James Glassman - Global Renewal Presentation

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Mr. James E. Glassman is a Managing Director and Senior Economist with JP Morgan Chase & Co. This is his presentation at the Northwest Growth Financing Conference in 2010

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James Glassman - Global Renewal Presentation

  1. 1. Global Renewal Happy one-year anniversary …
  2. 2. The rhythm of the economy … it’s a familiar story … GDP gap (deviation of real GDP from potential as a percent of potential real GDP) Source: NBER Macroeconomics Database
  3. 3. … and it seems the economic tide is coming back in US real GDP (chained 2000 dollars) Sources: US Department of Commerce; Macroeconomic Advisers LLC
  4. 4. The (abstract) drivers of recovery …
  5. 5. Four biggies … <ul><li>Potential growth </li></ul><ul><li>Pent-up demand (economic slack) </li></ul><ul><li>Fed policy </li></ul><ul><li>Fiscal policy </li></ul>
  6. 6. Caveat … financial shocks may be more challenging Market value of all publicly traded stocks (Wilshire 5000 index) Source: Dow Jones
  7. 7. It’s the “dust off the projects” that drives the accelerators Business investment (ratio to GDP) Source: US Department of Commerce
  8. 8. Demographics have something to say too Employment status by age (ratio of employment to population of selected age cohorts) Source: US Department of Labor 55+ 45-54 35-44 25-34 20-24 18-19 16-17
  9. 9. An industry where “pent-up” has a lot of room to run US light vehicle sales and domestic production (millions of units annualized) Sources: US Department of Commerce; Federal Reserve Board
  10. 10. So far, so good …
  11. 11. Over there … Real GDP in selected regions (percent change from four quarters earlier) Sources: US Department of Commerce; JPMorgan Chase & Co.
  12. 12. … and over here US real GDP (annualized percent change from the previous quarter) Source: US Department of Commerce
  13. 13. Layoffs are ending … Real GDP (% ch from four quarters earlier) Initial claims for unemployment benefits (thousands weekly) Sources: US Department of Labor; US Department of Commerce
  14. 14. … they’re normal … it’s now up to hiring Layoffs and new hires (percent of private employment) Source: US Department of Labor
  15. 15. Jobs are coming back … Real GDP and nonfarm payrolls (% ch from 3 months earlier, annual rate*) * Based on the 3-month average of the most recent three months. Sources: US Department of Labor; US Department of Commerce
  16. 16. … but jobs are only part of the picture … Real GDP, nonfarm payrolls and total private hours worked (% ch from 3 months earlier, annual rate*) * Based on the 3-month average of the most recent three months. Sources: US Department of Labor; US Department of Commerce
  17. 17. … in fact, it’s what’s in the paycheck that counts … Real GDP, payrolls total private hours, and compensation (% ch from 3 months earlier, annual rate*) * Based on the 3-month average of the most recent three months. Sources: US Department of Labor; US Department of Commerce
  18. 18. … for consumers Real consumer spending, disposable income, and wages and salaries (% change from 12 months earlier) Source: US Department of Commerce
  19. 19. Profits have lots of stories to tell … After-tax GDP profits (percent of nominal Gross Domestic Income) Source: US Department of Commerce
  20. 20. … and one of them is about the world … Global and US real GDP (2000 dollars) Sources: US Department of Commerce; JPMorgan Chase & Co.
  21. 21. … cap X is another Business investment for capital goods and software (percent change from a year earlier) Sources: US Department of Commerce; Federal Reserve Board
  22. 22. ‘ Low-for-really long’ Fed rates …
  23. 23. The Fed will have little reason to let off the gas for a while Federal funds rate and the 10-year Treasury yield (percent) Source: Federal Reserve Board
  24. 24. Unemployment is too high … US unemployment rate (percent of the labor force) ¹ Range of FOMC members’ views Sources: NBER recession bars; US Department of Labor; Federal Reserve Board
  25. 25. … inflation’s tame … Selected consumer price indexes (percent change from 12 months earlier) Sources: NBER recession bars; US Department of Commerce; US Department of Labor
  26. 26. … too low … Selected core consumer price indexes (percent change from 12 months earlier) Sources: NBER recession bars; US Department of Commerce; US Department of Labor
  27. 27. Two added and unprecedented challenges … (1) Weaning from fiscal stimulus (2) Regulatory reform and the cost of credit
  28. 28. Have demand, will create jobs … The private sector, not economists, knows where they will be …
  29. 29. Manufacturing’s transformation is stabilizing US factory jobs (millions of jobs) Source: US Department of Commerce
  30. 30. Construction won’t be what she used to be … Real construction outlays (ratio to 2006 Q1) Source: US Department of Commerce Public construction Nonresidential construction Residential construction
  31. 31. Home building will be a little subdued for a while … Starts of new houses (millions annualized) Months supply of unsold new homes Source: US Department of Commerce
  32. 32. This won’t be the employer it was for a while Nominal residential construction (billions of dollars) Housing-related employment (thousands) Source: US Department of Commerce
  33. 33. The big story …
  34. 34. An un-flat world feeds the drive to develop … US real GDP per capita (ratio to 2009 level) (chained 2000 dollars) Sources: US Department of Commerce; NBER
  35. 35. … that will remap global GDP … Real GDP in selected regions (percent change from four quarters earlier) Sources: US Department of Commerce; JPMorgan Chase & Co.
