the macroeconomy bubbles and bounceback, the us and japan presentation made at kendal of lexington...
TRANSCRIPT
The MacroeconomyBubbles and Bounceback, the US and Japan
Presentation made at Kendal of Lexington
Michael SmitkaProfessor of Economics
Washington and Lee UniversityAugust 25, 2009
Business cycles
• The Federal Reserve deliberately caused previous post-WWII recessions to dampen inflation– Hence when the Fed eased off on its hikes of interest rates,
the economy “V-ed” back
• I believe that a “bubble” recession is different– Excess capacity combined with lower asset values but high
debt are a potent combination– Rapid adjustment of asset prices in the US is bringing us
quickly to a bottom– But recovery will take years, not months
Today...
• I’ll look at the post-bubble experience of Japan• Then I’ll provide a brief overview of recent
data for the US– And at comparable “bubble” data for the US
Japan’s Experience
• A huge bubble during 1987-1991• Very easy monetary policy, huge deficits for
over a decade– As a Japan specialist, I teach a whole course on
this, so dare not start into details!• So how has Japan fared?– See graphs of before & after...
Japanese Urban Real Estate Pricesvs Consumer Price Index Inflation
CPI (inflation)
Commercial Real Estate—6 largest cities—
Japanese Urban Real Estate Pricesvs Consumer Price Index Inflation
CPI (inflation)
Commercial Real Estate—6 largest cities—
18 years!
1980.01
1980.09
1981.05
1982.01
1982.09
1983.05
1984.01
1984.09
1985.05
1986.01
1986.09
1987.05
1988.01
1988.09
1989.05
1990.01
1990.09
1991.05
1992.01
1992.09
1993.05
1994.01
1994.09
1995.05
1996.01
1996.09
1997.05
1998.01
1998.09
1999.05
2000.01
2000.09
2001.05
2002.01
2002.09
2003.05
2004.01
2004.09
2005.05
2006.01
2006.09
2007.05
2008.01
2008.09
2009.054,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
22,000
24,000
26,000
28,000
30,000
32,000
34,000
36,000
38,000
40,000
Nikkei Chart, 1980-dateHow far will corporate profits fall, and priced in already?
First passed 9,000 in
July 1983
Just over 9,000 inMay 2009
Peak of 38,915 inDecember 1989
1980.01
1980.09
1981.05
1982.01
1982.09
1983.05
1984.01
1984.09
1985.05
1986.01
1986.09
1987.05
1988.01
1988.09
1989.05
1990.01
1990.09
1991.05
1992.01
1992.09
1993.05
1994.01
1994.09
1995.05
1996.01
1996.09
1997.05
1998.01
1998.09
1999.05
2000.01
2000.09
2001.05
2002.01
2002.09
2003.05
2004.01
2004.09
2005.05
2006.01
2006.09
2007.05
2008.01
2008.09
2009.054,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
22,000
24,000
26,000
28,000
30,000
32,000
34,000
36,000
38,000
40,000
Nikkei Chart, 1980-dateHow far will corporate profits fall, and priced in already?
First passed 9,000 in
July 1983
Just over 9,000 inMay 2009
Peak of 38,915 inDecember 1989
Nikkei at 10,500 today
1956
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-8.0%
-7.0%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
Japanese GDP Growth(seasonally adjusted, % per annum over previous year)
Bubble Bursts: Peak 1991
Moving Average
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07/ 1
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2008
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09/ 1
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-8.0%
-7.0%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
Japanese GDP Growth(seasonally adjusted, % per annum over previous year)
Bubble Bursts: Peak 1991
Moving Average
Japan now in 4th post-bubble recession
0.9% pa real growth
US GDP
• GDP (gross domestic product) – is a measure that attempts to count (but not
double-count) all economic activity– By dividing the economy into • Personal consumption• Business & residential investment• Government consumption & investment• International trade
• Recently the economy has shrunk, not grown
Growth (or its lack) – next 2 slides
• Investment (red outline) has been dragging the economy down
• Government activity (black outline) has only just started pulling activity up
• Trade is important — unusual for the postwar US economy, but less unusual the past decade
• Note that despite Bush and accompanying demagoguery, the government share of the economy hasn’t shifted much
2007-I 2007-II 2007-III 2007-IV 2008-I 2008-II 2008-III 2008-IV 2009-I 2009-II
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
GDP Growth and Contribution Factors
State and local Nondefense National defenseNet exports of goods and services Change in private inventories Equipment and software Residential Construction Business Structures Services Nondurable goods Durable goodsGDP
% p
er a
nnum
Stimulus?!
