GERALD J. SWANSON, PH.D.Professor Emeritus of Economics

February 25, 2015

REMNANTS OF THE GREAT RECESSION

GOOD NEWS OUR ECONOMY IS GROWING

WE ARE NOT IN A RECESSION

BAD NEWSWORST RECESSION SINCE GREAT

DEPRESSION

WORST RECOVERY SINCE GREAT DEPRESSION

2

LABOR MARKETOctober 2009 unemployment rate = 10.0 %

January 2015 unemployment rate = 5.7%

Number employed exceeds high hit in Jan 2008

146 million

Number unemployed Jan. 2014 = 9 million3

LABOR MARKET Unemployment rate – including

marginally attached workers and part-time workers

Jan 2000 7.1%Jan 2015 11.3%

4

LABOR MARKETNEW NORMAL

Participation rate = % population over age of 16 in labor force

January 2000 67.5%January 2015 62.9%

If we had the same participation rate

today as we did in 2000 8.7 million more people would be in the labor force

5

LABOR MARKETWhy the change in the participation rate?

1. Boomers (1946-1964) retiring2.Worker’s skills not meeting employers

needs3. Increase in workers claiming disability4. Expanded safety net5. Mothers staying home with children6. Obama care7. Criminal record

6

LABOR MARKET

NEW NORMAL

Employment rate =% of population over the age of 16

employed

January 2000 67.1% January 2015 59.3%

If we had the same employment

rate as we did in 2000 19.4 million more people would be working today

7

January 2015 UNEMPLOYMENT BY LEVEL OF EDUCATION

Less than H.S. 8.5 % H.S. no college 5.4% Some college 5.2% Bachelor’s degree 2.8% or higher

EDUCATION MATTERS!

8

EDUCATION MATTERS

January 2015 Population 25 years and over

Participation Rate Employment Rate

Less than H.S. 46.0% 42.1%

H.S. no college 57.9%54.8%

Some college 67.2%63.8%

Bachelor’s Degree 74.4%72.3%

or higher

STRUCTURAL UNEMPLOYMENT

9

UNEMPLOYMENTREASONS FOR UNEMPLOYMENTSeptember 2014Job Losers 2.7% Job Leavers 0.5% Reentrants 1.8% New Entrants 0.7% Total unemployment = 5.7%

10

BIFURCATION OF RECOVERY

Those with homes and jobsOn the road to recovery

Those who lost job and/or homes

Stalled - minimal recovery

11

GDP GROWTH

UNDERPERFORMING 2009 GDP 2010 GDP 2011 GDP 2012

GDP Q1 -6.4% Q1 3.7% Q1 0.4% Q1 3.7% Q2 -0.7% Q2 1.7% Q2 1.3% Q2 1.2% Q3 1.6% Q3 2.5% Q3 1.8% Q3 2.8% Q4 5.0% Q4 2.3% Q4 3.0% Q4 0.1%

12

GDP GROWTH GDP 2013 GDP 2014 Q1 2.3% Q1 -2.1 Q2 1.8% Q2 4.6% Q3 4.3% Q3 5.0% Q4 3.3% Q4 2.6%

GROWTH ESTIMATE FOR 2014 = 2.4%

13

GROWTH NEW NORMAL

GDP AVERAGE GROWTH 1950 – 1999 3.6 %

GDP AVERAGE GROWTH 2009 – 2014 2.3%

HOW IMPORTANT IS THE CHANGE IN GROWTH?

3.6% GR0WTH - GDP DOUBLES IN 20 YRS

2.3% GROWTH – GDP DOUBLES IN 31 YRS

14

GROWTH BRIC Nations GDP Growth 2013 2014est. BRAZIL 8.9% 0.5%RUSSIA 3.4% 0.2%INDIA 3.4 5.6%CHINA 7.8% 7.4%

40% OF WORLD POPULATION 15

GROWTHGROUP OF SEVEN – SLOW TO NO

GROWTH GDP GROWTH 2014 est.

