the economic outlook: a puzzle by any other name
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The Economic Outlook: A Puzzle By Any Other Name
Economic Policy Division
Labor Market
1991199119911991199119911991199119911991199119911992199219921992199219921992199219921992199219921993199319931993199319931993199319931993199319931994199419941994199419941994199419941994199419941995199519951995199519951995199519951995199519951996199619961996199619961996199619961996199619961997199719971997199719971997199719971997199719971998199819981998199819981998199819981998199819981999199919991999199919991999199919991999199919992000200020002000200020002000200020002000200020002001200120012001200120012001200120012001200120012002200220022002200220022002200220022002200220022003200320032003200320032003200320032003200320032004200420042004200420042004200420042004200420042005200520052005200520052005200520052005200520052006200620062006200620062006200620062006200620062007200720072007200720072007200720072007200720072008200820082008200820082008200820082008200820082009200920092009200920092009200920092009200920092010201020102010201020102010201020102010201020102011201120112011201120112011201120112011201120112012201220122012201220122012201220122012201220122013100
110
120
130
140Million
1991199219931993199419941994199419951995199619961996199619971997199719971998199819981998199819981999199919991999200020002000200120012001200120012002200220022002200320032003200320032004200420042004200420042005200520052005200520062006200620062006200720072007200720072007200720072008200820082008200820082008200920092009200920092009200920092009200920092009200920092009200920092009201020102010201020102010201020102010201120112011201120112011201120112011201120112011201120112011201120112011201120112011201120112011201120112012201220122012201220122012201220122012201220122012201220122012201220132013201320132013201320132013201320132013201320132013201320132013201420142014201420142014201420142014201420142014200
300
400
500
600
700SA, Thousands, 4-week Moving Average
199119911991199119911991199119911991199119911991199219921992199219921992199219921992199219921992199319931993199319931993199319931993199319931993199419941994199419941994199419941994199419941994199519951995199519951995199519951995199519951995199619961996199619961996199619961996199619961996199719971997199719971997199719971997199719971997199819981998199819981998199819981998199819981998199919991999199919991999199919991999199919991999200020002000200020002000200020002000200020002000200120012001200120012001200120012001200120012001200220022002200220022002200220022002200220022002200320032003200320032003200320032003200320032003200420042004200420042004200420042004200420042004200520052005200520052005200520052005200520052005200620062006200620062006200620062006200620062006200720072007200720072007200720072007200720072007200820082008200820082008200820082008200820082008200920092009200920092009200920092009200920092009201020102010201020102010201020102010201020102010201120112011201120112011201120112011201120112011201220122012201220122012201220122012201220122012201320132013201320132013201320132013201320132013201420142014201420142014201420142468
1012141618
Unemployment Rate U-6
Percent
Total Nonfarm Jobs
Initial Unemployment
Claims
Unemployment Rate August
6.1%
1991199119911991199119911991199119911991199119911992199219921992199219921992199219921992199219921993199319931993199319931993199319931993199319931994199419941994199419941994199419941994199419941995199519951995199519951995199519951995199519951996199619961996199619961996199619961996199619961997199719971997199719971997199719971997199719971998199819981998199819981998199819981998199819981999199919991999199919991999199919991999199919992000200020002000200020002000200020002000200020002001200120012001200120012001200120012001200120012002200220022002200220022002200220022002200220022003200320032003200320032003200320032003200320032004200420042004200420042004200420042004200420042005200520052005200520052005200520052005200520052006200620062006200620062006200620062006200620062007200720072007200720072007200720072007200720072008200820082008200820082008200820082008200820082009200920092009200920092009200920092009200920092010201020102010201020102010201020102010201020102011201120112011201120112011201120112011201120112012201220122012201220122012201220122012201220122013100
110
120
130
140
150Million
Household Employment
Change in U.S. Output: Recoveries
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 200
5
10
15
20
25
30
198220012009
Quarters from the start of Recovery
Percent Change from Start of Recovery
Economic Recovery is Natural• Markets heal• Resources realign• Prices adjust• The output gap closes as the economy returns
to full employment
U.S. GDP Actual and Potential Quarterly, Q1 1980 to Q4 2015
Real GDP Trillion 2009 Dollars Log Scale
198019801980198019811981198119811982198219821982198319831983198319841984198419841985198519851985198619861986198619871987198719871988198819881988198919891989198919901990199019901991199119911991199219921992199219931993199319931994199419941994199519951995199519961996199619961997199719971997199819981998199819991999199919992000200020002000200120012001200120022002200220022003200320032003200420042004200420052005200520052006200620062006200720072007200720082008200820082009200920092009201020102010201020112011201120112012201220122012201320132013201320142014201420142015201520152015
Actual
Potential 48.0
Potential GDP estimated by Congressional Budget Office
$15.0
$9.0
$18.0
$12.5
$6.5
Forecast
Ingredients of a Rapid Recovery
• Entrepreneurial spirit
• Flexible financial and labor markets
• Benign policy environment
The Big Puzzle: Why the slow recovery?
