The Economy in 2014 Council
of Economic Advisers December 16, 2014

Overview 1 The Economy’s Progress
in 2014 • Jobs: By November, 2014 was already the best year of job growth since 1999. • Wages: Much of the pickup in job creation in 2014 occurred in higher-paying industries, and overall wage growth continued to exceed inflation. • Deficit: The deficit as a share of the economy has fallen by about two-thirds, and the FY2014 deficit was below its average over the past forty years. This is part of a broader economic rebalancing that sets the stage for more sustainable growth in the years ahead. • Health Care: Employer health insurance premiums grew at a rate tied for the lowest on record, consistent with the lowest health care price inflation in nearly half a century. • Energy: The United States is leading the world in both oil and natural gas production, contributing to a roughly 40 percent drop in oil prices over the second half of the year. At the same time, solar energy is up tenfold since 2008, while wind energy has increased threefold. The Challenges that Remain • Jobs and Wages: The labor market is not yet fully recovered—further reductions in long-term unemployment and faster wage growth are needed. • Household Finances: Household finances vary widely across the population, and more must be done to ensure the benefits of a strengthening economy are widely felt. • Global Economy: Growth is slowing in many of our key trading partners, requiring a renewed global emphasis on pro-growth policies.

Overview 2 Key Policy Steps
Contributing to the Progress We Have Seen • The Recovery Act and Subsequent Fiscal Measures: The United States has come further in its recovery than most other advanced economies around the world, in part because of the President’s aggressive policy response that included the Recovery Act, the payroll tax cut, and about a dozen additional fiscal measures. • Response to the Financial Crisis: Even when it was not popular, the President took the necessary steps to recapitalize the financial sector, rescue the auto industry, and reform financial regulation. • Affordable Care Act: Changes in the health care system, in part due to the Affordable Care Act, are creating major savings for households, businesses, and the Federal government. • All-of-the-Above Energy Strategy: In addition to the energy boom, the United States also made great strides in energy efficiency, contributing to a 10 percent reduction in carbon emissions from 2007 to 2013—the largest absolute emissions reduction of any country in the world. • Catalyzing Technological Innovation: The President signed into law the most sweeping patent reform in decades, made significant investments in research and development, and will nearly double the amount of wireless spectrum available for mobile broadband. • Reducing the Deficit: The Budget Control Act, the Affordable Care Act, and returning to Clinton-era tax rates for upper-income households will contribute to nearly $4 trillion in deficit reduction over the next decade. Key Policies to Support Further Progress • Investing in Infrastructure • Reforming the Business Tax Code • Common Sense Reforms to the Immigration System • Expanding Overseas Markets for America’s Goods and Services • Investing in Education from Pre-School through College and Training • Raising the Minimum Wage

Table of Contents 3 I.
Labor Market II. GDP III. Progress Toward Rebalancing IV. International V. Energy VI. Health

Businesses Have Added 10.9 Million
Jobs Over 57 Consecutive Months, the Longest Streak of Private-Sector Job Growth on Record 4Source: Bureau of Labor Statistics. Private employment has risen by at least 200,000 for ten consecutive months, the first time that has happened since the 1990s. In addition, total employment has risen for 50 straight months, also the longest streak on record. -900 -800 -700 -600 -500 -400 -300 -200 -100 0 100 200 300 400 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Monthly Change in Private Payroll Employment Thousands 12-month moving average Nov-14 Nov-14

The Pace of Job Growth
Has Picked Up to 241,000 Per Month in 2014, Up From 194,000 Per Month in 2013, and the Most in Any Year Since the 1990s 5 Note: Data for 2014 as of November. Source: Bureau of Labor Statistics. 95 -298 -424 88 174 186 194 241 2007 2008 2009 2010 2011 2012 2013 2014 -500 -400 -300 -200 -100 0 100 200 300 Average Monthly Job Growth by Year Average Monthly Job Gain/Loss (Thousands) Total employment has risen by 2.65 million in the first eleven months of 2014, already totaling more jobs than in any full calendar year since the late 1990s. The economy is adding jobs at a rate of about 2 percent per year, also on pace for the largest percentage increase in any calendar year since the late 1990s