U.S. 2.4%JAPAN .9%GERMANY 1.5%BRITAIN 2.6%FRANCE 0.3%CANADA 2.2%ITALY -1.9%

16

INFLATION RATE

2014 INFLATION RATE = 1.4%

17

AGGREGATE DEMAND

C+I+G+XCONSUMER SPENDINGINVESTMENT SPENDINGGOVERNMENT SPENDINGNET EXPORTS – EXPORTS-

IMPORTS 18

CONSUMER SPENDINGPENT UP DEMAND – BUYING CARS &

TRUCKS

SAVINGS RATE UP

NET WORTH OF HOUSEHOLDS UP

CONFIDENCE UP

REAL WAGES STAGNANT

GASOLINE PRICES DOWN19

INVESTMENT SPENDINGHOUSING MARKET IS STABILIZING

CONSTRUCTION IS SLOWLY PICKING UP

BUSINESS PROFITS ARE STRONG

BUSINESSES HAVE LOTS OF CASH

BUSINESSES ARE READY TO SPEND

UNCERTAINTY IS A MAJOR PROBLEM 20

EXPORTS

EXPORTS HAVE BEEN A DRIVING FORCE IN OUR ANEMIC RECOVERY

EXPORTS ARE SLOWING DOWN

EXPORTSACCOUNT FOR 13% OF OUR GDP

21

FISCAL POLICYANNUAL BUDGET DEFICIT2009 $1.4 TRILLION2010 $1.3 TRILLION2011 $1.3 TRILLION2012 $1.1 TRILLION2013 $ 680 BILLION

2014 $483 BILLION

TOTAL DEBT = $17.8 TRILLION + 22

FISCAL POLICYFACT FISCAL 2014

Tax revenues are up 8.6%2013 = $2,775 trillion2014 = $3,013 trillion

Government spending up 1.6%

2013 = $3,455 trillion2014 = $3,512 trillion .

23

FISCAL POLICY

GOOD NEWSDEFICIT AS A PERCENT OF GDP IS

SHRINKING

DECEMBER 2009 10.1 % GDPDECEMBER 2010 9.0% GDPDECEMBER 2011 8.7% GDPDECEMBER 2012 7.0% GDPDECEMBER 2013 4.1% GDP DECEMBER 2014 2.8% GDP

24

CURRENCY WARS

CENTRAL BANKS HAVE FLOODED THE WORLD FINANCIAL SYSTEM WITH MORE THAN $11 TRILLION IN CASH

25

UNCONVENTIONAL MONETARY POLICY

MOST EXPANSIVE MONETARY POLICY IN THE HISTORY OF THE FEDERAL RESERVE

PRINTING TONS OF MONEY

FEDERAL RESERVE BALANCE SHEET

HAS INCREASED BY

$3.5 TRILLION SINCE AUGUST 2007

26

MONETARY POLICY

UNCONVENTIONALQE1 NOVEMBER 2008

QE2 NOVEMBER 2010

QE3 SEPTEMBER 2011(operation twist)

QE4 SEPTEMBER 2012 (print $85B/mth)

27

MONETARY POLICYBANKS CURRENTLY HAVE $2.3 TRILLION IN EXCESS RESERVES

THESE RESERVES COULD CREATE $23 TRILLION IN NEW MONEY

OVER TWICE THE AMOUNT OF MONEY CURRENTLY IN OUR ECONOMY

28

MONETARY POLICY TREASURY YIELD CURVE INTEREST RATES TO MATURITY

SEPTEMBER 2000 FEBRUARY 2015

6 MTH RATE = 5.8% 0.06%1YR RATE = 6.0% 0.11%5YR RATE = 6.5% 1.50%10YR RATE = 6.6% 2.08%30YR RATE = 6.6% 2.71%

NEGATIVE REAL SHORT-TERM INTEREST RATES

29

MONETARY POLICY

OVER SIX YEARS WITH ZERO SHORT-TERM INTERST RATES

WHAT NEXT?

PATIENCE!

30

CONCLUSION

HEADWINDS FOR 2015

1. SLOW GROWTH IN EUROPE2. U.S. STRUCTURAL UNEMPLOYMENT RATE3. STOP- AND START NATURE OF CONSUMER

SPENDING4. ISIS5. RUSSIA/UKRAINE6. CONTINUED POLITICAL BRINKSMANSHIP7. FEAR THAT IT ALL COULD HAPPEN AGAIN8. MOTHER NATURE

31

CONCLUSIONSIX REASONS TO BE SLIGHTLY OPTIMISTIC

1. BALANCE SHEETS HAVE IMPROVED2. INFLATION IS TAME3. WE ARE GROWING FASTER THAN MOST

OF OUR COMETITORS4. MONEY IS CHEAP5. DEFICIT IS DECLINING6. WE ARE GAINING ENERGY

INDEPENDENCE7. BOOMERS ARE GETTING OLDER

32