1 Coping With The Limits of Macroeconomic Policy The Recovery from the Great Recession In this...

1

Coping With The Limits of Macroeconomic Policy The Recovery from the Great Recession

In this presentation

• National forecasts are produced by Global Insight, Inc.

• State and Metropolitan forecasts are public information produced by the Division of Research and Policy, Wisconsin DOR.

• Information is supplied by the U.S. Bureau Of the Census, U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis, Federal Housing Finance Authority, Federal Reserve Board of Governors, Federal Reserve Bank of Philadelphia, Federal Reserve Bank of New York, the Wisconsin Department of Workforce Development, and various divisions of the Wisconsin DOR.

2

Today’s Themes

1) Living a Half-Fast Recovery.

2) Coping with the Limits of Macroeconomic Policy

3) Prospects for US and Wisconsin in 2011 & 2012

Economy Now Fully RecoveredAt least pending another GDP Revision

3

Recovery Already in 29th Month

4

Real GDP Growth Has Stalled Compared to Recent Recoveries

5

Growth is About Half of Post War AverageRecoveries Aren't What They Used to Be

0

1

2

3

4

5

6

7

Average Real GDP Growth First 9 Quarters of Recovery

September 30, 2011 6

Remember the National Income Identity

Yd = C + I + (X-M) + G

Total Aggregate Demand is the sum of purchases for consumption, investment, net exports and government.

7

Consumption Fully Recovered by Late 2010

8

99

National Retail Sales Continue to Rise Around 8.0% Over Prior Year

-12%

-8%

-4%

0%

4%

8%

12%

2007 2008 2009 2010 2011

Total Total Less Sales of M otor Vehicles

Retail Sales

Year-over-year Growth

Exports Recovered Quickly


Federal Spending Never Faltered


Limits of Macroeconomic Policy

• Fiscal Policy– Keynesian Fallacy of Composition

– Bill comes dues for 2009 Stimulus

• Monetary Policy– Living in the Liquidity Trap


State & Local Purchases Matter MoreIn the "G" in the National Income Identity

13

State & Local Spending Unwinds 10 Years of Growth

1400

1420

1440

1460

1480

1500

1520

1540

State & Local Purchases, NIPA Basis

14

1515

State & Local Tax Revenues Have Not Recovered

Income and Sales Tax Collections, NIPA Basis

600

620

640

660

680

700

720

740

760

780

800

2006-I 2006-II 2006-III 2006-IV 2007-I 2007-II 2007-III 2007-IV 2008-I 2008-II 2008-III 2008-IV 2009-I 2009-II 2009-III 2009-IV 2010-I 2010-II 2010-III 2010-IV 2011-I2011-II2011-III

Billions of Dollars

1616

Bill Comes Dues for Stimulus

Stimulus Funds Fading AwayFederal Grants-In-Aid, NIPA Basis

300

350

400

450

500

550

600

2006-I 2006-II 2006-III 2006-IV 2007-I 2007-II 2007-III 2007-IV 2008-I 2008-II 2008-III 2008-IV 2009-I 2009-II 2009-III 2009-IV 2010-I 2010-II 2010-III 2010-IV 2011-I2011-II2011-III

Billions of Dollars

1717

State Government Losing Jobs

National Data

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

0 2 4 6 8 10 12 14 16 18 20 22 24 26

Months Since End of Recession

Percent Change Over Prior Year

Total PvtState Govt

1818

Persistent State Government Job Losses This Recovery

State Government Employment, Pct Change Over Prior Year

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

1 3 5 7 9 11 13 15 17 19 21 23 25 27

1990-9120012007-09

Source: U.S. Bureau of Labor Statistics

Wisconsin State Government Employment at 20 Year Low

19

In Wisconsin, State Government Job Losses Now Exceed Manufacturing Job Losses

20

Limits of Monetary Policy

• Principal Weakness in the Economy is Lack of Investment

• Low short-term interest rates have not spurred investment– Haven't move long-term rates that much– Relationship between interest and investment

has changed

• Lack of demand for funds

21

The Economy's Principal Weakness is Lack of Investment

22

Living in the Liquidity TrapFed Funds Rate less than 0.1% Since April

23

Pushing on the String

Yield on Inflation Indexed Securities Negative Since April


Cutting Short-Term RatesDoes Not Necessarily Move Long-Term Rates


Mortgage Rates At Record Lows


2727

Housing Stuck In Low

Investment in Residential Housing, Billions of 2005 Dollars

300

400

500

600

700

800

900

1995-I 1995-IV 1996-III 1997-II 1998-I 1998-IV 1999-III 2000-II 2001-I 2001-IV 2002-III 2003-II 2004-I 2004-IV 2005-III 2006-II 2007-I 2007-IV 2008-III 2009-II 2010-I 2010-IV 2011-III

