Download Where`s the Growth? 2015 Pine Brook Annual Meeting By Howard

October 20, 2015
Where’s the Growth?
By Howard Newman, President and CEO
The Question of The Day
2
The Question of The Day
3
Today’s Talk
1. Is There a Growth Problem?
2. Conundrum for the FED
3. The Great Debt Debate
4. Investment and Productivity
4
Is There a Growth Problem?
Growth Is on Everybody’s Mind
 IMF predicting lower growth globally
 FED delayed raising rates because of global growth and stability concerns
 Even the Democratic debate participants are running against the economic record
of the past 7 years
6
The U.S. Economy Is Doing Just Fine
Close to Full Employment
Unemployment Rate
12%
10%
8%
6%
4%
2%
0%
2000
2001
2002
2003
2004
2005
2006
2007
Consumer is Alive and Well
2008
2010
2011
2012
2013
2014
2015
Inflationary Expectations “Well Anchored”
3.0%
Source: St. Louis Federal Reserve
0.5%
2015
2014
2013
2012
2011
2010
2009
2008
0.0%
2007
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
-4%
2006
-2%
1.0%
2005
0%
1.5%
2004
2%
2.0%
2003
4%
2.5%
2002
6%
2001
Long Term CPI Inflation
Expectation
8%
2000
10%
YoY Growth in PCE
2009
7
Headwinds? Not Many
Housing?
Recovery proceeding
Credit?
Generally available
Energy?
Stable
Fiscal Policy?
Stable
Slow Growth Abroad?
Some concern
8
Nagging Concerns
 Real wage growth still inadequate
 Productivity growth remains muted
 Inequality is on everybody’s mind
 Strong dollar/problems abroad
 Why didn’t the FED tighten?
9
1947
1948
1950
1952
1953
1955
1957
1958
1960
1962
1963
1965
1967
1968
1970
1972
1973
1975
1977
1978
1980
1982
1983
1985
1987
1988
1990
1992
1993
1995
1997
1998
2000
2002
2003
2005
2007
2008
2010
2012
2013
Quarter over Sequential Quarter GDP Growth
There Is a Secular Problem, Not a Cyclical One
Real GDP Growth (Quarterly Rates, Annualized)
20.0%
15.0%
10.0%
5.0%
Average: 3.3%
0.0%
-5.0%
-10.0%
-15.0%
Source: St. Louis Federal Reserve
10
So Here is Today’s Big Question
11
The FED
Is Monetary Policy No Longer Effective?
13
The Decision to Defer
 FED’s decision to defer an interest rate increase pleased almost nobody
 Did it signal a concern about the U.S. economy?
 Did it signal a concern about the stability of the global financial system?
 Did it signal that the FED remains trapped in the deflation silo?
14
The FED’s Perspective: Deflation
 Deflation caused the Great Depression
– Tight money, bank failures and the absence of credit
 Deflationary spiral impossible to address after it begins due to the “zero rate
bound” constraint
 Growth requires credit-especially consumer and mortgage credit
 Focus on the health of the financial sector
 Cannot address the underlying macro causes of a crisis after it begins
15
The FED’s Perspective: Inflation
 Need some inflation so that monetary policy can be effective when needed
 Inflationary expectations are well rooted-and need to stay well rooted
 Current inflation is below the 2% target in adopted in 2012
 Real interest rates reflect expectations about inflation
 Deflation still a major concern given the persistence of low inflation
16
The FED’s Longer Term Problem
 Monetary policy works by creating debt
 Debt increases the instability of the system
 Instability reflects the cumulative debt balance in the system
 Using monetary policy to grow the economy creates the very macro prudential risks
the FED seeks to avoid-and using monetary policy to slow the economy actualizes
those risks as debt holders seek to avoid capital losses
17
Why Is Monetary Policy Not Working?
 Rational expectations explanation
– Inter-temporal budget constraint
 Sticky return requirements of investors
– Required risk premium is a function of the activity, not the availability of capital
– Driving returns down means driving asset prices up which makes investment unattractive
 Reduced consumption by savers at zero rates
 Will raising interest rates actually help the economy?
18
The FED’s Conundrum
 The FED is caught between its two policy goals (full employment and price stability)
and its macro prudential obligations.
 Macro prudential issues will always tilt the decision toward easing
 Deflation concerns tilt toward easing
 Cumulative easing may hurt animal spirits, investing and growth
 Short term stimulus may create a long term problem for the economy
19
The Great Debt Debate
Crushed by Debt?
