The U.S. and Michigan Economies

Transcription

1 The U.S. and Michigan Economies Christopher Douglas, Ph.D. Assistant Professor of Economics University of Michigan-Flint August 18, 2011 Michigan Family Business Seminar 1

2 NATIONAL ECONOMY 2

3 Change in Employment-Current and Past Recessions Source: Minneapolis Federal Reserve Branch 3

4 Change in GDP: Current and Past Recessions Source: Bureau of Labor Statistics 4

5 Short-Term Growth Forecast % 3 3.2% 2.9% % 2 2.5% q2 2011q3 2011q4 2012q1 2012q2 Source: Federal Reserve Bank of Philadelphia Survey of Professional Forecasters 5

6 New Jobs (000s/month) Unemployment Rate (%) Short-Term Unemployment and Jobs Forecast % % % % % q2 2011q3 2011q4 2012q1 2012q2 7.8 New Jobs (000s/month) Unemployment Rate Source: Federal Reserve Bank of Philadelphia Survey of Professional Forecasters 6

7 Longer-Term Recovery Picture / % % 10/2009 7/ % 9/ % "Morning in America" 8/1987, 6.0% 3/ % unemp. rate (early 80s recession & recovery) unemp. rate (current recession & recovery) Source: Bureau of Labor Statistics 7

8 1981q4 1982q1 1982q2 1982q3 1982q4 1983q1 1983q2 1983q3 1983q4 1984q1 1984q2 1984q3 1984q4 1985q1 1985q2 1985q3 1985q4 1986q1 1986q2 1986q3 1986q4 1987q1 1987q2 1987q3 1987q4 1988q1 1988q2 1988q3 1988q4 1989q1 1989q2 1989q Economic Growth During Recessions and Recoveries q1 3.8% q2 1.3% q1-6.4% 2008q4-8.9% Early 1980s Recession and Recovery Current Recession and Recovery Source: Bureau of Economic Analysis 8

9 Why Higher than Normal Growth is Important During a Recovery Source: Bureau of Economic Analysis 9

10 Why Higher than Normal Growth is Important During a Recovery Source: Bureau of Labor Statistics 10

11 Core Inflation During Recessions and Recoveries Early 1980s Recession and Recovery Current Recession and Recovery U.S. Bureau of Labor Statistics 11

12 1/1/2003 5/1/2003 9/1/2003 1/1/2004 5/1/2004 9/1/2004 1/1/2005 5/1/2005 9/1/2005 1/1/2006 5/1/2006 9/1/2006 1/1/2007 5/1/2007 9/1/2007 1/1/2008 5/1/2008 9/1/2008 1/1/2009 5/1/2009 9/1/2009 1/1/2010 5/1/2010 9/1/2010 1/1/2011 5/1/2011 Market Inflation Forecast Over a Ten Year Horizon-TIPS Spread Source: Federal Reserve 12

13 Why Low Inflation Expectations? Source: Federal Reserve 13

14 Why the Increase in Excess Reserves? Source: Federal Reserve 14

15 Current Growth and Unemployment Numbers 2 nd quarter 2011: GDP grew at an annualized rate of 1.3%. Better than 1 st quarter 2011: 0.4% increase Increase came from nonresidential fixed investment, increase in federal government spending, and a decrease in imports. Consumption spending and confidence are weak. Total Employment grew by 117,000 in July (154,000 in private sector). Better than June (+46,000) 15

16 Some Important Unemployment Definitions U3unemp. # unemployed # in labor force U6 unemp. # in labor # unemployed force # marginally attached # parttime but want full time employment to population ratio # employed population (16 and over) labor force participation rate # in labor force population (16 and over) 16

