COLLEGE OF BUSINESS

1
COLLEGE OF BUSINESS AND ECONOMICS
DEAN EMERITUS
Dr. Jay L. Tontz
THE U.S. ECONOMY IN 2009
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FORECAST VS. ACTUAL 2008

• FORECAST ACTUAL
• Real GDP 2.8 1.3 Unemployment 4.9
  .5 5.8
• Inflation 2.2 2.0 Interest rates .5
• Long-term -.92
• Short-term - 2.5

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ASSUMPTIONS 2008

• FISCAL POLICY Increased Exp.
• MONETARY POLICY Decreases in interest rate
• Federal Reserve will be successful in providing
  stability in financial markets. Rates are lower
  but credit is still difficult to get.
• INTERNATIONAL No major negative impact
• DOMESTIC
• No major negative weather related impacts
• No major negative impacts from terrorism
• Jan 2008

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Exciting time

• New president advisers economic conditions
  -- A team which has impressed almost everyone
  with its caliber and its centrism
• New party in power in Congress
• Agreement on end of war in Iraq - withdrawal
• Continuing debate about appropriate government
  economic policies
• We need to put this business cycle in historical
  perspective
• Long-term strength of our economic system

The Economist, January 17, 2009
5
2007 THREE DECADES OF SUSTAINED ECONOMIC PROGRESS

• The vast majority of families have experienced a
  rapid growth in their income and wealth---an
  astonishing pace of upward income mobility.
• Nearly 60 of American families own stock.
• Two-thirds own their own home.
• The average family for the first time ever
  has net worth of more than 100,000. Median
  family income has climbed to more than 54,000 a
  year.
• Wall Street Journal, Wed. Dec 21, 2005
• The U.S. has more billionaires under 40 than at
  any time in history,gen Xers create 4 out of
  every 5 new enterprises.
• The U.S. accounted for an incredible 1/3rd of the
  worlds economic growth

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Remarkable resilience of U.S. economy

• In the past 8 years the economy has endured
• Two stock market declines
• Two recessions
• Terrorist attacks, 9-11
• Corporate scandals, Enron, etc.
• High energy costs, and
• Devastating natural disasters
• 2007-08 housing market crisis
• The 2008 financial crisis.
• Takes a licking and keeps on ticking.

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Dec 1st NBER announced Recession 2008- started
in Dec. 07

• National Bureau of Economic Research
• a significant decline in economic activity
  spread across the economy lasting more than a few
  months, normally visible in real GDP, employment,
  industrial production and wholesale-retail
  sales.
• Dec poll 60 of Americans believe a depression
  is somewhat or very likely in the near future.
• Depression decline in growth of 10
• Unemployment 25 Not likely

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Causes of Housing Market Crisis

• Coming out of recession 2001 the Fed lowered
  interest rates From August 2001 to the middle of
  2003 the federal funds rate fell from 3.5 to
  1.
• As mortgage rates fell, demand for housing
  increased
• Mortgage lenders reduced standards -- developed
  two new types of mortgages
• Subprime mortgages made to individuals with
  questionable credit histories, and
• Alt-A mortgages made to individuals without
  documented income
• Many of which had adjustable interest rates.
• Mortgage companies packaged the loans and sold
  them to Fannie Mae and Freddie Mac and to other
  investment companies which repackaged and sold
  again.

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Evidence of recession
Real GDP declined .5 in 3rd qtr, and 3.8 in
4th qtr sharpest contraction in 26 years 2008
employment declined 2.6 M jobs Unemployment rate
averaged 5.8 for the year climbing to 7.2 in
Dec The highest since Jan 1993 Index of
Industrial Production 4th qtr -11.5
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Evidence of Recession
Retail Sales Dec 9.8 from Dec 07 Oct
decline of 2.8 from Sept. the worst drop since
current counting methods began in 1992 Core
Consumer Prices were down 0.1 in Oct. from Sept.
the first dip since 1982, up 1.8 for
2008 Monthly housing starts fell 4.5 in Oct.
to the lowest level since record-keeping began in
1947 45 below 2007
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Global recession 2009

• And, this is not just a U.S. recession, but one
  that is shared with many of the advanced and
  developing economies around the world.
• Started as a U.S. housing crisis, moved into a
  U.S. financial crisis, and then through the
  integrated international financial community
  around the globe.
• Forecast recessions (bottom 10) Britain,
  Singapore, Ireland, Estonia, Taiwan, Venezuela,
  Ukraine, Latvia, Zimbabwe, Iceland

The Economist, Dec 20th, 2008
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Financial Crisis a credit crunch

• Defaults and foreclosures made headlines
• Mortgage companies tightened lending standards
  because other financial institutions would no
  longer buy their mortgages
• Housing sales dropped further
• Consumption expenditures declined because of
  higher unemployment, lower employment, falling
  asset values stocks and houses
• A cumulative downward spiral some comparing it
  to the Great Depression of 1930s

