Professor Emeritus of Economics Thomas R. Brown Professor in Economics Education

GOOD NEWS – OUR ECONOMY IS GROWING WE ARE NOT IN A RECESSION WE HAVE A LONG WAY TO GO TO A FULL RECOVERY WORST RECOVERY SINCE GREAT DEPRESSION

October 2009 unemployment rate = 10.0 % September 2013 unemployment rate = 7.2% STILL 2.2 MILLION FEWER WORKERS THAN BEFORE THE FINANCIAL CRISIS Number unemployed Sept 2013 = 11.3 million

NEW NORMAL Participation rate = % population over age of 16 in labor force January % September % 136,000 left the labor force in September ,000 left the labor force in August 2013

NEW NORMAL Employment rate = % of population over the age of 16 employed January % September %

September 2013 Population 25 years and over Participation Rate Employment Rate Less than H.S.44.5% 39.9% H.S. no college59.0%54.5% Some college67.2%63.2% Bachelor’s Degree75.3%72.5% or higher

REASONS FOR UNEMPLOYMENT September 2013 Job Losers 3.8% Job Leavers 0.6% Reentrants 2.0% New Entrants 0.8% Total unemployment = 7.2%

Government Payroll Decline since 2006 Federal Government - 74,000 State Government -161,000 Local Government -560,000 State and local governments are starting to hire again

WH0 HAS BEEN HIRING? RETAIL HEALTH CARE PROFESSIONAL & BUSINESS SERVICES MANUFACTURING WHO IS STARTING TO HIRE? GOVERNMENT CONSTRUCTION

Those with homes and jobs are on the road to recovery Those who lost jobs and/or homes are stalled - No recovery

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% GROWTH FOR Q = 1.1% GROWTH FOR Q = 2.5%

NEW NORMAL GDP AVERAGE GROWTH 1950 – % GDP AVERAGE GROWTH 2007 – % HOW IMPORTANT IS THE CHANGE IN GROWTH? 3.6% GR0WTH - GDP DOUBLES IN 20 YRS 2.0% GROWTH – GDP DOUBLES IN 36 YRS

2013 INFLATION RATE = 1.5%

AGGREGATE DEMAND C+I+G+X CONSUMER SPENDING INVESTMENT SPENDING GOVERNMENT SPENDING NET EXPORTS (EXPORTS-IMPORTS)

PENT UP DEMAND – BUYING CARS & TRUCKS SAVINGS RATE UP = 4.6% NET WORTH OF HOUSEHOLDS UP CONFIDENCE UP & DOWN REAL WAGES STAGNANT

ECONOMY WORKED THROUGH FISCAL DRAG INCREASE IN PAYROLL TAX JAN % to 6.2 % TAX INCREASE ON AVERAGE WAS $40 PER BI-WEEKLY PAYCHECK CUT TAKE-HOME PAY BY $125 BILLION

HOUSING 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

EXPORTS HAVE BEEN A DRIVING FORCE IN OUR ANEMIC RECOVERY EXPORTS ARE SLOWING DOWN EXPORTS ACCOUNT FOR 14% OF OUR GDP

BRIC Nations est BRAZIL 2.4%8.9% RUSSIA 1.8%3.4% INDIA 4.2%3.4% CHINA 8.0%7.8% 40% OF WORLD POPULATION

EUROZONE UNEMPLOYMENT AT RECORD HIGH 17 COUNTRIES THAT USE THE EURO HIT THE HIGHEST UNEMPLOYMENT RATES IN THE HISTORY OF THE CURRENCY. = 12.2% MAY 2013 CURRENT UNEMPLOYMENT RATE = 12.1 %

SEPTEMBER 2013 UNEMPLOYMENT GREECE 27.9% SPAIN 26.2% ITALY 12.2% FRANCE 10.5% GERMANY 6.9% UK 7.7% SCHADENFREUDE!

