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Transcript of 1 Coping With The Limits of Macroeconomic Policy The Recovery from the Great Recession In this...
1
Coping With The Limits of Macroeconomic Policy The Recovery from the Great Recession
In this presentation
• National forecasts are produced by Global Insight, Inc.
• State and Metropolitan forecasts are public information produced by the Division of Research and Policy, Wisconsin DOR.
• Information is supplied by the U.S. Bureau Of the Census, U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis, Federal Housing Finance Authority, Federal Reserve Board of Governors, Federal Reserve Bank of Philadelphia, Federal Reserve Bank of New York, the Wisconsin Department of Workforce Development, and various divisions of the Wisconsin DOR.
2
Today’s Themes
1) Living a Half-Fast Recovery.
2) Coping with the Limits of Macroeconomic Policy
3) Prospects for US and Wisconsin in 2011 & 2012
Economy Now Fully RecoveredAt least pending another GDP Revision
3
Recovery Already in 29th Month
4
Real GDP Growth Has Stalled Compared to Recent Recoveries
5
Growth is About Half of Post War AverageRecoveries Aren't What They Used to Be
0
1
2
3
4
5
6
7
Average Real GDP Growth First 9 Quarters of Recovery
September 30, 2011 6
Remember the National Income Identity
Yd = C + I + (X-M) + G
Total Aggregate Demand is the sum of purchases for consumption, investment, net exports and government.
7
Consumption Fully Recovered by Late 2010
8
99
National Retail Sales Continue to Rise Around 8.0% Over Prior Year
-12%
-8%
-4%
0%
4%
8%
12%
2007 2008 2009 2010 2011
Total Total Less Sales of M otor Vehicles
Retail Sales
Year-over-year Growth
Exports Recovered Quickly
September 30, 2011 10
Federal Spending Never Faltered
September 30, 2011 11
Limits of Macroeconomic Policy
• Fiscal Policy– Keynesian Fallacy of Composition
– Bill comes dues for 2009 Stimulus
• Monetary Policy– Living in the Liquidity Trap
September 30, 2011 12
State & Local Purchases Matter MoreIn the "G" in the National Income Identity
13
State & Local Spending Unwinds 10 Years of Growth
1400
1420
1440
1460
1480
1500
1520
1540
State & Local Purchases, NIPA Basis
14
1515
State & Local Tax Revenues Have Not Recovered
Income and Sales Tax Collections, NIPA Basis
600
620
640
660
680
700
720
740
760
780
800
2006-I 2006-II 2006-III 2006-IV 2007-I 2007-II 2007-III 2007-IV 2008-I 2008-II 2008-III 2008-IV 2009-I 2009-II 2009-III 2009-IV 2010-I 2010-II 2010-III 2010-IV 2011-I2011-II2011-III
Billions of Dollars
1616
Bill Comes Dues for Stimulus
Stimulus Funds Fading AwayFederal Grants-In-Aid, NIPA Basis
300
350
400
450
500
550
600
2006-I 2006-II 2006-III 2006-IV 2007-I 2007-II 2007-III 2007-IV 2008-I 2008-II 2008-III 2008-IV 2009-I 2009-II 2009-III 2009-IV 2010-I 2010-II 2010-III 2010-IV 2011-I2011-II2011-III
Billions of Dollars
1717
State Government Losing Jobs
National Data
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
0 2 4 6 8 10 12 14 16 18 20 22 24 26
Months Since End of Recession
Percent Change Over Prior Year
Total PvtState Govt
1818
Persistent State Government Job Losses This Recovery
State Government Employment, Pct Change Over Prior Year
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
1 3 5 7 9 11 13 15 17 19 21 23 25 27
1990-9120012007-09
Source: U.S. Bureau of Labor Statistics
