Presentation by Dr. Ayse Somersan, professor emeritus and dean, University of Wisconsin.

1. Economic Outlook
Analyzing the forces shaping the
economy at home and abroad
Ayse Somersan
Fall 2011

2. The Outlook
• The economy has lost steam. GDP
growth is anemic, at best. Unemployment
is stuck at historic highs, with little
indication that it will come down soon.
• Even this anemic recovery is threatened
by outside forces. The European
sovereign debt crisis could easily push the
US and the global economy into
recession.

3. Gross Domestic Product
Value of all goods and services produced in
one year. Also the sum total of spending
in one year.
Components:
• Consumer spending
• Investment
• Government spending
• Net exports

4. GDP Growth
• 2010 4Q 3.1%
• 2011 1Q 0.4%
• 2011 2Q 1.3%
So, for the first 6 months of the year we
have a growth rate of 0.7%, not even
enough to absorb the new entries into the
labor market.

5. Consumer Spending
• Consumer spending is the single most
important component of GDP (70%).
Without robust demand from consumers,
GDP growth cannot be robust.
• Consumer sentiment about the future is
negative. There is little good news to turn
this around in the near term. Let us
analyze the particulars.

6. Why isn’t consumption robust?
Before the Great Recession, consumers
were on a shopping spree using two
sources: Equity in their homes and credit
card debt.
Equity is gone. In fact, of the 51 million
mortgages, 14.6 million are under water,
3.7 million are seriously delinquent and 5.2
million have been foreclosed. Home
prices have still not stabilized.

7. Consumption Cont.d
• Credit card debt has declined. Saving has
increased and debt reduction has brought
household balance sheets to a more
sustainable level. There is some hope
here. Holiday shopping season may yet
pull GDP growth to a slightly better level.
• Unemployment is a major drag on the
system. Almost 26 million people are
barely subsisting.

8. Consumption Cont.d
• Poverty has increased, continuing the long
term trend.
• If the unemployment insurance payment
extension which expires at the end of 2011
is not further extended into 2012, an
additional 5 million people will join the
ranks of people in poverty.

10. Figure 1

14. Income Inequality
• The income distribution has changed.
Most of the GDP growth since 1980 has
gone to the top 1% of earners (80%).
• The share of the top 1% in total income
has gone from almost 9% in 1979 to 24%
in 2010.
• The average income of the top 0.01% has
risen by 480%, from an annual average
income of $4.2 to $24.3 million.

16. Income cut-off for the top 1%
• 99th percentile $506,553
• 99.5th percentile $815,868
• 99.9th percentile $2,075,574
• When you look at the wealth distribution,
inequality increases. Top 1% holds about
a third of American wealth. The cut-off for
the 99th percentile in net worth was
$19,167,600 in 2007.

17. Income Inequality Cont.d
• On the other hand, the average annual income
of the lower 90% of the earners has hovered
around $29,000 for almost 30 years.
• CEO pay has gone from 42 times the average
worker(’80) to 185 times average worker(’05).
• The US has the most inequality in its income
distribution of any developed country and is
worse than many “banana republics”.

18. Investment
• Businesses have $2 trillion in cash on their
balance sheets at home, plus another
trillion abroad. While nonresidential
investment spending increased during Q2
over Q1, there appears to be no rush to
expand capacity and increase hiring.
• There is still ample excess capacity in the
system and demand is less than robust.

19. Investment Cont.d
• Large US business is investing and hiring
abroad. In the first two years after the start of
the Great Recession, large business cut US
workers by 500,000 and increased foreign
workers by 729,000. Since half of profits are
made abroad, and since growth is there….
• US tax code encourages offshoring. You can
deduct the cost of closing a US plant from your
taxable income!!!

20. Government
• Government spending is a drag on the
system. Any increases in Federal
spending are being offset by declines at
the state and local levels.
• If, by some miracle, the American Jobs Act
were to pass, it would provide a much
needed small boost to demand.

21. Net Exports
• Net Exports is always negative. We buy
more than we sell to the rest of the world.
• During the second quarter, exports
increased but imports increased more.
The deficit was $145 billion, up from $140
in the first quarter.
• No help for GDP growth from this item.

22. Unemployment
• Worst unemployment picture since the
Great Depression.
14.5 million unemployed.
8.8 million underemployed.
2.6 million dropped out.
Average duration of unemployment - 40 wks
6.4 million unemployed more than 6 months.
1.4 million unemployed more than 2 yrs.

23. Unemployment Cont.d
• The three groups—unemployed,
underemployed and drop outs make up
16.2% of working age Americans.
• The figure is 26% for Blacks and 22% for
Hispanics.
• Job growth will stay weak for 2-3 years
even if all else goes well.

24. Where Did the Jobs Go?
Consider four factors:
• Shortfall of demand.
• Technology
• Structural impediments
• Globalization: Offshoring

25. Offshoring
• Lower labor costs
• Sidestep more stringent US workplace and
environmental regulations
• Take advantage of foreign government
subsidies
• Tap a labor pool that is in many cases
better versed in math and science

26. What is to come?
Scenario 1: We muddle through with slow
growth and high unemployment for this
year and next, the European debt crisis is
stabilized and we cross our fingers for
some positive external and internal
shocks.
Scenario 2: Greece defaults.
A. Best scenario: Greece pulls out of the
Euro, devalues currency, growth and

27. Competitiveness is restored. European
banks suffer but are shored up. Funds not
spent on Greece go to at-risk countries
like Spain and Italy. Markets stabilize.
growth resumes.
B. Worst Scenario: Greece exits the Euro.
Euro zone banks are hit hard, stop
lending. Money flows out of weak
European countries. Countries can’t get

28. financing and also default or pull out of the
Euro. Market unrest. Growth collapses.
We have a global double dip recession.