Martin Neil Baily The Brookings Institution Prepared for the US-Japan Research Institute Event March 9, 2012

Transcription

1 The Economic Situation in the United States: Growth, Deficits and Financial Reform Martin Neil Baily The Brookings Institution Prepared for the US-Japan Research Institute Event March 9, 2012

2 US economic growth seems more solid. There are Substantial Risks 5 Real GDP Growth, United States Percent Change at Annual Rate Macroeconomic Advisers Forecast History Q1 08Q3 09Q1 09Q3 10Q1 10Q3 11Q1 11Q3 12Q1 12Q3 13Q1 13Q31 SOURCE: BEA, Macroeconomic Advisers (released 9/14//11); IHS Global Insight (9/6/11)

3 Why is Growth Recovering? Why is the Recovery So Weak? The economy is recovering because consumers are spending, residential construction is growing, business investment remains ok, and net exports have not been a drag on the economy. The recovery hasbeen slow because of the continued weakness in the labor market, the loss of household wealth, the overhang of mortgage gg foreclosures and underwater mortgages, and the decline in government spending. The Federal Reserve has kept the Federal Funds rate close to zero and used quantitative easing. This has raised inflation concerns among some commentators, but there is little sign of a problem so far, beyond oil prices. 2

4 EMPLOYMENT Huge employment decline. Only in recent months has job growth picked up. Decline from peak US employment 1 Percentage from peak month prior to recession 0 July 1974-Jan March-Nov July 1981-Oct June 1990-Jan Feb Jan Jan Jan million jobs lost from peak-to-trough (Dec 2007 to Dec 2009) 3.1 million net job gains since the start of 2010 (Jan 2010 through Jan 2012) -5.0 U.S. employment today (Jan 2012) is 5.5 million -6.0 jobs below peak of December Months since employment peak 1 Total non-farm employment, seasonally adjusted 2 Preliminary numbers subject to change SOURCE: US Bureau of Labor Statistics 3

5 CONSUMER HEALTH A $7.4 trillion decline in U.S. household net worth erased all increases in the wealth income ratio since the mid 1990 s US household net worth relative to disposable income Ratio In absolute terms US households lost $7.4 trillion since the crisis began -23% Q4 10 SOURCE: Federal Reserve; Haver Analytics 4

6 CONSUMER HEALTH The household saving rate jumped higher and is projected to remain above its trough Personal Saving Rate % of disposable income SOURCE: Bureau of Economic Analysis; Eurostat; Haver Analytics; McKinsey Global Institute 5

7 TRADE US trade gap has begun widening as imports pick up. Exports U.S. Monthly Imports and Exports of goods and services 1, 2006 to 2011 USD Billions Imports Trade gap Includes trade of goods and services SOURCE: U.S. Census Bureau 6

8 HOUSING MARKETS Housing starts have remained at one third of the level of the long term trend Housing starts Millions of units; annual rate; 3-month moving average; through April, NBER dated recessions Long term trend is between 1.5 and 1.6 million starts according to the CBO SOURCE: Census Bureau via Moody s Analytics; Congressional Budget Office (November, 2008); NBER 7

9 INTEREST RATES & CREDIT SPREADS The rise in inflation has been a concern to those who see the FED s huge balance sheet as likely to cause monetary inflation 3.00% YoY Percent Change in Personal Consumption Price Index (Excluding Food and Energy) 2.50% 2.00% 1.50% 1.00% Fed's informal target range 0.50% 0.00% SOURCE: Bureau of Labor Statistics

10 INTEREST RATES & CREDIT SPREADS Inflation is expected to ease, however, and TIPS spreads show an expectation of modest inflation over the next 5 to 10 years Spread between yield on US Treasuries and TIPS with same maturity (through January, 2012) Percent year 7 year 5 year SOURCE: Federal Reserve Board H.15 Report 9

11 GOVERNMENT DEBT Deficits will too large unless there are policy steps are taken Federal Deficits and Surpluses as a percentage of GDP Alt. Fiscal Scenario 1 CBO Baseline 5 3 Actual Projected SOURCE: Congressional Budget Office 1 The alt. fiscal scenario includes: extending the Bush tax cuts, indexing the AMT with inflation, automatic spending cuts are not enacted, and medicare payments remain constant 10

12 Together with taxes, health care costs are the primary driver of debt 11

13 Financial Reform The Dodd Frank legislation contained many elements that will make the US financial sector more stable and lower the chances of another crisis. More bank capital, more informationbeing provided, Federal Reserve supervision over all important institutions, better supervision of derivatives. Some regulations were not needed or misguided. Durbin amendment on debit card fees makes little sense. Volcker amendment is not necessary, hard to live with. The legislation left a lot for the regulators to do and the different regulatory agencies are competing against each other and not cooperating well. 12

14 Conclusions I The US economy should continue a slow recovery (2 to 3 percent) with gradually declining unemployment. The biggest risks ik come from a mid east conflict with iha jump in oil prices and from Europe. So far there is no upward pressure on Treasury interest trates, despite the downgrade. But it is important to put into place a long run plan for deficit reduction. Confidence is improving. If Europe remains calm and tensions in the mid east subside, US growth could surprise to the upside over 3 percent. 13

15 Conclusions II It is unlikely that major progress will be made on the budget deficit before the election. Tax reform would be great, but if the reform effort fails, then the best option would be to allow the Bush tax cuts to expire once economic growth is strong enough. Obama has made cuts in Medicare and Ryan and Wyden have proposed a plan that is similar to the Domenici Rivlin proposal. The potential for a solution is there. Unfortunately, t the electorate t is not ready. A recent poll showed 80 percent of Americans wanted no cuts in Medicare. Beware the December January period. Appropriations due. Debt limit. Bush tax cuts expire. Sequester deadline. 14