dating Committee:• Recession started in December 2007• Recession ended June 2009 18 months• Output fell -0.3% in 2008 and fell -3.5% in 2009.

This was the worst recession since WW II

RecessionPeak-to-trough decline

Recession DurationReal GDP Employment

  percent percent months

1948-49 1.6 5.0 111953-54 2.5 3.4 101957-58 3.1 4.2 81960-61 0.5 2.3 101969-70 0.2 1.2 111973-75 3.2 1.9 161980 2.2 2.3 61981-82 2.6 3.1 161990-91 1.4 1.4 82001 0.7 1.7 8Average 1.8 2.6 102007-09 4.1 6.1 18

Source: NBER, ERFC, Washington State Economic and Revenue Forecast Council

GDP is Growing Again…but… slowly

…It is still far below potential

Recently, GDP growth is slow, but improving

Source: BEA, data through 2011 Q3 Data published December 22, 2011

2011: 1.7%2010: 3.0%2009: -3.5%

2nd half: 2.4%

How long did it take us to recover?

Growth was +3.0% in 2010, and continued to be positive in 2011, so by the 3rd quarter of 2011, we were back to the previous peak in

2007.

Output is back to its previous peak, but jobs are another story.

Employment

• It may take another two years to get to our previous peak.

•It may take another 5 years to get back to full employment.

How long will it take us to recover?

5.0 million

U.S. Unemployment RateU.S. Unemployment Rate

June 2011: 9.1%

October 2011: 8.9%

November 2011: 8.7%

December 2011: 8.5%

January 2012: 8.3%

Good improvement.

The Bright Side of the News

We are now producing our pre-recession GDP with 5.0 million fewer jobs.

Labor Productivity has increased.

Inflation- CPI

• Consumer Price Index: stabilizing• 2008 : 3.8%• 2009 : -0.3%• 2010 : 1.6%• 2011 : 3.1%

• Slowdowns are deflationary; excess capacity• The risk is persistent deflation• October 0.0%, Nov. 0.1%, Dec. 0.0%, Jan. 0.2%• Core rate has been 0.1%, 0.2%, 0.1%, 0.2%

Where are we going?

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US and WA Unemployment Rate, 1987-2015

US UE Rate WA UE Rate

Forecasts

ERFC Global Insights: February

Monetary Policy: Fed Funds Rate

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Fiscal policy is mildly stimulative

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SURVEY of OUTPUT FORECASTS SURVEY of OUTPUT FORECASTS 2012-20132012-2013

• Federal Reserve Board: Low and High range: January

• Congressional Budget Office: August• Governors Council of Ec. Adv.: February• Survey of Professional Forecasters by the

Philadelphia Fed; May, August, November

2012-2014 OUTPUT FORECASTS2012-2014 OUTPUT FORECASTS

• Federal Reserve Board: • Feb 29: Low and High Central Tendency:

• 2012: 2.2% - 2.7%• 2013: 2.8% - 3.2%• 2014: 3.3% - 4.0%

• Congressional Budget Office: December* (Does not include payroll tax cut)• 2012: 2.2% • 2013: 1.0%• 2014: 3.6%

2012-2014 OUTPUT FORECASTS2012-2014 OUTPUT FORECASTS

• Survey of Professional Forecasters: February

• 2012: 2.3%• 2013: 2.7%• 2014: 3.0%• 2015: 3.1%

• WA Governor’s Council of Economic Advisors(Global Insight): February• 2012: 2.2% WA : 1.1%• 2012: 2.6% WA : 2.8%

Some GDP Forecasts are Stabilizing

11 12 13 14 11 12 13 14 11 12 13 14

Philadelphia Federal Reserve Bank

What is Needed to Sustain the Recovery?

• A return to normal consumer spending patterns which depends on a virtuous circle of:• Improved employment• Recovery in the housing market and wealth• Improved Consumer Confidence

• How do these look now?

