WHAT JUST HAPPENED AND WHERE DO WE GO FROM HERE?

Wisconsin’s Economic Outlook

December 3, 2010December 3, 2010

Wisconsin Economics Association

WHAT JUST HAPPENEDWHAT JUST HAPPENEDANDAND

WHERE DO WE GO FROM HERE?WHERE DO WE GO FROM HERE?

Dennis K. WintersChief, Office of Economic AdvisorsWisconsin Department of Workforce Development

December 3, 2010

WELCOME

http://flowingdata.com/2010/03/02/where-bars-trump-grocery-stores/

FIRST, YOU HAVE TO UNDERSTANDWISCONSIN’S ECONOMY

HOW BAD

WAS IT?

• Longest recession since the Great Depression

• Four negative U.S. GDP quarters in a row

• Global GDP declined

• The U.S. and Japan were in recession at same time

• Personal consumption expenditures were down 3 out of four quarters, with the one registering just +0.1%

HOW BAD WAS IT?THINGS THAT NEVER HAPPENED BEFORE

INDUSTRIAL ACTIVITY PLUNGED U.S. AND ESPECIALLY THE MIDWEST

Source: Chicago Fed, OEA

Manufactuing Production Indexes

Jan-73 Jan-82 Jan-91 Jan-00 Jan-09

MidwestU.S.

Total NonFarm Y/Y Job Growth(unadjusted)

Wisconsin

EMPLOYMENT DROPPED PRECIPITIOUSLY JOB LOSSES WORSE THAN 1981 RECESSION

Source: Bureau of Labor Statistics, LMI, OEA

UNEMPLOYMENT CLIMBED NOT QUITE TO LEVELS OF 1981 RECESSION

Unemployment Rates(seasonally adjusted)

Wisconsin

Source: U.S. DOL, WI Dept. of Workforce Development; Local Area Unemployment Statistics and National Bureau of Economic Research

WORKERS DROPPED OUT OF THE WORKFORCE “MARGINAL” WORKER

U6 - U3 Difference

Jan 2010 U3 = 9.7%U6 = 17.6%

Average Weeks Unemployed

Source: U.S. Dept. of Labor, Bureau of Labor Statistics and National Bureau of Economic Research

DURATION OF FINDING NEW JOBIS PROTRACTED

WORKER ANGST DIDN’T DECREASEJUST SHIFTED

Source: UI, OEA

CUIC State and Fed Extentions

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2008w1 2008w14 2008w27 2008w40 2009w1 2009w14 2009w27 2009w40 2010w1 2010w14 2010w27 2010w40

WI CUIC

Fed Exts

YES VIRGINIA,WE ARE IN

RECOVERY MODE, BUT…

Industry Indexes

Non-ManufacturingManufacturing

BOTH MAJOR SECTORS RECOVERING MANUFACTURING AND NON-MANUFACTURING

Source: St. Louis Fed, OEA

• GDP

• DJIA

• JOBS

HOW DO YOU SPELLRECOVERY?

Real GDP Growth

2000q1 2002q1 2004q1 2006q1 2008q1 2010q1

HOW DO YOU SPELL RECOVERY?GDP; Five positive quarters, Q3 up 2.5%

Source: Bureau of Economic Analysis, OEA

HOW DO YOU SPELL RECOVERY?DJIA; UP 72% SINCE MARCH 9, 2009

Source: http://moneycentral.msn.com/investor/charts/chartdl.aspx

HOW DO YOU SPELL RECOVERY?JOBS; STILL DOWN 150,000

Wisconsin Total Nonfarm Jobs (NSA)

2,600,000

2,650,000

2,700,000

2,750,000

2,800,000

2,850,000

2,900,000

2,950,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2007200820092010

JOB RECOVERY WILL TAKE TIME

Source: BLS, OEA

Job Losses in Recent Recessions - Wisconsin - # of Months Since Recession Declaration

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61

Source: DWD, OEA, X12 adjustment of not seasonally adjusted CES via U.S. BLS

1981 Recession 1990 Recession2001 Recession Current Recession

EVEN JOB NUMBERS CAN BE DECEIVINGTHE UNDEREMPLOYED

CAUTION STILL REIGNSMANAGING YEAR-END COSTS

NEW CLAIMS MOVING SIDEWAYSINDUSTRIES CONTINUE TO ADJUST

GDP = C + I + G + (I-M)

C = CONSUMPTION

PERSONAL INCOMENOT SNAPPING BACK LIKE BEFORE

RETAIL SALES CLIMBINGWHAT WILL BE THE NEW NORMAL

EVEN WITH LOW MORTGAGE RATESNEW HOME SALES AREN’T RESPONDING

Source: Wisconsin Department of Revenue

HOUSING MARKETSWON’T BE AN ECONOMIC DRIVER

2006 2007 2008 2009 2010

Housing Starts Housing Permits (3-Month Moving Average)

U.S. Housing Starts and Permits

WHERE HAVE ALL THE YUPPIES GONE?WHO WILL BUILD A NEW HOUSE NOW?