21
Aggregate Debt and Growth Negatively Correlated
Selected Credit Classes as a Percent of GDP
350%
‘10-’15: 2.2%
Debt as a Percent of GDP (%)
300%
‘99-’07: 2.5%
250%
200%
‘80-’99: 3.4%
‘50-’80: 3.8%
150%
100%
50%
0%
Government Agency Debt (excl. Mortgages)
Consumer Credit
Municipal Debt
Source: Federal Reserve Board, St. Louis Federal Reserve
Note: Italicized numbers indicated compounded real GDP growth during the period.
1) Excludes U.S held debt of foreign institutions.
Mortgage Debt
U.S. Corporate Debt¹
Federal Government Debt
22
Growth Seems to Have Been Hurt by Relying on Consumption
Average Personal Consumption
Share of Gross GDP
Average Percent
Increase in Real GDP1
Year
Share
Growth
1960 – 1970
59.8%
4.5%
1970 – 1980
60.5%
3.4%
1980 – 1990
62.5%
3.2%
1990 – 2000
64.7%
3.4%
2000 – 2010
67.3%
1.7%
2010 – 2015
68.4%
2.2%
Source: St. Louis Federal Reserve
1)
Real GDP growth calculated by annualizing quarter over sequential quarter growth.
23
Investing Is Not Down Enough to Explain Subdued Growth
Average Private Investment
Share of Gross GDP
Average Percent
Increase in Real GDP1
Year
Share
Growth
1960 – 1970
16.5%
4.5%
1970 – 1980
17.9%
3.4%
1980 – 1990
18.5%
3.2%
1990 – 2000
17.3%
3.4%
2000 – 2010
17.8%
1.7%
2010 – 2015
15.4%
2.2%
Source: St. Louis Federal Reserve
1)
Real GDP growth calculated by annualizing quarter over sequential quarter growth.
24
Government Spending Not A Factor
Average Government Spend
Share of Gross GDP
Average Percent
Increase in Real GDP1
Year
Share
Growth
1960 – 1970
23.1%
4.5%
1970 – 1980
21.8%
3.4%
1980 – 1990
20.8%
3.2%
1990 – 2000
19.2%
3.4%
2000 – 2010
19.3%
1.7%
2010 – 2015
19.4%
2.2%
Source: St. Louis Federal Reserve
1)
Real GDP growth calculated by annualizing quarter over sequential quarter growth.
25
Net Exports Have Had an Impact
Average Net Exports
Share of Gross GDP
Average Percent
Increase in Real GDP1
Year
Share
Growth
1960 – 1970
0.6%
4.5%
1970 – 1980
(0.2)%
3.4%
1980 – 1990
(1.7)%
3.2%
1990 – 2000
(1.2)%
3.4%
2000 – 2010
(4.4)%
1.7%
2010 – 2015
(3.2)%
2.2%
Source: St. Louis Federal Reserve
1)
Real GDP growth calculated by annualizing quarter over sequential quarter growth.
26
Financing Housing Instead of Financing Investment
($bn)
Net Imports of Goods and Services
Residential Investment
1,000.0
Net Imports vs. Residential Investment1
800.0
600.0
400.0
200.0
0.0
(200.0)
(400.0)
(600.0)
(800.0)
(1,000.0)
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10
Source: Bureau of Economic Analysis
27
Consumer Debt : Cause or Effect?
Aggregate Consumer Debt
$3,500
$3,000
Total Debt ($ bn)
$2,500
($ bn)
Revolving Consumer Credit
Auto Loans
Student Loans
Other Installment Debt
Total
1951
$0
$6
$0
$19
$25
1975
$15
$57
$0
$135
$207
1985
$132
$212
$0
$267
$611
2007
$1,002
$801
$584
$228
$2,615
2015
$890
$958
$1,215
$249
$3,312
$2,000
$1,500
$1,000
$500
$0
Other Installment Debt
Source: St. Louis Federal Reserve
Student Loans
Auto Loans
Revolving Consumer Credit
28
The Two Faces of Debt
 Debt allows current consumption to increase
– Monetary policy works by encouraging/discouraging consumption
 Debt requires future consumption to decrease
– Less true if debt finances income
– Compounded if debt finances consumption, including housing
– Research shows that it would take a tax rate on future generations of 74% to satisfy the
government’s inter-temporal budget constraint
29
Debt As a Macro Economic Variable
 Aggregate debt increases financial instability
 Aggregate debt ties the hands of the monetary authorities
 Aggregate debt dampens animal spirits and hampers investment
30
Investment and Productivity
There’s Something About Investing
32
Since 2000, the U.S. Created 11 Million Jobs
Non-Farm Payrolls (000’s)
145,000
142,371
Non-Farm Payrolls
140,000
138,365
135,000
132,767
130,000
133,500
131,009
129,649
130,147
125,000
120,000
2000
2001
Source: St. Louis Federal Reserve
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
33
Secular or Cyclical: Healthcare
Healthcare Jobs (000’s)
19,500
18,500
17,500
Healthcare Jobs (000’s)
16,500
15,500
14,500
13,500
12,500
11,500
10,500
Jan
2000
1)
Jan
2001
Jan
2002
Source: Bureau of Labor Statistics.