17 1/1/2001 6/1/ /1/2001 4/1/2002 9/1/2002 2/1/2003 7/1/ /1/2003 5/1/ /1/2004 3/1/2005 8/1/2005 1/1/2006 6/1/ /1/2006 4/1/2007 9/1/2007 2/1/2008 7/1/ /1/2008 5/1/ /1/2009 3/1/2010 8/1/2010 1/1/2011 6/1/2011 U6 Unemployment Source: Bureau of Labor Statistics 17

18 Employment-to-Population Ratio Source: Bureau of Labor Statistics 18

19 Labor Force Participation Rate Source: Bureau of Labor Statistics 19

20 Dark Clouds on the Horizon The Eurozone is falling apart: Greece: Debt/GDP = 140% To bring debt/gdp ratio to 90%: 52% haircut now, 63% haircut in 2012, 68% in 2013, 70% in Ireland: Debt/GDP ratio = 94% now, 140% by Italy, 119%, Portugal, 93%; Spain, 60%, U.S.; 100% All need to roll over debt equal to 30%-40% of GDP between Sources: Zerohedge.com, cnn.com, IMF 20

21 Source: S&P 21

22 The Housing Market Usually leads recoveries. June sales: down 0.8% to 4.77 million homes 6 million needed for healthy market First time homebuyers made up only 31% of new sales. 16% of home sales were canceled (4x usual) Foreclosure backlog? Fannie/Freddie and FHA/VA account for nearly 90% of mortgage originations Housing construction down 66% (compared to 10 year average, 587k vs. 1.7 million), new household formation down 76% (compared to 2006, 1.6 million vs. 357k) 22

23 U.S. Budget Deficit Deal-We Blew It Source: CBO 23

24 24

25 State Pensions-The Next Bailout? State and local pensions are $2 trillion underfunded. Nearly no state retiree health care costs are currently funded. How will this play out? Will the federal government continue to be able to borrow in unlimited amounts? 25

26 Reports of the U.S. Manufacturing Base s Demise are Greatly Exaggerated Source: Federal Reserve 26

27 GDP of five largest countries compared with U.S. manufacturing output (trillions of $) $6.0 $5.0 $4.0 $4.9 $4.3 $3.7 $3.7 $3.0 $2.9 $2.7 $2.0 $1.0 $0.0 Japan China U.S. Mfg. Germany France U.K. Source: Mark Perry ( 27

28 1/1/2001 6/1/ /1/2001 4/1/2002 9/1/2002 2/1/2003 7/1/ /1/2003 5/1/ /1/2004 3/1/2005 8/1/2005 1/1/2006 6/1/ /1/2006 4/1/2007 9/1/2007 2/1/2008 7/1/ /1/2008 5/1/ /1/2009 3/1/2010 8/1/2010 1/1/2011 6/1/ What About Manufacturing Jobs? / million / million Source: Bureau of Labor Statistics 28

29 But, This Is Not a New Trend 50.0% Manufacturing Employment as a % of Private Employment 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Source: Bureau of Labor Statistics 29

30 1/1/1972 1/1/1975 1/1/1978 1/1/1981 1/1/1984 1/1/1987 1/1/1990 1/1/1993 1/1/1996 1/1/1999 1/1/2002 1/1/2005 1/1/2008 1/1/2011 Manufacturing Outpt Per worker What Is Responsible for a Decline in Manufacturing Employment $300, $250, $200, $150, $276, (June 2011) $100, $50, $74, (Jan 1972) $84, (Jan. 1980) $110, (Jan. 1990) $161, (Jan. 2000) $- Source: Federal Reserve Board of Governors 30

31 Merchanise and Serices Trade (billions of $) It is a myth that the U.S. imports but does not export exports imports Germany China United States Japan France U.K. Russia Mexico Saudi Arabia Source: Bureau of Labor Statistics 31

32 Recommendations The Fed can do more: QE3 and removing the interest rate on excess reserves. Stop prolonging the inevitable and let the housing market find a bottom. Wind down mortgage subsidies and require down payments. Stop adding uncertainty to the economy. Address long-term fiscal issues (Medicare, public pensions, the deficit). Bi-partisan supercommittee -zzzzzzzzzzzzzzzzz.. Health reform that actually controls costs. 32

