GERALD J. SWANSON, PH.D.Professor Emeritus of Economics

October 24, 2015

The New Normal

October, 2015

GOOD NEWS Relative to the rest of the world’s

economies we are in good shape

BAD NEWS Our new normal growth rate is

significantly below the old normal growth rate

October, 2015

LABOR MARKETOctober 2009 unemployment rate = 10.2 %

September 2014 unemployment rate = 5.9%

September 2015 unemployment rate = 5.1%

Number employed back to high hit in Jan 2008

148.8 millionNumber unemployed

Oct. 2009 =15.7 millionSept. 2014 = 9.3 millionSept. 2015 = 7.9 million

October, 2015

September 2015 UNEMPLOYMENT BY LEVEL OF EDUCATION

Less than H.S. 7.9 % H.S. no college 5.2% Some college 4.3% Bachelor’s degree 2.5% or higher

Cognitive skills win in today’s labor market

STAY IN SCHOOL! October, 2015

LABOR MARKET Unemployment rate – including

marginally attached workers and part-time workers

SEPT 2000 7.2%Sept 2014 11.8%Sept 2015 10.0%

October, 2015

LABOR MARKETNEW NORMAL

Participation rate = % population over age of 16 in labor force

September 2000 67.4%

September 2014 62.7%

September 2015 62.4%

Between Aug 2015 & Sept. 20015

350,000 worker left the labor force

October, 2015

LABOR MARKETNEW NORMAL

Employment rate =% of population over the age of 16

employed

September 2000 67.1% August 2014 59.4% September 2015 59.2%

Between Aug 2015 & Sept 2015

236,000 fewer people working

October, 2015

EDUCATION MATTERS

September 2015 Population 25 years and over

Participation Rate Employment Rate

Less than H.S. 44.8% 41.3%

H.S. no college 56.9%54.0%

Some college 66.0%63.1%

Bachelor’s Degree 74.4%72.6%

or higher

NEW NORMAL STRUCTURAL UNEMPLOYMENT

October, 2015

UNEVEN RECOVERY Selected States Unemployment – Aug.

2015

Top unemployment Lowest unemployment

1. West Virginia 7.6% 1.Nebraska 2.8%

2. Nevada 6.8% 2. North Dakota 2.9%

3. D C 6.8% 3. Hawaii 3.6%

4. New Mexico 6.7% 4. South Dakota 3.7%

5. Alaska 6.6% 5. Utah 3.7%

6. Arizona 6.3% 6. Minnesota 4.0%

7. Mississippi 6.3% 7. Texas 4.1%

8. Alabama 6.2% 8. Montana 4.1%

9. California 6.1% 9. Colorado 4.2%

October, 2015

LABOR MARKET Facts 1. Jobs requiring middling skills have

declined sharply.2. Employment in low skill jobs have increased. (service sector)3. Employment in high skilled occupations

have increased significantly.

5.8 million job openings in September

October, 2015

LABOR PAINS

NEW NORMAL

Labor’s share of national income is declining

1947-2001 70% 2010-2014 62%

October, 2015

LABOR PAINSWhy stagnant wages for many?1. Globalization of markets2. Substitution of capital for labor3. Weakening of workers’ bargaining

power4. Lower price of technology and

investment5. Opportunities to shift capital overseas 6. Massive increase in world supply of

labor* since 1980s

*Think – China, India, former USSR,

Viet Nam, Thailand, Cambodia

October, 2015

GDP GROWTH GDP 2013 GDP 2014 GDP 2015 Q1 1.9% Q1 -0.9% Q1 0.6% Q2 1.1% Q2 4.6% Q2 3.7% Q3 3.0% Q3 4.3% Q3 1.0%*

Q4 3.8% Q4 2.1%

GDP GROWTH FOR 2014 = 2.4%GDP GROWTH FOR 2015 = 2.5%** estimate

October, 2015

GROWTHWhy do we have slow growth?Multiple explanations

1. Hangover from financial crisis2. Foreign economic problems3. Failure of government to spend enough4. Taxes are too high/too many

regulations5. We have an aging population/shrinking

labor force

October, 2015

GROWTH Countries that use the Euro = Euro zone

Unemployment in the Euro zone is 11%

Growth rate in the Euro zone is 0.9%

If the Euro zone was a country it would bethe second largest economy in the

world –22% of world GDP

October, 2015

GROWTHGROUP OF SEVEN – SLOW TO NO

GROWTH GDP GROWTH 2015 est.