GROUP OF SEVEN: SLOW TO NO GROWTH GDP GROWTH 2013 est U.S. 2.2% JAPAN 1.9% GERMANY 0.9% BRITAIN 1.3% FRANCE-0.1% CANADA 1.6% ITALY-1.0%

WE WENT OVER THE FISCAL CLIFF AND LIVED TO TALK ABOUT IT WE DID GET HIGHER TAXES WE DID GET SEQUESTRATION

2009 $1.4 TRILLION 2010 $1.3 TRILLION 2011 $1.3 TRILLION 2012 $1.1 TRILLION 2013 $642 BILLION est. TOTAL DEBT = $17 TRILLION +

FACT FISCAL 2013 Tax revenues are up by $383 billion Government spending is down $75 billion

GOOD NEWS DEFICIT AS A PERCENT OF GDP IS SHRINKING DECEMBER % GDP DECEMBER % GDP DECEMBER % GDP DECEMBER % GDP DECEMBER % GDP est.

Three Reasons for Deficit Decline !. Recession is over - economy is growing 2. Sequestration remains in effect 3. Govt health care costs lower than expected

DEBT AS A PERCENT OF GDP IS GROWING % % % % % % est.

December 13, 2013 Conference Committee Fiscal 2014 Budget Due January 15, 2014 Second Round of Sequester Budget Cuts February 7, 2014 Reach New Debt Ceiling

MOST EXPANSIVE MONETARY POLICY IN THE HISTORY OF THE FEDERAL RESERVE FEDERAL RESERVE BALANCE SHEET INCREASED BY $2.9 TRILLION SINCE AUGUST 2007

UNCONVENTIONAL QE1 NOVEMBER 2008 QE2 NOVEMBER 2010 QE3 SEPTEMBER 2011(operation twist) QE4 SEPTEMBER 2012 ( print $85B/mth)

UNCONVENTIONAL FEDERAL RESERVE IS PRACTICING TRANSPARENCY INFLATION TARGET 2.5% UNEMPLOYMENT TARGET 6.5% KEEP INTEREST RATES AT ZERO INDEFINITELY PUMP $85 BILLION PER MONTH INTO ECONOMY

TAPER TANTRUM September 2013 FED ANNOUNCES IT IS GOING TO TAPER DOWN THE AMOUNT OF MONEY IT IS PRINTING EVERY MONTH Stock market falls World currencies devalue Mortgage interest rate jump October 2013 FED REVERSES POSITION – WILL KEEP PRINTING INDEFINITELY

FUTURE EFFECT OF MONETARY POLICY IS VERY LIMITED PUSHING ON A STRING WE HAVE HAD 58 MONTHS OF ZERO INTEREST RATES SEPTEMBER 2013 BANKS HAD $2.2 TRILLION IN EXCESS RESERVES

HEADWINDS FOR DEBT CRISIS PLAGUING EUROPEAN GOVERNMENTS 2. HIGH U.S. UNEMPLOYMENT RATE 3. STOP-AND-START NATURE OF CONSUMER SPENDING 4. LACK OF CONFIDENCE AMONG CEO’S 5. LACK OF CONSUMER CONFIDENCE 6. CONTINUED POLITICAL BRINKSMANSHIP 7. FEAR THAT IT ALL COULD HAPPEN AGAIN

FIVE REASONS TO BE SLIGHTLY OPTIMISTIC 1. BALANCE SHEETS HAVE IMPROVED 2. INFLATION IS TAME 3. WE ARE GROWING FASTER THAN MANY OF OUR COMPETITORS 4. DEFICIT IS DECLINING 5. WE ARE GAINING ENERGY INDEPENDENCE

IF WASHINGTON DOES NOT GET ITS ACT TOGETHER WILL LOOK A LOT LIKE 2013 OUR ECONOMY WILL CONTINUE TO GROW AT A SLOW PACE OUR UNEMPLOYMENT RATE WILL REMAIN UNACCEPTABLY HIGH