DR. WILLIAM DUNKELBERG

Chief Economist

NATIONAL FEDERATION

OF INDEPENDENT BUSINESS

CHAIRMAN, LIBERTY

BELL BANK, NEW JERSEY

CHAIR, GLOBAL

INTERDEPENDENCE CENTER

TWO WAYS OUT, NEITHER DESIRABLE

THE 99 PERCENT

GDP AND EMPLOYMENT

7000

8000

9000

10000

11000

12000

13000

14000

'00 '03 '06 '09 '12

130000

132000

134000

136000

138000

140000

142000

144000

146000

148000

GDP2005$(left) EMPLOYMENT(right)

HUGE EMPLOYMENT GAP

HOUSING STARTS

500

800

1100

1400

1700

2000

91 93 95 97 99 '01 '03 '05 '07 '09 '11

UNITS

UN

ITS

000

HOME OWNERSHIP RATES

60

62

64

66

68

70

80 83 86 89 92 95 98 '01 '04

Perc

ent

USA

BARNEY’S “UNAFFORDABLE” HOUSING

CONSUMPTION SHARE OF

GDP & CONSUMER SAVING

58

60

62

64

66

68

70

72

78 83 88 93 98 '03

'08

0

2

4

6

8

10

12

14

CONSUMPTION SPENDING SAVING RATE

0

2000

4000

6000

8000

10000

12000

14000

16000

90 93 96 99 '02 '05 '08 '11

(00

0)

DEBT=.7GDP ACTUAL

“EXCESS” DEBT: PAYING FOR

THE “PARTY”

MAINTAINING DEBT/GDP RATIO IN 1999

TRADE DEFICIT

-800

-700

-600

-500

-400

-300

-200

-100

0

78 83 88 93 98 '03

'08

Source: BEA

BIL

LIO

NS

OF

CO

NS

TA

NT

DO

LL

AR

S

THE PARTY

INDEX OF CONSUMER

SENTIMENT

50

60

70

80

90

100

110

78 83 88 93 98 '03

'08

Source: University of Michigan

Ind

ex

Valu

e

RATING OF GOVERNMENT POLICY

-50

-40

-30

-20

-10

0

10

20

30

40

50

'00

'03

'06

'09

'12

Source: University of Michigan

Perc

en

t o

f C

on

su

mers

NET % POLICIES ARE GOOD 2008-12

HOUSE PRICES

0

50

100

150

200

250

87 90 93 96 99 '02

'05

'08

'11

Pe

rce

nt

FHFA CASE SHILLER

CONSUMER NET WORTH

05

10152025303540455055606570

78 80 82 84 86 88 90 92 94 96 98 '00 '02 '04 '06 '08 '10

TR

ILL

ION

S O

F D

OL

LA

RS

NET WORTH

SMALL BUSINESS FACTS

• 90% OF ALL EMPLOYERS HAVE

FEWER THAN 20 EMPLOYEES

• 99% HAVE FEWER THAN 500

• PRODUCE HALF OF THE PRIVATE

SECTOR GROSS DOMESTIC PRODUCT

• EMPLOY 50%+ OF PRIVATE SECTOR

EMPLOYEES

• PRODUCE 2/3RDS OF THE NEW JOBS

SMALL BUSINESS

OPTIMISM INDEX (QUARTERLY, 1986 = 100)

80

85

90

95

100

105

110

76 79 82 85 88 91 94 97 '00 '03 '06 '09 '12

SEASONALLY ADJUSTED MAY JUNE

FIRST MONTH IN EACH QUARTER

SMALL BUSINESS

OPTIMISM INDEX (RECOVERY FROM NBER TROUGH)

80

85

90

95

100

105

110

2009:Q2 2001:Q4 1991:Q1 1982:Q4 1975:Q1

SURVEY FIRST MONTH IN EACH QUARTER

MAY JUNE

EXPECTATIONS FOR GENERAL

BUSINESS CONDITIONS

IN 6 MONTHS (PCT “BETTER” - PCT “WORSE”)

-50

-30

-10

10

30

50

70

76 79 82 85 88 91 94 97 '00

'03

'06

'09

'12

Perc

en

t o

f F

irm

s

QUARTERLY MAY JUNE

SEASONALLY ADJUSTED

OUTLOOK FOR BUSINESS

EXPANSION (PCT “NOW IS A GOOD TIME”)