The Big Puzzle: Why the slow recovery?
Answer: Lagging business investment
Next Puzzle: Why is business investment lagging?
Answer 1: Excess capacity
Why is business investment lagging?
Answer 1: Excess capacity
Real Answer: Washington
Why the Slow Recovery?Strike 1: Poor Policy Focus
Why the Slow Recovery?Strike 1: Poor Policy Focus
2009: Poorly designed stimulus Cap and trade legislation
Why the Slow Recovery?Strike 1: Poor Policy Focus
2009: Poorly designed stimulus Cap and trade legislation
2010: Obamacare
Why the Slow Recovery?Strike 1: Poor Policy Focus
2009: Poorly designed stimulus Cap and trade legislation
2010: Obamacare2012: Tax hikes
Why the Slow Recovery?Strike 1: Poor Policy Focus
2009: Poorly designed stimulus Cap and trade legislation
2010: Obamacare2012: Tax hikes2014: Income inequality and Inversions
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
Why the Slow Recovery?Strike 1: Poor Policy Focus
Strike 2: Regulatory Policy
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
Why the Slow Recovery?Strike 1: Poor Policy Focus
Strike 2: Regulatory Policy
Strike 3: Policy Uncertainty
Sources of Policy Uncertainty• Dodd-Frank financial regulation• ACA regulations• Environmental regulations• Monetary policy
Why the Slow Recovery?Strike 1: Poor Policy Focus
Strike 2: Regulatory Policy
Strike 3: Policy Uncertainty
• Three strikes against a robust recovery
Economy set to accelerateGDP Growth Rates• 2011: 1.6 %• 2012: 2.3 %• 2013: 2.2 %
Forecast:• 2H 2014: 3.0 %• 2015: 3.1 %
Three Headwinds on the Horizon
Three Headwinds on the Horizon
1) The Fed’s Puzzle: tapering and exiting
Jan2008
Feb.
Mar.
Apr.
May
June
July
Aug.
Sep.
Oct.
Nov.
Dec
Jan2009
Feb
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Jan2014
Feb
Mar
Apr
May
Jun
Jul
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Excess Federal Reserve Assets Money Supply (M1)
Billions $Fed Policy
Bank Assets and Liabilities
CBO’s Inflation Forecast
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 20240.0
0.5
1.0
1.5
2.0
2.5Percent
Consumer Price Index
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20200
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Excess Federal Reserve Assets
Billions $
Fed Policy
Bank Assets and Liabilities
Not a Forecast
Three Headwinds on the Horizon
1) The Fed’s Puzzle: tapering and exiting
Interest rates will rise as economy recovers
They may rise faster, farther, as the Fed exits
Three Headwinds on the Horizon
1) The Fed’s Puzzle: tapering and exiting2) The Fiscal Puzzle: Debt, deficits, and interest rates
1980
1981
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1983
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1989
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2013
2014
2015
2016
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2018
2019
2020
2021
2022
2023
2024
-15
-10
-5
0
5 Percent of GDP
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
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1994
1995
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1999
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2022
2023
2024
-2000
-1500
-1000
-500
0
500 Billions $
Deficit to GDP
CBO’s Baseline Deficit(August 2014)Budget Deficit
1980
1981
1982
1983
1984
1985
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2023
2024
0102030405060708090
Percent of GDP
Government Baseline Outside Debt
(CBO’s Baseline – August 2014)
Debt to GDP
Debt
1980
1981
1982
1983
1984
1985
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1989
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2019
2020
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2022
2023
2023
0
5,000
10,000
15,000
20,000
25,000Billions $
Three Headwinds on the Horizon
1) The Fed’s Puzzle: tapering and exiting2) 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
CBO’s Interest Rate Forecast
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 20240.0
1.0
2.0
3.0
4.0
5.0
6.0
10 Year Treasury Note
Percent
Building on CBO’s Interest Rate Forecast
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 20240.0
1.0
2.0
3.0
4.0
5.0
6.0
10 Year Treasury Note QE Reversal
Percent
Building on CBO’s Interest Rate Forecast
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 20240.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
10 Year Treasury Note QE Reversal
Debt & Entitlements
Percent
Three Headwinds on the Horizon1) The Fed’s Puzzle: tapering and exiting2) The Fiscal Puzzle: Debt, deficits, and interest rates
Crowding out has not gone awayInterest rates will go higher as a result of this increase in debt
And don’t forget the looming entitlements problem:
Three Headwinds on the Horizon
1) The Fed’s Puzzle: tapering and exiting2) The Fiscal Puzzle: Debt, deficits, and interest rates3) Many international puzzles:
Big worries: Europe, ChinaLesser worries: Ukraine, Middle East, Americas
Review the Bidding• Recovery has been very weak• Due largely to Washington policies• Headwinds may hold us back, but then
– Any reasons for optimism?
