The Economic Outlook: A Puzzle By Any Other Name

1. The Economic Outlook: A Puzzle By Any Other Name Economic Policy Division

2. Labor Market Total Nonfarm Jobs Household Employment Unemployment Rate August 6.1% Initial Unemployment Claims

3. Change in U.S. Output: Recoveries

4. Economic Recovery is Natural Markets heal Resources realign Prices adjust The output gap closes as the economy returns to full employment

5. U.S. GDP Actual and Potential Quarterly, Q1 1980 to Q4 2015 Real GDPTrillion 2009 Dollars Log Scale Forecast $18.0 $15.0 $12.5 $9.0 $6.5

6. Ingredients of a Rapid Recovery Entrepreneurial spirit Flexible financial and labor markets Benign policy environment

7. The Big Puzzle: Why the slow recovery?

8. The Big Puzzle: Why the slow recovery? Answer: Lagging business investment

10. Next Puzzle: Why is business investment lagging? Answer 1: Excess capacity

11. Why is business investment lagging? Answer 1: Excess capacity Real Answer: Washington

12. Why the Slow Recovery? Strike 1: Poor Policy Focus

13. Why the Slow Recovery? Strike 1: Poor Policy Focus 2009:Poorly designed stimulus Cap and trade legislation

14. Why the Slow Recovery? Strike 1: Poor Policy Focus 2009: Poorly designed stimulus Cap and trade legislation 2010: Obamacare

15. Why the Slow Recovery? Strike 1: Poor Policy Focus 2009: Poorly designed stimulus Cap and trade legislation 2010: Obamacare 2012: Tax hikes

16. Why the Slow Recovery? Strike 1: Poor Policy Focus 2009: Poorly designed stimulus Cap and trade legislation 2010: Obamacare 2012: Tax hikes 2014: Income inequality and Inversions

17. Why the Slow Recovery? Strike 1: Poor Policy Focus – and not just from President Obama…. • Republicans shut down the government • Some threatened to allow government to default • Not exactly a business confidence booster

18. Why the Slow Recovery? Strike 1: Poor Policy Focus Strike 2: Regulatory Policy

19. Why the Slow Recovery? Strike 1: Poor Policy Focus Strike 2: Regulatory Policy In five years, 157 new major rules 26 new major rules in 2013 alone Cost of $73 billion annually

20. Why the Slow Recovery? Strike 1: Poor Policy Focus Strike 2: Regulatory Policy Strike 3: Policy Uncertainty

21. Sources of Policy Uncertainty Dodd-Frank financial regulation ACA regulations Environmental regulations Monetary policy

22. Why the Slow Recovery? Strike 1: Poor Policy Focus Strike 2: Regulatory Policy Strike 3: Policy Uncertainty Three strikes against a robust recovery

23. Economy set to accelerate GDP Growth Rates 2011: 1.6 % 2012: 2.3 % 2013: 2.2 % Forecast: 2H 2014: 3.0 % 2015: 3.1 %

24. Three Headwinds on the Horizon

25. Three Headwinds on the Horizon 1) The Fed’s Puzzle: tapering and exiting

26. Fed Policy Bank Assets and Liabilities

27. CBO’s Inflation Forecast Consumer Price Index

28. Fed Policy Bank Assets and Liabilities Not a Forecast

29. Three Headwinds on the Horizon The Fed’s Puzzle: tapering and exiting Interest rates will rise as economy recovers They may rise faster, farther, as the Fed exits

30. Three Headwinds on the Horizon 1) The Fed’s Puzzle: tapering and exiting 2) The Fiscal Puzzle: Debt, deficits, and interest rates

31. CBO’s Baseline Deficit (August 2014) Budget Deficit Deficit to GDP

32. Government Baseline Outside Debt (CBO’s Baseline – August 2014) Debt Debt to GDP

33. Three Headwinds on the Horizon 1) The Fed’s Puzzle: tapering and exiting • The Fiscal Puzzle: Debt, deficits, and interest rates Crowding out has not gone away Interest rates will go higher as a result of this increase in debt

34. CBO’s Interest Rate Forecast

35. Building on CBO’s Interest Rate Forecast

36. Building on CBO’s Interest Rate Forecast

37. Three Headwinds on the Horizon 1) The Fed’s Puzzle: tapering and exiting • The Fiscal Puzzle: Debt, deficits, and interest rates Crowding out has not gone away Interest rates will go higher as a result of this increase in debt And don’t forget the looming entitlements problem:

40. Three Headwinds on the Horizon 1) The Fed’s Puzzle: tapering and exiting 2) The Fiscal Puzzle: Debt, deficits, and interest rates 3)Many international puzzles: Big worries: Europe, China Lesser worries: Ukraine, Middle East, Americas

41. Review the Bidding • Recovery has been very weak • Due largely to Washington policies • Headwinds may hold us back, but then • Any reasons for optimism?

42. Any Reasons for Optimism? Refilling the well for startups

43. Household Balance Sheet Household Wealth Household Assets

44. Any Reasons for Optimism? Refilling the well for startups Recovering labor market flexibility

45. Housing Market Trends Home Sales Housing Starts Median Home Prices Housing Affordability Index

46. Any Reasons for Optimism? Refilling the well for startups Recovering labor market flexibility Rationalizing business structures

47. Review the Bidding • Lackluster recovery • Due almost entirely to poor Washington policies

48. Review the Bidding • Lackluster recovery, about to accelerate

49. Review the Bidding • Lackluster recovery, about to accelerate • Three possible headwinds • from Washington, especially higher interest rates • From the Fed • From federal debt and deficits • from overseas

50. Review the Bidding Lackluster recovery More headwinds, but also Three reasons for optimism Refilling the startup well Regaining flexibility in labor markets Improving business structures