TAKE MY HOUSEPLEASE

MORTGAGE RISKSTILL HAS CHALLENGES PENDING

ALL SECTORS OVERBUILTRESIDENTIAL, COMMERCIAL, HEAVY

INTEREST IS LESS DISMALBUT STILL CONTRACTING

AUTO SALES LIMITED CONTRIBUTION

FUTURE UNCERTAINTYDAMPENS CONSUMER MOOD

IS THE PHILLIPS CURVE BACK?IF YES, THEN FED HAS LEEWAY

I = INVESTMENT

Source: William R. Emmons, Federal Reserve Bank of St. Louis, May 7, 2010 talk on the District II Economic Outlook.

LOW INTEREST RATESGAVE INCENTIVES TO BORROW

Domestic government sector

All sectors

Source: Federal Reserve Board, Data Download Program

Reserves of Depository Institutions(billions of dollars)

$1,000

$1,200

$1,400

Jul 2008

Jul 2009

Required Reserves

Total reserves

EXTENDING CREDITBANKS ARE RETICENT TO LEND FUNDS

Yield Spread: BAA Corporate Rate minus 10 Year Treasury Rate

Source: Prof. Don Nichols, Emeritus

STILL UNCERTAINABOUT ECONOMIC STRENGTH

MANAGING RISK WHERE IS THE INCENTIVE TO EXPAND

CORPORATE PROFITS LOOK HEALTHYMOSTLY DUE TO COST CUTTING

Corp Profits as % National Income

FROM WHERE ELSEWILL PRIVATE INVESTMENT COME

DEMAND STILL INSUFFICIENT TO EXPANDWILL KEEP INFLATION AT BAY

G = GOVERNMENT

Source: http://seekingalpha.com/article/115525-the-scariest-chart-ever?source=article_sb_popular

http://money.cnn.com/news/specials/storysupplement/stimulus-tracker/index.html

QE1 TRACK IT

• TARP– AIG– AGP– ASSP– AITP– CPP– CBLI– MHA– PPIP– TIP

QE2 = MORE MONEYTO BE APPLIED WHERE?

• Fed Reserve Rescue Efforts– ABCPMMMFL– BoALLB– BSB– CLLB– CPFF– FEDS– GSEDP– GSEMBSP– MMIFF– PDCF– TABSLF

– TAF– TSLF– US Bond purchases

• Federal Stimulus Programs– ESA of 2008– UIBE– SLG– ARRA– ATVMP– CARS

QE2 = MORE MONEY (continued)

TO BE APPLIED WHERE?

• AIG– Asset purchases– Bridge loan– Gov’t stakes in subs– TARP

• FDIC– 2008 Bank takeovers– 2009 Bank takeovers

• Other Financial Initiatives– CUDIG– MMGP– NCUA Bailout of credit unions– USFCUI– TLGP

QE2 = MORE MONEY (continued again)

TO BE APPLIED WHERE?

• Other Housing Initiatives– Fannie– Freddie– FHA – MHAI

$11 trillion committed $3 trillion invested

http://money.cnn.com/news/storysupplement/economy/bailouttracker/#TARP

Yield Curve: Yield on Ten Year Treasury minus yield on One Year Treasury

LONG-TERM RATES RELATIVELY HIGHFED TRYING TO BRING THEM DOWN

I-M = NET EXPORTS

Source: Wisconsin Department of Revenue

LOWER U.S. DEMANDHELPING HOLD DOWN TRADE IMBALANCE

2007 2008 2009 2010

U.S. Goods and Services Trade BalanceB

LACK OF U.S. DEMANDHELPING HOLD DOWN TRADE IMBALANCE

DOLLAR DROPPINGWHOSE SIDE ARE YOU ON?

GDP = C + I + G + (I-M)

ADD IT ALL UPAND …

U.S Gross Domestic Product(Real 2005 U.S. Dollars)

10,000

11,000

12,000

13,000

14,000B

Source: U.S. Bureau of Economic Analysis

RECOVERINGBUT STILL LOWER

Source: U.S. Bureau of Economic Analysis; OEA

BIGGEST DIP, SLOWEST RECOVERYTWELVE Q’s SINCE LAST PEAK, STILL NOT BACK

Time from Peak to New High

Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12 Q13Quarters

19481953195719601969197319801981199020012007

IN CONCLUSIONTORTOISE RECOVERY

Slow but sturdy recovery Low inflation due to excess capacity Employment breach in 2012? Strength of recovery subject to consumer

income and wealth uncertainty

Risks Financial workouts put too much strain on

economy. European Union fiscal problems wash

over the global financial markets. High unemployment saps consumption.

