Bill Watkins UCSB Economic Forecast Project

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Bill Watkins UCSB Economic Forecast Project
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Santa Barbara County
Bill Watkins
April 23, 2009
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(No Transcript)
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The FED is creating dynamics that will lead to a
crisis it cant contain.
Bill Said (April 2008)
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Outline

• United States
• California
• Santa Barbara County

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United StatesEconomy
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What Happened?
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Nash EquilibriumandMultiple Equilibria
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We had panic. We switched to a bad equilibrium.
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A Quick Summary of the Current Situation
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Were Losing Jobs
Agricultural
Non-Farm
Private Sector
Public Sector
40.7
219.0
-2,143.3
-2,321.7
Net Job Growth - 2008 Q4 (Y-O-Y change, thousands
of jobs)
12
Unemployment is approaching double digits.
13
Were Losing Jobs, Almost Everywhere
1.0
Public Sector
0.1
Other Services
-1.3
Leisure Hospitality Services
2.8
Education Health Services
-3.0
Professional Business Services
-2.4
Finance, Insurance, Real Estate
-2.7
Retail Trade
-2.5
Wholesale Trade
-2.4
Transportation, Warehousing, Utilities
-2.2
Information Services
-3.4
Non-durables Manufacturing
-5.8
Durables Manufacturing
-7.6
Construction
7.9
Mining Quarrying
1.9
Agricultural Production/Forestry/Fishing
Employment by Sector - 2008 Q4 Year-on-Year Growth
14
Wealth is Declining
13 trillion gone!
9.6
8.4
8.0
7.4
6.1
5.3
5.2
4.1
4.0
3.3
3.2
-2.9
-8.4
Net Wealth Growth
-10.6
-15.6
-17.5
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2005
2006
2007
2008
15
New Motor Vehicle Sales Have Collapsed
300
250
200
150
100
50
Real New Motor Vehicle Sales, billions 2000
dollars
0
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
16
Economic Activity Has Tanked
4.8
4.8
4.8
3.9
3.0
2.8
2.7
2.6
1.5
1.3
0.9
0.8
0.0
-0.2
-0.5
Real GDP Annual Growth Rate
-6.2
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2005
2006
2007
2008
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Recessions accompanied by financial panic are
different.
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Robert Barro says
We have a 20 percent chance of going into a
depression.
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Financial Panics Since the Civil War

• 1873 65 months
• 1893 17 months
• 1907 13 months
• 1929 43 months

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J.P. Morgan and the 1907 Financial Panic
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1907 Sequence

• October 19, Morgan enters scene
• October 21, does not intervene in Knickerbocker
  Trust
• October 23, 8.25 million to Trust Company of
  America
• October 24, 25 million to N.Y. Banks
• October 24, Rockefeller 10 million in National
  City Bank.

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Principles of Responding to Financial Panics

• Act Promptly
• Provide liquidity
• Let bad institutions fail
• Send a credible signal on good institutions
• Avoid dumb

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Forecasting after a regime shift
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Henning Bohn says
Equilibria may be very close right now.
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So, what is the forecast?
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Economic Activity Will Decline Dramatically
4.8
4.8
2.8
0.9
0.2
0.0
-0.2
-0.3
-0.5
-1.3
-2.4
-3.9
-6.1
-6.2
Real GDP Growth
-6.9
-9.5
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2007
2008
2009
2010
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Job Losses Will Accelerate
1.4
1.0
0.9
0.8
0.5
0.0
-0.3
-1.5
-1.5
-2.2
-2.6
-2.6
Job Growth
-3.1
-3.7
-4.0
-4.0
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2007
2008
2009
2010
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Unemployment Will Reach Double Digits
11.7
10.8
10.7
10.3
10.1
10.0
9.3
9.3
Unemployment Rate, NSA
6.6
6.0
5.3
5.2
4.8
4.7
4.6
4.4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2007
2008
2009
2010
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Comparing Recessions - Real GDP Growth
-
0.2
-
0.5
-
0.7
-
0.7
-
1.0
-
2.2
-
3.4
-
8.6
-
13.1
-
29.3
1930
-
1938
1945
-
1949
1954
1958
1974
1980,
1991
2009
1933
1947
-
1975
1982
-
2010
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Why Are Other Forecasts So Optimistic? Part 1