Red outline = investment componentsBlack outline = government components
I 1995
III 1995
I 1996
III 1996
I 1997
III 1997
I 1998
III 1998
I 1999
III 1999
I 2000
III 2000
I 2001
III 2001
I 2002
III 2002
I 2003
III 2003
I 2004
III 2004
I 2005
III 2005
I 2006
III 2006
I 2007
III 2007
I 2008
III 2008
I 2009
00.5
11.5
22.5
33.5
44.5
55.5
66.5
77.5
88.5
99.510
10.511
11.512
12.513
Shares of GDP: Government Sectors
Federal
National defense
Nondefense
State and local
I 1995
III 1995
I 1996
III 1996
I 1997
III 1997
I 1998
III 1998
I 1999
III 1999
I 2000
III 2000
I 2001
III 2001
I 2002
III 2002
I 2003
III 2003
I 2004
III 2004
I 2005
III 2005
I 2006
III 2006
I 2007
III 2007
I 2008
III 2008
I 2009
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19Shares of GDP: Trade
Net exports
Exports
Imports
I 1995
III 1995
I 1996
III 1996
I 1997
III 1997
I 1998
III 1998
I 1999
III 1999
I 2000
III 2000
I 2001
III 2001
I 2002
III 2002
I 2003
III 2003
I 2004
III 2004
I 2005
III 2005
I 2006
III 2006
I 2007
III 2007
I 2008
III 2008
I 2009
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
5.5
6
6.5
7
7.5
8
8.5
9
9.5
10Shares of GDP: Investment
Business Investment: Structures
Business Investment: Equipment & software
Residential Construc-tion
Unemployment – next 6 graphs
• In 1933, unemployment was roughly 25%– Or 11.4 million Americans in a population of 127 million
• And two-income households were not the norm
• In July 2009 unemployment was 9.4%– Or 14.4 million Americans in a population of 307 million
• But dual-income households & supplemental income are both more prominent– We don’t (yet?) see 1930s-style homelessness
• In normal times voluntary quits and new entry means 4.4 million Americans are counted as unemployed– the recession has thus added “only” 10 million
• Nevertheless, we are looking at an economic disaster– that affects as many people as the Great Depression
1948 1950 1953 1956 1959 1962 1965 1967 1970 1973 1976 1979 1982 1984 1987 1990 1993 1996 1999 2001 2004 20070
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
US Unemployment, Total Numbers by Duration (1,000s of people)
U Less than 5 weeksU 5 to 14 weeksU for 15 Weeks & overU for 27 Weeks & over
8 million
Long-term unemployment is worse than at any time in the past 60 years
19751976197719791980198219831984198619871989199019921993199419961997199920002001200320042006200720090.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Unemployment by Duration as % of Labor Force
U < 5 wksU 5-14 wksU 15-26 wksU 27+ wks
1978197919811982198419851987198919901992199319951997199820002001200320042006200820090.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
Labor Market Entry & Exit
Headline U Job losersTotal Frictional New entrants Reentrants Quits/Job Leavers
Job losses (red) dominate the rise in unemployment,but people returning to the job market (blue) – such
as spouses seeking work – also matter
2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 20100.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
Underemployment and Unemployment— total pain measure —
Involuntary short hoursMarginally attachedDiscouraged workersHeadline UnemploymentTotal Pain Measure
It’s not just “headline” unemployment, but also peoplewho have had their hours cut or are discouraged aboutfinding a job and are no long counted as unemployed