So, what will be the biggest socio-economic

policy challenge in the next 20 years?

ELDERLY NUMBERS WILL SWELLWIDEN THE SIDEWALKS WILL YA !?

QUANTITY

WISCONSIN’S WORKFORCE GROWTHBECOMES FLAT

Source: Bureau of Labor Statistics, OEA

Wisconsin Population and Labor Force

1960 1970 1980 1990 2000 2010 2020 2030

POPULATION

CIVILIAN LABOR FORCE

BLS RAISED LFPR FOR THE FUTUREPARTICULARLY FOR OLDER COHORTS

Source: Bureau of Labor Statistics, Bureau of the Census, OEA

Changes in LFPR by Age Cohort

16-19 20-24 25-34 35-44 45-54 55-59 60-64 65-69 70-74 75+

Constant2000201020202030

WISCONSIN’S WORKFORCE HIGHER LFPRs OFFER LIMITED GAINS

Source: Bureau of Labor Statistics, OEA

Worker Difference from Census 2000

(20,000)

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2010 2010 2020 2020 2030 2030

New BLS Plus 3% New BLS Plus 3% New BLS Plus 3%

LITTLE CHANGES EVEN WITH HIGHER LFPRRETIREMENTS SWAMP PARTICIPATION

Source: Bureau of the Census, DOA, OEA

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

1960 1970 1980 1990 2000 2010 2020 2030

PopulationLabor force base caseBLS prj. changeElevated LFPR of 3 percentage points

Wisconsin Population and Labor Force

NURSING WORKFORCE IN WISCONSIN DEMOGRAPHICS AT WORK

Source: Office of Economic Advisors

Wisconsin Nurses by Age

10,000

12,000

14,000

< 25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75 +

QUALITY

Age Groups:

15-2425-34

over 75

Education Categories:

Less than high schoolHigh school graduateSome college, no degreeAssociate degree,Bachelor’s degree,Graduate or Professional degree

Income Categories:

EarningsTransfer paymentsDividends (interest, rent, and other income)Total income

Data: March Supplement of CPS, 1992-2007 (via IPUMS) Population projections from DOA

Source: 1992-2007 CPS (Wisconsin) & DOA Pop Projections

Year: 20007.6%

82.1%Earnings

Transfers

Dividends Year: 2035

6.9% 74.6%

Income stream shifts with age from earned income to transfer payments.

AS BOOMERS RETIREINCOME COMPONENTS CHANGE

Real escalation in transfer payments is near zero – essentially eliminating gains from this income source.

Aggregate. Real IncomeHistoric 1992-2007, and Projected 2010-2035

1992 1997 2002 2007 2012 2017 2022 2027 2032

Historic

Version 2.0

AGGREGATE REAL INCOME GROWTHFLATTENS WITH WORKFORCE AND SOURCE

UNDER BASE CASE ASSUMPTIONS PCI DECREASES STARTING IN 2015

Graph 1: Population vs Agg Real Income Change, 1995-2035

1995-2000

2000-2005

2005-2010

2010-2015

2015-2020

2020-2025

2025-2030

2030-2035

Pop 15+ ChangeAgg Income Change (Base)

50.0% Less HSHSSomeAABAGrad

45-5435-44

LAYING IN EDUCATION PROJECTIONSTO ACCOUNT FOR ATTAINMENT TRENDS

Aggregate Real IncomeHistoric 1992-2007, and Projected 2010-2035

1992 1997 2002 2007 2012 2017 2022 2027 2032

Historic

Version 2.0

Version 3.0

WE GET A BOOST IN PERSONAL INCOMEFROM MORE EDUATION AND TRAINING

THE INCOME BOOST ONLY DELAYSTHE PCI LOSS FOR A FEW YEARS

Graph 1: Population vs Agg Real Income Change, 1995-2035

1995-2000

2000-2005

2005-2010

2010-2015

2015-2020

2020-2025

2025-2030

2030-2035

Pop 15+ ChangeAgg Income Change (Base)Agg Income Change (New )

WORKFORCE TRENDSARE:

Unprecedented – we have never faced a declining workforce before;

Assured – demographics will change little;

Largely unalterable – demographics and migration patterns do not change abruptly.

RAMIFICATIONS OF WORKFORCE TRENDSARE:

Potentially devastating – without sufficient productivity gains the state’s economy will stagnate;

Necessitating a focus on talent – large investments in education and training are needed; best ROI is early childhood

Requiring match – talent supply and industry demand must be matched or you lose both.

QUESTIONS?

Dennis Winters

Phone: 608-267-3262

Email: dennis.winters@dwd.wisconsin.gov

Website: www.dwd.wisconsin.gov

OEA website: www.dwd.wisconsin.gov/oea

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