33 THE MICHIGAN ECONOMY 33

34 Change in Employment in Michigan- Current and Previous Recessions Source: Federal Reserve Bank of Minneapolis 34

35 Jan-48 Jan-51 Jan-54 Jan-57 Jan-60 Jan-63 Jan-66 Jan-69 Jan-72 Jan-75 Jan-78 Jan-81 Jan-84 Jan-87 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 The U.S. and Michigan Unemployment Rates U.S. Michigan Source: Bureau of Labor Statistics 35

36 Summary Statistics for the U.S. and Michigan Unemployment Rates Average U.S. unemployment rate ( ): 5.7% Average U.S. unemployment rate during recessions ( ): 7.1% Average U.S. unemployment rate during expansions ( ): 4.6% Average difference between U.S. and Michigan unemployment rate ( ): +1.9% Average difference between U.S. and Michigan unemployment rate ( ): +1.4% Average difference between U.S. and Michigan unemployment rate ( ): +1.5% Average difference between U.S. and Michigan unemployment rate ( ): -0.3% Current Difference: +1.3% (MI: 10.5%, U.S.: 9.2%) 36

37 Industry United States Michigan Manufacturing 11.31% 15.73% Durable Goods 6.19% 12.01% Motor Vehicle and Parts 0.56% 5.85% Nondurable Goods 5.12% 3.72% All services 70.30% 70.70% Wholesale and Retail Trade 11.42% 12.63% Real Estate, Rental, and Leasing 13.33% 12.12% Finance and Insurance 8.36% 7.37% Health Care 7.55% 8.82% Information 4.56% 2.80% Construction 3.83% 3.09% Transportation and Warehousing 2.78% 2.29% Utilities 1.91% 2.54% Education 1.11% 0.80% Agriculture, Forestry, Fishing, and Hunting 0.95% 0.70% Mining 1.72% 0.28% Federal Civilian Government 2.27% 1.46% Federal Military 1.72% 0.36% State and Local Government 9.35% 10.78% Source: Bureau of Economic Analysis 37

38 Michigan s Economic Troubles Explained by Just One Graph! Source: Yahoo Finance 38

39 Auto Company Market Share GM Ford Chrysler Toyota Honda Nissan Source: Wards Auto Data 39

40 GM Stock Price-Post IPO Source: Yahoo Finance 40

41 Customer complaints per 100 new vehicles GM Ford Toyota Source: John Lippert, The Fall of Detroit: An Insider s Tale, Bloomberg Market s Magazine, November

42 Labor hours required to assemble a car GM Toyota Sources: 2008 Harbour Report and Lippert article 42

43 Source: Comerica Bank 43

44 Michigan Forecast (my best guess) Best case scenario: SUV craze part 2, or Sudden emergence of new industry Structural reforms to Michigan government to prevent yearly budget crisis Most likely best case scenario Auto industry muddles through downturn, sales pick up when economy recovers, unemployment rate falls to +2 percentage points or so above national average Michigan government muddles through without structural reforms. Budget crises diminish in severity as economic slides subsides. State economy diversifies over time, new industries enter Worst case scenario Bankruptcy of Chrysler or GM, state government implodes, financial crisis #2. 44

45 Recommendations Short run: so goes the national economy, so goes Michigan. The auto companies stabilizing will go a long way in helping Michigan. Recent GM stock price decrease is disconcerting. Reforms (that can be implemented fairly easily): Taxes: eliminate MBT and personal property tax. Raise revenue via income and sales tax (extended to services). Don t pick winners or losers. Make overall climate business friendly. Dump the film tax credits. Stop the disinvestment in education, especially higher education. Fix the structural budget deficit to give some predictability. Repeal the Michigan smoking ban. 45

46 QUESTIONS? 46