0

5

10

15

20

25

30

76 79 82 85 88 91 94 97 '00

'03

'06

'09

'12

(SEASONALLY ADJUSTED)

Perc

en

t o

f F

irm

s

QUARTERLY MAY JUNE

“NO” FOR 18 QUARTERS

BAD TIME TO EXPAND DUE TO THE POLITICAL CLIMATE

0

5

10

15

20

25

30

'01

'04

'07

'10

(SEASONALLY ADJUSTED)

Perc

en

t o

f F

irm

s

QUARTERLY MAY JUNE

% OF THOSE SAYING “BAD TIME”

REPORTED CHANGE IN PAST

SALES (last 3 months vs prior 3)

-40

-30

-20

-10

0

10

20

30

76 79 82 85 88 91 94 97 '00

'03

'06

'09

'12

[% "HIGHER" - % "LOWER", SEAS. ADJ.]

Perc

en

t o

f F

irm

s

QUARTERLY MAY JUNE

EXPECTED REAL SALES

-30

-20

-10

0

10

20

30

40

50

76 79 82 85 88 91 94 97 '00

'03

'06

'09

'12

[% "HIGHER" - % "LOWER", SEAS. ADJ.]

Perc

en

t o

f F

irm

s

QUARTERLY MAY JUNE

ACTUAL PRICE INCREASES SEASONALLY ADJUSTED

-40

-20

0

20

40

60

80

76 79 82 85 88 91 94 97 '00

'03

'06

'09

'12

Perc

en

t o

f F

irm

s

RAISED (NET) MAY JUNE

FIRST MONTH IN EACH QUARTER

EMPLOYMENT

3000

8000

13000

18000

23000

28000

75 80 85 90 95 '00

'05

'10

Em

plo

ym

en

t

CONSTRUCTION MANUFACTURINGRETAIL PROF/BUS SERVICESGOVERNMENT

AVERAGE CHANGE IN EMPLOYMENT

PER FIRM

-1.2

-0.8

-0.4

0

0.4

79 82 85 88 91 94 97 '00

'03

'06

'09

'12

NU

MB

ER

OF

WO

RK

ER

S

WORKERS PER FIRM MAY JUNE

QUARTERLY: FIRST MONTH IN EACH QUARTER

JOB CREATION PLANS % PLAN INCREASE - % PLAN DECREASE

-10

-5

0

5

10

15

20

25

76 79 82 85 88 91 94 97 '00

'03

'06

'09

'12

Perc

en

t o

f F

irm

s

QUARTERLY MAY JUNE

REAL INVESTMENT

• CREATION OF REAL PRODUCTIVE ASSETS

– MAINTENANCE MODE

• SOLD OFF EXCESS INVENTORY, NEW

ORDERS WEAK

• FIRE SALE IS OVER, SATISFIED WITH

CURRENT STOCKS

• HOUSING: NO HELP FOR PRODUCTIVITY

40

45

50

55

60

65

70

75

82 85 88 91 94 97 '00

'03

'06

'09

'12

Perc

en

t o

f F

irm

s

% SPENDING %SPEND + LEASE

ACTUAL CAPITAL OUTLAYS

FIRST MONTH IN EACH QUARTER+MAY JUNE

LEASING ADDED

PLANNED CAPITAL OUTLAYS

(NEXT SIX MONTHS)

15

20

25

30

35

40

45

77 80 83 86 89 92 95 98 '01

'04

'07

'10

Perc

en

t o

f F

irm

s

QUARTERLY MAY JUNE

MOST IMPORTANT PROBLEMS

0

5

10

15

20

25

30

35

76 79 82 85 88 91 94 97 '00

'03

'06

'09

'12

Perc

en

t o

f F

irm

s

TAXES REGULATIONS WEAK SALES INSURANCE

FIRST MONTH IN EACH QUARTER+MAY JUNE

CREDIT

• FEW USES FOR LOANS

• PRIVATE LOAN DEMAND WEAK,

GOVERNMENT DEMAND STRONG

• LOTS OF UNCERTAINTY: RETURNS

• PLANNING HORIZONS LONGER THAN

6 MONTHS

• TOO MUCH “TEMPORARY” STUFF

SMALL BUSINESS

CREDIT PROBLEMS (% HARDER TO GET - % EASIER)

