Surviving the Recovery: Economic Outlook and Analysis. Dr. Mira Farka

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1 Surviving the Recovery: Economic Outlook and Analysis Dr. Mira Farka California State University, Fullerton PIHRA, District 8 Buena Park, CA Nov 10, 2011

2 The Humpty Dumpty Economy This side of the Wall: Japan style lost decade This side of the Wall: Stagnation/Stagflation The US economy sat on a wall The US economy had a great fall All the King s horses and all the King s men Couldn t agree on how to put it together again

3 Mihaylo College of Business & Economics Rule 1 Please don t shoot the messenger Rule 2 Rule 1 is the only rule that applies

4 The Lost Decade? Main Themes Let s forget the 00s (noughties) How Much Worse was it Really? Comparison Across Recessions much, much worse Where is my Boom? The Painfully Weak Recovery Why does it still hurt? Recovery Outlook No Double-Dip, but a Long Slog OC Outlook Healing Very Slowly

5 A Decade to Forget

6 140,000 Total employment less than in 2000 but with 30 million more people (nonfarm employment, thousands of people) 138, , , , , ,000 Jan-00 Jul-01 Jan-03 Jul-04 Jan-06 Jul-07 Jan-09 Jul-10

7 210 Real Estate Prices same as in 2002 Case-Shiller Home Price and Moody s s Commercial Price (Index, Jan 2001=100) Commercial Housing

8 Not a Garden Variety Recession The Triple Whammy Deep financial crisis Balance Sheet repair consumers and banks Housing market Crisis

9 GDP Declined More than in any Postwar Recession (percent decline in RGDP from peak to trough) Cal -0.7 State Fullerton

10 The Pace of Job Destruction Was Faster and Deeper (total nonfarm employment losses, thousands of jobs) Now ,453-1, Cumulative Job losses (lhs) -1, Unemployment Rate (rhs) 2.0-8,

11 Ditto for Investments (percent decline in investments from peak to trough) s 1980s Now

12 Where is my Boom? Where is my Boom?

13 Now and Then Current Recovery: - Worse than 1990 and Much Worse than 70s and 80s

14 110 Labor Market: A Deeper Hole (Index, first month of recovery= Current Recovery

15 So far, a Painfully Weak Recovery (percent change from recession trough) Past Recoveries Current Difference Real GDP Consumption Residential Investment Employment Real Disposable Income Profits

16 What s s Different this Time? For most of the Recovery, Growth is Supported Primarily by Cyclical Forces Previous Recoveries Current Recovery Fundamental Components 47.7% 2.4% Consumption 55.6% 38.9% Nonresidential Structures -2.4% -14.8% Net Exports -12.7% -26.1% Government Spending 7.2% 4.4% Cyclical Components 52.3% 97.6% Equipment Investments 9.2% 36.1% Residential Construction 14.5% 4.5% Inventories 28.6% 57.0%

17 Why Did We Stall? Temporary Factors Middle East turmoil and oil prices Japan Disaster disrupted supply chain More Fundamental Factors GDP Revisions Waning of Fiscal Support Eurozone Crisis Debt ceiling talks

18 13,500 RGDP Revisions Mind the Gap (RGDP, level) 13,400 13,300 13,200 13,100 13,000 12,900 12,800 RGDP Original RGDP Revision 1 GDP Revision 2-3.8% 12,700 12, % Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11

19 The Credit Downgrade The Credit Downgrade

20 Recovery Outlook No Double-Dip. but a Long Slog

21 Why no Double-dip? No main driver just a number of small gains Corporate profits and cash are high Exports will help Business investments will remain robust Low Inventory ratio should help production Production is holding steady Some labor market indicators are up

22 Why the Long Slog? Surviving the Recovery Shaken and Stirred The Long Slog Ahead Who ate my job? Labor Market Outlook What are you Doing for your Country? Consumers The Homeless Recovery Housing Blues Pray for Europe it Could Drag us Down One More Chance for Fiscal Policy

23 Problems Before the Great Recession: 25 Last Decade Added Half the Jobs of the Previous Three (employment, millions) s 1960s 1970s 1980s 1990s

24 Problems Before the Great Recession: Recoveries are Becoming More Jobless (months to reach pre-recession recession employment peak after GDP peak) ? Now

25 We ve Failed to Add Jobs in the Right Sectors 98% of Jobs since were in Nontradable Sector (employment changes, thousands) Health 6,541 Professional Services Leisure and hospitality Government Trade Construction Education Financial Activities Professional Services Other Services Information 5,885 4,250 4,235 3,986 2,050 1,321 1,630 1,383 1, Nontradable Sector added 28.2 mn. jobs Tradable Sector added 0.6 mn. jobs Mining and logging -17 Manufacturing -4,071-7,000-2,000 3,000 8,000 13,000

26 Nontradable Sectors have Contributed Very Little to Productivity Growth (productivity growth, %) Construction -0.2% Other Services Leisure/Hospitality Education Health Care Government Retail Transportation Administration Wholesale Real Estate Professional Services Finance Manufacturing Information -0.1% -0.1% -0.1% 0.0% 0.0% 0.0% 0.1% 0.1% 0.2% 0.3% 0.2% 0.2% 0.3% 0.4% Nontradable Sector contributed only 10% to productivity grow th Tradable contributed 90% to productivity grow th Computers/Electronic 0.4% -0.4% 0.1% 0.6% 1.1% 1.6%

27 Who Ate my Job? Problems Related to the Great Recession Need to absorb 6.7 million jobs lost during recession Less labor mobility due to housing crisis - has added between 0.6% - 0.7% to unemployment rate Extension of Unemployment benefits - has added between 0.3% - 0.5% to unemployment rate WANTED: 21.5 million jobs during this decade

