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

December 2013

Dr. Anne M. AlexanderUniversity of Wyoming For the

Wyoming Business Report Central Wyoming Economic Forecast Luncheon

Hooray! Slowly improving unemployment picture

WY Unemployment Rate, Jan 2001-Jan 2011

US Economic Outlook*November 2013 rate = 7.0%

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

12.0U.S. Unemployment rate

US Economic Outlook*September rate = 63% Lowest participation rate since late 1970’s.

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

US Economic Outlook*

• Increasing rate of retirements• Severe rates of extremely

long-term unemployment because of Great Recession

Jan-03 Aug March Oct May Dec July Feb Sept Apr i l Nov JuneJan-10 Aug March Oct May Dec July55.0

56.0

57.0

58.0

59.0

60.0

61.0

62.0

63.0

64.0

U.S. Employment-populati on rati o

Oct. 2013 = 58.6%

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

In the Great Recession, on average, the extremely long-term unemployed tended to be in their late 40’s or early 50’s when first laid off. They are facing higher rates of perceived skills obsolescence than younger demographics, and are nearing retirement. They may simply be biding their time until they drop out of the work force

• Current # Weeks Unemployed = 36.1 • High during Great Recession = 40.7• Average, Jan. 2003-Dec. 2007 = 18.2• Average, Jan. 2008-present = 31.6

Jan Sep May Jan-05 Sep May Jan-07 Sep May Jan-09 Sep May Jan-11 Sep May Jan-13 Sep0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

Average Weeks Unemployed

November Trends

Transportation and warehouse sectors added 30,500 jobs in November – up 50% over last year – while hiring for retail in stores was 24,800 – down 50% from last year.

Manufacturing added 27,000 jobs, and now 12 million are working in sector with lots of overtime. This means the death of manufacturing is greatly exaggerated.

Still, the long-term unemployment trend is concerning – 37% of unemployed Americans have been out of work for 6 months or longer.

Federal GovernmentBudget Debates – Shutdown!

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%.

h

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.

Our Heroes?

• The deadline to come up with a framework for a budget deal Friday, Dec. 13, the last day the House is in Washington before heading home for the holidays.

• If that date is breached, it really doesn’t matter because the real deadline is Jan. 15, 2014, when funding for the government runs out.

• The December goal is there because it would give appropriators time to write their bills and divvy up the funds Congress approves.

• If Ryan and Murray miss the deadlines but an agreement is within reach, Congress can pass a “continuing resolution” to keep government operating. 

Some good news! National housing market improving substantially

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

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