BRITAIN 2.7%U.S. 2.5%GERMANY 2.1%FRANCE 1.1%CANADA 1.0%JAPAN 0.8%ITALY 0.7%

October, 2015

GROWTH

BRICS Nations Drag on global economy World GDP Growth

GDP Rank 2014 2015 est.

8 BRAZIL 0.1% -1.5% 14 RUSSIA 0.6% -

3.7% 7 INDIA 7.2% 7.0% 2 CHINA 7.3% 6.9% 34 SOUTH AFRICA 1.4% -

1.3%

42% OF WORLD POPULATION 20% OF WORLD GDP

October, 2015

CHINA SYNDROMENew normalAs China goes, so goes the global

economyFacts about China1. Population 1.4 billion2. Second largest economy in the world (maybe

largest)

3. Accounts for 19% of world GDP4. Largest exporting nation in the world5. Second largest importing nation in the world6. Average growth rate 1989-2015 10.9%7. China’s current growth rate at 25yr low –

6.9%*

*estimate

October, 2015

CHINA SYNDROME What countries will be most

affected by China’s slowdown? % of China’s imports(2014)

1. Japan 18.0% 2. South Korea 14.0% 3. United Sates 11.0% 4. Germany 8.3% 5. Australia 6.6% 6. Brazil 3.8%

October, 2015

INFLATION RATE

SEPTEMBER 2015

CURRENT ANNUAL INFLATION RATE =

0.0%

CURRENT ANNUAL CORE INFLATION RATE =

1.9% (omits food and energy prices)

October, 2015

AGGREGATE DEMAND

C+I+G+XCONSUMER SPENDINGINVESTMENT SPENDINGGOVERNMENT SPENDINGNET EXPORTS – EXPORTS-

IMPORTS October, 2015

CONSUMER SPENDING

PENT UP DEMAND – RECORD CAR & TRUCK SALES

SLOWLY STARTING TO SPEND GAS SAVINGS

NET WORTH OF HOUSEHOLDS AT RECORD LEVEL

CONFIDENCE UP & DOWN

REAL WAGES STILL STAGNANT FOR MANYOctober, 2015

INVESTMENT SPENDINGHOUSING MARKET IS STABILIZING

CONSTRUCTION IS PICKING UP

BUSINESSES HAVE LOTS OF CASH TO SPEND

$2 TRILLION IN CASH ABROAD

BUSINESS CONFIDENCE IS STAGNANT

UNCERTAINTY IS A MAJOR PROBLEM

October, 2015

EXPORTS

EXPORTS ARE SLOWING DOWN

Strong dollarSlow global growth EXPORTSACCOUNT FOR 14% OF OUR GDP October, 2015

FOREIGN TRADETrade deficit growing - drag on our

economy

U.S. Trade Deficit (exports-imports) billions

2013 -$478.394b2014 -$508.324b2015 Jan. – Aug -$345.450b

Why? Strong dollar – more imports – fewer

exportsWeak global economy – fewer exports

October, 2015

SEQUESTRATION

ANNUAL BUDGET DEFICIT2009 $1.4 TRILLION2010 $1.3 TRILLION2011 $1.3 TRILLION2012 $1.1 TRILLION2013 $ 680 BILLION 2014 $ 483 BILLION

2015 $435 BILLION

TOTAL DEBT = $18.4 TRILLION

October, 2015

FISCAL POLICY

GOOD NEWSDEFICIT AS A PERCENT OF GDP IS

SHRINKING

DECEMBER 2009 10.1% GDPDECEMBER 2010 9.0% GDPDECEMBER 2011 8.7% GDPDECEMBER 2012 7.0% GDPDECEMBER 2013 4.1% GDP DECEMBER 2014 2.8% GDP DECEMBER 2015 2.4% GDP