-5

0

5

10

15

20

25

30

74 77 80 83 86 89 92 95 98 '01

'04

'07

'10

'13

Perc

en

t o

f F

irm

s

QUARTERLY MAY JUNE

LOAN DEMANDS WEAKEN THROUGH

THE RECESSION

35

40

45

50

55

93 96 99 '02

'05

'08

'11

Perc

en

t o

f F

irm

s

PERCENT OF ALL FIRMS NOT WANTING A LOAN MAY JUNE

RECESSION STARTS

SINGLE MOST IMPORTANT

PROBLEM FACING OWNERS

0

5

10

15

20

25

30

35

40

45

76 79 82 85 88 91 94 97 '00

'03

'06

'09

'12

Perc

en

t o

f F

irm

s

INFLATION CREDIT

FIRST MONTH IN EACH QUARTER+MAY JUNE

CREDIT: NO PROBLEM

Deposit $100 REQUIRED

RESERVE $10

ASSETS LIABILITIES

CASH $10 Deposit $100

ASSETS LIABILITIES

BANK BANK

EXCESS

RESERVE $90

LOAN $90

TS

LF

-3/1

1/0

8, 9

50

"TD

WP

-8

/1

7/0

7"

TA

F-1

2/1

2/0

7

PD

CF

-3/1

6/0

8

Se

ries B

rea

k

Se

ries B

rea

k

$450

$600

$750

$900

$1,050

$1,200

$1,350

$1,500

$1,650

$1,800

$1,950

$2,100

$2,250

$2,400

$2,550

$2,700

$2,850

$3,000

27

-Ju

n-0

7

8-A

ug

-07

28

-No

v-0

7

9-J

an

-08

20

-Fe

b-0

8

2-A

pr-0

8

24

-Se

p-0

8

5-N

ov-0

8

17

-De

c-0

8

28

-Ja

n-0

9

11

-Ma

r-09

20

09

-04

-22

20

09

-06

-03

20

09

-07

-15

20

09

-08

-26

20

09

-10

-07

18

-No

v-0

9

30

-De

c-0

9

10

-Fe

b-1

0

24

-Ma

r-10

5-M

ay-1

0

16

-Ju

n-1

0

28

-Ju

l-10

8-S

ep

-10

20

-Oct-1

0

1-D

ec-1

0

12

-Ja

n-1

1

23

-Fe

b-1

1

6-A

pr-1

1

18

-Ma

y-1

1

29

-Ju

n-1

1

10

-Au

g-1

1

21

-Se

p-1

1

2-N

ov-1

1

14

-De

c-1

1

25

-Ja

n-1

2

Factors Using Reserves on Federal Reserve's Balance Sheet (Liabilities)

from 6/27/2007 to 2/15/2012

Reserve Balances

Other Liabilities and Capital

Deposits - Not Reserve

Balances

Treasury Cash Holdings

Reverse-RPs with Dealers

Reverse RPs: Foreign

Official and International

AccountsCurrency in Circulation

TSLF-3/11/08

"TDWP - 8/17/07"

TAF-12/12/07

Billions

AVERAGE RATE PAID ON

SHORT TERM LOANS

0

5

10

15

20

25

81 84 87 90 93 96 99 '02

'05

'08

'11

Perc

en

t o

f F

irm

s

RATE PAID 1 YR TREASURY

RATIO OF GOVERNMENT

SPENDING TO GDP

25

30

35

40

78 83 88 93 98 '03

'08

Source: BEA

PE

RC

EN

T

U.S. Federal Deficit

-1500

-1000

-500

0

500

78 81 84 87 90 93 96 99 '02

'05

'08

CROWDING OUT?

SO, WHERE ARE WE? • ECONOMIC GROWTH SLOW

• UNEMPLOYMENT HIGH

• SMALL BUSINESS, HALF OF GDP, STALLED

• MOST IMPORTANT PROBLEMS?

– HEALTH CARE COST, TOP FOR 25 YEARS

– UNCERTAINTY ABOUT THE ECONOMY #2

– UNCERTAINTY ABOUT GOVERNMENT POLICY #4

– ADMINISTRATIVE LAW, EPA, HHS REGS ETC

• CHALLENGES ARE LOCAL, NATIONAL, GLOBAL

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