Any Reasons for Optimism?• Refilling the well for startups
Household Balance Sheet
19801980 - Q21980 - Q31980 - Q419811981 - Q21981 - Q31981 - Q419821982 - Q21982 - Q31982 - Q419831983 - Q21983 - Q31983 - Q419841984 - Q21984 - Q31984 - Q419851985 - Q21985 - Q31985 - Q419861986 - Q21986 - Q31986 - Q419871987 - Q21987 - Q31987 - Q419881988 - Q21988 - Q31988 - Q419891989 - Q21989 - Q31989 - Q419901990 - Q21990 - Q31990 - Q4199119911991199119921992199219921993199319931993199419941994199419951995199519951996199619961996199719971997199719981998199819981999199919991999200020002000200020012001200120012002200220022002200320032003200320042004200420042005200520052005200620062006200620072007200720072008200820082008200920092009200920102010201020102011201120112011201220122012201220132013201320132014102030405060708090Trillion $
Household Wealth
0
10
20
30
40
50
60
Nonfinancial Assets
Financial Assets
Trillion $Household Assets
Any Reasons for Optimism?• Refilling the well for startups• Recovering labor market flexibility
199819992000200120032004200520062008 20130
500
1000
1500
2000
2500Thous. of Units, SAAR
Housing Market Trends
Housing Starts
2000200020002000200020002000200020002000200020002001200120012001200120012001200120012001200120012002200220022002200220022002200220022002200220022003200320032003200320032003200320032003200320032004200420042004200420042004200420042004200420042005200520052005200520052005200520052005200520052006200620062006200620062006200620062006200620062007200720072007200720072007200720072007200720072008200820082008200820082008200820082008200820082009200920092009200920092009200920092009200920092010100
150
200
250
300Sales Price, Thous. $
Existing HomesNew Homes
Median Home Prices
20002000200020002000200020002000200020002000200020012001200120012001200120012001200120012001200120022002200220022002200220022002200220022002200220032003200320032003200320032003200320032003200320042004200420042004200420042004200420042004200420052005200520052005200520052005200520052005200520062006200620062006200620062006200620062006200620072007200720072007200720072007200720072007200720082008200820082008200820082008200820082008200820092009200920092009200920092009200920092009200920102010201020102010201020102010201020102010201020112011201120112011201120112011201120112011201120122012201220122012201220122012201220122012201220132013201320132013201320132013201320132013201320142014201420142014201420142500
3500
4500
5500
6500
7500
200
400
600
800
1000
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1400Thous. of Units, SAAR
Existing Home Sales (right axis)New Home Sales (left axis)
Home Sales
20002000200020002000200020002000200020002000200020012001200120012001200120012001200120012001200120022002200220022002200220022002200220022002200220032003200320032003200320032003200320032003200320042004200420042004200420042004200420042004200420052005200520052005200520052005200520052005200520062006200620062006200620062006200620062006200620072007200720072007200720072007200720072007200720082008200820082008200820082008200820082008200820092009200920092009200920092009200920092009200920102010201020102010201020102010201020102010201020112011201120112011201120112011201120112011201120122012201220122012201220122012201220122012201220132013201320132013201320132013201320132013201320142014201420142014201480
100120140160180200220 Housing
Affordability Index
Any Reasons for Optimism?• Refilling the well for startups• Recovering labor market flexibility• Rationalizing business structures
Review the Bidding• Lackluster recovery
– Due almost entirely to poor Washington policies
Review the Bidding• Lackluster recovery, about to accelerate
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
Review the Bidding• Lackluster recovery • More headwinds, but also • Three reasons for optimism
Refilling the startup wellRegaining flexibility in labor marketsImproving business structures
Review the Bidding• Lackluster recovery • Three headwinds vs three reasons for optimism
Outlook:• Steady growth, with a chance for better, especially
with better policies
Final Policy Puzzle: How can government help now?
Final Policy Puzzle: How can government help now?
1) Near Term: Get Out of the Way
Final Policy Puzzle: How can government help now?
1) Near Term: Get out of the way!2) Next year – do something positive
– Not this:
Final Policy Puzzle: How can government help now?
1) Near Term: Get out of the way!2) Next year – do something positive
– Immigration reform– Some tax reform– Reform one entitlement program– Pass a sustainable highway bill
Final Policy Puzzle:How can government help now?
3) And stay out of the way
A Puzzle By Any Other Name
Economic Policy Division
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