The 2010 Economy: What Can We Expect? What are the Challenges? When will Employment Recover? Which State are Leading the Recovery? What are the Risks?
Bruce Yandle January 22, 2010 Bruce Yandle
January 22, 2010
Date
May-9
1
Oct-9
1
Mar-9
2
Aug-9
2
Jan-
93
Jun-
93
Nov-9
3
Apr-9
4
Sep-9
4
Feb-
95
Jul-9
5
Dec-9
5
May-9
6
Oct-9
6
Mar-9
7
Aug-9
7
Jan-
98
Jun-
98
Nov-9
8
Apr-9
9
Sep-9
9
Feb-
00
Jul-0
0
Dec-0
001
M5
01M10
2-Mar
2-Aug
3-Ja
n3-
Jun
3-Nov
4-Apr
4-Sep
5-Fe
b5-
Jul
5-Dec
6-May
6-Oct
7-Mar
7-Aug
8-Ja
n8-
Jun
8-Nov
9-Apr
9-Oct
105000
110000
115000
120000
125000
130000
135000
140000
145000
150000
Total Employed, 16 and Over, Seasonally AdjustedHousehold Survey, with Trend
1/1991 - 12/2009
Th
ou
sa
nd
Date
May-9
1
Oct-9
1
Mar-9
2
Aug-9
2
Jan-
93
Jun-
93
Nov-9
3
Apr-9
4
Sep-9
4
Feb-
95
Jul-9
5
Dec-9
5
May-9
6
Oct-9
6
Mar-9
7
Aug-9
7
Jan-
98
Jun-
98
Nov-9
8
Apr-9
9
Sep-9
9
Feb-
00
Jul-0
0
Dec-0
001
M5
01M10
2-Mar
2-Aug
3-Ja
n3-
Jun
3-Nov
4-Apr
4-Sep
5-Fe
b5-
Jul
5-Dec
6-May
6-Oct
7-Mar
7-Aug
8-Ja
n8-
Jun
8-Nov
9-Apr
9-Oct
105000
110000
115000
120000
125000
130000
135000
140000
145000
150000
Total Employed, 16 and Over, Seasonally AdjustedHousehold Survey, with Trend
1/1991 - 12/2009
Th
ou
sa
nd
September 2003
2006
M1
2006
M3
2006
M5
2006
M7
2006
M9
2006
M11
2007
M1
2007
M3
2007
M5
2007
M7
2007
M9
2007
M11
2008
M1
2008
M3
2008
M5
2008
M7
2008
M9
2008
M11
2009
M1
2009
M3
2009
M5
2009
M7
2009
M9
2009
M11
0
10
20
30
40
50
60
70
Diffusion Index, 1/2006-12/2009271 Industries over 1-month Span
V U W
Recovery? What Shape?
20
01
M1
20
01
M4
20
01
M7
20
01
M1
0
20
02
M1
20
02
M4
20
02
M7
20
02
M1
0
20
03
M1
20
03
M4
20
03
M7
20
03
M1
0
20
04
M1
20
04
M4
20
04
M7
20
04
M1
0
20
05
M1
20
05
M4
20
05
M7
20
05
M1
0
20
06
M1
20
06
M4
20
06
M7
20
06
M1
0
20
07
M1
20
07
M4
20
07
M7
20
07
M1
0
20
08
M1
20
08
M4
20
08
M7
20
08
M1
0
20
09
M1
20
09
M4
20
09
M7
0
100
200
300
400
500
600
700
TOTAL PERSONAL SAVINGS: 2001-2009$Billion
What’s Real & What’s Stimulus?
TWO KEY U.S. INDICATORS
1991
q1
1991
q4
1992
q3
1993
q2
1994
q1
1994
q4
1995
q3
1996
q2
1997
q1
1997
q4
1998
q3
1999
q2
2000
q1
2000
q4
2001
q3
2002
q2
2003
q1
2003
q4
2004
q3
2005
q2
2006
q1
2006
q4
2007
q3
2008
q2
2009
q1
2009
q4
2010
q3
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
Real GDP Growth, 1991-2010Ewith 4-quarter moving average
Recovery Signals
1. Equity markets move up.2. Hours worked go up.3. Firms become profitable.4. Employment increases.5. Personal Income rises.