2828

Lower Mortgage Rates Don’t Spur StartsRelationship Between Housing Starts and Mortgage Rates Breaks Down

0

500

1,000

1,500

2,000

2,500

3,000

Apr-71 Jan-77 Oct-82 Jul-88 Apr-94 Jan-00 Oct-05 Jul-11Source: U.S. Department of Commerce: Census Bureau/Board of Governors of the Federal Reserve System/FRED

Thousands of Units

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Percent

Housing Starts

30-year Mortgage Rate (Right Axis)

29

Correcting the Housing Price Bubble

Housing Prices Relative to Consumer Prices

100

120

140

160

180

200

220

240

Mar-91Mar-92Mar-93Mar-94Mar-95Mar-96Mar-97Mar-98Mar-99Mar-00Mar-01Mar-02Mar-03Mar-04Mar-05Mar-06Mar-07Mar-08Mar-09Mar-10Mar-11

Index 1991q1=100

FHFA Index

CPI

30

Correcting the Housing Price BubbleWisconsin’s Correction More Modest than US

FHFA Purchase Index

-15%

-10%

-5%

0%

5%

10%

15%

Mar-92Mar-93Mar-94Mar-95Mar-96Mar-97Mar-98Mar-99Mar-00Mar-01Mar-02Mar-03Mar-04Mar-05Mar-06Mar-07Mar-08Mar-09Mar-10Mar-11


US

WI

3131

Wisconsin Housing Bouncing Around the Bottom

Wisconsin Building Permits, 12 Month Total

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

Jan 01Jul 01 Jan 02Jul 02 Jan 03Jul 03 Jan 04Jul 04 Jan 05Jul 05 Jan 06Jul 06 Jan 07Jul 07 Jan 08Jul 08 Jan 09Jul 09 Jan 10Jul 10 Jan 11Jul 11

3232

Lack of Demand for Funds

Households Paying Down Debt

Household Debt Outstanding

-4

-2

0

2

4

6

8

10

12

14

2006q12006q22006q32006q42007q12007q22007q32007q42008q12008q22008q32008q42009q12009q22009q32009q42010q12010q22010q32010q42011q12011q2

Percent Change At Anual Rates

3333

Lack of Demand for Funds

Consumers Rapidly De-LeveragingConsumer Financial Obligations at Lowest Level in 18 years

Consumer Financial Obligaton Ratio (FOR)

15.0

15.5

16.0

16.5

17.0

17.5

18.0

18.5

19.0

19.5

20.0

80q181q383q184q386q187q389q190q392q193q395q196q398q199q301q102q304q105q307q108q310q1

Pct. of Disposable Personal Income

FOR

30 Yr Avg

Source: Federal Reserve Board of Governors

3434

Consumers Still Paying Down Credit CardsRevolving Credit Has Been Dropping Rapidly Since Feb 2009

-100000

-80000

-60000

-40000

-20000

0

20000

40000

60000

80000

100000

Jan 1 2000Apr 1 2000Jul 1 2000Oct 1 2000Jan 1 2001Apr 1 2001Jul 1 2001Oct 1 2001Jan 1 2002Apr 1 2002Jul 1 2002Oct 1 2002Jan 1 2003Apr 1 2003Jul 1 2003Oct 1 2003Jan 1 2004Apr 1 2004Jul 1 2004Oct 1 2004Jan 1 2005Apr 1 2005Jul 1 2005Oct 1 2005Jan 1 2006Apr 1 2006Jul 1 2006Oct 1 2006Jan 1 2007Apr 1 2007Jul 1 2007Oct 1 2007Jan 1 2008Apr 1 2008Jul 1 2008Oct 1 2008Jan 1 2009Apr 1 2009Jul 1 2009Oct 1 20091/1/20104/1/20107/1/2010

