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The Economic Outlook: A Puzzle By Any Other Name

The Economic Outlook: A Puzzle By Any Other Name. Economic Policy Division. Labor Market. Total Nonfarm Jobs. Household Employment. Unemployment Rate August 6.1%. Initial Unemployment Claims. Change in U.S. Output: Recoveries. Economic Recovery is Natural. Markets heal

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The Economic Outlook: A Puzzle By Any Other Name

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  1. The Economic Outlook: A Puzzle By Any Other Name Economic Policy Division

  2. Labor Market Total Nonfarm Jobs Household Employment Unemployment Rate August 6.1% Initial Unemployment Claims

  3. Change in U.S. Output: Recoveries

  4. Economic Recovery is Natural Markets heal Resources realign Prices adjust The output gap closes as the economy returns to full employment

  5. U.S. GDP Actual and Potential Quarterly, Q1 1980 to Q4 2015 Real GDPTrillion 2009 Dollars Log Scale Forecast $18.0 $15.0 $12.5 $9.0 $6.5

  6. Ingredients of a Rapid Recovery Entrepreneurial spirit Flexible financial and labor markets Benign policy environment

  7. The Big Puzzle: Why the slow recovery?

  8. The Big Puzzle: Why the slow recovery? Answer: Lagging business investment

  9. Next Puzzle: Why is business investment lagging? Answer 1: Excess capacity

  10. Why is business investment lagging? Answer 1: Excess capacity Real Answer: Washington

  11. Why the Slow Recovery? Strike 1: Poor Policy Focus

  12. Why the Slow Recovery? Strike 1: Poor Policy Focus 2009:Poorly designed stimulus Cap and trade legislation

  13. Why the Slow Recovery? Strike 1: Poor Policy Focus 2009: Poorly designed stimulus Cap and trade legislation 2010: Obamacare

  14. Why the Slow Recovery? Strike 1: Poor Policy Focus 2009: Poorly designed stimulus Cap and trade legislation 2010: Obamacare 2012: Tax hikes

  15. Why the Slow Recovery? Strike 1: Poor Policy Focus 2009: Poorly designed stimulus Cap and trade legislation 2010: Obamacare 2012: Tax hikes 2014: Income inequality and Inversions

  16. Why the Slow Recovery? Strike 1: Poor Policy Focus – and not just from President Obama…. • Republicans shut down the government • Some threatened to allow government to default • Not exactly a business confidence booster

  17. Why the Slow Recovery? Strike 1: Poor Policy Focus Strike 2: Regulatory Policy

  18. Why the Slow Recovery? Strike 1: Poor Policy Focus Strike 2: Regulatory Policy In five years, 157 new major rules 26 new major rules in 2013 alone Cost of $73 billion annually

  19. Why the Slow Recovery? Strike 1: Poor Policy Focus Strike 2: Regulatory Policy Strike 3: Policy Uncertainty

  20. Sources of Policy Uncertainty Dodd-Frank financial regulation ACA regulations Environmental regulations Monetary policy

  21. Why the Slow Recovery? Strike 1: Poor Policy Focus Strike 2: Regulatory Policy Strike 3: Policy Uncertainty Three strikes against a robust recovery

  22. Economy set to accelerate GDP Growth Rates 2011: 1.6 % 2012: 2.3 % 2013: 2.2 % Forecast: 2H 2014: 3.0 % 2015: 3.1 %

  23. Three Headwinds on the Horizon

  24. Three Headwinds on the Horizon 1) The Fed’s Puzzle: tapering and exiting

  25. Fed Policy Bank Assets and Liabilities

  26. CBO’s Inflation Forecast Consumer Price Index

  27. Fed Policy Bank Assets and Liabilities Not a Forecast

  28. Three Headwinds on the Horizon The Fed’s Puzzle: tapering and exiting Interest rates will rise as economy recovers They may rise faster, farther, as the Fed exits

  29. Three Headwinds on the Horizon 1) The Fed’s Puzzle: tapering and exiting 2) The Fiscal Puzzle: Debt, deficits, and interest rates

  30. CBO’s Baseline Deficit (August 2014) Budget Deficit Deficit to GDP

  31. Government Baseline Outside Debt (CBO’s Baseline – August 2014) Debt Debt to GDP

  32. Three Headwinds on the Horizon 1) The Fed’s Puzzle: tapering and exiting • The Fiscal Puzzle: Debt, deficits, and interest rates Crowding out has not gone away Interest rates will go higher as a result of this increase in debt

  33. CBO’s Interest Rate Forecast

  34. Building on CBO’s Interest Rate Forecast

  35. Building on CBO’s Interest Rate Forecast

  36. Three Headwinds on the Horizon 1) The Fed’s Puzzle: tapering and exiting • The Fiscal Puzzle: Debt, deficits, and interest rates Crowding out has not gone away Interest rates will go higher as a result of this increase in debt And don’t forget the looming entitlements problem:

  37. Three Headwinds on the Horizon 1) The Fed’s Puzzle: tapering and exiting 2) The Fiscal Puzzle: Debt, deficits, and interest rates 3)Many international puzzles: Big worries: Europe, China Lesser worries: Ukraine, Middle East, Americas

  38. Review the Bidding • Recovery has been very weak • Due largely to Washington policies • Headwinds may hold us back, but then • Any reasons for optimism?

  39. Any Reasons for Optimism? Refilling the well for startups

  40. Household Balance Sheet Household Wealth Household Assets

  41. Any Reasons for Optimism? Refilling the well for startups Recovering labor market flexibility

  42. Housing Market Trends Home Sales Housing Starts Median Home Prices Housing Affordability Index

  43. Any Reasons for Optimism? Refilling the well for startups Recovering labor market flexibility Rationalizing business structures

  44. Review the Bidding • Lackluster recovery • Due almost entirely to poor Washington policies

  45. Review the Bidding • Lackluster recovery, about to accelerate

  46. Review the Bidding • Lackluster recovery, about to accelerate • Three possible headwinds • from Washington, especially higher interest rates • From the Fed • From federal debt and deficits • from overseas

  47. Review the Bidding Lackluster recovery More headwinds, but also Three reasons for optimism Refilling the startup well Regaining flexibility in labor markets Improving business structures

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