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The Economy 2010 and How We Got Here

Explore the trajectory of the US economy in 2010 and how it got there, including high unemployment, deflationary fears, negative wealth shocks, bursting of housing and consumption bubbles, global shocks, and the near demise of the financial system.

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The Economy 2010 and How We Got Here

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  1. The Economy 2010 and How We Got Here Steven L. Cobb, Ph.D. UNT Center for Economic Education

  2. The U.S. Economy is on a Trajectory of Slow, but Improving Growth for 2010

  3. Guitar-string theory: • Deeper recessions are followed by stronger, more rapid recoveries. • -Milton Friedman

  4. “The aftermath of deep financial crises shows deep and lasting effects on asset prices, output and employment. Unemployment and house price declines extend out for five and six years. Output declines last two years on average. Even recessions sparked by financial crises do eventually end, albeit almost invariably accompanied by massive increases in government debt.” • -Reinhart and Rogoff(Dec. ‘08)

  5. The Current Situation GDP: 2-3%, more likely close to 3% • Absent the financial crisis: 5-6% Headline inflation: 3.0% Core inflation: 1.5% Unemployment: 10.4% peak in 2010 Q2 Sustained employment growth to begin after Feb. 2010

  6. What have we experienced? • High unemployment • Actual deflation • Negative wealth shock • Bursting of multiple bubbles • Near-demise of banking/financial system

  7. Unemployment and Deflation

  8. High Unemployment

  9. High Unemployment

  10. Deflationary Fears

  11. Negative Wealth Shocks

  12. The Bursting of the Housing Bubble

  13. A Softening of the Housing Market As A Result Of Higher Interest Rates (’04 – ’07)

  14. The Inevitable Was Delayed By New Mortgage Instruments

  15. By 2006 Real Estate Prices Were No Longer Rising

  16. Sales of New and Existing Homes Fall Rapidly

  17. Construction Falls As Well

  18. The Consumption Bubble Also Burst

  19. GDP Growth Was Fueled By Consumption Expenditures

  20. As Long As Home Prices Were Rising, Consumers Were Using Equity To Finance Their Purchases

  21. Real Estate Concerns Negatively Impacted Consumer Confidence

  22. Falling Confidence Led To Falling Sales

  23. Consumption Fell in Both Nominal and Real Terms

  24. Falling Consumption Led to Declines In Retail Sales

  25. Global Shocks

  26. The Downturn Was Global

  27. The Largest Economies Were All Hit Hard

  28. The Trend Was Similar In Established and Rising Stars

  29. The US Experiences a Rise in the Value of the Dollar

  30. But the Stronger Dollar Is Very Hard On Exporters

  31. The Result of All This Is the Near Demise of the Financial System

  32. What have we experienced? This Recession is the most painful since the Great Depression • Longest, Deep, and Wide It followed 25 years of growth interrupted by two short, mild recessions Bottom Line: Relative to a generation of experience, this was a truly traumatic event.

  33. Headwinds • Credit to households and small businesses • Banking system –Capital, Commercial Real Estate losses • Anticipated taxes • Policy uncertainty • Higher energy prices

  34. Crosswinds • Monetary policy • Fiscal policy • Regulatory policy

  35. Tailwinds • Growth in temporary employment • Declining initial unemployment claims • Declining layoff announcements • Employment gains in 11 states • 11 sectors showing employment gains • Synchronized global recovery • Industrial production bounce-back

  36. Positives

  37. 2007 2008 2009 U.S. GDP Growth

  38. 2007 2008 2009 Low to Moderate Inflation

  39. Year-end inflation? • Given fears of deflation at year-end 2008, economists thought a 1% deflation over 2009 was the most likely outcome. •  Federal Reserve Policy averted that outcome, and that’s a prediction we’re very happy to have been wrong about. • Credit Chairman Bernanke and the FOMC

  40. Consumer Behavior • After a number of years where the U.S. saving rate was negative, there is an indication that Americans are beginning to save again. This has the potential to be one of the more positive impacts of the recession.

  41. Remaining Concerns

  42. Unemployment • May not have peaked – some expect it to hit 10.4% in the second quarter of this year. • Doesn’t measure discouraged workers and part-time workers that want full time jobs (may currently be as high as 16.3%) • Some economists still fear a jobless recovery

  43. Budget Deficits • The spending measures may have been critical to avoiding a much larger crisis, but our national debt is rising rapidly. • It is now over $12 Trillion (more than $40,000 per citizen) • Current deficits are adding to this number at record rates

  44. Long-term concerns have been put on the back burner • Social Security • Medicare

  45. Lessons Learned Only traumatic events, not hiccups, produce behavior modification.

  46. What is the Bottom Line? The circulation of confidence is better than the circulation of money. -James Madison

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