10/1/20101/1/2011

Change over Prior Year $M

Source: Federal Reserve Board of Governors Last Month Plotted: February 2011

3535

New Frugality

Savings Up Substantially Personal Savings, Billions of Dollars

0

100

200

300

400

500

600

700

800

2000-I 2000-III 2001-I 2001-III 2002-I 2002-III 2003-I 2003-III 2004-I 2004-III 2005-I 2005-III 2006-I 2006-III 2007-I 2007-III 2008-I 2008-III 2009-I 2009-III 2010-I 2010-III 2011-I

Collateral DamageLow Interest Rates Reduce Personal Income

36

Two Sectors Sufficient to Explain the Half-Fast Recovery

Contributions to Real GDP Growth From Sector

-0.4-0.2

0.00.20.4

0.60.8

1.01.2

1953-541957-581960-611969-701974-751981-821990-912000-012007-09

Real GDP Growth At Annual Rates

S&L GovtResidential

Source: BEA, NIPA Table 1.1.2. Contributions to Percent Change in Real Gross Domestic Product

Rest of Economy Outpacing Last Two Recoveries

9 Qtr Real GDP Growth in Recovery

0

1

2

3

4

5

6

7

1953-54 1957-58 1960-61 1969-70 1973-75 1981-82 1990-91 2001 2007-09

Real GDP At Annual Rates

TotalLess S&L, Res Inv

Wisconsin Outlook in 2011 and 2012

40

Wisconsin Among 25 States with Unemployment Significantly Below US

State Unemployment RatesAugust 2011

Below US Average (25)Near US Average (16)Above US Average (9)

4141

Manufacturing Leading Wisconsin’s Recovery

Wisconsin Employment, Percent Change over Prior Year

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Jan-07Apr-07Jul-07Oct-07Jan-08Apr-08Jul-08Oct-08Jan-09Apr-09Jul-09Oct-09Jan-10Apr-10Jul-10Oct-10Jan-11

Total

Manufacturing

42

Milwaukee Manufacturing Edges Up ISM Manufacturing Index: PMI

25

50

75

2007M01 2008M01 2009M01 2010M01 2011M01Index; Reading above 50 signals expansion

National Milwaukee

43

Sales Tax Collections Trend Higher3 Month Moving Average

Sales Tax Collections3-Month Moving Average

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

2007M09 2008M09 2009M09 2010M09

Year/Year Change

44

Withholding Collections Also Trend Higher Withholding Collections

3-Month Moving Average

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2007M09 2008M09 2009M09 2010M09

Year/Year Change

4545

Wisconsin Income Held Up Better Than US

Cumulative Income Growth Since 2007q4

-4%

-2%

0%

2%

4%

6%

8%

10%

2008Q12008Q22008Q32008Q42009Q12009Q22009Q32009Q42010Q12010Q22010Q32010Q42011Q12011Q2

US

WI

46

Wisconsin Per Capita Income Edging Closer to US Average

91.0%

92.0%

93.0%

94.0%

95.0%

96.0%

97.0%

2004 2005 2006 2007 2008 2009 2010

47

Wisconsin Ranks 25th in Per Capita Personal Income

State Per Capita Personal Income2010

Top 10 (8)Second 10 (10)Middle 10 (10)Fourth 19 (10)Bottom 10 (12)

48

Employment OutlookWisconsin Slightly Ahead of US in 2011

Change in Nonfarm Employment

-5

-4

-3

-2

-1

0

1

2

2007 2008 2009 2010 2011 2012 2013


US

WI

Source: Wisconsin DOR, Wisconsin Economic Outlookhttp://www.revenue.wi.gov/ra/econ/index.html

49

Income OutlookWisconsin Outperforms US in 2011

Total Personal Income

-6

-4

-2

0

2

4

6

8

2007 2008 2009 2010 2011 2012 2013Percent Change Over Prior Year

US

WI

Source: Wisconsin DOR, Wisconsin Economic Outlookhttp://www.revenue.wi.gov/ra/econ/index.html

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