EQUATION OF EXCHANGE
MV = PQ
M: Money SupplyV: Velocity
P: Price Level (CPI)Q: Output (GDP)
2000M1 2000M11 2001M9 2002M7 2003M5 2004M3 2005M1 2005M11 2006M9 2007M7 2008M5 2009M3-40
-20
0
20
40
60
80
Annual Growth of Industrial Production on 9-month Lagged M-1 Growth: 1/1990-9/2009
Ann
ual G
row
th R
ate
Money Supply Growth
2000M1 2000M11 2001M9 2002M7 2003M5 2004M3 2005M1 2005M11 2006M9 2007M7 2008M5 2009M3-60
-40
-20
0
20
40
60
80
100
Annual Growth of Industrial Production on 9-month Lagged M-1 Growth: 1/1990-9/2009
Ann
ual G
row
th R
ate
Money Supply Growth
Industrial Production Growth(lagged nine months)
1990
Q1
1990
Q4
1991
Q3
1992
Q2
1993
Q1
1993
Q4
1994
Q3
1995
Q2
1996
Q1
1996
Q4
1997
Q3
1998
Q2
1999
Q1
1999
Q4
2000
Q3
2001
Q2
2002
Q1
2002
Q4
2003
Q3
2004
Q2
2005
Q1
2005
Q4
2006
Q3
2007
Q2
2008
Q1
2008
Q4
-25
-20
-15
-10
-5
0
5
10
15
20
Dow-Jones & GDP Growth: 1Q1990-2Q2009
Dow-Jones annual growth, 4-quarter moving average. GDP quarterly annuallized growth.
U.S. S&P 500
Japan Nikkei 2
25
China SSEA
Britain FT
SE 100
Canada S&P TSX
Austria A
TX
Belgium BEI 20
France
CAC 60
Germany D
AX
Italy FT
SEM18
Czech
PX
Denmark G
MXCB
Hungary BUX
Sweden DM
XS30
Australia
ALL
ORD
Hong Kong Hang Seng
India BSE
Parkist
an KSE
Singpore STI
South Kore
a KOSPT
Agentina MERV
Brazil
BVSPChile
Venezuela IB
C
Israel T
A100
Egypt CASE30
0
20
40
60
80
100
120
Financial Market Performance, Dec. 2007-Oct. 2009(in U.S. dollar terms)
Perc
enta
ge C
hang
e D
ec. 3
1 th
roug
h O
ctob
er 2
8
19731974
19751976
19771978
19791980
19811982
19831984
19851986
19871988
19891990
19911992
19931994
19951996
19971998
19992000
20012002
20032004
20052006
20072008
2009
-10
-5
0
5
10
15
Industrial Production & S.C. Total Personal Income Growth: 1973-2009
Industrial Production
Grow
th R
ate
19731974
19751976
19771978
19791980
19811982
19831984
19851986
19871988
19891990
19911992
19931994
19951996
19971998
19992000
20012002
20032004
20052006
20072008
2009
-10
-5
0
5
10
15
Industrial Production & S.C. Total Personal Income Growth: 1973-2009
Industrial Production Real TPI
Grow
th R
ate
U.S. Unemployment Rate by Educational AttainmentDecember 2009
Less than High School Education 15.3%
High School Graduates 10.5%
Associate Degree Holders 9.0%
Bachelor Degree Holders 5.0%
Constraints on Hiring Less Educated People
• Workers have to produce enough wealth to earn their keep.
• This includes all fringe benefits that must be provided by employers.
• Higher minimum wage means entry level workers must be even more productive.
• Mandated fringe benefits require even more productivity.
Unemployment among teenage workers rises each time the minimum wage rate is raised.
