2. , Division of Research The Economic Outlook Dr. Doug Woodward Director, Division of Research Professor of Economics Orangeburg, SC November 12, 2008

3. Overview Perspective on the financial crisis Perspective on the economic crisis –U.S. –South Carolina The Fundamentals: Long-term Competitiveness

4. Perspective on the Financial Crisis  A parallel financial industry created, sold, and bought trillions of dollars of derivative securities  based upon "hedging" or "insuring" the value of a much smaller base of real assets.  Akin to gambling: credit default swaps  Some versions of these instruments are imaginary capital.  These claims overlap on the same types of mortgages and other financial instruments.  TARP’s problem  Hard to price and sell these financial products.

5. Co-Pilots

6. “Beware … of geeks … bearing formulas.” C = S * N(d1) - K * (e ^ -rt) * N (d2) d1 = ln (S / K) + (r + (sigma) ^ 2 / 2) * t / sigma * sqrt(t) d2 = d1 - sigma * sqrt(t)

7. Financial Cycle Excitement Rational response to an event or opportunity Euphoria Growing confidence Excessive risk Irrational exuberance Leverage Bubble Revulsion Bubble bursts Fear sets in Hoarding Crisis of confidence

8. Real Investment Matters Financial disorder creates a crisis of confidence –Fundamental uncertainty Financial crises can have real consequences –Consumer retrench –Loss of confidence and animal spirits (Keynes) Real investment stagnates –Real investment is plant, equipment, even housing –Productivity enhancing investments decline Government fiscal stimulus needed

9. The Forecast for the Real U.S. Economy Recession …

10. What is a Recession? Two quarters of declining GDP Further: A significant decline in economic activity spread across the economy Consumers retrench and wholesale- retail sales weaken Employment losses mount

12. The Long-run Business Cycle

14. Real Investment in Peril

15. The Forecast for the Real South Carolina Economy Recession …

16. South Carolina Economic Barometer

22. Retail Rebound for Christmas? Low gas prices Stock market recovery No more financial shocks Rising confidence Stimulus checks

25. Exports Holding Up Manufacturing Dollar’s decline helped the S.C. economy Growing exports were a central reason why the S.C. economy stabilized in 2008 But the latest data show … –Exports of goods will slow in 2009 –They were growing at double digit rates

26. BMW’s Cumulative Capital Investment in South Carolina in 2007 Dollars Millions

28. Outlook Summary The ongoing financial crises will ensure a national recession. Meager economic gains during 2009. Mild recovery possible in mid-2009. Local and state government in fiscal crisis.

29. Looking further ahead A rebound in 2010. 2010–15: South Carolina will be a leading state economy with export clusters. More diversified Cluster and competitiveness initiatives are still the key to long run growth.

30. Thank you! Additional information available at the web site for the Division of Research, Moore School of Business, University of South Carolina: http://mooreschool.sc.edu/moore/research/

31. 28th Annual Economic Outlook Conference December 3, 2008 Marriott Columbia City Center 8:30 am Continental Breakfast and Networking 9:30 am Check-in 10:00 am-12:00 noon "Outlook for the U.S. and S.C. Economy 2009" Luncheon Speaker: Daniel H. Stern--"Current Status of the Financial Markets" Cost is $75 (includes morning program and luncheon.) Visit Moore School Website or call 800-393-2362 Deadline to register is Nov. 26