Coping With The Limits of Macroeconomic Policy
The Recovery from the Great Recession
In this presentation
•
National forecasts are produced by Global Insight, Inc.
•
State and Metropolitan forecasts are public information produced by the Division of Research and Policy, Wisconsin DOR.
•
Information is supplied by the U.S. Bureau Of the Census, U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis,
Federal Housing Finance Authority, Federal Reserve Board of Governors, Federal Reserve Bank of Philadelphia, Federal Reserve
Bank of New York, the Wisconsin Department of Workforce Development, and various divisions of the Wisconsin DOR.
1
Today’s Themes
1) Living a Half-Fast Recovery.
2) Coping with the Limits of Macroeconomic
Policy
3) Prospects for US and Wisconsin in 2011
& 2012
2
Economy Now Fully Recovered
At least pending another GDP Revision
3
Recovery Already in 29th Month
4
Real GDP Growth Has Stalled Compared to
Recent Recoveries
5
Growth is About Half of Post War Average
Recoveries Aren't What They Used to Be
Average Real GDP Growth First 9 Quarters of Recovery
7
6
5
4
3
2
1
0
September 30, 2011
6
Remember the National Income Identity
Yd = C + I + (X-M) + G
Total Aggregate Demand is the sum of purchases for consumption, investment,
net exports and government.
7
Consumption Fully Recovered by Late 2010
8
National Retail Sales Continue to Rise
Around 8.0% Over Prior Year
Retail Sales
12%
Year-over-year Growth
8%
4%
0%
-4%
-8%
-12%
2007
2008
Total
2009
2010
2011
Total Less Sales of M otor Vehicles
9
Exports Recovered Quickly
September 30, 2011
10
Federal Spending Never Faltered
September 30, 2011
11
Limits of Macroeconomic Policy
• Fiscal Policy
– Keynesian Fallacy of Composition
– Bill comes dues for 2009 Stimulus
• Monetary Policy
– Living in the Liquidity Trap
September 30, 2011
12
State & Local Purchases Matter More
In the "G" in the National Income Identity
13
2001q1
2001q3
2002q1
2002q3
2003q1
2003q3
2004q1
2004q3
2005q1
2005q3
2006q1
2006q3
2007q1
2007q3
2008q1
2008q3
2009q1
2009q3
2010q1
2010q3
2011q1
2011q3
State & Local Spending Unwinds
10 Years of Growth
State & Local Purchases, NIPA Basis
1540
1520
1500
1480
1460
1440
1420
1400
14
20
06
20 -I
06
20 -II
06
20 -III
06
-IV
20
07
20 -I
07
20 -II
07
20 -III
07
-I
20 V
08
20 -I
08
20 -II
08
20 -III
08
-IV
20
09
20 -I
09
20 -II
09
20 -III
09
-IV
20
10
20 -I
10
20 -II
10
20 -III
10
-I
20 V
11
20 -I
11
20 -II
11
-II
I
Billions of Dollars
State & Local Tax Revenues Have Not Recovered
Income and Sales Tax Collections, NIPA Basis
800
780
760
740
720
700
680
660
640
620
600
15
20
06
20 -I
06
20 -II
06
20 -III
06
-IV
20
07
20 -I
07
20 -II
07
20 -III
07
-I
20 V
08
20 -I
08
20 -II
08
20 -III
08
-IV
20
09
20 -I
09
20 -II
09
20 -III
09
-IV
