The document provides an economic forecast from the group "Too Big to Fail" (TBTF) for 2014. It predicts: - Minimal short-term economic growth of 2.0% GDP for 2014, driven by increases in personal consumption and investment as consumer confidence and demand rise. - A decrease in the unemployment rate to 6.3% alongside a drop in labor force participation to 62.5% despite improvements in the job market. - Inflation of around 1.3% for core and headline inflation rates, driven by stable energy prices, declining healthcare costs, and flattening shelter inflation. - Continuation of quantitative easing and an extremely low Fed Funds rate of 0

1. Too Big to Fail
EconForecast 2014
Members: Kay Ayeni, Anastasia Paluch, John Lee,
Michael Ort, Saigeetha Narasimhan, Jinjin Song, Vaibhav
Sharma

2. Executive Summary
In a nutshell, Too Big to Fail
predicts minimal short-term
growth and a wait-and-see
policy.

3. Growth in the Previous Year

4. Consumer Confidence Pushes up
Consumption
1) Consumer Confidence Increase
2) Evidence of “Pent-up Demand” for consumer
durables

5. Personal Consumption, Investment Likely to
Rise

6. Fiscal Policy to create a Drag on GDP

7. TBTF 2014 GDP Prediction: 2.0%
● Kiplinger: 2.5- 3.0%
● personal consumption expenditures
● unemployment levels
● Fed: 2.8 to 3.2 %
● unemployment levels decreasing and income levels rising,
much stronger overseas growth
● Pent-up demand for consumer durables

8. Labor Markets & the Unemployment Rate
● Current Unemployment Rate: 6.7% (BLS)
● Current Labor Participation Rate: 62.8%
Prediction:
● Labor Participation Rate: 62.5%
● Unemployment Rate: 6.3%

9. Understanding the Unemp. Rate
● Unemployment rate will drop, but doesn’t
mean much by itself
● Labor market examination to see real
meaning behind the lower rate

10. Labor Markets
● Current Participation Rate: 62.8% (March 2014, BLS)
○ Lowest since 1978
● Improving economy, but labor participation rate is
expected to drop indefinitely
● Multiple factors involved

11. Many still have not yet recovered from the recent recession
and doesn’t seem as if they will in any rapid rate compared to
previous recoveries
Note:
Participation rate and
unemployment rates have had
an inverse relationship in
previous recoveries.
Note the drop in labor force
participation rate even while
unemployment drops.

12. Trends of the
Civilian
Unemployment
Rate

13. Inflation Forecasts
● Federal Reserve – 1.55% (core and headline)
•PIMCO – 1.5% (core and headline)
•Too Big To Fail (TBTF) – 1.27% (core), 1.23%
(headline)

14. The EIA Predicts Flat Energy Prices

15. 10-Year TIPS Break Even Rate

16. Declining Health Care Inflation
• The federal government’s new readmission penalties.
• Major employers now contract directly with big-name health systems.

17. Rental Market Tightness Index Predicts Flattening Shelter Inflation
● Market tightness index is a leading indicator of housing costs

18. Monetary Policy Predictions
● FOMC rate is 0.36%
● Inflation rate is 1.65%
● Unemployment rate is 6.3%

19. Forecasted Fed Funds Rate (FOMC)
● Forecasted Fed Funds Interest Rate is 0.36%
● This number determines that the quantitative easing procedure will
continue
● Narayana Kocherlakota believes that the FOMC rate is a
“Negative Fed Fund Rate”
● This basically states that the FOMC rate will be lower than the rate
of inflation

20. Fed’s Inflation Rate Predictions
● Inflation is projected to be about 1.65%, which is nearing the 2% stable
rate in normal economic times.
● As a result of this, it is paramount that the Fed not raise interest rates.
● Narayana Kocherlakota believes that both inflation and unemployment
rates will guide the Fed interest rate policy

21. Application of the Taylor Rule
● As long as unemployment is above 5.5% and inflation is below 2.25%,
the process of extraordinary accommodation will proceed
● A fall in interest rates means a decrease in demand for money, will cause
an increase in demand for bonds, which increases the money supply, and
increases aggregate demand. Thus increasing real GDP and the price
level.
IR $ Bond Demand MS
AD GDP Price Level

22. Fiscal Policy
● Increase government savings
● Research and Development
● Infrastructure
● Education
● Minimum wage
● Defense

23. Government expenditures have decreased
since the financial crisis, as investors
regain confidence

24. Discretionary Defense Cuts
495.6 Billion Dollar Proposal

25. Increase in Government Savings
● $580 billion in revenue from tax reform closing loopholes to those that
need it least
● $200 billion in savings from reduced interest on debt
● $200 billion in savings from mandatory programs, reducing farm subsidies

26. $68.6 Billion Invested in Education
● Includes $150 million to redesign high schools (24/65)
● Make college more affordable by increasing Pell Grant

27. Investment of $135 Billion in R&D (overall)
● Clean energy/ handle nuclear waste, cut energy waste
● Improve vehicle manufacturing

28. Four Year - $302 Billion Invested in Infrastructure
● Establishment of national infrastructure bank
● $837 million to modernize aviation system
● “Fix it first”

29. Raising Minimum Wage to $10.10
● Payroll tax credit
● Middle class tax cut

30. 10 Year Treasury Bond Yield: Pressure from Foreign
Market Uncertainty
● Japan announced its first sales tax increase by 3% since 1997,
suppressing consumer confidence and demand
● Asset purchasing of 7 trillion Yen a month will keep rates at a medium to
long term low
● Low inflation (.5% in February) in EU and unemployment at 12%. Rate Cut
predictions by:
➢ Credit Agricole SA - .15%
➢ Danske Bank A/S - .15%
➢ Goldman Sachs Group Inc. - .1%

31. 10 Year Treasury Yield: Pressure from Term Structure
● Steady short term Fed Funds Rate but expected increase within a
year
➢ market expectations pressuring rates on long term data
● 10 Year yield has already increased by over 100 basis points from
a year ago without current change in Fed Funds Rate
● Projection: 3.1% to 3.4% (nominal)
1.6% to 2.0% (real using Fisher Equation)

32. Average Earnings Growth
We expect 10 year cyclically average earnings growth to stabilize at .0028 due to increased market
activty and gradual stability in labor market yet offset by decreasing market liquidity
We expect 10 year cyclically average earnings growth to stabilize at .0028 due to
increased market activity and gradual stability in labor market yet offset by
decreasing market liquidity

33. Cyclically Adjusted P/E 10 Ratio
Average YTD P/E Ratio of 25 and Earnings of 72. Computed price is 1805

34. Real Estate Market
● Housing prices will increase by 4% nationally
● Mortgage rate will go up to about 5%
● Demand of houses will go up
● Supply of houses will go down

36. Factors for Demand of Houses
● Unemployment will decrease to 6.3%, more young
people likely want to move out
● In Trulia’s latest survey, 74% of Americans said that
homeownership was part of achieving their personal
American Dream
● According to the U.S. Census Bureau, 2014, the United
States population will be 317,297,938. This represents
an increase of 2,218,622, or 0.7 percent, from New
Year's Day 2013

37. Factors for Supply of Houses
● Cold weather
● Interest rates will remain high in 2014, which
discourages developers to build houses.
● More workers will enter construction markets, but it will
have a less strong impact on supply

38. The End
Thank you!