How Can The U.S. Grow?

1. Session 1 | U.S. Economic Outlook How Can The U.S. Grow? Presented by: Jon Southard, Managing Director, Director of Forecasting • William Wheaton, Senior Consultant

2. GDP is Again Consumer Based % Growth, Quarters SA Annualized

3. Slower GDP Growth Constrains Hiring – Even with Only Modest Productivity Increases Year-over-year, % Source: Bureau of Labor Statistics; Bureau of Economic Analysis.

4. Lack of Agreement On Time To Full Employment

5. Short-Term May Prove Better than Long-Term Despite Consensus Source: CBRE Econometric Advisors, Bureau of Labor Statistics.

6. Questions to be Answered:

7. Short Term (Keynesian) Sources of Growth LETS DEAL WITH KEYNESIAN ISSUES FIRST AND THEN TACKLE SOME LONGER-TERM QUESTIONS

8. How Much Growth is Left in Consumption? Source: Bureau of Economic Analysis.

9. An Increase in the Consumption Rate Could Accompany a Recovery in Housing with the Restoration of Household Balance Sheets Existing single family house price, % change year ago Consumption rate, % share of disposable income Source: OFHEO, BEA.

10. A Recovery in Housing Construction is in the Cards Source: Bureau of Economic Analysis; Federal Reserve.

11. Net Trade also Generates Growth Source: U.S. Census Bureau.

12. A Weakened Dollar has, will Continue to Help Trade Source: Bureau of Economic Analysis; Federal Reserve.

13. Why are Recoveries Increasingly Slower?

14. Is this also Caused by a Skill Mismatch, and also a Geographic Mismatch?

15. U.S. Top Ten Occupations in Demand (August 2012, SA) Source: The Conference Board Help Wanted OnLine® (HWOL)

16. Vacant Jobs Versus Employment Structural cyclic

17. Research Finds Limited Evidence of Structural Shifts

18. Fiscal Debt and Deficit Accounting • D = Debt in $, G = GDP in $ • d = deficit in $ • iD/G = fraction of GDP used to pay off debt (at rate i) ∆[D/G] = growth in Debt as a % of GDP With some math ∆[D/G] = [d/G] - ∆G/G x [D/G] Japan: 8% = 9% - .5% x 2 2012 (D/G) = 2.15 x 1.08 US: 6% = 9% - 3% x 1 2012 (D/G) = .98 x 1.06 GDP used to pay debt reduces savings/investment (GDP growth) and thus D/G increases further…. Crisis: Markets demand more (i) = makes it worse

19. Keynes’ View of Deficits • Good years: balanced budget, D/GDP declines with the growth rate in GDP (e.g. 3% yearly, 35% per decade) • Recession/Crisis years: run deficits of 5-10% to help restore growth (do so for say 3 years, D/GDP rises 15 – 30% during each Crisis). • Over time D/GDP stable or declining, countries are always borrowing (a bit) from the future to fight crisis, UNLESS a). You do not balance the budget in good years. b). Crisis become more common (10 year average) c). GDP grows more slowly. d). Your initial D/GDP is (too) high (e.g. >1)

20. The Twin Impacts of Deficit Reductions

21. Bowles-Simpson Plan Components Cutting Discretionary spending may harm productivity the most and B-S does NOT deal with long term Heath care and retirement reform.

22. Bowles-Simpson Plan Components • 2012-2015 revenue: $174B, 2016-2020 revenue: $820B • “Revenue with Reform”: a sound idea

23. How Economies Grow in the Longer Term

24. Long Term Sources of Growth (continued)

25. Gordon: Industrial Revolutions Pre - 1780: productivity growth 0.3% yearly (!) IR#1: 1780-1840: Steam, coal, railroads. Short and quick, productivity growth increases to 0.8% IR#2: 1870-1970: electricity, clean water, oil-IC engine, radio, health: 2.4% sustained productivity growth for a century (16x increase in std. of living) IR#3: 1970-current: computers, information age, internet. - 1970-1995: productivity growth 1.5% (Why?) - 1995-2004: productivity growth 2.5% (Wow!) - 2005-2012: productivity growth 1.3% (Ugh) - 2013-2020: ?

26. The Current IT Industrial Revolution Is the IT productivity boom (IR #3) really petering out?

27. Current Industrial Revolution (continued)