Wisconsin State Government Employment at 20 Year Low
19
In Wisconsin, State Government Job Losses Now Exceed Manufacturing Job Losses
20
Limits of Monetary Policy
• Principal Weakness in the Economy is Lack of Investment
• Low short-term interest rates have not spurred investment– Haven't move long-term rates that much– Relationship between interest and investment
has changed
• Lack of demand for funds
21
The Economy's Principal Weakness is Lack of Investment
22
Living in the Liquidity TrapFed Funds Rate less than 0.1% Since April
23
Pushing on the String
Yield on Inflation Indexed Securities Negative Since April
September 30, 2011 24
Cutting Short-Term RatesDoes Not Necessarily Move Long-Term Rates
September 30, 2011 25
Mortgage Rates At Record Lows
September 30, 2011 26
2727
Housing Stuck In Low
Investment in Residential Housing, Billions of 2005 Dollars
300
400
500
600
700
800
900
1995-I 1995-IV 1996-III 1997-II 1998-I 1998-IV 1999-III 2000-II 2001-I 2001-IV 2002-III 2003-II 2004-I 2004-IV 2005-III 2006-II 2007-I 2007-IV 2008-III 2009-II 2010-I 2010-IV 2011-III
2828
Lower Mortgage Rates Don’t Spur StartsRelationship Between Housing Starts and Mortgage Rates Breaks Down
0
500
1,000
1,500
2,000
2,500
3,000
Apr-71 Jan-77 Oct-82 Jul-88 Apr-94 Jan-00 Oct-05 Jul-11Source: U.S. Department of Commerce: Census Bureau/Board of Governors of the Federal Reserve System/FRED
Thousands of Units
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
Percent
Housing Starts
30-year Mortgage Rate (Right Axis)
29
Correcting the Housing Price Bubble
Housing Prices Relative to Consumer Prices
100
120
140
160
180
200
220
240
Mar-91Mar-92Mar-93Mar-94Mar-95Mar-96Mar-97Mar-98Mar-99Mar-00Mar-01Mar-02Mar-03Mar-04Mar-05Mar-06Mar-07Mar-08Mar-09Mar-10Mar-11
Index 1991q1=100
FHFA Index
CPI
30
Correcting the Housing Price BubbleWisconsin’s Correction More Modest than US
FHFA Purchase Index
-15%
-10%
-5%
0%
5%
10%
15%
Mar-92Mar-93Mar-94Mar-95Mar-96Mar-97Mar-98Mar-99Mar-00Mar-01Mar-02Mar-03Mar-04Mar-05Mar-06Mar-07Mar-08Mar-09Mar-10Mar-11
Percent Change Over Prior Year
US
WI
3131
Wisconsin Housing Bouncing Around the Bottom
Wisconsin Building Permits, 12 Month Total
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
Jan 01Jul 01 Jan 02Jul 02 Jan 03Jul 03 Jan 04Jul 04 Jan 05Jul 05 Jan 06Jul 06 Jan 07Jul 07 Jan 08Jul 08 Jan 09Jul 09 Jan 10Jul 10 Jan 11Jul 11
3232
Lack of Demand for Funds
Households Paying Down Debt
Household Debt Outstanding
-4
-2
0
2
4
6
8
10
12
14
2006q12006q22006q32006q42007q12007q22007q32007q42008q12008q22008q32008q42009q12009q22009q32009q42010q12010q22010q32010q42011q12011q2
Percent Change At Anual Rates
3333
Lack of Demand for Funds
Consumers Rapidly De-LeveragingConsumer Financial Obligations at Lowest Level in 18 years
Consumer Financial Obligaton Ratio (FOR)
15.0
15.5
16.0
16.5
17.0
17.5
18.0
18.5
19.0
19.5
20.0
80q181q383q184q386q187q389q190q392q193q395q196q398q199q301q102q304q105q307q108q310q1
Pct. of Disposable Personal Income
FOR
30 Yr Avg
Source: Federal Reserve Board of Governors
3434
Consumers Still Paying Down Credit CardsRevolving Credit Has Been Dropping Rapidly Since Feb 2009
-100000
-80000
-60000
-40000
-20000
0
20000
40000
60000
80000
100000