Jan
2003
Jan
2004
Jan
2005
Jan
2006
Jan
2007
Jan
2008
Jan
2009
Jan
2010
Jan
2011
Jan
2012
Jan
2013
Jan
2014
Jan
2015
34
Secular or Cyclical: Leisure and Hospitality
Leisure and Hospitality Jobs (000’s)
15,500
15,000
Leisure & Hospitality Jobs (000’s)
14,500
14,000
13,500
13,000
12,500
12,000
11,500
11,000
10,500
Jan
2000
Jan
2001
Source: Bureau of Labor Statistics.
Jan
2002
Jan
2003
Jan
2004
Jan
2005
Jan
2006
Jan
2007
Jan
2008
Jan
2009
Jan
2010
Jan
2011
Jan
2012
Jan
2013
Jan
2014
Jan
2015
35
Secular or Cyclical: Manufacturing
Manufacturing Jobs (000s)
18,500
17,500
Manufacturing Jobs (000’s)
16,500
15,500
14,500
13,500
12,500
11,500
10,500
Jan
2000
Jan
2001
Source: Bureau of Labor Statistics.
Jan
2002
Jan
2003
Jan
2004
Jan
2005
Jan
2006
Jan
2007
Jan
2008
Jan
2009
Jan
2010
Jan
2011
Jan
2012
Jan
2013
Jan
2014
Jan
2015
36
Where Are Jobs Being Created?
(Jobs in 000’s)
January 2000
September 2015
Variance (#)
Secular Growth in Employment
14,959
22,153
7,194
Cyclical Growth in Employment
94,980
105,099
10,119
Declining Employment
20,842
15,119
(5,723)
130,781
142,371
11,590
Total Non-Farm Employment
Source: Bureau of Labor Statistics.
1) Changes shown in real GDP is from 1999 - 2014. GDP is in chained 2009 dollars.
37
Creating Jobs without Creating Productivity
Change Between 2000 – 2015
Jobs1
GDP2
Annual Change in
Labor Productivity
Secular Growth
48.1%
46.1%
(0.1)%
Cyclical Growth
10.7%
30.8%
1.1%
Declining Employment
(27.5)%
39.1%
4.4%
8.8%
33.3%
1.4%
Total
Source: Pine Brook internal analysis, Bureau of Economic Analysis, and Census.
1) Change in jobs represents growth from seasonally adjusted annualized data from Jan 200 – Sept 2015.
2) Change in GDP is from 1999-2014. Data set only available annually. GDP is in chained 2009 dollars.
38
Investing Creates Productivity and Wage Growth
Change Between 2000 – 2015
Aggregate
Capital
Expenditure
($bn)
% of Total
Aggregate
Capital
Expenditure
Aggregate
Capital
Expenditure ($)
per Average
Worker
Aggregate
Capital
Expenditure ($)
per New
Worker
Secular Growth
$1,335
8.7%
$72,367
$185,538
Cyclical Growth
$9,925
64.8%
$139,688
$980,863
Declining Employment
$4,048
26.4%
$243,878
n/a
$15,308
100.0%
—
—
Total
Source: Pine Brook internal analysis, St. Louis Federal Reserve
39
Summary and Conclusion: Where’s the Growth?
Summary
 The U.S. economy is growing, but not at a rate to make everyone happy
 The FED’s statutory obligations of full employment and price stability
conflict with its macro prudential obligations
 Debt overhang looms large and may be impacting investment
 For most of this century, the US has been creating too many jobs in
productivity resistant industries –perhaps because they have not attracted
investment, or perhaps because of other factors
41
The US has a “Use of Proceeds” Problem
 The economy has been creating jobs that are productivity resistant
 Over-investing in housing may be creating drag on US productivity
 Recent drivers of recovery-energy, housing and credit expansion-have done what
they can do
 Absent a change in policy and politics, “more of the same” is the most likely
outcome for the US economy
42