Outlook for the U.S. Economy
Joe Kennedy
Is there a Trade-off Between Inflation
and Unemployment?
Years
16.0
Annual Inflation Rate
14.0
12.0
10.0
8.0
6.0
4.0
2.0
.0
-2.0 0.0
2.0
4.0
6.0
8.0
Annual Unemployment Rate
10.0
12.0
GDP Growth
10
Growth is Moderate
•Growth in the 1st Quarter of 2012
slipped to 2.2 percent.
•This ended a streak of three straight
quarters of accelerating growth and
indicated that strong growth may not
be just around the corner.
8
6
4
2
0
-2
-4
-6
-8
-10
2000
2005
2010
The Economy has Finally
Started Adding Jobs
•The economy added only 115,000
jobs in April 2011.
•After three strong months at the turn
of the year, job creation may be
slowing.
•Economists believe that the economy
needs add approximately 125,000
each month just to accommodate new
entrants into the workforce.
Change in Total
Nonfarm
Employment
(Thousands)
Monthly Job Loss/Gain
600
400
200
0
2000 - Jan
2010 - Jan
-200
-400
-600
-800
-1000
Year
20
The degree of long-term
unemployment remains high
18
U-6
16
14
12
10
8
6
4
Unemployment Rate
2
0
1994
1995
1996
1997
1999
2000
2001
2002
2004
2005
2006
2007
2009
2010
2011
•The unemployment rate fell to 8.1
percent in April although much of the
recent improvement has been due to
people leaving the workforce rather
than finding jobs.
•A broader measure of unemployment
that includes marginally attached
workers, discouraged workers and
part-time workers who seek full-time
work is much higher.
•The average duration of
unemployment is 39.1 weeks.
•41.3 percent of the unemployed have
been jobless for 27 weeks or longer.
•An interesting question is whether
the expiration of extended
unemployment benefits helped create
a sudden fall in unemployment that is
now petering out.
•Labor market participation has
declined over 2 percentage points
from its high going into the recession.
18
16
Less than high school
Education matters
14
12
10
8
6
College or more
4
2
0
1994
1995
1996
1997
1999
2000
2001
2002
2004
2005
2006
2007
2009
2010
2011
The unemployment rate for those
without a high-school degree is much
higher than for those with a college
degree or more.
•Age and race also matter.
•The unemployment rate for teenagers
is 24.9 percent, for those age 25-54 it
is 6.9 percent.
•The unemployment rate of blacks is
usually double that for whites,
currently 13.0 percent to 7.4 percent.
The Economy is Still
Driven by Consumer
Spending
•Consumption has risen to over 70
percent of GDP, while private
investment has fallen to just over 13
percent.
•A persistent criticism is that America
does not invest enough in
infrastructure, education, and research
and development.
Personal Consumption and Private
Percent of GDP Investment as a Percent of GDP
80%
70%
60%
50%
40%
30%
20%
10%
0%
1950
1960
1970
1980
Year
1990
2000
2010
And Consumers are Still
Over-Leveraged
•Much of the reduction in household
debt has been due to write-offs as
consumers and homeowners defaulted
on outstanding loans. Only a portion
has been due to a shift away from
consumption and into savings.
Percent of
Disposable
Income
Household Debt Service Ratio
1600%
1400%
1200%
1000%
800%
600%
400%
200%
0%
1980Q1
1985Q1
1990Q1
1995Q1
Year
2000Q1
2005Q1
2010Q1
Price
$4.50
$4.00
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
Axis Title
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
$0.00
1991
•Crude oil accounts for 65 percent of
the cost of gasoline. Taxes add
another 13 percent.
Weekly Price of Regular Gasoline
1990
Rising Gas Prices Could
Depress Consumer
Spending
Business Fixed Investment
Continues to Rebound
$Billion
2500
Gross Private Domestic Investment
2000
1500
1000
500
0
1980 - Q1
1985 - Q1
1990 - Q1
1995 - Q1
Year
2000 - Q1
2005 - Q1
2010 - Q1
But the Financial Sector
Still Accounts for a High
Percent of Total Profits
•This is a dangerous sign. The financial
sector is a service industry that should
follow business activity in the rest of
the economy, not lead it.
•High profits may mean that financial
institutions are building leverage and
expanding risk again.
