Economic Outlook 2013 – 2014

1. Economic Outlook 2013 – 2014 Steel Manufacturers Association Annual Members Conference Mayflower Hotel April 30, 2013 Washington, DC Peter Morici University of Maryland pmorici@rhsmith.umd.edu Twitter @pmorici1

2. How “Great” a Recession 1854 - 2012: 33 Recessions Average Length: 16 Months Long Depression: 1873-79 (65 mos.) Great Depression: 1929-33 (43 mos.); 1937 – 38 (18 mos.) Volcker Recession (Reagan): 1980 (6 mos.); 1981-82 (16 mos.) Great Recession (Obama): 2007–09 (18 Months) Peak Unemployment 1876, 14% – Long Depression 1933, 24.9% – Great Depression November, 1982, 10.8% – Volcker Recession (Reagan) October, 2009 10% - Great Recession (Obama)

4. Reasons for Optimism U.S. Innovation Continues at a Strong Pace New and Improved Products Strongest Manufacturing Productivity Growth Among Industrialized Countries Logistics Shale Gas/Oil Revolution Heavy Transportation Intercity and Urban Transport Manufacturing Revival Repricing of U.S. Labor Superior Higher Education System Morrill Act of 1862 – Colleges of Science and Engineering Scientific Management – America’s Business Colleges

5. Potential Growth Potential Trend GDP Growth: 3% Per Year Average Productivity Growth: 2% Per Year Average Labor Force Growth: 1% Per Year After Deep Recession Growth of 4 – 6% Possible Potential Productivity Growth: 2 – 4% Potential Employment Growth: 2 – 4% Growth Above 3 % Is Needed to Reduce Unemployment Unemployment Has Been Falling Because Adults Are Leaving the Labor Force

6. Lessons of HistoryStronger Growth is Possible Reagan Recovery: 1982 - 1990 Unemployment Rate November 1982: 10.8 June 1986: 7.2% GDP Growth 1982:Q3 – 1986:Q2: 5.0% Obama Recovery: 2009 – Unemployment October 2009: 10.0% March 2013: 7.6% GDP Growth 2009:Q2 – 2013:Q1: 2.1%

7. Obstacles to Growth China Slowing? Europe: Euro; Bank and Sovereign Debt Chinese/German/Japanese Mercantilism US: Trade Deficit: Oil, China U.S. Regulatory Overreach Tax System High Individual and Corporate Rates Raise the Price of Capital Misplaced Efforts to Obviate Income Inequality Runaway Health Care Social Security and Federal/State Pensions

8. Chinese Growth Model Running Out of Steam? Modernization and Inexpensive Labor Has Limits Growing Trade Surpluses with U.S. Has Limits Undervalued Yuan Subsidies/High Tariffs/Other Forms of Protection Trade Deficits Slow Growth in U.S. Competition from Pakistan, Vietnam, Others Overseas Resource and Energy Investments

9. Europe: Festering Problems in Eurozone and Debt Disparate Productivity Growth—North vs. South Balkanized Labor Markets Absence of Fiscal Union Limited ECB Powers/Mandate Absence of Unified Banking Regulation and Bank Resolution Tools/Authority Absence of Sovereign Lender of Last Resort Result: Sovereign, Bank and Private Debt

10. Global Variables 2012 2013 2014 Global 1.5% 1.5 2.0 US 2.2 2.0 2.2 Eurozone -0.5-0.5 0.0 China 7.7 7.8 8.0 India 5.0 5.7 6.5 Mexico 3.9 3.2 3.6 Brazil 0.9 2.7 3.4 Russia 3.4 3.1 3.5 Japan 2.0 0.4 2.4 Oil (WTI) $94 96 103 Oil (Brent) 113 108 115

12. U.S. Autos and Housing Vehicle Sales Housing Starts 2012 14.4 M 780K 2013 15.4 1000K 2014 16.0 1200K

13. Retail Sales Nominal Real 2012 5.0 2.9 2013 5.1 2.9 2014 5.6 2.8

14. U.S. Policy Fixes Fix Trade With China – Currency Reform Develop Domestic Oil & Gas Federal Deficit – Entitlement Reform Health Care – Fewer Subsidies, Genuine Reform Social Security – Raise Retirement Age Banking Rollback Dodd Frank Restructure Banks – Glass Steagall Broader Regulatory Reform Personal/Corporate Income Tax Reform – VAT Secondary Education Reform – Costs/Orientation to Labor Market (More Vocational Training) Post Secondary Reform – Cost Issues

15. Fixing the Trade Deficit China’s Yuan, Japan’s Yen General Currency Reform – Euro? Recalibrate Trade Agreements and World Trade Organization Education/Infrastructure/R&D Corporate/Personal Income – Value Added Tax Swap Energy Policy

16. Energy Policy Crude Oil Supply Domestic Production 9.5 MBD Net Imports 6.6 Total 14.1 Gasoline Consumption 8.4 Diesel for Transportation 2.7

17. Health Care Policy Price Not Provider Is the Issue U.S. and Germany Both Have Generous Government Payment Systems U.S. Cost Per Capita - $9000; Germany - $6000 Germany Better Regulates Prices for Drugs, Insurance Co, Admin Costs, Hospitals, etc. U.S. Malpractice System

18. Lessons of Great Recession Global Economy Is Fundamentally Altered (Destabilized) by New Technologies, Global Finance, Government Efforts to Insulate Citizens Strong Firms Continue Growing by Winning Market Share During Recessions and Periods of Slow Growth Customer Focus is Critical to Success Cost Control Cutting Edge Technologies Transparency: Accomplishments & Shortcomings Profits Are Earned by Exploiting Windows in the Marketplace: Mini-Monopolies

19. Issues for Businesses/Investors Moderate/Slow GDP Growth—Recession Risk Structural Changes in the Market Place Continuing Challenges for U.S. Manufacturing Autos – Fundamentally Altered Core Product Tougher Environmental/Mileage Standards Emphasis on Infrastructure, Skill-Specific Education Strengthening Competitiveness Customer Focus/Customer Relations Altering Mix of Products and Markets – More Value-Added Products Innovation and New Products Costs and Employment Policies