  36. 36. … to look more like the distribution of the population Distribution of real GDP (percent of global output) Sources: NBER recession bars; US Department of Commerce; various academic sources
  37. 37. Conclusion … what it means
  38. 38. Recovery puts the focus on high-tide for asset values … Market value of all publicly traded stocks (Wilshire 5000 index) Source: Dow Jones
  39. 39. … and that makes the market look cheap … Equity P-E Wilshire 5000 index Source: US Department of Labor
  40. 40. … and for bonds, the market has been too bearish … Nominal and real 10-year Treasury yield (percent) Sources: NBER recession bars; Federal Reserve Board; US Department of Labor
  41. 41. … especially when businesses have options Market value of all publicly traded stocks (Wilshire 5000 index) Source: Dow Jones
  42. 42. The retail sector faces the biggest challenge … Consumer spending share of GDP (percentage of GDP ) Source: US Department of Commerce
  43. 43. Appendix I. The runs of August (2007)
  44. 44. The unsustainable can’t be sustained Nominal gross income per household and house prices (ratio to 1970 Q1 level) Sources: Loan Performance Corporation; US Department of Commerce
  45. 45. The home building correction was manageable Contribution of new home building to quarterly real GDP growth (percentage points annualized) Source: US Department of Commerce
  46. 46. When the cure became the problem Selected rates in the interbank funding markets (percent) Sources: BBA; Federal Reserve Board
  47. 47. The weakest links were shut down Long-term yield on noninvestment grade debt less 10-year Treasury yield (basis points) Sources: JPMorgan Chase & Co.; Bloomberg
  48. 48. Appendix II. Inflation … R.I.P.
  49. 49. “ Low levels of resource utilization”, the big idea US unemployment rate (percent of the labor force) ¹ Range of FOMC members’ views Sources: NBER recession bars; US Department of Labor; Federal Reserve Board
  50. 50. Unemployment … but what you don’t see counts too … Ratio of selected worker status to the population Source: US Department of Labor
  51. 51. … deviations from a normal economy Status of selected people in the labor pool (thousands) Source: US Department of Labor
  52. 52. Remember how recessions work on inflation … slowly Core chain PCE inflation (annualized percent change) Source: US Department of Commerce
  53. 53. Working with the cycle, the Fed’s long-run strategy Core chain PCE inflation (annualized percent change) Actual unemployment less Nairu Source: US Department of Commerce
  54. 54. Appendix III. The monetary base(less)
  55. 55. The textbook story about money creation … Federal Reserve assets (billions of dollars outstanding) Source: Federal Reserve Board
  56. 56. … doesn’t apply in today’s case … Federal Reserve liabilities (billions of dollars outstanding) Source: Federal Reserve Board
  57. 57. … because the Fed’s reserves remain it its vaults Monetary base (billions of dollars) M2 (billions of dollars) Source: Federal Reserve Board
  58. 58. Appendix IV. Fiscal hysteria … get a grip
  59. 59. Wanted … a new conversation about fiscal issues The airwaves are full of nonsense (like global warming, it’s not about the seasonal shifts) Tedious … we don’t need you to repeat the front pages Pointless … we’re not going to cut the deficit in recession Misdirected focus … the $1.5 trillion – $1 trillion due to recession – isn’t the issue It’s the underlying (long-term) issue Left on auto pilot, spending doubles as a share of the economy (CBO) Five options: (1) Double the tax burden … not happening (2) Deficit finance … over the market’s (and economy’s) dead body (3) Defer to an outsider (the government) to continually whittle health care spending (4) Incentivize the industry to find the best solution … users need to be more involved (5) Change the conversation about economics (raise economic literacy): * Endogenize the retirement decision * Spur national saving (eliminate the tax on saving, consumption-based income tax) * Eliminate the corporate income tax (people pay taxes) * Eliminate the employer deductibility of health care expenses * Tort reform
  60. 60. Bonds to pundits: it’s not about today’s red ink … Federal budget balance (percent of GDP) 10-year Treasury yield (percent) Sources: NBER recession bars; Congressional Budget Office; Federal Reserve Board
  61. 61. The red ink, scary of course, in absolute terms … Federal budget balance (billions of dollars over the most recent 12 months) Sources: NBER recession bars; NBER Macroeconomic database
  62. 62. … up close Federal budget balance (billions of dollars over the most recent 12 months) Sources: NBER recession bars; NBER Macroeconomic database
  63. 63. Scaled to the size economy … Federal budget balance (percent of GDP) Sources: NBER recession bars; NBER Macroeconomic database
  64. 64. … up close Federal budget balance (percent of GDP) Sources: NBER recession bars; NBER Macroeconomic database
  65. 65. … here’s how much … Actual budget balance and excluding the impact of the recession (percent of GDP) Sources: NBER recession bars; Congressional Budget Office; JPMorgan Chase & Co.