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John Maynard Keynes 1936

• Great Depression resulted from insufficient
  aggregate demand. Government policies remedies
• Fiscal policy to stimulate Aggregate Demand
• Reduce taxes increase disposable income
• Increase government spending more jobs, improve
  infrastructure
• Monetary policy stimulate Investment
• Reduce interest rate
• Improve operation of financial markets
• Determinants of component parts of Aggregate
  Demand

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Keynesian policies

• Continuing debate about appropriate government
  policies
• Monetary Policy - Federal Reserve
• Institutional policy stabilize financial sector
• Monetary policy -- interest rate
• Fiscal Policy stimulus
• Tax rebates stimulus 2nd qtr 08
• 700 B financial institutions Oct 08
• Auto industry bailout Dec 08 17 B
• Obama -- 819B stimulus package? 1st 2nd
  qtr 09
• Now in Senate at 900B

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The Central bank

• Monetary policy is conducted by a countrys
  central bank.

• In the U.S., thecentral bank is called the
  Federal Reserve (the Fed). Est. 1913

To maintain stability of financial institutions
the banks To control the supply of money, and
interest rates To control rate of inflation
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AGGREGATE DEMAND

• CONSUMPTION -- 70
• f(Income, wealth, consumer expectations, and
  availability of credit)
• INVESTMENT -- 16
• f( Interest rate, expected profits, and
  availability of credit)
• GOVERNMENT EXPENDITURES - 17
• f(political considerations )
• INTERNATIONAL TRADE
• f(world growth rates, barriers to trade)

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Consumers 2009

• Consumption Expenditures
• Wealth will increase -- assumptions
• Stock market will rise over the year
• Home prices will stabilize
• Disposable income assumptions
• Employment will increase -- affected by stimulus
  package
• Decline in gas prices has led to 500 B increase
  in spendable income
• Obama plan -- 300 B in tax cuts workers and
  businesses

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Consumers 2009

• Consumer confidence
• Will increase with growth in jobs, stable prices,
  lower interest rates, higher stock prices, and
  Obamas successes
• Availability of credit
• Will increase as Fed and Treasury programs
  increase stability of financial institutions

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CONSUMER CONFIDENCE

• Index of Consumer confidence all time low in
  Dec
• Oct 38.8
• Nov 44.7 1985 100
• Dec 38
• The lowest level since start of index in 1967
• Causes
• Deepening job insecurity
• Falling asset prices stocks DOW down 36, and
  houses Oct down 18 --largest drop since began
  collecting data in 2000

Tri-Valley Herald, Dec 31, 2008
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2009 CONSUMERS CONFIDENCE

• CONSUMER PSYCHOLOGY --
• Declined through out the year until the election
• Major thrust of Obamas appointments and comments
  we will get out of this recession.
• Prior to elections 67 of people thought economy
  was headed in wrong direction.
• Nov. 21st poll 53 of voters gave Obama good or
  excellent marks on how he will handle the economy
• Dec poll 72 likely voters expect better economy
  in 09

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Latest Poll Sunday 18 Jan NYT

• President-elect Barack Obama is riding a
  powerful wave of optimism into the White House,
  with Americans confident he can turn the economy
  around but prepared to give him years to deal
  with the crush of problems he faces starting
  Tuesday, according to the latest New York
  Times/CBS News Poll.
• Most Americans said they did not expect real
  progress in improving the economy, reforming the
  health care system or ending the war in Iraq
  three of the central promises of Mr. Obamas
  campaign for at least two years. The poll found
  that two-thirds of respondents think the
  recession will last two years or longer.

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INVESTMENT

• THE INTEREST RATE COST OF CAPITAL
  Historically low interest rates, but financial
  markets are not working and credit is limited
• Treasury plan to cut fixed mortgage rates to
  4.5 could shore up the free-falling housing
  market and provide substantially improved both
  consumer and investor confidence Navellier, Dec
  14th
• EXPECTED PROFITS will improve as the economy
  improves

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GOVERNMENT 2009

• STATE AND LOCAL EXPENDITURES
• Revenues have been reduced due to recession
• Calif. Not sign budget until Sept. with further
  reduction in revenues now looking at 28 - 48b
  shortfall and mid year reductions
• Other states in much the same condition
• FEDERAL EXPENDITURES
• A series of stimulus packages American Recovery
  Reinvestment Plan
• Obamas -- 819B more direct state spending
  infrastructure and education
• Jump start job market in the private sector and
  consumers confidence
• STATE AND LOCAL REVENUES
• Will increase as the economy increases and as
  stimulus program goes into effect

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Latest Poll Sunday 18 Jan NYT

• President-elect Barack Obama is riding a
  powerful wave of optimism into the White House,
  with Americans confident he can turn the economy
  around but prepared to give him years to deal
  with the crush of problems he faces starting
  Tuesday, according to the latest New York
  Times/CBS News Poll.
• Most Americans said they did not expect real
  progress in improving the economy, reforming the
  health care system or ending the war in Iraq
  three of the central promises of Mr. Obamas
  campaign for at least two years. The poll found
  that two-thirds of respondents think the
  recession will last two years or longer.

