1

Looking Better... but Still Not Great

Steven A. WoodLecturer

University of California, BerkeleyMarch 26, 2014

Rudney Associates Presents

2

The Economy is Growing … Real Gross Domestic Product

Quarter-to-Quarter Percent Change

Real Gross Domestic ProductBillions of Chained 2009 Dollars

141312111009080706Sources: Bureau of Economic Analysis /Haver Analytics

9

6

3

0

-3

-6

-9

16000

15600

15200

14800

14400

14000

3

and Jobs are Being CreatedNonfarm Payroll Employment

Monthly Change, Thousands

Nonfarm Payroll EmploymentMillions

141312111009080706Source: Haver Analytics

800

400

0

-400

-800

-1200

140

138

136

134

132

130

128

4

Unemployment is Retreating …

Civilian Unemployment Rate

Percent

141312111009080706Source: Bureau of Labor Statistics /Haver Analytics

10

9

8

7

6

5

4

10

9

8

7

6

5

4

5

and Wages are Picking Up

Average Hourly Earnings

Year-to-Year Percent Change

141312111009080706Source: Bureau of Labor Statistics /Haver Analytics

5

4

3

2

1

5

4

3

2

1

6

The Fed is Highly Accommodative

Federal Reserve Credit Outstanding

Billions of Dollars

141312111009080706Source: Haver Analytics

4500

3750

3000

2250

1500

750

4500

3750

3000

2250

1500

750

7

Keeping Interest Rates LowFederal Funds Rate, Percent

10-Year Treasury Note Yield, PercentMoody's Seasoned Baa Corporate Bond Yield, Percent

1005009590858075706560Sources: Federal Reserve Board /Haver Analytics

20

16

12

8

4

0

20

16

12

8

4

0

8

Banks are Lending Again

Commercial Bank Loans

Billions of Dollars

141312111009080706Source: Federal Reserve Board/Haver Analytics

8400

8000

7600

7200

6800

6400

8400

8000

7600

7200

6800

6400

9

Housing Starts are ClimbingNew Single Family Home Sales

12-Month Average, Thousands of Units

Existing Single Family Home Sales12-Month Average, Thousands of Units

1005009590Sources: Census Bureau, National Association of Realtors /Haver Analytics

1400

1200

1000

800

600

400

200

6750

6000

5250

4500

3750

3000

2250

10

and Car Sales have Rebounded

Total Motor Vehicle Sales

12-Month Average, Millions of Units

1005009590Source: Autodata /Haver Analytics

18

16

14

12

10

18

16

14

12

10

11

Exports are Growing

Exports of Goods & Services

Billions of Chained 2009 Dollars

141312111009080706Source: Bureau of Economic Analysis /Haver Analytics

2200

2000

1800

1600

1400

2200

2000

1800

1600

1400

12

But …

13

But Growth is Still Sluggish …

-4 -3 -2 -1 PEAK

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 3090

100

110

120

130

140

Real GDPBusiness Cycle Peak = 100

1948 Q4

1953 Q2

1957 Q3

1960 Q2

1969 Q4

1973 Q4

1981 Q3

1990 Q3

2001 Q1

Average 10 Prior Re-cessions

2007 Q4

Cumulative Quarterly Change Relative to Business Cycle Peak

Ind

ex

14

and Job Creation is Still SoftPayroll Employment

Business Cycle Peak = 100

90

95

100

105

110

115

120

-12 Peak 12 24 36 48 60 72

Cumulative Monthly Change Relative to Business Cycle Peak

Inde

x

October 1949May 1954April 1958February 1961November 1970March 1975July 1981March 1991November 2001Average of 10 Prior RecessionsJune 2009