• The dont fully understand the regime switch
• They underweight the international nature of the
  recession
• They think the stimulus will work

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Why Are Other Forecasts So Optimistic? Part 2

• They underestimate the difficulty in
  resuscitating the financial sector
• They underweight the foreclosure problem
• They are using an average recession scenario

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What About Housing?
U.S. Home Ownership Rates
1968
1980
1984
1988
1992
1996
2004
2008
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What About Inflation?
Surplus of GDP
Inflation percent
20.0
10.0
5.0
15.0
0.0
10.0
-5.0
5.0
-10.0
-15.0
0.0
1901
1910
1919
1928
1937
1946
1955
1964
1973
1982
1991
2000
2009
-20.0
-5.0
-25.0
-10.0
-30.0
-15.0
-35.0
Inflation
Surplus of GDP
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What to Do?

• Monetary Policy
• Fiscal Policy
• Something Else

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Monetary Policy

• Inflation is Good
• Zero Rates Plus
• The multiplier
• Interest on Reserves
• Traps

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Fiscal Policy

• Crowding Out and Ricardian Equivalence
• When might fiscal policy (stimulus) work?
• Size and Composition

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Something ElseWhat Weve Been Doing

• Bailing out financial institutions
• Bailing out auto manufacturers
• Bailing out bad borrowers

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Moral Hazard is not a theoretical concept.
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Whats wrong with government ownership of
financial institutions businesses?
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Then, There is the Toxic Asset Plan

• Underpriced assets
• Becker and Sachs
• Interest on Reserves
• Convert TARP to Equity
• Ergo.

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What to Do?

• Banks, Swedish or Bankruptcy
• Unambiguously Expansionary Monetary Policy
• Stop retarding the reallocation of assets

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CaliforniasEconomy
Not What it Used to Be
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Jobs Are Falling Fast
1.6
1.2
0.8
0.4
0.0
-0.4
-0.8
-1.2
-1.6
-2.0
Year-on-year job growth
-2.4
-2.8
-3.2
-3.6
California
United States
-4.0
2007M01
2007M08
2008M03
2008M10
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Unemployment skyrocketing
11.5
11.0
10.6
9.1
7.9
7.6
7.0
6.5
6.5
6.4
5.7
5.4
5.4
4.8
2007 01
2007 07
2008 01
2008 07
Jan 09
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Retail Sales Continue To Decline
6.5
6.2
4.9
2.3
2.1
2.1
1.9
-0.7
-1.5
-4.1
-4.7
-5.2
Real Retail Sales per Capita Growth
1997
1999
2001
2003
2005
2007
1998
2000
2002
2004
2006
2008
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All Retail Sales Have Declined
Other Retail
Service Stations
Home Furnish./Appliances
General Merchandise
Food Stores
Eating and Drinking
Motor Vehicles Supplies
Bldg Mat'l and Farm
Apparel Sales
1-Year Real Retail Sales Growth - 2008
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Tourism Revenue in Freefall
8.1
7.2
7.0
6.7
5.3
4.4
3.9
3.8
3.7
3.7
3.4
3.2
0.2
-0.2
-3.7
Real Hotel/Motel Room Y-O-Y Revenue Growth
-11.1
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2005
2006
2007
2008
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People Are Leaving
Thousands
500
400
300
200
100
0
-100
-200
Immigration
-300
Migration
-400
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
1993
1994
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Then, there is the State budget
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Public Policy is the Opposite of Stimulus

