U.S. Economic Update: Current and Future Trends

A Presentation to the National Association of Wholesaler Distributors

Billion Dollar Company CFO RoundtableChicago, June 5-6, 2012

Tassos MalliarisQuinlan School of BusinessLoyola University Chicago

My Plan

• Review current data and trends.

• Offer forecasts

• Discuss how we ended up where we are.

• Offer 3 possible scenarios moving forward

Where are we now?

• Slow economic growth• High Unemployment• Inflation remains low• Financial System is unstable• Fiscal and monetary policies are extremely

stimulative

GDP Growth

Components of GDP Chart

Taylor graph

Taylor graph

Trend GDP

Employment

2009 to Present Payrolls and Unemployment

Payroll declines and recoveries following recessions

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

Job Losses as Percentage Off of Peak Employment in Post WWII Recessions

19481953195819601969197419801981199020012007

Japan vs. U.S.

Interest Rates since 1987

S&P 500 Index

CPI

PPI

U.S. Debt

Foreign holdings of U.S. debt

Country Amount (billions)

China 1169.9

Japan 1083.0

Oil Exporters 254.5

Brazil 237.4

Caribbean Banking Centers 224.8

Taiwan 184.4

Switzerland 147.8

Russia 146.7

Hong Kong 138.8

Luxembourg 136.8

Source: U.S. TreasuryData as of end of march

The Fed’s Balance Sheet

Household Housing Debt

Housing sales and starts 2000-12

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2001-01-01

2002-01-01

2003-01-01

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2005-01-01

2006-01-01

2007-01-01

2008-01-01

2009-01-01

2010-01-01

2011-01-01

2012-01-01

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new home sales (left) starts(right)

From Review to Forecasts

• GDP• Unemployment• Consumer Prices• Interest Rates• Government Deficits

GDP Forecast

Unemployment Forecast

PCE Forecast

2012 and 2013 GDP Growth Forecasts

Deficit projections

Economic Projections

Fed’s Projections

Historically low long-term rates

William Dudley - President, New York FedMay 30, 2012

• Expects slow recovery• Regarding the 2013 “Fiscal Cliff”

– If no solution found, GDP growth will decline by 3%

• In that scenario further easing is necessary

How did we get here?• Success of Great Moderation• Risk Management Approach• Price Stability implies Financial Stability• Clean vs. Lean Against Bubbles (Also called the

Jackson Hole Consensus)• Very low interest rates during 2003-2005• Housing boom and bust• Financial crisis

Lessons Learned from the Crisis• Price Stability Does Not Imply Financial

Stability

• The Cost of Cleaning up After a Bubble Bursts is Very High

• Financial Instability Seriously Impacts the Real Macroeconomy

Where Are We Now?

• 15 million Unemployed in the U.S.• 13 trillion of wealth lost in the U.S.• Slow Growth in the U.S. and Europe• Significant Increases in U.S. Deficits• Sovereign Debt Crisis in the EU• Unbalanced Growth in China

Why are we at a crossroad?

• Monetary (primarily) and Fiscal Policies Have Contributed to Stopping the Decline of the Real Economy

• Zero Bound Policies Contribute Modestly• Fiscal and Political Uncertainty• Sovereign debt crisis• Global inter-dependencies

Moving Forward

• Reinhart and Rogoff: Recovery from Financial Crises takes Long Time

• Additional Difficulties from the EU• The Instability of the Euro and Eventually of

the Dollar• Emerging Countries and Mild Global Inflation

Beyond the Crossroad: Three Choices

Ranges of Inflation and Deflation

Three Scenarios

• Slow growth 2.0 to 3.0% and slow inflation (CONSENSUS FORECAST)

• Deflation

• Inflation above 2%

• Above will be influenced by components of UNCERTAINTY

Uncertainty

• Fiscal Cliff – U.S. Elections• European Sovereign Debt and Insolvent Banks• Global Deleveraging• Volatility in Equity and Bond Markets• Future of the US dollar and euro• Degree of Fragility of Consumer and Business

Confidence• Unknown unknowables

Current Scenario

• GDP Growth 0 to 2.5%; inflation 0 to 2%• Moderate uncertainty • Fed funds stay close to zero till 2014• US Firms and Banks are doing well• Protracted deleveraging• Partial response to US and EU sovereign crises• 50% chance

Variables Euroa USAa Japana

Gov’t Debt 90 107 236

Household Debt 70 88 74

Non-Financial Corp 138 87 143

Financial Institutions 142 87 177

Total Debt 440 269 630

a % WEO projection of GDP 2012. * April 2012 Global Financial Stability Assessment, IMF

• Euro area countries differ significantly in their individual debt problems. • Ireland and Spain are examples of a private debt overhang, whereas in Italy

and Greece high public debt is balanced by strong household balance sheets

Debt Burden by Sectors: Euro, US and Japan*

Deflation / Recession

• GDP -2% to 0; prices decline between 0 to -2%• Higher uncertainty: bond market?• Fed funds remain close to zero beyond 2014• Additional QE but velocity is flat• Contrast to the 1982-2007 leverage driven

growth• Wealth volatility • Worse case scenario for the Fed: 20% chance

Faster Growth and Mild Inflation

• GDP Growth above 3%; inflation 2 to 5%• Uncertainty is reduced; bold fiscal solutions• Confidence is improved• Velocity increases• Fed restrains from increasing Fed funds• Wealth increases rapidly • 30% chance