15

The Output Gap Remains WideReal Gross Domestic Product

Billions of Chained 2009 Dollars

Real Potential Gross Domestic ProductBillions of Chained 2009 Dollars

141312111009080706050403020100Sources: BEA, CBO /Haver

17000

16000

15000

14000

13000

12000

11000

17000

16000

15000

14000

13000

12000

11000

16

Leaving Employment Depressed

Employment-to-Population Raio

Ratio

1005009590858075706560Source: Bureau of Labor Statistics /Haver Analytics

65

63

61

59

57

55

65

63

61

59

57

55

17

with Lots of Part-Time Workers

Working Part-Time for Economic Reasons

Percent of Total Employment, 12-Month Average

1005009590858075706560Source: Haver Analytics

7

6

5

4

3

2

7

6

5

4

3

2

18

Unemployment is Still High

Civilian Unemployment Rate

Percent

1005009590858075706560Source: Bureau of Labor Statistics /Haver Analytics

12

10

8

6

4

2

12

10

8

6

4

2

19

Government Spending is Fading

Federal Government Outlays

Billions of Dollars, 12-Month Average

141312111009080706050403020100Source: Haver Analytics

3200

2800

2400

2000

1600

1200

3200

2800

2400

2000

1600

1200

20

Government Spending is FadingReal Federal Government Purchases

Index: 2007 Q4 = 100

Real State & Local Government PurchasesIndex: 2007 Q4 = 100

141312111009080706Sources: Bureau of Economic Analysis /Haver Analytics

120

115

110

105

100

95

90

120

115

110

105

100

95

90

21

Government Jobs DisappearTotal Government Employment

Business Cycle Peak = 100

90

95

100

105

110

115

120

-12 Peak 12 24 36 48 60 72

Cumulative Monthly Change Relative to Business Cycle Peak

Ind

ex

October 1949May 1954April 1958February 1961November 1970March 1975July 1981March 1991November 2001Average 10 Prior RecessionsJune 2009

22

Budget Deficit Rapidly Shrinks

Federal Government Budget Balance

Billions of Dollars, 12-Month Total

1005009590858075706560Source: Haver Analytics

250

0

-250

-500

-750

-1000

-1250

250

0

-250

-500

-750

-1000

-1250

23

Money Supply Grows SlowlyFederal Reserve Credit Outstanding

Index: 2007 Q4 = 100

Money SupplyIndex: 2007 Q4 = 100

141312111009080706Sources: Federal Reserve Board /Haver Analytics

500

400

300

200

100

0

500

400

300

200

100

0

24

Banks Are Not Lending MuchTotal Reserve Balances

Billions of Dollars

Required Reserve BalancesBillions of Dollars

141312111009080706Source: Haver Analytics

2500

2000

1500

1000

500

0

2500

2000

1500

1000

500

0

25

Banks Continue to Deleverage

Financial Institutions Debt Outstanding

Percent of GDP

1005009590858075706560Source: Federal Reserve Board/Haver Analytics

120

100

80

60

40

20

0

120

100

80

60

40

20

0

26

Consumers Also Deleverage

Household Debt Outstanding

Percent of Disposable Income

1005009590858075706560Source: Federal Reserve Board/Haver Analytics

125

100

75

50

125

100

75

50

27

Inflation Stays LowPersonal Consumption Expenditure Price Index

Year-to-Year Percent Change

Core Personal Consumption Expenditure Price IndexYear-to-Year Percent Change

1005009590858075706560Sources: Bureau of Economic Analysis /Haver Analytics

12

10

8

6

4

2

0

-2

12

10

8

6

4

2

0

-2

28

Below the Fed’s TargetPersonal Consumption Expenditure Price Index

Year-to-Year Percent Change

Core Personal Consumption Expenditure Price IndexYear-ot-Year Percent Change

141312111009080706Sources: Bureau of Economic Analysis /Haver Analytics

6

4

2

0

-2

6

4

2

0

-2

29

What about

financial markets?

30

Interest Rates to Stay LowFederal Funds Rate, Percent

10-Year Treasury Note Yield, PercentMoody's Seasoned Baa Corporate Bond Yield, Percent

1005009590858075706560Sources: Federal Reserve Board /Haver Analytics

20

16

12

8

4

0

20

16

12

8

4

0

31

Corporate Profits at Record Levels

Corporate Profits

Percent of GDP

1005009590858075706560Source: Haver Analytics

14

12

10

8

6

14

12

10

8

6

32

Stock Market at Record Levels

S&P 500 Compsite Index

Index: 1941 - 43 = 100

1005009590858075706560Source: Standard & Poor's /Haver Analytics

2000

1600

1200

800

400

0

2000

1600

1200

800

400

0

33

Stocks Appear “Fairly” Valued

S&P 500 Composite Index

Price/Earnings Ratio

1005009590858075706560Source: Standard & Poor's/Haver Analytics

50

40

30

20

10

0

50

40

30

20

10

0

34

But Profit Growth has Slowed

Corporate Profits

Year-to-Year Percent Change

1005009590858075706560Source: Bureau of Economic Analysis /Haver Analytics

60

40

20

0

-20

-40

60

40

20

0

-20

-40

35

The Major Known Risks

1. Confrontation with Russia/oil price shock

2. Weaker European growth/new recession

3. European sovereign debt problems

4. Political stalemate in Washington

5. The Chinese “bubble” economy

6. Slower emerging market growth

36

Looking Better

… but Still Not Great

Questions?