• Decreased Government Spending
• Higher Taxes
• Increased Regulation

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CaliforniaForecast
53
A Deep Extended Recession
7.9
7.6
5.8
5.2
4.5
4.0
3.8
3.7
3.6
3.0
1.5
1.3
1.2
-0.4
-0.7
-1.0
-3.7
Real Gross Domestic Product Growth
-6.7
1993
1996
1999
2002
2005
2008
2010
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Well Lose a Decades Job Gains
17.108
17.059
16.948
Total Employment (,000)
16.671
16,373
16.354
16.220
16.200
16.024
15.861
15.566
15.203
14.780
1997
1999
2001
2003
2005
2007
2009
1998
2000
2002
2004
2006
2008
2010
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Unemployment Will Approach 15 Percent
14.7
13.7
13.7
13.2
12.8
12.5
11.6
Unemployment Rate
11.3
8.5
7.6
6.5
6.4
5.6
5.5
5.3
5.0
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2006
2008
2009
2010
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Retail Sales Will Continue Historic Decline
-0.4
-2.2
-3.6
-3.8
-4.2
-4.2
-4.3
-4.3
-4.5
-4.7
-4.7
-5.0
-5.6
-5.7
-6.0
Real Taxable Sales Growth
-6.1
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2006
2008
2009
2010
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Comparing Recessions Real GDP Growth
U.S.
California
1970
1974
-
75
1980-82
1991
-
93
2001
2008
-
2010
59
Principles

• Reduce uncertainty
• Do no harm

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What to Do?

• The budget
• The regulatory environment
• The future

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Santa Barbara County
Economy
62
Ambrose Bierce says
Happiness, an agreeable sensation contemplating
the misery of another
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Santa Barbara County will be Protected from the
Worst Impacts

• North County
• Institutional Employers
• Tourism

64
Santa Barbara County will see a relatively modest
decline in economic activity.
Real Gross County Product Growth
Santa Barbara County
1997
1999
2001
2003
2005
2007
2009
2011
65
The South Coast will do even better
10.3
Real Gross Regional Product Growth
8.2
7.4
South Coast of Santa Barbara County
4.5
3.0
2.2
1.9
1.7
1.7
0.5
-0.5
-0.7
-1.1
-1.3
-2.2
1997
1999
2001
2003
2005
2007
2009
2011
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The County will lose relatively few jobs.
3.7
3.4
2.8
1.8
1.6
1.5
1.4
0.9
0.4
0.2
0.0
-0.1
-0.2
-0.5
Santa Barbara County Job Growth
-1.5
1997
1999
2001
2003
2005
2007
2009
2011
67
The South Coast will do even better
6.0
5.9
South Coast Job Growth
1.9
1.8
1.4
0.9
0.6
0.5
0.2
0.2
0.0
0.0
-0.1
-0.5
-1.0
1997
1999
2001
2003
2005
2007
2009
2011
68
County unemployment will rise, but less than in
other California communities.
9.5
8.9
8.4
5.4
5.2
5.1
5.1
4.7
4.4
4.4
4.4
4.4
4.4
4.1
3.9
1997
1999
2001
2003
2005
2007
2009
2011
69
County retail sales declines will moderate.
7.7
Real Retail Sales per Capita Growth
3.8
3.8
3.4
2.0
1.0
0.3
-0.1
-0.4
-0.8
-2.6
-3.4
-4.1
-5.1
-6.2
1997
1999
2001
2003
2005
2007
2009
2011
70
Tourism losses will be modest
78.9
77.7
South Coast Hotel / Motel Occupancy Rate
77.2
76.2
73.9
73.0
72.9
72.7
72.4
71.7
71.6
71.2
70.6
70.1
1997
1999
2001
2003
2005
2007
2009
2011
71
Tourism losses will be modest
South Coast Hotel / Motel Room Rate
162
161
158
154
154
153
146
140
128
111
1997
1999
2001
2003
2005
2007
2009
2011
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(No Transcript)
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Dan says
Try to keep your

• spouse
• job
• house

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Dont procrastinate, and remember that your
competitors have the same problems.
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General Principles

• Caution
• Flexibility
• Human capital

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Individuals

• Listen to Dan
• Increase human capital

77
Businesses

• Gain market share
• Keep your best people
• Cut fat

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Governments
79
Nietzsche said
That which does not kill you will make you
stronger.
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Thank you for not shooting the messenger. Visit
us at www.ucsb-efp.com