  66. 66. … or, if you want the numbers Cyclical (temporary) factors boosting the federal deficit (billions of dollars, fiscal year basis) Sources: Congressional Budget Office; JPMorgan Chase & Co.
  67. 67. Appendix V. The healthcare challenge
  68. 68. The health care expansion isn’t the real issue <ul><li>PPACA morphs an inhumane, dysfunctional system to merely a dysfunctional one </li></ul><ul><li>Agnostic about the net impact of the health initiative on the amount of national resources consumed by health care: </li></ul><ul><ul><li>Shifting from the ER model, a private/public-subsidized system to a federal-subsidized system, will raise the government’s health care costs by 8-10%, but could in theory lower the stealth private subsidy </li></ul></ul><ul><ul><li>Validating the present government/employer-provided health insurance model disengages users from health care decisions. A system that is financed by the public purse or taxes on investment income with users not accountable is economically dysfunctional (lesson of the ethanol mandate) </li></ul></ul><ul><li>Most employers offer benefits and shouldn’t be affected. 70% of employees are at firms that employ 26 or more people and 87-98% of those firms offer benefits. 55-65% of employees are covered by those company plans, implying some take coverage in other (spousal) systems. Small businesses will benefit some. </li></ul><ul><li>Firms will continue to offer health care benefits, even if penalties are less than the cost of benefits, for the same reason they now offer benefits despite no penalty if not. The competitive advantage and federal subsidy remains. </li></ul><ul><li>85% of typical health care outlays for the average person occur after 65 years of age, implying that Medicare and Medicaid are the elephant in the room </li></ul>
  69. 69. CBO gives you the starting point … CBO’s government spending projections (billions of dollars, fiscal year basis) Source: Congressional Budget Office
  70. 70. … and they say spending will outstrip revenues* Long-term projections (billions of dollars, fiscal year basis) Source: Congressional Budget Office
  71. 71. The electorate won’t accept (1) a doubled tax burden … Long-term projections (percent of GDP) Source: Congressional Budget Office
  72. 72. The bond market won’t accept (2) a mounting debt service … Long-term projections (billions of dollars, fiscal year basis) Source: Congressional Budget Office
  73. 73. The (3.5%) growth* option … Long-term projections (billions of dollars, fiscal year basis) Source: Congressional Budget Office
  74. 74. … keeps the spending share in line with revenues Long-term projections (billions of dollars, fiscal year basis) Source: Congressional Budget Office
  75. 75. The growth* option … why it’s an issue Long-term projections (billions of dollars, fiscal year basis) Source: Congressional Budget Office
  76. 76. It’s a political (not a market) issue … <ul><li>Deficit financing would be economic suicide </li></ul><ul><li>Two political choices </li></ul><ul><ul><li>Allow federal spending to grow and come up with the revenues (hence the talk about a Value Added Tax) </li></ul></ul><ul><ul><li>Control government health care spending and enhance incentives to grow </li></ul></ul>
  77. 77. Appendix VI. US consumer myths
  78. 78. The consumer’s footprint may shrink in coming years … Consumer spending share of GDP (percentage of GDP ) Source: US Department of Commerce
  79. 79. … as pressures build to save more … Selected measures of saving (percent of disposable personal income) Sources: US Department of Commerce; Federal Reserve Board
  80. 80. … with balance sheets down for now … Saving (% of income) Net worth (ratio to income) Sources: US Department of Commerce; Federal Reserve Board
  81. 81. … depending on how we view our wealth … Household net worth (billions of dollars) (ratio to disposable personal income) Source: Federal Reserve Board
  82. 82. … [it’s mostly about stocks, not real estate] Household net worth (ratio to disposable personal income) Source: Federal Reserve Board
  83. 83. Household leverage is reversing … Household debt (ratio to disposable personal income) Source: Federal Reserve Board
  84. 84. … in the mortgage area … Interest rates (percent) Selected household debt measures (ratio to disposable income) Source: Federal Reserve Board
  85. 85. … and mortgage debt service is kinda normal … Debt service (% of income) Household mortgage debt (ratio to income) Source: Federal Reserve Board
  86. 86. … same for servicing credit card debt … Financial obligations of folks who rent (% of income) Non-mortgage debt level (ratio to income) Source: Federal Reserve Board
  87. 87. … for homeowners and renters alike Financial obligations of folks who rent (% of income) Non-mortgage debt level (ratio to income) Source: Federal Reserve Board
  88. 88. Appendix VII. Stealth energy revolution
  89. 89. New realities spur a quiet revolution for transportation Prices of petroleum and natural gas (dollars per barrel, thermally-equivalent basis) Sources: American Petroleum Institute; Bloomberg
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