US Economy Forecast 2013 2014 Till Schreiber College

US Economy Forecast 2013, 2014 Till Schreiber College of William & Mary September 26 th 2013 Nafa Annual Convention, Savannah, GA

Forecast for 2013, 2014 • What would we like to happen? – Deficit and debt ceiling deal – Entitlement and health care reform agreements – Fewer but smarter regulations and tax reform – Less uncertainty – …. • What’s actually going to happen? – Not all of that.

Realistic forecast must make assumptions about some of these factors • No ideological agenda • Based on current and historical data, facts (and some theory) • Where is the economy now? • What do some leading indicators suggest about the near future?

Snapshot of the economy • Unemployment rate 7. 4% – Mediocre job creation, people dropped out of labor force – Government sector shedding jobs • GDP growth disappointing – 1. 1% in first quarter (at annual rate), just 1. 7% for the second quarter • Economy slowed down by multiple “headwinds” – Political uncertainty – Sequester – Slowdown/crisis in Europe and China • Inflation expected to be about 2 -3% each year going forward over the next decade (based on bond yields)

Will the jobs/workers come back?

Government spending cuts • Absolutely necessary over the long term – Unless you are ok with living in a country like France; most Americans don’t seem to be • Big cuts right NOW will slow the economy down for the rest of the year and next year – Higher unemployment than otherwise – Reduction in growth – All bets are off, if debt ceiling is not increased. This would lead to a massive reduction of spending right NOW. How nasty will the political fight be? • Assume: Assume No reversal of spending cuts this year, no “stimulus” from government sector

Investment, Investment • Main issue of disappointing “recovery” – Private sector investment fell of a cliff in late 2008, early 2009 – Has recovered only very slowly since 2009 and is still quite a bit away from levels before 2007

Investment as share of GDP (blue) vs. Unemployment rate (red)

Housing Market • Residential fixed investment (People building houses, or major remodel/improvements) – According to latest numbers still way below 2005 level. For every $100 spend on housing construction in 2005, now only $56 are spent. But up a bit from two years ago. • Assume: Assume Housing market continues to slowly recover.

Business Sector • You guys! • High levels of uncertainty – Regulations and Taxes – Consumer and Industry demand going forward • Consumer Confidence Measures still low compared to 2003 -07 – Slow recovery of confidence • Purchasing Managers’ Index (ISM) – Big jump up in July. New Orders in manufacturing for capital goods are also up. Temporary blip or beginning of faster recovery? ? ?

Exports • Questions about growth prospects in emerging markets – Dollar has recently appreciated versus many emerging market currencies • Eurozone faces internal issues, so does Japan • No export boom likely overall

What to make of all this? • Growth in the last part of 2013 will likely be at most around 3%, maybe lower. – Not enough to make major progress in terms of reducing unemployment; no surprise if rate remains above 7% over the rest of the year – Combined with growth of about 1. 5% in the first half, overall growth for the year of 2013 will be way below 3%

Forecast for 2014 • Growth should pick up once the recovery really takes hold – Has been predicted since late 2009, many businesses and households have now paid down debt substantially • Crucial market: Investment! Both residential (housing) and other fixed investment • No government policies in sight to address regulation mess boldly – Muddling through • If economy grows fast, interest rate hikes may slow down recovery of housing market somewhat

Forecast for 2014 • Households and many businesses are still paying down debt from the bubble years – Will continue in 2014 – Debt levels have come down but not nearly to prebubble levels • “Disappointing” recovery may continue • Growth of 3% unlikely to be topped next year • Unemployment comes down very, very slowly

Forecast for 2014 • Assumes no major new “headwinds” • Also no miracles • Assumes no major policy changes – Safe assumption for Congress – Also unlikely that the Federal Reserve will be willing to do something dramatic, if anything expect a return to “more normal” policies and a bit higher long term interest rates • Forecast consistent with forecast from Federal Reserve, economists at Goldman Sachs, PIMCO etc. – Sorry, I am not more cheerful but I have good company…