U.S. Economic Update: Current and Future Trends

2. U.S. Economic Update: Current and Future Trends A Presentation to the National Association of Wholesaler Distributors Billion Dollar Company CFO Roundtable Chicago, June 5-6, 2012 TassosMalliaris Quinlan School of Business Loyola University Chicago

3. My Plan • Review current data and trends. • Offer forecasts • Discuss how we ended up where we are. • Offer 3 possible scenarios moving forward

4. Where are we now? • Slow economic growth • High Unemployment • Inflation remains low • Financial System is unstable • Fiscal and monetary policies are extremely stimulative

5. GDP Growth

6. Components of GDP Chart

7. Taylor graph

8. Taylor graph

9. Trend GDP

10. Employment

11. 2009 to Present Payrolls and Unemployment

12. Payroll declines and recoveries following recessions

13. Japan vs. U.S.

15. Interest Rates since 1987

16. S&P 500 Index

17. CPI

18. PPI

19. U.S. Debt

20. Foreign holdings of U.S. debt Source: U.S. Treasury Data as of end of march

21. The Fed’s Balance Sheet

22. Household Housing Debt

23. Housing sales and starts 2000-12

24. From Review to Forecasts • GDP • Unemployment • Consumer Prices • Interest Rates • Government Deficits

25. GDP Forecast

26. Unemployment Forecast

27. PCE Forecast

28. 2012 and 2013 GDP Growth Forecasts

29. Deficit projections

30. Economic Projections

31. Fed’s Projections

32. Historically low long-term rates

33. William Dudley - President, New York FedMay 30, 2012 • Expects slow recovery • Regarding the 2013 “Fiscal Cliff” • If no solution found, GDP growth will decline by 3% • In that scenario further easing is necessary

34. How did we get here? • Success of Great Moderation • Risk Management Approach • Price Stability implies Financial Stability • Clean vs. Lean Against Bubbles (Also called the Jackson Hole Consensus) • Very low interest rates during 2003-2005 • Housing boom and bust • Financial crisis

35. Lessons Learned from the Crisis • Price Stability Does Not Imply Financial Stability • The Cost of Cleaning up After a Bubble Bursts is Very High • Financial Instability Seriously Impacts the Real Macroeconomy

36. Where Are We Now? • 15 million Unemployed in the U.S. • 13 trillion of wealth lost in the U.S. • Slow Growth in the U.S. and Europe • Significant Increases in U.S. Deficits • Sovereign Debt Crisis in the EU • Unbalanced Growth in China

37. Why are we at a crossroad? • Monetary (primarily) and Fiscal Policies Have Contributed to Stopping the Decline of the Real Economy • Zero Bound Policies Contribute Modestly • Fiscal and Political Uncertainty • Sovereign debt crisis • Global inter-dependencies

38. Moving Forward • Reinhart and Rogoff: Recovery from Financial Crises takes Long Time • Additional Difficulties from the EU • The Instability of the Euro and Eventually of the Dollar • Emerging Countries and Mild Global Inflation

39. Beyond the Crossroad: Three Choices

40. Ranges of Inflation and Deflation

41. Three Scenarios • Slow growth 2.0 to 3.0% and slow inflation (CONSENSUS FORECAST) • Deflation • Inflation above 2% • Above will be influenced by components of UNCERTAINTY

42. Uncertainty • Fiscal Cliff – U.S. Elections • European Sovereign Debt and Insolvent Banks • Global Deleveraging • Volatility in Equity and Bond Markets • Future of the US dollar and euro • Degree of Fragility of Consumer and Business Confidence • Unknown unknowables

43. Current Scenario • GDP Growth 0 to 2.5%; inflation 0 to 2% • Moderate uncertainty • Fed funds stay close to zero till 2014 • US Firms and Banks are doing well • Protracted deleveraging • Partial response to US and EU sovereign crises • 50% chance

44. Debt Burden by Sectors: Euro, US and Japan* VariablesEuroaUSAaJapana Gov’t Debt 90 107 236 Household Debt 70 88 74 Non-Financial Corp 138 87 143 Financial Institutions 142 87 177 Total Debt 440 269 630 a % WEO projection of GDP 2012. * April 2012 Global Financial Stability Assessment, IMF • Euro area countries differ significantly in their individual debt problems. • Ireland and Spain are examples of a private debt overhang, whereas in Italy and Greece high public debt is balanced by strong household balance sheets

45. Deflation / Recession • GDP -2% to 0; prices decline between 0 to -2% • Higher uncertainty: bond market? • Fed funds remain close to zero beyond 2014 • Additional QE but velocity is flat • Contrast to the 1982-2007 leverage driven growth • Wealth volatility • Worse case scenario for the Fed: 20% chance

46. Faster Growth and Mild Inflation • GDP Growth above 3%; inflation 2 to 5% • Uncertainty is reduced; bold fiscal solutions • Confidence is improved • Velocity increases • Fed restrains from increasing Fed funds • Wealth increases rapidly • 30% chance