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Source: Standard and Poors

U.S. Housing Permits

Housing Market

• Foreclosure sales still depressing prices• 8% of mortgages are seriously delinquent

in the US, down from 20% in 2010• 6% seriously delinquent in Washington• 29% of house sales are distressed

properties• Permits are depressed: Where are all

those kids going?

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Consumer confidence is volatileEdit Graph    Print    PDF    Save Edit Graph    Print    PDF    Save

Consumer Sentiment Index, up 1.3 to 75.3 in FebruaryConsumer Confidence Index up in January

© Copyright 2012, Advisor Perspectives, Inc.

The Growth of Public Debt: July 2011

Other Drivers of Future Consumer Spending

•Household formation demand is accumulating

•Net worth is rising

•Our cars are older than ever: pent up demand

•Savings is declining from 4.1% to 3.6% to 3.5% in November

• Continues to rise after a dip in 2011:• increased .4% in January 2012

• 7 of 10 components rose: January 2012

• increased .5% in December 2011

US Index of Leading Economic Indicators

Index of Leading Economic Indicators

USA:https://www.conference-board.org/pdf_free/press/PressPDF_4407_1329469190.pdf

Euro area:https://www.conference-board.org/pdf_free/press/PressPDF_4416_1330277142.pdf

Global Trends: GDP Growth

2010 2011 2012 2013World 5.2 3.8 3.3 3.9Advanced Economies 3.2 1.6 1.2 1.9 USA 3 1.8 1.8 2.2 Euro Area 1.9 1.6 -0.5 0.8Emerging economies 7.3 6.2 5.4 5.9 Asia 9.5 7.9 7.3 7.8 China 10.4 9.2 8.2 8.8 Latin America 6.1 4.6 3.6 3.9

IMF World Economic Outlook, January 2012

Global Trends: Govt. Debt/GDP%

2010 2011 2012 2013World 70 70 71 71Advanced Economies 100 104 108 110 USA 98 102 108 112Euro Area 85 88 91 93 Italy 118 121 125 127 Spain 61 70 78 84 Japan 219 233 241 247Emerging economies 41 38 36 35

International Monetary Fund, January 2012

2012 Positives

• We are growing, but slowly• Inflation seems stable• Housing market seems to be closer to bottom• Index of Leading Economic Indicators is up• Aerospace, Software and Agriculture Exports are

doing well in Washington• We will likely muddle through an slow patch in

2012

2012 Risks

• Housing Market fails to stabilize: 1/4th of mortgages are underwater

• Unemployment continues to restrain consumer spending and confidence

• Middle East tensions are rising• Asia growth is slowing • European debt situation threatens a new

recession

2012 Risks

• European Debt Situation• Greece (165%), Italy(121%), Spain(70%),

Ireland(109%), Portugal(103%), Eurozone(88%)

• Threaten German and French Banks, which threaten the US Banks

• Growth of US Public Debt: now about 102% of GDP: 2011

• Political gridlock in DC

Conclusions:

• We expect the U.S. and WA economies will experience slow growth, muddle through conditions.

• The risk of another recession remains elevated, but has receded modestly since September.

• Uncertainty remains high, but forecasts are no longer being revised downward.

• Employment growth will lag the recovery in output. It may take four or five years to get to full employment.

• Consumer confidence remains weak.

Conclusions:

• The European debt and uncertainty in the Middle East are threats to recovery.

• The federal government needs to balance the need for further stimulus in the short term with the need for a credible long term fiscal policy.

• WA is likely to underperform the nation despite good performance by aerospace, software publishing, and agriculture.

• The slowdown in Asian economic growth threatens Washington State.

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ResourcesState of Washington Economic Forecast Council.

http://www.erfc.wa.gov/

Federal Reserve Economic Data Base, St. Louis Fed.

http://research.stlouisfed.org/fred2/

Standard and Poors, Case-Shiller House Price Index.

Charles P. Kindleberger and Robert Aliber, Manias, Panics and Crashes: A History of Financial Crises, 5th ed.,Wiley, 2005

IMF, World Economic Outlook, http://www.imf.org/external/ns/cs.aspx?id=29

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Inflation: Annual Rates

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