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INVESTMENT

• THE INTEREST RATE COST OF CAPITAL
  Historically low interest rates, but financial
  markets are not working and credit is limited
• Treasury plan to cut fixed mortgage rates to
  4.5 could shore up the free-falling housing
  market and provide substantially improved both
  consumer and investor confidence Navellier, Dec
  14th
• EXPECTED PROFITS will improve as the economy
  improves

26
GOVERNMENT 2009

• STATE AND LOCAL EXPENDITURES
• Revenues have been reduced due to recession
• Calif. Not sign budget until Sept. with further
  reduction in revenues now looking at 28 - 48b
  shortfall and mid year reductions
• Other states in much the same condition
• FEDERAL EXPENDITURES
• A series of stimulus packages American Recovery
  Reinvestment Plan
• Obamas -- 819B more direct state spending
  infrastructure and education
• Jump start job market in the private sector and
  consumers confidence
• STATE AND LOCAL REVENUES
• Will increase as the economy increases and as
  stimulus program goes into effect

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Two decades of increasing trade

• Since 1982 world trade has benefited from more
  than two decades of increasing openness.
• Tariffs on goods declined from a world wide
  average of 26 in 1986 to 8.8 in 2007.
• Trade has grown spectacularly more than twice
  as fast, on average, as world output.
• It has also become more inclusive developing
  countries have nearly doubled their share of
  world exports since 2000 to 37 in 2007.
• a rise in protectionism could turn the clock
  back a long way.

The Economist , Dec 20th 2008 January 2, 2009
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International Trade 2009

• 1982 the last year when volume of world trade
  shrank
• 2009 World Bank forecast 2 decline
• A serious slowdown in trade is underway
• 1) Worsening economic outlook
• 2) the threat of protectionism
• India, Russia, and Vietnam raised tariffs in 2008
• Campaigning in Ohio Obama said he wanted to
  renegotiate NAFTA
• Buy American stimulus funds

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INTERNATIONAL DEMAND 2009

• Latest IMF forecast
• Total world output will decline in 2009
• Advanced industrial nations will be in a
  recession
• Developing nations China, India will grow, but
  at slower rates
• 2009 will be the world economys worst year since
  1945
• Global GDP growth of only 0.5, U.S. growth of
  only 1.6
• BARRIERS TO TRADE
• WTO -- Doha round of tariff reductions failed
• As economies fall on hard times many are pushing
  for more protectionism which will increase
  barriers and reduce trade
• The exact policies which caused the increased
  depth of the Great Depression
• CONCLUSION
• decline in U.S. exports in 2009
• This sector will detract from aggregate demand
  growth

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The good news

• The resilience of our economy
• The institutions established after Depression
• Federal Deposit Insurance Corporation
• The Council of Economic Advisers
• The maturity of and leadership at the Fed
• Unemployment Insurance recent extended coverage
• The G.I. Bill concept - support of Education
• The opportunity for change to be a more
  bipartisan endeavor. Lincoln and the team of
  rivals.
• If Obama can build confidence he will go a long
  way in building an economic recovery

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History is on our side

• Recessions tend to push inflation lower
• Stocks usually recover before the economy does
• Jobs recover later but this time fiscal
  stimulus will concentrate on infrastructure and
  jobs
• Downturns dont last forever
• Its when people are most disheartened that
  rebounds begin.

Jan 2nd, 2009 Labor Department Report
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Leading Indicator The Stock market

• The market usually turns up 3 to 4 months before
  the economy.
• - down 33 in 2008
• Up 258 points 1st trading day of 2009
• The governments stimulus packages, bailouts,
  interest rate cuts, and liquidity strategies
  appear to be gaining traction finally
• As a result, the stock market is prepared to
  surge significantly higher in the months ahead,
  in our opinion.
• But the majority of the gains could occur very
  quickly.
• 4 T sitting on the sidelines awaiting bottom of
  the market

Navellier Weekly Marketmail Friday Dec 12, 2009
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Bullish opportunities in bears clothing

• www.intrade.com
• Remarkably accurate at predicting future events
• 70 chance that 2009 will wind up with a healthy
  economy.
• The markets performance in last 4 recoveries on
  average
• 38 in 1st 12 months of recovery
• 11 in 2nd 12 months
• 4 in 3rd 12 months

Steve Butler, Tri Valley Herald, Monday Jan 5,
2009
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Assumptions 2009

• Fiscal Policy STIMULUS
• Obama will be successful in getting his stimulus
  package passed on order of 900 billion
• Monetary policy
• Federal Reserve working with Treasury
  Department will be successful in getting credit
  markets functioning again
• No international disturbance will negatively
  affect the U.S. economy
• No weather related issues will negatively affect
  our economy
• No terrorist actions will negatively affect the
  aggregate economy

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Forecast 2009

• The economy will turn to positive growth in the
  second quarter.
• Real GDP 1.5
• Unemployment 6.8
• Inflation 2.5 .5
• Interest rates
• Long term - 2.0
• Short term 1.0