Bubble
• Real estate prices zoomed– But only in some metropolitan areas– Particularly those where “supply” is constrained by
geography and/or local policy• And lots of debt incurred in the process– But mainly by people with lower credit scores– Over the short run, those with low incomes (or poor
track records of self-restraint) got access to credit• But the old rules-of-thumb were appropriate: they are the
ones going into default
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
4047.5
5562.5
7077.5
8592.5100
107.5115
122.5130
137.5145
152.5160
167.5175
182.5190
197.5205
212.5220
227.5235
242.5250
257.5265
272.5280
Case-Shiller Housing Price Index
AZ-PhoenixCA-Los AngelesFL-MiamiNV-Las VegasReal GDPNominal GDPCPI
116
160
145
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
40
50
60
70
80
90
100
110
120
130
140
150
160
170
180
190
200
210
220
230
240
250
260
270
280
Bubble vs Stable Housing Markets
CA-Los AngelesCO-DenverFL-MiamiGA-AtlantaIL-ChicagoMI-DetroitNC-CharlotteOH-ClevelandTX-DallasNominal GDP
City % Average Amount Total Amount Underwater Underwater Underwater Per House $ millions Atlanta 45 $18,016 $984 Boston 21 $17,156 $202 Chicago 35 $18,201 $965 Cleveland 32 $9,865 $114 Denver 33 $12,607 $267 Las Vegas 89 $83,654 $7,872 Los Angeles 52 $80,484 $13,594 Miami 69 $68,357 $10,418 Minneapolis 61 $32,839 $1,156 New York 13 $22,119 $823 Phoenix 80 $73,314 $9,025 Portland 24 $18,676 $191 San Diego 61 $84,371 $4,497 San Francisco 39 $65,986 $2,831 Seattle 21 $17,125 $236 Tampa 60 $37,110 $1,889 Washington, D.C. 47 $52,113 $3,398 Seventeen-area composite 47 $58,496 $58,461 Dec 2008 data?
Half!
Prices Have Adjusted Quickly
• “This year, in 14 ZIP codes in Southern California, including Moreno Valley’s, median home prices have fallen below 1989 levels, making places like Beth Court affordable for the first time to many new homeowners.”
– Jennifer Steinhauer. “Beth Court: A Cul-de-Sac of Lost Dreams, and New Ones.” The New York Times, August 23, 2009.
– But recovery requires new construction, not just stable prices – we built a lot of new houses the since 2002
Japan comparison: Conclusion
• Are we like Japan looking at a decade-plus of 1% growth?– NO, thankfully
• Why?– Japan’s labor force is shrinking• Averaged across the business cycle, Japan’s economic
growth will therefore inevitably be low• But a low average means even a mild downturn results
in negative growth / a recession
Much of the world will look like Japan
• The children of Japan’s baby boomers aren’t having children– There are fewer toddlers (age 0-4)• than doddlers (age 70-74)
• Many countries have the same demographics– Including China, Korea, Taiwan, Spain and Italy• All are at or soon will hit the point where their native-
born population will shrink– While immigration may help Spain, it’s hard to imagine 100+
million people moving to China in 2030-2050...
50045040035030025020015010050050100150200250300350400450500
0 〜 4
5 〜 910 〜 14
15 〜 19
20 〜 24
25 〜 29
30 〜 34
35 〜 39
40 〜 44
45 〜 49
50 〜 54
55 〜 59
60 〜 64
65 〜 69
70 〜 74
75 〜 79
80 〜 84
85 〜
0 〜 4
5 〜 910 〜 14
15 〜 19
20 〜 24
25 〜 29
30 〜 34
35 〜 39
40 〜 44
45 〜 49
50 〜 54
55 〜 59
60 〜 64
65 〜 69
70 〜 74
75 〜 79
80 〜 84
85 〜
Japan's Population Age Structure
Female Male
1,000 people
Born 1970-74
Born 1945-49
Born 1995-99