2008 Economic Freedom & Knowledge Index Rankings
0
5
10
15
20
25
30
35
40
45
50
55
0 5 10 15 20 25 30 35 40 45 50 55
Knowledge Economy Ranking
Eco
no
mic
Fre
ed
om
R
an
kin
g
Kansas
Georgia
Colorada Utah
New HampshireVirginia
Delaware Arizona
Hawaii
NebraskaMinnesota
South Carolina
Montana
North Carolina
Alabama
Missouri
Iowa
Rhode Island
New York
CaliforniaNew Jersey
VermontMichigan
Washington
Maryland
Connecticut
Massachusets Oregon
S. DakotaIdaho
Wisconsin
N. Dakota
OklahomaNevada
Wyoming
Arkansas
Mississippi
Indiana
Maine
New Mexico
Alaska
Texas
FloridaTennessee
Louisiana
Kentucky
W. Virginia
OhioPennsylvania
Illinois
Employment Growth: 1996-2006
Unemployment Destroys Wealth &Creates Opportunity
Opportunity cost goes down for:• Education & Training
• Moving to a New Location• Starting a New Business
Policy Issues
Climate Change & CopenhagenBanker Bonuses & Bank Tax
Others???
2010 Outlook• GDP growth will range from 2.2% to 2.5% for both 2010 and 2011.• The unemployment rate will average 9.5% for 2010 and 8.4% for 2011.• Inflation will remain low, perhaps at 1% in 2010.• Interest rates will remain tame, with perhaps a 100 basis point increase at the
long end of the yield curve by the end of the year. There are four hazards or ghosts from the past that may disturb the outlook. • Fear-driven increases in personal savings, which means rebuilding consumer net
worth but further reductions in retail sales.• Rising energy prices.• A potential for massive inflation or credit market manipulation by the Fed to
avoid it.• Government entanglement in the economy that regulates and otherwise limits
economic freedom.
Next Three Months?1. We keep getting positive news, but there are new concerns about the exploding deficit.
Cash for Clunkers raises 3Q2009 GDP growth to plus 2.0%. The Dow continues to crawl ahead. We see 9900 in November. But the deficit prospects seem to be pushing interest rates higher as the government hits credit markets for more cash. Mortgage rates and bond yields are rising again. Consumer savings continues to augur for a slow recovery. It is surely not a Goldilocks economy, with everything beginning to feel just right, but we are at last on the recovery road.
122. While 3Q2009 GDP growth is artificially high, 2% or better, there is a soft under belly
developing in the economy. The unemployment rate is hanging high at 9%. People are not buying, unless huge government giveaways push them to buy. Construction spending is a bit better but still in the cellar. The Dow reflects this. A market correction has the Dow hitting 9,000. Once again, it begins to feel like a double dip.
53. This is no double-dip recession. It is a caterpillar economy. One month looks good; the
next not so good. But in spite of all the ups and downs, the economy does seem to be generating positive growth. But the world is flat. The Dow seems hung at 9500. The unemployment rate is stuck at 9.5%. Back to school spending was in the basement, and the prospects for Christmas spending are bleak. Banks are struggling with bad commercial debt. And bank failures continue to plague the economy. Forecasters are revising their 2010 forecasts….downward.
19
Next Three Months?1. Yes, it is a caterpillar economy, but a solid growth base is showing up in manufacturing.
Housing markets are firming, and retail sales are picking up a wee bit. GDP growth over the next quarter should exceed 2%. But unemployment will rise above 10.5% We should keep our money in the market…, that is , if we have any left. The Dow will rise above 10,900.
2. Caterpillar be damned. A double-dip is showing up. Stimulus comes and goes, but there is nothing to offset bankruptcies and defaults in the commercial property market. First and second quarter GDP growth will likely trend downward to less than 2%, and the Dow, still looking for profits, will be locked at about 10,500. Unemployment? Get ready to see 11%.
3. Everyone knew that China was keeping us afloat, but few wanted to admit it. Now that our great benefactor has decided to put a lid on GDP growth, there will be less Chinese demand for stuff we produce (they love our agricultural products) and less surplus there that needs to be invested in good old U.S. bonds. You guessed it. Interest rates will rise. The U.S. economy will get a case of the slows, and our GDP growth will begin to look awfully pale. Now, this won’t happen overnight, but the ugly edge will start showing up in March or April. Look for GDP growth here to get clamped at around 1.5%. Unemployment to head toward 12%, and the Dow to start looking for 9,800.