Tales of Madcap Economic ScienceOr, What They Never, Ever Taught Me in Grad School

November 2013

Dr. Anne M. AlexanderUniversity of Wyoming For the

Wyoming Business Report Southeast Wyoming Economic Forecast Luncheon

Hooray! Slowly improving unemployment picture, Wyo’s 5th lowest unemployment rate in US

WY Unemployment Rate, Jan 2001-Jan 2011

WY

US Economic Outlook*

Jan-03 Jul 1-Jan Jul Jan-05 Jul Jan-06 Jul Jan-07 Jul Jan-08 Jul Jan-09 Jul Jan-10 Jul Jan-11 Jul Jan-12 Jul Jan-13 Jul0.0

2.0

4.0

6.0

8.0

10.0

12.0

U.S. Unemployment rate

September 2013 rate = 7.2%

US Economic Outlook*

Jan-03 Jul Jan-04 Jul Jan-05 Jul Jan-06 Jul Jan-07 Jul Jan-08 Jul Jan-09 Jul Jan-10 Jul Jan-11 Jul Jan-12 Jul Jan-13 Jul0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

U.S. Labor Force Parti cipati on Rate Civilian labor force participation rate

September rate = 63.2% Lowest participation rate since late 1970’s.

US Economic Outlook*

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 201355.0

56.0

57.0

58.0

59.0

60.0

61.0

62.0

63.0

64.0

U.S. Employment-populati on rati oEmployment-population ratio

• Increasing rate of retirements• Severe rates of extremely

long-term unemployment because of Great Recession

US Economic Outlook REMINDER: This was a really, really, really bad recession, aggravated by a financial crisis.

Recessions caused or aggravated by financial crises historically damage the economy for a decade. We tend to see unemployment rates, asset prices, credit issued, and GDP growth return to normal only after 10 years or so.

And, we are now creeping up on 6 years since the Great Recession began

US Economic Outlook

In the Great Recession, on average, this group tended to have been in their late 40’s or early 50’s when laid off from their job. They are facing higher rates of perceived skills obsolescence than younger demographics.

• Current # Weeks Unemployed = 36.9 (over 9 months)• High during Great Recession = 40.7 (over 10 months)• Average, Jan. 2003-Dec. 2007 = 18.2 (around 4.5

months)• Average, Jan. 2008-present = 31.6 (around 8 months)

Jan Jul Jan-04 Jul Jan-05 Jul Jan-06 Jul Jan-07 Jul Jan-08 Jul Jan-09 Jul Jan-10 Jul Jan-11 Jul Jan-12 Jul Jan-130.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

Average Weeks Unemployed – enti re workforce

Federal GovernmentBudget Debates – Shutdown!

We won’t know for at least a month what damage the shutdown did to growth. Early estimates - the government shutdown cost at least $24 billion,

according to Standard & Poor's and The Economist. Forecast GDP growth in 4th quarter 2013 cut by > 0.6% and annual GDP growth from 3% to 2%.

Federal GovernmentBudget Debates – Shutdown!

Agricultural price collection in many markets (free price info to producers) was shut down – producers had to pay private firms for prices of, for example, cut hogs so they could infer what the price of a whole hog should be.

Firms who work with other firms with some government contracts were seized up in their activities.

Widespread reported slowdown at oil and gas transport facilities along the Mississippi.

Also, gathering and analysis of data for GDP growth, unemployment, inflation, regional prices and growth, producer prices, import values, export values, hourly earnings, job openings, occupational outlooks…. All stopped for 17 days. So, there’s also that.

Federal GovernmentBudget Debates – Debt Ceiling

Probably more damage done because of the fact government went up to a line that can bring catastrophic results – the debt ceiling.

Treasuries would have, and did, continue to sell at par. The harm done to the global financial system by a Treasury debt default would not be

caused by cash losses to our bond investors.

But, global investor faith in US institutions has already been undermined. The full faith and credit of the United States is now in question.

Want to know why we economists were freaking out about the debt ceiling??

NEXT SLIDE, PLEASE!

If US Treasury payments can’t be trusted, then all risk instruments - stocks, bonds, futures and forward contracts, swaps, options, all derivatives of all kinds – all the stuff of our corporate, personal, and government investment portfolios - need to be re-priced, as does the most basic counterparty risk of all, the political risk posed by the US government. BECAUSE THE US GOVERNMENT, in one form or another, IS A COUNTERPARTY TO EVERY SINGLE FINANCIAL PLAYER AND TRANSACTION IN THE WORLD.

• In other words, the US government’s payments on obligations already made, for services already rendered, MUST BE CERTAIN. If they are not the whole web of the financial system could collapse, starting with the multi-trillion-dollar interest-rate derivatives market, and moving rapidly from there to all financial markets.• Would have rippled through

financial markets, foreign capitals, corporate boardrooms, state budget offices and the bank accounts of everyday investors.

Some good news! National housing market improving substantially

But, expect home prices to cool as Fed tapers on quantitative easing policy

And, private debt is falling – deleveraging is happeningNational Debt and Credit Report – Federal Reserve

The Eurozone Euro area growth has been anemic this year, but

prospects for 2014 are much better (Economist Intelligence Unit)

2013 2014

Global Growth Forecast, 2014 • Despite the self-inflicted fiscal

crisis in the US, continued austerity in Europe, and more subdued growth in China, global economic growth is poised to accelerate next year.

• The Eurozone is starting to sustain a recovery, and in 2014 all major developed markets will probably see robust growth all at once for the first time in four years.

• Political risk remains high in the US, and there is also a risk of severe disruption in emerging markets as US monetary policy shifts away from quantitative easing.

• Global GDP will grow by 3.6% in 2014, according to the EIU. This is up from an estimated 2.8% in 2013

Global Growth Forecast, 2014

The greatest risk to the US economy in 2014 is…. The US Government

And, the greatest risk to the global economy in 2014 is…. The US Government