US Economy Forecast 2014 2015 Till Schreiber Senior

US Economy Forecast 2014, 2015 Till Schreiber Senior Lecturer Professor College of William & Mary September 26 th 2014 Nafa Annual Convention, Aspen, CO

Looking back to Savannah • My forecast a year ago: – Slow (below long-term average) growth in 2014 – Unemployment falls slowly – Disappointing recovery continues – Government muddling through instead of implementing pro-growth policies • Unfortunately, this turned out to be about right

Realistic forecast must make assumptions about some 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 6. 2% (ticked up recently) – Labor force participation still really low • GDP growth disappointing – FELL 2. 1% in first quarter (at annual rate), then went up by 4. 2% second quarter • Economy slowed down by multiple “headwinds” – Cold winter in first part of the year – Government deadlock – Slowdown in Europe and emerging markets • Inflation expected to be about 2% each year going forward over the next decade (based on bond yields)

Will the jobs/workers come back?

Share of workers claiming social security disability (Mueller et al, 2013)

Government regulation • How much does ‘too much regulation’ reduce growth? – Talk of secular stagnation, permanently lower growth – Can US economy return to 20 th century trend growth? • Immigration • Not just you. Talk to Virginia Credit Union League some month ago, very similar issues • Assume: Assume No reduction in red tape imminent

Investment, Investment • Main issue of disappointing “recovery” – Private sector investment (spending by businesses on R&D, new machines etc. ) fell of a cliff in late 2008, early 2009 – It has recovered somewhat, will it now continue to increase or flatten out?

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

Business Sector • You guys! • High levels of uncertainty – Regulations and Taxes – Consumer and Industry demand going forward • Purchasing Managers’ Index (ISM) – High last summer/fall. Then big fall in early 2014, now has regained the ground. Temporary blip or beginning of faster recovery? ? ? • Assume: Assume Resilient investment demand, total construction spending up over last year

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 second half of 2014 will likely be around 3%. But don’t be too optimistic (see below)

Forecast for 2015 • 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 continues

Forecast for 2015 • If economy grows fast, interest rate hikes may slow down recovery of housing market and investment generally somewhat – Federal Reserve scheduled to raise rates next year • “Disappointing” economy may continue • Growth of 3% unlikely to be topped next year • Unemployment comes down further very, very slowly if at all