The Unemployment Rate Has Fallen
Much More Rapidly than Expected 6 Note: Based on forecasts published in March of given year. Source: Bureau of Labor Statistics; Blue Chip Economic Indicators. Just last year, forecasters expected that the unemployment rate would remain above 6 percent into 2017—it was 5.8 percent in November 2014. 4 5 6 7 8 9 10 11 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2012 Forecast 2013 Forecast 2014 Forecast 2011 Forecast 2010 Forecast Unemployment Rate and Consensus Forecasts Percent

The Alternative Measures of Labor
Underutilization are Falling About as Fast or Faster than the Overall Unemployment Rate 7 Note: As of November 2014. Change in short- and long-term unemployment rates may not sum due to rounding. Source: Bureau of Labor Statistics. The long-term unemployment rate remains elevated at 1.8 percent (compared to about 1 percent prior to the recession), but it has fallen disproportionately quickly over the past year. -1.2 -1.2 -1.1 -1.7 -0.3 -0.8 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 Overall Unemployment Rate (U-3) U-4 (U-3 + Discouraged Workers) U-5 (U-4 + Other Marginally Attached) U-6 (U-5 + Part-Time for Economic Reasons) Short-Term Unemployment Rate Long-Term Unemployment Rate 12-Month Changes in Key Employment Indicators Percentage Points

The Overall Unemployment Rate is
89 Percent of the Way Back to its Pre- Recession Average, but More Work Remains on Long-Term Unemployment 8Source: Bureau of Labor Statistics; CEA calculations. The long-term unemployment rate and U-6 rate that includes involuntary part-time work are 77 and 72 percent of the way back to their pre-recession averages, respectively, reflecting continued challenges in these areas. 77 107 ​ 72 83 87 ​ 89 324 64 88 84 92 90 74 -4 25 14 12 10 -50 0 50 100 150 200 250 300 350 Long-Term Unemployment Rate Short-Term Unemployment Rate U-6 (U-5 + Part-Time for Economic Reasons) U-5 (U-4 + Other Marginally Attached) U-4 (U-3 + Discouraged) Overall Unemployment Rate Remaining Elevation as of November 2014 Percent Increase to Great Recession Peak Percent Recovered Percent Change in Indicator Relative to 2001-07 Average Tracking the Recovery Across Labor Market Indicators All Data as of November 2014

Essentially All of the Increase
in Employment Since 2010 Has Been in Full-Time Positions 9 Note: Based on Employment Situation table A-9. Source: Bureau of Labor Statistics. Overall part-time work has been roughly flat in the recovery, as the number of involuntary part-time workers declines and the number of voluntary part-time workers continues to recover from its drop in the recession. 2010 2011 2012 2013 2014 2015 -2 -1 0 1 2 3 4 5 6 7 8 9 10 Change in Employment Since the Beginning of 2010 Millions of Workers Full-Time Part-Time Nov-2014 Nov-2014

The Pickup in Job Growth
During 2014 Has Occurred in Higher-Paying Industries 10 *Excludes temporary help services (shown separately) Note: Data for 2014 as of November, except earnings for temporary help services lags one month. Source: Bureau of Labor Statistics; CEA calculations. For instance, the pace of manufacturing job growth has more than doubled to 15,000 per month this year, from 7,000 per month last year, and average weekly earnings for manufacturing workers are about $170 higher than for all private-sector workers. Mining & Logging Construction Manufacturing Wholesale TradeRetail Trade Transportation & Warehousing Utilities Information Financial Activities Professional & Business Services* Temporary Help Services Education & Health Services Leisure & Hospitality Other Services -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 Change in Job Growth vs. Average Earnings by Industry Average Weekly Earnings, November 2014 Pick Up (+)/Slow Down (-) in Percentage Change in Employment, 2014 vs. 2013 (percentage pts.) Average Weekly Earnings for All Private Sector Workers: $853.24

In Addition to the 764,000
Manufacturing Jobs Added Since Early 2010, the Average Workweek in Manufacturing is the Highest Since WWII 11 Note: For production and non-supervisory workers. Source: Bureau of Labor Statistics. The average workweek in manufacturing has hit 42.2 hours several times this year, the highest level since 1945. 37.0 37.5 38.0 38.5 39.0 39.5 40.0 40.5 41.0 41.5 42.0 42.5 43.0 1950 1960 1970 1980 1990 2000 2010 Average Workweek in Manufacturing Hours Nov- 2014

