The Outlook for the U.S. and Global Economies

1. The Outlook for the U.S. and Global Economies Dan North Euler Hermes Chief Economist, North America MAY 2012

2. The Outlook May, 2012 • Overall Cautious Optimism • Risks • Debt uncertainty in Europe/U.S. • A positive, but weak U.S. economy • Forces and measures • Government responses • Conclusions ntshl

3. World growth should fall from 3.0% in 2011 to +2.7% for 2012, with emerging economies leading the way (Asia ex-Japan, China, India, Latin America). In the US, growth should be around 2% for 2012. Recession in the Euro zone which will be severe for several economies. Risk of disorderly default or exit from the EMU is rising. The Economic Outlook for 2012 in a nutshell Eur dbt

4. European Debt Crisis Uncertainty • This started over 2 yrs ago. Europe is burning while its leaders fiddle. • What happens whenGreece defaults again? • What happens ifItaly, Spain, France need bailouts? • Latest plan: fiscal unity + ECB printing €’s. Had fiscal targets before – ignored. • Will also need European Financial Stability Fund (EFSF) 500B €, IMF, EU. China? U.S. Fed / taxpayer? • 7 changes in government • 9 downgrades • Dozens of meetings • 17 countries, heads of state, finance ministers, central banks, commercial banks, ECB/IMF/EU. • It’s visibility goes up and down • Problem is UNCERTAINTY! Afct us

5. European Debt Crisis Uncertainty • How Does It Affect Us? • Exports to Europe • <2% of our GDP • Financial contagion • Possibility that our banks are exposed to losses in Europe - all debt markets are eventually linked • Confidence • Fear slows consumers • Financial markets weaken • None of the three by themselves that much, but all three together could be a significant drag US dbt

6. U.S. Debt Uncertainty • U.S. debt problem is different. In contrast to Europe, U.S. will never have to default because it can do what no one else can – print U.S. dollars. • U.S. problem is government has no plan to reduce debt that’s so high it hurts the economy. • Deficits continue and debt/GDP at 100% for next 10 years. No attempt to reform entitlements. • Congress is stuck…fiscal cliff, debt ceiling, 2012 elections…uncertainty • Uncertainty over taxes, regulation hurting growth. • But that’s just one aspect of the economy, let’s look at the details…

7. The four forces which started and ended the recession can help forecast the outlook: • Oil • Housing • Fed policies • Fear • (GDP: $15T, 3.3% ave. growth. It’s the “size” of the economy. Use it to measure the “size” of other big numbers like budget deficit/debt)

10. Recent oil

11. gas

12. Gasoline prices more closely related to Brent – not enough pipeline to get glut of WTI to refineries fast enough gas

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14. Housing fndmntl

15. Housing Yld crv

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19. lendng

20. Banks are lending, fear receding recap

21. Recap • Four forces caused/ended recession • Oil has been a drag, now improving • Housing flat • Yield curve positive but falling • Lending good • So what do the measures of the economy say?

22. GDP recovering

23. Consumption: income fuels spending mfr

24. Manufacturing strong cntnrs

25. Two last measures, Bankruptcies brpt

26. But perception of risk still very high: emply

28. 4 yrs later, less than half recovered recp

29. Recap • Four forces caused/ended recession • Oil has been a drag but improving • Housing flat • Yield curve positive but falling • Lending good • GDP, consumer weak, manufacturing good • Employment alarming • To fix it, the government is causing two big problems: • Debt & Potential Inflation fisc

30. FISCAL POLICY Congress, Administration Spending, taxing, borrowing deficits/debt, budgets… math

31. Budget Math in Washington • Year 1: spent $80 • Original budget for year 2: spend $110 • Final budget for year 2: spend $90 • In Washington, even though they’re spending $10 more in year 2,this is what they call a $20 “cut”. • Both sides do this defs

32. Spending, Deficits and Debt Gov’t spends $10 Gov’t gets tax revenue $6 Deficit $4 Treas. gets loan, issues $4 notes/bonds How big is $4T? Don’t know - measure against size of the economy - GDP debt

33. Accumulated deficits become debt…

34. Accumulated deficits become debt… Debt>90% = -1% GDP Def red com

35. The Simpson - Bowles Deficit Reduction Commission finally said it out loud: • We must touch the “third rails” of • Social Security • Medicare • If we don’t we will never be able to balance the budget - entitlements will become the entire budget • The rest is whistling past the graveyard…

36. Outlays, 2010 Budget, $3.5T

37. Outlays, 2010 Budget, $3.5T entltmnts

38. Entitlements Entitlement spending, particularly Medicare or some other form of national healthcare, will be one of the two most contentious and important social, political and economic issue for several generations, the other being energy (ex war). One generation will not be getting the benefits they think are owed them and another generation will be taxed to exhaustion to try to provide them. But it is not hopeless nor doomsday because the math is simple, but right now politicians seem to be incapable of mustering the political will to fix it. isunce

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40. FYI, this week alone, the Treasury is indebting you and your kids for: $30B 4 wk. bills $30B 3 mo. bills $27B 6 mo. bills $35B 2 yr. notes $35B 5 yr. notes $29B 7 yr. notes Fisc rev

41. Fiscal Policy Review • We need CLARITY, CERTAINTY, a plan, instead we have: • No 2011 budget, no 2012 budget • 2013 Admin. budget DOA – more debt and deficit • 2013 Republican budget DOA • Budget Control Act of 2011 (BCA) and its Super Committee did nothing to reduce debt, did nothing to reform Medicare and Social Security • Four administration deficit reduction plans 2011 • Many others from Congress, Commissions, candidates • Borrowing more every day… stuck

42. FISCAL POLICY REVIEW • Congress stuck - What now? • Things could change at: • 2012 Fiscal cliff (expiration of Bush and payroll tax cuts, some jobless benefits, sequestration, ceiling?) • 2012 elections • 2024 Medicare goes insolvent • 2050 Social Security goes insolvent • Do note that this is the current situation – it can change mon

43. MONETARY POLICY The Federal Reserve Bank, Ben Bernanke

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46. MONETARY POLICY • Lowering the short term Fed Funds interest rate usually works

47. MONETARY POLICY • Lowering the short term Fed Funds interest rate usually works • But this time needed an extra boost, lowering long term interest rates. • Quantitative easing: • Fed prints new $ bills • Buys Treasury bonds in open market • Raises bond prices, lowering interest rates (they move in opposite directions) • Puts $ into financial system • And creates inflationary pressures… QE3? Bal sht

48. Quantitative Easing (QE) 10 yr work

49. Did QE2 work?

50. Did QE2 work?