US Financial and Product Market Outlook

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US Financial and Product Market Outlook

• F. Gerard Adams
• McDonald Professor
• Northeastern University
• Room 409 Hayden Hall
• f.adams_at_neu.edu
• http//www.cba.neu.edu/fgadams

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• My part
• lecture/discussion
• Your part
• participation
• prepare questions for afternoon
• presentations--8 teams
• papers

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Reading

• from Gnomon
• WEFA Executive Summary US Outlook
• WEFA Special Report What if a severe recession
• Alan S. Blinder, The Internet and the New
  Economy
• The Economist, A New Economy
• On the Internet
• http//www.estore-exchange.com/slide/ite
• Choose 1.1 lecture on Whats New about the New
  Economy

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What People Have Been Saying

• Economic Report (February 2001)Over the past 8
  years the American economy has transformed itself
  so radically that many believe that we have
  witnessed the creation of a New Economy
• Greenspan
• irrational exuberance Dec 1996
• ..a set of imbalances that.threaten our
  continuing prosperity Feb 2000
• Summers
• The New Economy is built on old virtues thrift,
  investment, and letting market forces operate

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What do we mean?

• New Economy vs. Old Economy
• Bubble Economy
• Goldilocks economy

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What Did the Economy Look Like in the 70s and 80s?

• A Mature Economy
• Slow growth
• Minimal Gains in Productivity
• Business cycle
• Oil shocks and Inflation
• Increasing inequality

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What Happened in the 1990s? A Goldilocks
Economy

• Longest recovery on record
• Accelerated growth of productivity
• Low Unemployment
• Low Inflation
• Improvement in Equity

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Debate

• Was it a Bubble Economy or a New Economy?
• Group 1 --Bubble
• Group 2 --New Economy

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Where are we now?

• We have a stock market collapese
• Will we have a recession?

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Is the Business Cycle Dead?

• What did it look like?

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Is the Business Cycle Dead?

• It would be imprudent, however, to presume that
  the business cycle has been purged from market
  economies so long as human expectations are
  subject to bouts of euphoria and disillusionment
  Alan Greenspan (February 17, 2000)

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How Do We Forecast the Economy?
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A Simple Demand Model
G
I
C
GDP
Income Feedback
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Aggregate Demand and Supply 1
Price Level
AD
AS
GDP
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Where is full capacity utilization (full
employment)?
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Full Capacity Utilization
Price Level
AD
AS
Full capacity/full employment
GDP
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Aggregate Demand and Supply 2
P
AS1
AD2
AD1
GDP
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Aggregate Demand and Supply 3
P
AS1
AD2
AD1
AS2
GDP
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• Demand Side
• The demand components
• Keeping up with the latest information
• Supply Side
• Short run -- Labor Markets and Inflation
  (Phillips curve)
• Long run -- Productivity growth

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Policy

• Fiscal long inside lag, short
  outside lag
• Monetary short inside lag, long
  outside lag