20
10
20 -I
10
20 -II
10
20 -III
10
-I
20 V
11
20 -I
11
20 -II
11
-II
I
Billions of Dollars
Bill Comes Dues for Stimulus
Stimulus Funds Fading Away
Federal Grants-In-Aid, NIPA Basis
600
550
500
450
400
350
300
16
National Data
3%
Total Pvt
State Govt
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
-6%
26
24
22
20
18
16
14
12
10
8
6
4
2
-7%
0
Percent Change Over Prior Year
State Government Losing Jobs
Months Since End of Recession
17
Persistent State Government Job
Losses This Recovery
State Government Employment, Pct Change Over Prior Year
5%
4%
3%
2%
1990-91
2001
2007-09
1%
0%
-1%
-2%
27
25
23
21
19
17
15
13
11
9
7
5
3
1
-3%
Source: U.S. Bureau of Labor Statistics
18
Wisconsin State Government
Employment at 20 Year Low
19
In Wisconsin, State Government Job Losses
Now Exceed Manufacturing Job Losses
20
Limits of Monetary Policy
• Principal Weakness in the Economy is
Lack of Investment
• Low short-term interest rates have not
spurred investment
– Haven't move long-term rates that much
– Relationship between interest and investment
has changed
• Lack of demand for funds
21
The Economy's Principal Weakness is Lack
of Investment
22
Living in the Liquidity Trap
Fed Funds Rate less than 0.1% Since April
23
Pushing on the String
Yield on Inflation Indexed Securities Negative Since April
September 30, 2011
24
Cutting Short-Term Rates
Does Not Necessarily Move Long-Term Rates
September 30, 2011
25
Mortgage Rates At Record Lows
September 30, 2011
26
II I
20
I
04
20 IV
05
-I
20 I I
06
-I
20 I
07
20 -I
07
20 IV
08
-I
20 I I
09
-I
20 I
10
20 -I
10
20 IV
11
-II
I
04
-
II
03
-
20
20
02
-
IV
I
II
01
-
01
-
20
20
II I
00
-
20
20
99
-
IV
I
98
-
98
-
19
19
II
97
-
II I
900
19
19
96
-
IV
I
95
-
95
-
19
19
19
Housing Stuck In Low
Investment in Residential Housing, Billions of 2005 Dollars
800
700
600
500
400
300
27
Lower Mortgage Rates Don’t Spur Starts
Relationship Between Housing Starts and Mortgage Rates Breaks Down
3,000
20.0
18.0
2,500
16.0
14.0
12.0
1,500
10.0
Percent
Thousands of Units
2,000
8.0
1,000
6.0
4.0
500
Housing Starts
30-year Mortgage Rate (Right Axis)
0
Apr-71
Jan-77
Oct-82
Jul-88
2.0
Apr-94
Jan-00
Oct-05
0.0
Jul-11
Source: U.S. Department of Commerce: Census Bureau/Board of Governors of the Federal Reserve System/FRED
28
220
FHFA Index
CPI
200
180
160
140
120
Index 1991q1=100
Correcting the Housing Price Bubble
Housing Prices Relative to Consumer Prices
240
100
1
-1
ar
M 0
-1
ar
M 09
ar
M 8
-0
ar
M 7
-0
ar
M 6
-0
ar
M 05
ar
M 4
-0
ar
M 3
-0
ar
M 2
-0
ar
M 01
ar
M 0
-0
ar
M 9
-9
ar
M 8
-9
ar
M 97
ar
M 6
-9
ar
M 5
-9
ar
M 4
-9
ar
M 3
-9
ar
M 92
ar
1
-9
M
ar
M
29
US
WI
10%
5%
0%
-5%
-10%
Percent Change Over Prior Year
Correcting the Housing Price Bubble
Wisconsin’s Correction More Modest than US