October, 2015

FISCAL POLICYFACTFiscal 2015

Tax revenues are up 8.0%

Government spending up 5.2%

October, 2015

FEDERAL OUTLAYS AS PERCENTAGE OF GDP

SEQUESTRATION Year Share of GDP Current dollars (trillions)

2009 24.4% $3.52 2010 23.4% 3.46 2011 23.4% 3.60 2012 22.0% 3.54 2013 20.8% 3.45 2014 20.3% 3.51 2015 20.6%* 3.68**Estimate

October, 2015

FISCAL POLICY

Total National Debt2007 $ 8.506 trillion2008 $10.024 trillion2009 $11.909 trillion2010 $13.561 trillion 2011 $14.790 trillion2012 $16.066 trillion2013 $16.738 trillion2014 $17.824 trillion2015 $18.397 trillion

2007 - 2015 $9.891 trillion increase October, 2015

INTEREST ON THE NATIONAL DEBT

YR Avg. interest rate INTEREST ON DEBT

2015 2.074% $381.6 billion

2014 2.013% 430.8 billion

2013 1.975% 415.7 billion

2012 2.365% 359.8 billion

2002 4.373% $332.5 billion

2001 5.283% 359.5 billion

2000 6.665%* 361.9 billion

*This used to be the average rate

October, 2015

FISCAL POLICY 2000 Avg. interest on debt = 6.665% 2015 national debt = $18.397 trillion

6.665% X $18,397 trillion = $1.226 trillion

Actual interest paid 2015 =$381.6 billion

$844.4 billion in additional interest expense if average rate returned to 2000 level.

October, 2015

UNCONVENTIONAL MONETARY POLICY

Interest rates have been at zero since December 2008 – Approx. 7 years

The last time the Federal Reserve Bank raised interest rates was

July 2006, more than 9 years ago

October, 2015

TRAPPED AT ZEROWhy is the Federal Reserve Bank reluctant

to raise interest rates?

1. Our economy is too weak. 2. Dollar is already too strong. 3. Inflation is too low. 4. Increased cost of servicing

national debt. 5. The International Monetary

Fund and the European Central Bank

say “don’t do it now!” 6. FRB can’t find the Phillips

Curve.

I

October, 2015

UNCONVENTIONAL MONETARY POLICY

The Federal Reserve stopped quantitative easing in October 2014.

The European Central Bank started quantitative easing in

January 2015.October, 2015

MONETARY POLICYBANKS CURRENTLY STILL HAVE LOTS

OF EXCESS RESERVES $2.5 TRILLION

BANKS STILL HAVE HIGH LENDING STANDARDS

NOT OVERLY ANXIOUS TO MAKE LONG-TERM LOANS AT LOW INTEREST RATES

October, 2015

HEADWINDS FOR 20151. SLOW GROWTH IN EUROPE2. SLOW GROWTH IN CHINA/ASIA3. U.S. STRUCTURAL UNEMPLOYMENT PROBLEM4. ISIS IS STILL ALIVE AND WELL5. FRACTIOUS AND DYSFUNCTIONAL POLITICS6. GROWING DIVIDE IN OUR INCOME DISTRIBUTION7. MOTHER NATURE

NEW NORMAL OUR FUTURE GROWTH NOW DEPENDS GREATLY

ON THE WORLD ECONOMY.

October, 2015

Reality Easy money is really only a lubricant

for growth. It can’t be the underlying driver of

growth.

Central Banks are pushing on a string

The world is currently awash with cash

–yet world growth is subpar.October, 2015

CONCLUSION REASONS TO BE SLIGHTLY

OPTIMISTIC

1. HOUSEHOLD NET WORTH AT RECORD LEVEL

2. INFLATION NON-EXISTANT3. WE ARE GROWING FASTER THAN MOST

OF OUR COMETITORS4. GAS IS CHEAP AND WILL REMAIN

CHEAP THE REST OF THE YEAR5. OUR GLASS IS MORE THAN HALF FULL

October, 2015