Mercatus Center's Capitol Hill Campus Course A Quarterly Economic Update January 2010 with Dr. Bruce Yandle.

1. 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

8. Recovery? What Shape? V U W

10. What’s Real & What’s Stimulus?

13. TWO KEY U.S. INDICATORS

16. Recovery Signals1. Equity markets move up.2. Hours worked go up.3. Firms become profitable.4. Employment increases.5. Personal Income rises.

18. EQUATION OF EXCHANGE MV = PQ M: Money Supply V: Velocity P: Price Level (CPI) Q: Output (GDP)

26. What about brains?

27. 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%

28. 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.

30. Employment Growth: 1996-2006

32. Moving to a New Location

34. 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.

35. Next Three Months? 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. 12 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. 5 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

36. Next Three Months? 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. 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%. 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.