FHFA Purchase Index
15%
-15%
1
-1
ar
M 0
-1
ar
M 9
-0
ar
M 8
-0
ar
M 7
-0
ar
M 6
-0
ar
M 5
-0
ar
M 4
-0
ar
M 3
-0
ar
M 2
-0
ar
M 1
-0
ar
M 0
-0
ar
M 9
-9
ar
M 8
-9
ar
M 7
-9
ar
M 6
-9
ar
M 5
-9
ar
M 4
-9
ar
M 3
-9
ar
2
-9
M
ar
M
30
Wisconsin Housing Bouncing Around the Bottom
Wisconsin Building Permits, 12 Month Total
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
11
1
l1
n
Ju
Ja
10
0
l1
n
Ju
Ja
09
9
l0
n
Ju
Ja
08
8
l0
n
Ju
Ja
07
7
l0
n
Ju
Ja
06
6
l0
n
Ju
Ja
05
5
l0
n
Ju
Ja
04
4
l0
n
Ju
Ja
03
3
l0
n
Ju
Ja
02
2
l0
n
Ju
Ja
01
1
l0
n
Ju
Ja
31
14
12
10
8
6
4
2
0
-2
-4
Percent Change At Anual Rates
Lack of Demand for Funds
Households Paying Down Debt
Household Debt Outstanding
06
q2
11
20 q1
11
20 q4
10
20 q3
10
20 q2
10
20 q1
10
20 q4
09
20 q3
09
20 q2
09
20 q1
09
20 q4
08
20 q3
08
20 q2
08
20 q1
08
20 q4
07
20 q3
07
20 q2
07
20 q1
07
20 q4
06
20 q3
06
20 q2
06
20 q1
20
32
Lack of Demand for Funds
Consumers Rapidly De-Leveraging
Consumer Financial Obligations at Lowest Level in 18 years
Consumer Financial Obligaton Ratio (FOR)
Pct. of Disposable Personal Income
20.0
FOR
30 Yr Avg
19.5
19.0
18.5
18.0
17.5
17.0
16.5
16.0
15.5
10q1
08q3
07q1
05q3
04q1
02q3
01q1
99q3
98q1
96q3
95q1
93q3
92q1
90q3
89q1
87q3
86q1
84q3
83q1
81q3
80q1
15.0
Source: Federal Reserve Board of Governors
33
Ja
n
Ap 1
r 1 200
Ju 2 0 0
O l 1 2 00
ct 0
J a 1 2 00
n 0
Ap 1 00
r 1 200
Ju 2 0 1
O l 1 2 01
ct 0
J a 1 2 01
n 0
Ap 1 01
r 1 200
Ju 2 0 2
O l 1 2 02
ct 0
J a 1 2 02
n 0
Ap 1 02
r 1 200
Ju 2 0 3
O l 1 2 03
ct 0
J a 1 2 03
n 0
Ap 1 03
r 1 200
Ju 2 0 4
O l 1 2 04
ct 0
J a 1 2 04
n 0
Ap 1 04
r 1 200
Ju 2 0 5
O l 1 2 05
ct 0
J a 1 2 05
n 0
Ap 1 05
r 1 200
Ju 2 0 6
O l 1 2 06
ct 0
J a 1 2 06
n 0
Ap 1 06
r 1 200
Ju 2 0 7
O l 1 2 07
ct 0
J a 1 2 07
n 0
Ap 1 07
r 1 200
Ju 2 0 8
O l 1 2 08
ct 0
J a 1 2 08
n 0
Ap 1 08
r 1 200
Ju 2 0 9
O l 1 2 09
ct 0
1 09
1/ 2 00
1 9
4/ /2 0
1 10
7/ /2 0
10 1/2 10
/1 01
/ 0
1/ 201
1/ 0
20
11
Change over Prior Year $M
Consumers Still Paying Down Credit Cards
Revolving Credit Has Been Dropping Rapidly Since Feb 2009
100000
80000
60000
40000
20000
0
-20000
-40000
-60000
-80000
-100000
Source: Federal Reserve Board of Governors
Last Month Plotted: February 2011
34
20
00
-I
00
-I
20 I I
01
20 -I
01
-I
20 I I
02
20 -I
02
-I
20 I I
03
20 -I
03
-I
20 I I
04
20 -I
04
-I
20 I I
05
20 -I
05
-I
20 I I
06
20 -I
06
-I
20 I I
07
20 -I
07
-I
20 I I
08
20 -I
08
-I
20 I I
09
20 -I
09
-I
20 I I
10
20 -I
10
-I
20 I I
11
-I
20
New Frugality
Savings Up Substantially
800
Personal Savings, Billions of Dollars
700
600
500
400
300
200
100
0
35
Collateral Damage
Low Interest Rates Reduce Personal Income
36
Two Sectors Sufficient to
Explain the Half-Fast Recovery
Real GDP Growth At Annual Rates
