The U.S. & Global Economic Outlook Greg Ip, U.S. Economics Editor, The Economist Remarks to The American Sportfishing Association Hilton Head, S.C. Oct. 9, 2012
How We Got Here
Great Moderation = More Leverage Debt % of GDP Grey bars = recessions 275% 225% 175% 125% 75% Public Private 25% 1952 1960 1968 1976 1984 1992 2000 2008
Bipartisan push for more home ownership Financing strategies, fueled by the creativity and resources of the private and public sectors, should address financial barriers to homeownership. Clinton s National Homeownership Strategy, 1994 We want everybody in America to own their own home. An ownership society is a compassionate society. George Bush, 2002
Where We Are Now
Two models of recovery Bungee model (V): The deeper the recession, the stronger the recovery Post crisis model (U, L): Recoveries after financial crises are weak
This ain t no V Employment, post-war cycles 15 10 5 % 0-5 -10 2007-2012 0 5 10 15 20 25 30 35 40 45 50 55 Months since pre-recession peak Source: Minneapolis Fed, updated 9/28/2012
Crises Leave Lasting Damage Source: IMF World Economic Outlook Sept 2009 p 122
America Follows the Pattern GDP, $trn (2005 dollars) 15 13 11 Potential GDP 15 13 11 9 Actual GDP 9 7 1990 1993 1996 1999 2002 2005 2008 2011 7
The Deleveraging Cycle: See you in 2015 Household debt % disposable income 140% 120% 100% 80% Trendline 60% 1990 1993 1996 1999 2002 2005 2008 2011 2014
A long slog back for jobs 37 36 35 34 33 32 31 % population not in labor force unemployment rate 10 9 8 7 6 5 4 30 1990 1994 1998 2002 2006 2010 3
Where are we now?
1600 On Course barely S&P 500 Weekly UI claims 700,000 1500 Claims 1400 1300 1200 1100 1000 900 800 700 S&P 500 600 2008 2009 2010 2011 2012 650,000 600,000 550,000 500,000 450,000 400,000 350,000 300,000 250,000
Feels so good when it stops (1) Ratio of home prices to income & rents Over/under valuation vs. 1970-2010 average Source: Capital Economics 2/9/2012
Home vacancy rate Time to build again
Feels so good when it stops (2) Bank loan loss provisions 250 200 $billion 150 100 50 0 2000 2002 2004 2006 2008 2010 Source: FDIC
Feeling QEasy What is the Fed doing? Where is inflation going?
Printing money, not credit $trn 7.90 7.70 7.50 7.30 7.10 6.90 6.70 6.50 Bank credit (left axis) Money supply (right axis) 2008 2009 2010 2011 2012 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Source: Federal Reserve; Credit data break-adjusted by author
QE3: Spend now, not later please! 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0 QE1 QE2 Expected inflation Real bond yield QE3 2008 2009 2010 2011 2012
160 Seems to be working Consumer confidence 140 120 100 Expectations of the future 80 60 40 20 Current Situation 0 2006 2007 2008 2009 2010 2011 2012
Recovery likely to strengthen as: *housing improves *deleveraging less urgent *credit easier *QE3 What could go wrong?
The Big Hairball of Risk Probability China avoids hard landing: 80% Probability Euro zone survives mostly intact: 60% Probability United States eliminates fiscal cliff : 70% Probability all 3 things happen: 80% X 60% X 70% = 34%
Risks to the Recovery #1 - Europe
Spot the sovereign crisis Net public debt % of GDP 5-yr credit default swap spreads 80 700 70 600 60 United States 500 400 Spain 50 300 40 30 20 2000 2002 2004 2006 2008 2010 Spain 200 100 0 United States 2007 2008 2009 2010 2011 2012
Looking for relief government bond yields, % 8 7 First ECB purchases ECB 3-year loans 6 5 Spain 4 3 ECB promises unlimited buying 2 1 Germany 0 Jul-12 Apr-12 Jan-12 Oct-11 Jul-11 Apr-11 Jan-11 Oct-10 Jul-10 Apr-10 Jan-10
Risks to the Recovery #2 Emerging markets
Watch for falling BRICs
China s transition problem
Risks to the Recovery #3 - America
Fiscal cliff & clifflet Fiscal tightening in 2013, % of GDP 6 5 4 3 Sequester+ expiration of Bush tax cuts 2 1 0 United States Italy Spain UK France Source: IMF Fiscal monitor, April 2012
Need this like a hole in the head Indexes of uncertainty Source: The Economist, June 16, 2012
The grand canyon Ideological distribution of Congressmen, 2012 # of individuals <= More liberal. More conservative => Source: Voteview.com
A pox on both your houses
Economists rate the candidates 4 1=very poor, 5=very good 3 Obama Romney 3 2 2 1 1 0 Overall Tax reform Deficit Entitlements
Economists rate the candidates (2) Who do you rate better on 70% 60% 50% 40% 30% Obama Romney Neither/no difference 20% 10% 0% Economics The Fed China
Platforms compared Obama Romney/Ryan Top tax rate 39.6% 28%/25% Medicare Provider cuts, premium increases, IPAB Vouchers Social Security No proposal Raise eligibility age Medicaid Expand Block grants
The fine print We re not coming before you today to say we have a definitive solution to that long-term problem. What we do know is, we don t like yours. Tim Geithner So will there be [departments and programs] that get eliminated or combined? Yes, but I m not going to give you a list right now. Mitt Romney
Shameless self promotion Thinking citizen s guide to the economy Clearly written, examples, anecdotes No Greek letters or charts. Not a crisis book Does explain origins of crisis, and its consequences Journalism, not ideology Useful: explains economic indicators and economic concepts Little: half the size of most hard cover books. And short!