28 When will the Labor Market be Back to Normal? (5% unemployment rate) Jobs per Month New Jobs to keep up With Population Growth 125, ,000 Number of Years Never Back to Normal 200, ,000 Early , ,000 Late , ,000 Mid 2014

29 Jobs and the time Capsule It s NOT Dead!! It s just going to take a LOOOONG time!!!

30 What are You Doing for Your Country? 10,100 Consumption Spending below Trend (level, billions of dollars) 9,600 9,100 8,600 8,100 Consum ption 2% below trend 7,600 M ar-02 M ar-03 M ar-04 M ar-05 M ar-06 M ar-07 M ar-08 M ar-09 M ar-10 M ar-11

31 110% Households are Reducing Debt Fast But Government Debt is Rising Faster (debt, percent of GDP) 90% 100% 90% 80% 70% 60% Household Debt (lhs) Public Debt (rhs) 80% 70% 60% 50% 50% 40% 40% %

32 This is Going to Hurt!! Deleveraging is a Long and Painful Process Cross-Country Country Perspective 10-years before recession Real GDP Growth 2-3 years after recession 10 years after recession

33 50 Housing Activity has been Dismal in this Recovery Cycle (percent, year-over over-year) Year 1 of Recovery Year 2 of Recovery s 1980s 1990s 2001 now -4.3

34 70,000 Housing Woes have Caused Sharp Declines in Household Wealth (levels, billions of dollars) 30,000 60,000 50,000 40,000 30,000 20,000 Net Wealth Housing W ealth 25,000 20,000 15,000 10,000 10,000 5,

35 30% Whirlwinds from Europe: When you lie down with PIIGS (Direct Bank Exposure to PIIGS, % of GDP) 25% 20% 15% 10% 26.0% 16.0% 15.5% Direct Exposure: $220 billion Indirect Exposure: $646 billion 9.0% 5% 2.7% 1.9% 1.4% 0% France Germany UK Spain Italy Japan USA

36 90% But Connections run Deeper Total Direct Bank Exposure to all Europe (% of GDP) 80% 70% 60% 50% 40% 30% 20% 78% 55% 47% 45% Total European Exposure: $1.8 trillion 34% 13% 12% 10% 0% France Germany UK Spain Italy Japan USA

37 Pray for Europe it could Drag us Down A European break-up is not out of the question European policy response - slow and confusing US insurers have large exposure to defaults -56% of payments US total exposure to the crisis is large -through banks and insurers

38 Forgive us Our Trespasses One more Chance for Fiscal Policy First, do no Harm Next year will be the largest fiscal contraction in history Contraction is substantial enough to derail the recovery Maintain Some Support in the Short-term Proposal Effect on GDP Unemployment benefits 1.3% Reduce Employer Payroll Taxes 1.1% Reduce Employee Payroll Taxes 0.9% Expensing investment costs 0.7% Infrastructure investment 0.7%

39 In Search of a Policy Fix: Thankfully, we have options Long-Term Plan for Reducing Deficits a Must Entitlements Social Security Medicare/Medicaid Tax Reform Simplify/remove loopholes Broaden the tax base Lower marginal tax rates

40 We Tax Income/Capital/Profits Too Much and Consumption Too Little (tax revenue by sector, % of total) Incom e/capital/profits Consum ption US UK Germ any France

41 US Forecasts Mihaylo College of Business & Economics

42 Mihaylo College of Business & Economics 2011f 2012f Real GDP Unemployment Employment (% change) National Forecasts

43 Mihaylo College of Business & Economics

44 OC Unemployment Rate has caught up 12% to US and Remains High (percent) 10% 8% 6% 4% OC US 9.1% 8.6% 2% 0% Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

45 40,000 OC Job Losses Were Massive 0-40,000-80, ,000 but Gains have been Puny (level, year-over over-year changes) 13, ,000 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

46 80,000 40, ,000-80,000 OC Job Gains Too Slow to Dent Unemployment Rate (level, year-over over-year changes) 65,325 6, ,000 (109,475)

47 CSUF OC Business Survey: Business Expectations have Downshifted OCBX Index OC Emp Change 5.0% 3.0% 1.0% -1.0% -3.0% -5.0% -7.0% -9.0% 0 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan %

48 OC Firms Have Lower Delinquencies than US and SoCal 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 9.5% Source: Experian and IIES (percent) Delinquent Severely Delinquent 5.9% 5.6% 4.8% 4.4% 4.3% 4.1% 3.2% 3.1% 3.2% 2.9% 1.9% US SB LA RV SoCal OC

49 60% 40% 20% 0% -20% -40% Orange County Home Prices have Taken Another Tumble Median Price - Single Family Existing Homes April '06 = $736,000 Median Price Year to Year % Change Aug '11 = $508,910 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 $900,000 $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000

50 102 Mortgage Debt has Declined in SoCal but Mostly because of Foreclosures (Index level, Q4 2008=100) LA OC RV SB 90 Q Q Q Q Q Q Source: Experian and IIES

51 Orange County Forecasts Mihaylo College of Business & Economics Payroll Jobs (level, thousands) Employment (% change) 2011f 2012f 1,360 1, % 1.2% Unemployment 8.8% 8.2%

52 Outlook? The Long Slog Recession is Dead!! Long Live the Recession!

53 Mihaylo College of Business & Economics Thank you for not shooting me!!! Questions? Mira Farka (657)

The Fate of the US Recovery: Economic Outlook and Analysis. Dr. Mira Farka

The Fate of the US Recovery: Economic Outlook and Analysis Dr. Mira Farka California State University, Fullerton Richey Advisors Inc. Coyote Hills Country Club, Fullerton, CA Nov 8, 2011 The Humpty Dumpty