Jan 1 2000Apr 1 2000Jul 1 2000Oct 1 2000Jan 1 2001Apr 1 2001Jul 1 2001Oct 1 2001Jan 1 2002Apr 1 2002Jul 1 2002Oct 1 2002Jan 1 2003Apr 1 2003Jul 1 2003Oct 1 2003Jan 1 2004Apr 1 2004Jul 1 2004Oct 1 2004Jan 1 2005Apr 1 2005Jul 1 2005Oct 1 2005Jan 1 2006Apr 1 2006Jul 1 2006Oct 1 2006Jan 1 2007Apr 1 2007Jul 1 2007Oct 1 2007Jan 1 2008Apr 1 2008Jul 1 2008Oct 1 2008Jan 1 2009Apr 1 2009Jul 1 2009Oct 1 20091/1/20104/1/20107/1/2010
10/1/20101/1/2011
Change over Prior Year $M
Source: Federal Reserve Board of Governors Last Month Plotted: February 2011
3535
New Frugality
Savings Up Substantially Personal Savings, Billions of Dollars
0
100
200
300
400
500
600
700
800
2000-I 2000-III 2001-I 2001-III 2002-I 2002-III 2003-I 2003-III 2004-I 2004-III 2005-I 2005-III 2006-I 2006-III 2007-I 2007-III 2008-I 2008-III 2009-I 2009-III 2010-I 2010-III 2011-I
Collateral DamageLow Interest Rates Reduce Personal Income
36
Two Sectors Sufficient to Explain the Half-Fast Recovery
Contributions to Real GDP Growth From Sector
-0.4-0.2
0.00.20.4
0.60.8
1.01.2
1953-541957-581960-611969-701974-751981-821990-912000-012007-09
Real GDP Growth At Annual Rates
S&L GovtResidential
Source: BEA, NIPA Table 1.1.2. Contributions to Percent Change in Real Gross Domestic Product
Rest of Economy Outpacing Last Two Recoveries
9 Qtr Real GDP Growth in Recovery
0
1
2
3
4
5
6
7
1953-54 1957-58 1960-61 1969-70 1973-75 1981-82 1990-91 2001 2007-09
Real GDP At Annual Rates
TotalLess S&L, Res Inv
Wisconsin Outlook in 2011 and 2012
40
Wisconsin Among 25 States with Unemployment Significantly Below US
State Unemployment RatesAugust 2011
Below US Average (25)Near US Average (16)Above US Average (9)
4141
Manufacturing Leading Wisconsin’s Recovery
Wisconsin Employment, Percent Change over Prior Year
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
Jan-07Apr-07Jul-07Oct-07Jan-08Apr-08Jul-08Oct-08Jan-09Apr-09Jul-09Oct-09Jan-10Apr-10Jul-10Oct-10Jan-11
Total
Manufacturing
42
Milwaukee Manufacturing Edges Up ISM Manufacturing Index: PMI
25
50
75
2007M01 2008M01 2009M01 2010M01 2011M01Index; Reading above 50 signals expansion
National Milwaukee
43
Sales Tax Collections Trend Higher3 Month Moving Average
Sales Tax Collections3-Month Moving Average
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
2007M09 2008M09 2009M09 2010M09
Year/Year Change
44
Withholding Collections Also Trend Higher Withholding Collections
3-Month Moving Average
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
2007M09 2008M09 2009M09 2010M09
Year/Year Change
4545
Wisconsin Income Held Up Better Than US
Cumulative Income Growth Since 2007q4
-4%
-2%
0%
2%
4%
6%
8%
10%
2008Q12008Q22008Q32008Q42009Q12009Q22009Q32009Q42010Q12010Q22010Q32010Q42011Q12011Q2
US
WI
46
Wisconsin Per Capita Income Edging Closer to US Average
91.0%
92.0%
93.0%
94.0%
95.0%
96.0%
97.0%
2004 2005 2006 2007 2008 2009 2010
47
Wisconsin Ranks 25th in Per Capita Personal Income
State Per Capita Personal Income2010
Top 10 (8)Second 10 (10)Middle 10 (10)Fourth 19 (10)Bottom 10 (12)
48
Employment OutlookWisconsin Slightly Ahead of US in 2011
Change in Nonfarm Employment
-5
-4
-3
-2
-1
0
1
2
2007 2008 2009 2010 2011 2012 2013
Percent Change Over Prior Year
US
WI
Source: Wisconsin DOR, Wisconsin Economic Outlookhttp://www.revenue.wi.gov/ra/econ/index.html
49
Income OutlookWisconsin Outperforms US in 2011
Total Personal Income
-6
-4
-2
0
2
4
6
8
2007 2008 2009 2010 2011 2012 2013Percent Change Over Prior Year
US
WI
Source: Wisconsin DOR, Wisconsin Economic Outlookhttp://www.revenue.wi.gov/ra/econ/index.html