Axis Title
0.5
Financial as a percent of total corporate
profits
0.4
0.3
0.2
0.1
0
1980-I
1985-I
1990-I
1995-I
-0.1
-0.2
Axis Title
2000-I
2005-I
2010-I
Index
The Dollar Has Fallen
•Most recently the dollar has been
trending up after a long decline
•The weak American economy has
caused the dollar to depreciate against
major currencies.
•But this has been offset by the
dollar’s position as the world’s reserve
currency and the tendency of investors
to flock to Treasuries in times of high
risk.
•The European and Japanese markets
also have economic difficulties.
Major Currencies Index
120
100
80
60
40
20
0
2000-01
2005-01
2010-01
Date
$ Billion
Exports have Increased
but so have Imports
•Changes in the currency rate usually
take about two years to fully affect
trade patterns
Real Value of Exports and Imports
2500
Imports
2000
1500
1000
Exports
500
0
1980 - Q1
1985 - Q1
1990 - Q1
1995 - Q1
Year
2000 - Q1
2005 - Q1
2010 - Q1
1982 - Jan
1983 - Dec
1985 - Nov
1987 - Oct
1989 - Sep
1991 - Aug
1993 - Jul
1995 - Jun
1997 - May
1999 - Apr
2001 - Mar
2003 - Feb
2005 - Jan
2006 - Dec
2008 - Nov
2010 - Oct
Inflation Expectations
Remain Low
Cleveland 5-year Expected
Inflation Rate
7
6
5
4
3
2
1
0
Inflation Remains Low
Despite Rising Food and
Gas Prices
•Motor fuel accounts for 5.1 percent of
all consumer purchases
•Household energy accounts for
another 4 percent of purchases
•Food accounts for only 14.8 percent
of all purchases
Monthly Percent
Change
Major Indices of Inflation
7.0
6.0
CPI
5.0
4.0
3.0
2.0
CPI Less Food and
Energy
1.0
0.0
2000
2004
2008
-1.0
-2.0
-3.0
-4.0
Year
Federal Defict as a Percent of GDP
The Federal Deficit Has
Expanded Rapidly
•The automatic rise in spending and
fall in taxes accounted for much of the
deterioration between 2008 and 2011.
•Policy changes, in particular the ARRA
accounted for a smaller portion.
•Future deficits are driven largely by
entitlement programs driven by the
growing number of retirees and,
especially, the expected rise in medical
costs.
Percent of GDP
10
5
0
-5
-10
-15
1935
1945
1955
1965
1975
-20
-25
-30
-35
Year
1984
1994
2004
The Current Deficit is due
to Both Rising Spending
and Falling Revenues
•But even without additional taxes,
revenues are expected to surpass the
recent average of around 18 percent of
GDP once the economy recovers.
Revenues and Spending as a Percent of
GDP
Percent of GDP
30.0
Outlays
25.0
20.0
15.0
Revenues
10.0
5.0
0.0
1971
1981
1991
Year
2001
2011
Total Federal Debt is on
Pace to Exceed World War
II Highs
Percent of GDP
Federal Debt Held by Public
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
1971
1981
1991
Year
2001
Case-Shiller 10-City Index of Home Prices
Index Value
Housing Remains Weak
•Housing prices appear to have
stabilized
•A large number of foreclosures
remain in the system.
•Uncertainty over how these
foreclosures will be handled and how
quickly will continue to depress prices.
•Approximately 25 percent of homes
remain underwater.
•It is unclear whether financial
institutions have adequately marked
down these assets.
250.00
200.00
150.00
100.00
50.00
0.00
Year
Major Stock Market Indices
Equity Markets have
Rebounded
Adjusted Daily
Closing Price
16000
14000
12000
10000
DJIA
8000
6000
4000
NASDAQ
2000
0
Date
Index value
Volatility is Down
90
Although far down from its
extraordinary highs during the
financial crisis, the VIX index, is still
subject to sudden swings.
80
VIX Index Weekly Prices
70
60
50
40
30
20
10
0
Date
P/E Ratio
But Markets Still Appear
to be Overvalued
When prices are divided by a ten-year
average of real earnings, they appear
to be much higher than their long-run
average.
Shiller P/E Ratio
50.00
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
1960.011965.011970.011975.011980.011985.011990.011995.012000.012005.012010.01
Year
Main Risks Going Forward
International
• European Sovereign Debt
• Unrest in the Middle East
(including Pakistan and
Afghanistan)
• Overheating and Political
Instability in China
Domestic
• Fears of Inflation
• Inevitable Fed Unwinding
• Government Deficits
• Continued Foreclosures
• Policy Uncertainty