Contributions to Real GDP Growth From Sector
1.2
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
S&L Govt
Residential
19
1
1
1
1
1
1
2
2
53 957 960 969 974 981 990 000 007
-54 -58
-61 -70
-75 -82 -91
-01 -09
Source: BEA, NIPA Table 1.1.2. Contributions to Percent Change in Real Gross Domestic Product
Rest of Economy Outpacing
Last Two Recoveries
9 Qtr Real GDP Growth in Recovery
Real GDP At Annual Rates
7
Total
Less S&L, Res Inv
6
5
4
3
2
1
0
1953-54
1957-58
1960-61
1969-70
1973-75
1981-82
1990-91
2001
2007-09
Wisconsin Outlook in 2011
and 2012
Wisconsin Among 25 States with Unemployment
Significantly Below US
State Unemployment Rates
August 2011
Below US Average (25)
Near US Average (16)
Above US Average (9)
40
Manufacturing Leading
Wisconsin’s Recovery
6%
4%
2%
Wisconsin Employment, Percent Change over Prior Year
Total
Manufacturing
0%
-2%
-4%
-6%
-8%
-10%
-12%
-14%
Ja
n0
Ap 7
r-0
7
Ju
l-0
O 7
ct
-0
7
Ja
n0
Ap 8
r-0
8
Ju
l-0
O 8
ct
-0
8
Ja
n0
Ap 9
r-0
9
Ju
l-0
O 9
ct
-0
9
Ja
n1
Ap 0
r-1
0
Ju
l-1
O 0
ct
-1
0
Ja
n11
-16%
41
Milwaukee Manufacturing Edges Up
Index; Reading above 50 signals expansion
ISM Manufacturing Index: PMI
75
50
25
2007M01
2008M01
2009M01
National
2010M01
2011M01
Milwaukee
42
Sales Tax Collections Trend Higher
3 Month Moving Average
Sales Tax Collections
3-Month Moving Average
8.0%
Year/Year Change
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
-8.0%
-10.0%
-12.0%
2007M09
2008M09
2009M09
2010M09
43
Withholding Collections Also Trend Higher
Withholding Collections
3-Month Moving Average
12.0%
Year/Year Change
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
-8.0%
2007M09
2008M09
2009M09
2010M09
44
Wisconsin Income Held Up Better Than US
Cumulative Income Growth Since 2007q4
10%
8%
US
WI
6%
4%
2%
0%
-2%
-4%
20
20
20
20
20
20
20
20
20
20
20
20
20
20
11
11
10
10
10
10
09
09
09
09
08
08
08
08
2
Q
1
Q
4
Q
3
Q
2
Q
1
Q
4
Q
3
Q
2
Q
1
Q
4
Q
3
Q
2
Q
1
Q
45
Wisconsin Per Capita Income Edging
Closer to US Average
97.0%
96.0%
95.0%
94.0%
93.0%
92.0%
91.0%
2004
2005
2006
2007
2008
2009
2010
46
Wisconsin Ranks 25th in Per Capita
Personal Income
State Per Capita Personal Income
2010
Top 10
Second 10
Middle 10
Fourth 19
Bottom 10
(8)
(10)
(10)
(10)
(12)
47
Employment Outlook
Wisconsin Slightly Ahead of US in 2011
Percent Change Over Prior Year
Change in Nonfarm Employment
2
1
0
-1
US
WI
-2
-3
-4
-5
2007
2008
2009
2010
2011
2012
2013
Source: Wisconsin DOR, Wisconsin Economic Outlook
http://www.revenue.wi.gov/ra/econ/index.html
48
Income Outlook
Wisconsin Outperforms US in 2011
Percent Change Over Prior Year
Total Personal Income
8
6
4
2
US
WI
0
-2
-4
-6
2007
2008
2009
2010
2011
2012
2013
Source: Wisconsin DOR, Wisconsin Economic Outlook
http://www.revenue.wi.gov/ra/econ/index.html
49