Comments on: Economic Outlook for 2013 Beyond the Fiscal Cliff

Transcription

1 Comments on: Economic Outlook for 2013 Beyond the Fiscal Cliff Marc Hayford Department of Economics December 3, 2012

2 Themes in the Outlook 1 st Theme: Substantial Slack in the U.S. economy 16,000 15,000 billions 2005 chained $ 14,000 13,000 12,000 CBO Potential Real GDP output gap Real GDP FOMC forecast 11,000 10, Source: FRED and author s calculations Accumulated loss of Real GDP relative to potential 2008 to 2015 = $5.6 trillion

3 Output Gap 100*(real GDP/potential real GDP - 1) forecast percent Source: 55 FRED 60 and 65author s calculations

4 Corresponding slackness in the labor market -8.7m +4.2m

5 Employment over working age population (percent)

6 Working part time for economic reasons as percent of labor force

7 2 nd Theme Inflation on target -- labor market slack implies slow growth in unit labor costs 2010 Q Q Q Q Q Q Q Q

8 Slow growth in unit labor costs Results in low inflation

9 Low inflation environment implies low expected inflation 10 year T bond minus 10 year Inflation Indexed T bond

10 3 rd Theme: Slow recovery from the Great Recession Why the slow recovery? Past recoveries helped by cuts in the Fed Funds rate

11 Cuts in the Fed funds rate increases interest sensitive spending Post WWII recoveries associated with growth in spending on housing and autos:

12 Autos recovering more than housing $ for clunkers!

13 Historically recoveries are slow after financial crises or balance sheet recessions -$16T +$12T

14 What other components of spending account for the current recovery? Post WWII average (%) 1982:4 1986:1 Average (%) 2009:2-2012:3 Average (%) Real GDP growth Contribution to percent change in Real GDP Consumption Nonresidential investment Residential Investment Change in inventories Net exports Government purchases Fiscal Drag Source: U.S. BEA and author s calculations

15 Summary of forecasts Real GDP growth (%) f 2013f 2014f 2015f Northern Trust (Q4/Q4) Blue Chip FOMC (9/12) Inflation (%) f 2013f 2014f 2015f Northern Trust (CPI Q4/Q4) Blue Chip (CPI) FOMC (PCE 9/12) Unemployment rate (%) f 2013f 2014f 2015f Northern Trust (EOP) FOMC (9/12) Note: FOMC central tendencies imply: Implicit target inflation = 2%, Natural rate of unemployment = 5.2 to 6% Growth rate of potential GDP = 2.3 to 2.5%

16 Risks to the forecast 4.0 Intrade Contract: The US Economy will go into Recession during CBO report Election day 2.8 $ /30/ M05 12M06 12M07 12M08 12M09 12M10 12M11 This market will settle $10.00 if the US into recession during 2013 and $0 if the US DOES NOT go into recession during 2013

17 Source of recession risk: 1 st source: The Fiscal cliff CBO Aug 22, 2012 report Baseline projection (economy goes over the cliff ): 2013 Federal Government Budget deficit by - $641B 2013 real GDP growth = -0.5% and unemployment rate = 9% Alternative projection no tax increase (except expiration of payroll tax holiday) or major cuts in spending: 2013 Real GDP growth = 1.7% and unemployment rate = 8%.

18 Primary Federal Government Budget Deficit 10 8 primary budget deficit percent of GDP Primary deficit minus Medicare Most of increase in the primary budget deficit is due to projected increase in Medicare spending

19 Federal Government Debt held by the Public (CBO Alternative Baseline) percent of GDP Suggests another decade of sustainable government debt to GDP ratio before it explodes

20 Bond market doesn t seem to be worried yet

21 Source of recession risk: 2 nd source: Recession in Europe weaker economic growth in Europe has decreased US exports potential collapse of Euro would cause a European financial crisis contagion effect on U.S.? 3 rd source: Fragility of the U.S. economy Little (political) room for fiscal policy to stimulate the U.S. economy Little room for monetary policy to stimulate the U.S. economy. Or is there?

22 Milton Friedman (1969) The Optimum Quantity of Money

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