Governors Council of Economic Advisors Meeting 21705

1
Governors Council of Economic Advisors Meeting
2/17/05
2
The Recovery

• Key Variables
• Nonfarm employment
• Real nonfarm personal income
• Retail sales
• Coincident Indicator (New)

3
Growth Since 2002
4
Steady Growth Loss Recovered
5
Slow Growth But
6
SD US
7
Starting to Fall
8
Growth Slows
9
Steady US GrowthSD More Volatile
10
Big Rebound
11
5.8 Growth 6 Months7.0 Growth 12 Months
12
Growth But Volatile
13
GLOBAL INSIGHT FORECAST 9/04

• Variable 2004 2005 2006
• GDP 4.4 3.5 3.1
• NF Emp 1.1 1.7 1.4
• Per Inc 5.4 5.0 5.3
• CPI 2.7 2.0 1.6
• Un Rate 5.5 5.2 5.2

14
TOP-10 ECONOMIC PREDICTIONS FOR 2005

• Slower growth 3.5, 3.1 3.2 GDP growth.
• Slower consumption spending but business fixed
  investment will see double-digit growth.
• Housing activity slowed to more normal pace.
• Govt spending (all levels are slowing) fiscal
  responsibility.
• Export sector will pick up with weak and will
  weaken more. Slow growth in Eurozone and Japan.
  Rest of Asia strong.

15
Top-10 Continued

• 6. Global Insight emphasizes high current account
  deficit (6 of GDP).
• 7. Job growth slows to 1.7, 1.4, 1.1.
• 8. Inflation remains in check. 2.0 in 2005 and
  1.6 in 2006.
• 9. Interest rates will rise year. 10 year
  Treasury 4.27 (2004), 4.55, 5.06, 5.41.
• 10. Main concern is international position
• of US.

16
Global Imbalances Keep Getting Worse!!!
17
Current Account Deficit 5-6 of GDP
18
Trade Deficit5-6 of GDP
19
We Consume More Than We Produce
20
How Much Further for ?
21
Deficit Eventually Responds to Value
22
What Could be the Worst Case?

• 1. Foreign lenders (private public) unwilling
  to accept s.
• 2. Value of drops sharply.
• 3. Interest rates in US shoot up.
• 4. Inflation increases as imports become very
  expensive.
• 5. Economy goes into deep recession.
• 6. This could happen fast or slower.

23
What Does GI Think?

• Is Global imbalance due to US profligacy?
• US public-private debt levels no higher than G-7
  average.
• Slow growth in Eurozone Japan is part of the
  problem.
• China et al refuse to revalue currencies and
  accumulate large reserves.
• GI thinks depreciation of of 30 needed to
  correct imbalance.

24
Global Insight

• will fall 30.
• China will gradually revalue in 2006.
• Exports will rise and imports will slow.
• Economy will slow
• Interest rates will rise.
• They see gradual adjustment to global imbalance
  rather than collapse as some see.

25
Foreign Govt Buying
26
The END
27
Savings and Investment
28
(No Transcript)
29
(No Transcript)
30
Large Current Account Deficit
31
(No Transcript)
32
(No Transcript)
33
(No Transcript)
34
(No Transcript)
35
(No Transcript)
36
Current Account Deficit
37
(No Transcript)
38
(No Transcript)