, Division of Research
The Economic Outlook
Dr. Doug WoodwardDirector, Division of Research
Professor of Economics
Orangeburg, SC
November 12, 2008
Overview
• Perspective on the financial crisis• Perspective on the economic crisis
– U.S.– South Carolina
• The Fundamentals: Long-term Competitiveness
Perspective on the Financial Crisis A parallel financial industry created,
sold, and bought trillions of dollars of derivative securities based upon "hedging" or "insuring"
the value of a much smaller base of real assets.
Akin to gambling: credit default swaps
Some versions of these instruments are imaginary capital. These claims overlap on the same
types of mortgages and other financial instruments.
TARP’s problem Hard to price and sell these
financial products.
Co-Pilots
“Beware …
of geeks … bearing formulas.”
C = S * N(d1) - K * (e ^ -rt) * N (d2) d1 = ln (S / K) + (r + (sigma) ^ 2 / 2) * t / sigma * sqrt(t) d2 = d1 - sigma * sqrt(t)
Financial Cycle• Excitement
• Rational response to an event or opportunity
• Euphoria• Growing confidence
• Excessive risk• Irrational exuberance• Leverage• Bubble
• Revulsion• Bubble bursts• Fear sets in• Hoarding• Crisis of confidence
Real Investment Matters• Financial disorder creates a crisis of
confidence– Fundamental uncertainty
• Financial crises can have real consequences– Consumer retrench– Loss of confidence and animal spirits
(Keynes)• Real investment stagnates
– Real investment is plant, equipment, even housing
– Productivity enhancing investments decline
• Government fiscal stimulus needed
The Forecast for the Real U.S. Economy
Recession …
What is a Recession?
Two quarters of declining GDP
Further:A significant decline in economic activity
spread across the economy• Consumers retrench and wholesale-
retail sales weaken• Employment losses mount
The Long-run Business Cycle
Real Investment in Peril
The Forecast for the Real South Carolina Economy
Recession …
South Carolina Economic Barometer
Retail Rebound for Christmas?
• Low gas prices• Stock market
recovery• No more financial
shocks• Rising confidence• Stimulus checks
Exports Holding Up Manufacturing
• Dollar’s decline helped the S.C. economy• Growing exports were a central reason
why the S.C. economy stabilized in 2008• But the latest data show …
– Exports of goods will slow in 2009– They were growing at double digit rates
BMW’s Cumulative Capital Investmentin South Carolina in 2007 Dollars
Millions
Figure 3BMW Employment Impact
(2007 Values)
5,400
10,124
7,526
23,050
0
5,000
10,000
15,000
20,000
25,000
Direct Indirect Induced Total
Outlook Summary
• The ongoing financial crises will ensure a national recession.
• Meager economic gains during 2009.• Mild recovery possible in mid-2009.
• Local and state government in fiscal crisis.
Looking further ahead
• A rebound in 2010.• 2010–15: South Carolina will be a leading state
economy with export clusters.• More diversified• Cluster and competitiveness initiatives are still
the key to long run growth.
Thank you!
Additional information available at the web site for the Division of Research, Moore School of Business, University of South Carolina:
http://mooreschool.sc.edu/moore/research/
28th Annual Economic Outlook ConferenceDecember 3, 2008
Marriott Columbia City Center
8:30 am Continental Breakfast and Networking
9:30 am Check-in
10:00 am-12:00 noon "Outlook for the U.S. and S.C. Economy 2009"
Luncheon Speaker: Daniel H. Stern--"Current Status of the Financial Markets"
Cost is $75 (includes morning program and luncheon.)
Visit Moore School Website orcall 800-393-2362
Deadline to register is Nov. 26