Jay Harzell, Ph.D.2014 Economic Forecast

Professor of Finance, McCombs School of BusinessThe University of Texas as Austin

October 17, 2013Federal Reserve Bank-Houston Branch

Economic Outlook 2014

Jay C. HartzellChair, Department of Finance, McCombs School of Business

The University of Texas at Austin

Economic Forecasts Research Department, Federal Reserve

Bank of Philadelphia “Survey of Professional Forecasters” First quarter (August 16, 2013) Doing this since 1968

42 “Professional Forecasters” Provide advice used by large commercial

institutions Members of National Association for Business

Economics (NABE) Use a variety of techniques and assumptions to

arrive at forecasts

Real Gross Domestic Product Definition Historic average annual rate of growth

~ 3.0% Median forecasts (annual rate of growth)

2013 2.2%2014 2.3%2015 2.7%2016 2.9%

Risk of negative quarter (probability)2013: Q3 10.5%2013: Q4 11.2%2014: Q1 11.7%2014: Q2 11.5%2014: Q3 11.8%

Unemployment & Workforce Participation Unemployment (natural rate ~ 6.0%)

2013 7.5% (~12.5 million)2014 7.1%2015 6.6%2016 6.1%

Under-employed (BLS “Alternatives”)~ 12%-18%

Workforce Participation Rate2000 67.3% (143 million)2008 66.3% (154 million)2013 63.2% (155 million)

Okun’s Law~ 3.0% Real GDP Growth to reduce unemployment

Foundations of Low Growth Consumer spending and households

Stagnant incomes High or under employment Deleveraging Uncertainty

Business investment In aggregate, slim profit prospects

Contraction in household and government sectors Uncertainty, particularly in government policy

Government spending AAAAGGGGHHH! (debt-to-GDP ratio)

Net Export Slowing global growth

Inflation (Consumer Price Index) Definition Historical average (annual rate)

~ 4.0% Median forecasts (annual rate)

Long-term forecasts (annual rate)

Comments of Fed on controlling inflation Managing liquidity (e.g., bank and non-bank reserves) Commitment to inflation

Headline CPI Core CPI

2013 1.4% 1.8%

2014 2.0% 2.0%

2015 2.3% 2.1%

Headline CPI

2012-2016 2.0%

2012-2021 2.0%

View from 30,000 Feet (2013-2016)

Slow growth Improving private sector balance sheets Deteriorating (dramatically) public sector balance

sheets High unemployment High under-employment Lower workforce participation Low interest rates Low-ish inflation More wealth re-distribution than creation

Energy Health care Education

Latest Fed Forecasts

 US Economic Policy Uncertainty Index

 US Economic Policy Uncertainty Index

Fed Policy: Growth and Inflation Forecasts

Texas Job Growth

Texas Leading Index