Average Earnings Have Been Rising
Slightly Quicker than Inflation Since 2013, But Faster Growth is Needed 12 *Inflation data for November 2014 is based on Bloomberg consensus for CPI-U as of 12/15. Numbers may not sum due to rounding. Note: Annual average basis. For production and non-supervisory workers. Source: Bureau of Labor Statistics; CEA calculations. On average in the first eleven months of this year, nominal hourly earnings were up 2.3 percent compared to last year, while the consumer price index was up 1.7 percent.* 0.3 -1.5 -0.6 0.7 0.7 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2010 2011 2012 2013 2014* Yearly Growth in Real Average Hourly Earnings Percent 2001-2007 Average

Economic Growth in the Second
and Third Quarters Was Strong 13Source: Bureau of Economic Analysis. As of the third quarter of 2014, real GDP was 7.8 percent higher than the pre-recession peak in 2007. -10 -8 -6 -4 -2 0 2 4 6 07:Q1 08:Q1 09:Q1 10:Q1 11:Q1 12:Q1 13:Q1 14:Q1 Real GDP Growth Percent 14:Q3 Quarterly % change, annual rate Four-quarter % change

Real GDP Has Been Growing
More Quickly Since the Beginning of Last Year 14Source: Bureau of Economic Analysis; CEA calculations. This mostly reflects a pickup in consumer spending, a continued solid pace of growth in business investment, and reduced fiscal drag at the State and local levels. Federal fiscal drag rose as a result of the sequester in 2013 but has eased in 2014. Start of Recovery (09:Q2-12:Q4) 2013 and 2014 (12:Q4-14:Q3) Gross Domestic Product 2.1 2.7 Consumer Spending 2.0 2.4 Businsess Fixed Investment 5.2 5.3 Residential Investment 5.9 4.7 Exports 7.4 3.7 Imports 6.8 3.2 Federal Gov't - 0.6 - 2.5 State & Local Gov't - 2.2 1.1 Components of Real GDP (percent change at an annual rate)

Business Investment Has Picked Up
in Recent Quarters 15Source: Bureau of Economic Analysis. -30 -25 -20 -15 -10 -5 0 5 10 15 20 25 07:Q1 08:Q1 09:Q1 10:Q1 11:Q1 12:Q1 13:Q1 14:Q1 Real Business Fixed Investment Growth Percent 14:Q3 Four-quarter % change Quarterly % change, annual rate In the recovery, business investment has grown at an average annualized rate of more than 5 percent.

Consumer Sentiment Recently Reached the
Highest Level Since January 2007 16Source: Reuters/University of Michigan. This year’s gains in consumer sentiment likely reflect improving income and employment expectations, the decline in gasoline prices, and the fiscal certainty secured for much of the year by the late-2013 Ryan-Murray budget agreement. 40 50 60 70 80 90 100 110 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Reuters/Univ. of Michigan Consumer Sentiment Index Index, 1966:Q1=100 Dec-2014 (prelim.) Dec-2014

Auto Sales are On Track
for the Strongest Year Since 2006 17Source: Bureau of Economic Analysis; Federal Reserve. 6 8 10 12 14 16 18 20 22 24 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Light Motor Vehicle Sales Millions of units, seasonally adjusted annual rate Nov-14 Domestic light vehicle sales are on track to exceed 16 million units in 2014, the highest since 2006. Additionally, domestic light vehicle production is on track to surpass 11 million units in 2014 for the first time since 2005.

Progress Toward Rebalancing in International
Transactions: Current Account Deficit is Narrowest Since the 1990s 18Source: Bureau of Economic Analysis. 1970:Q1 1980:Q1 1990:Q1 2000:Q1 2010:Q1 -7 -6 -5 -4 -3 -2 -1 0 1 2 Current Account Balance Percent of GDP 14:Q2 The current account balance is a measure of our net transactions with the rest of the world in goods, services, and income. Declining oil imports (see slide 30) is one important factor helping to reduce the current account deficit in recent years.

Progress Toward Rebalancing in the
Federal Government: The Deficit Has Been Cut by Two-Thirds Since FY2009, Now Below its Average Since 1970 19Source: Office of Management and Budget. 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 -12 -10 -8 -6 -4 -2 0 2 4 Federal Budget Balance Percent of GDP Fiscal Year Average Since 1970 FY14 FY1 4 The last time deficits fell at a faster rate as a share of the economy over a comparable period of time was during the post-war demobilization from 1945 to 1950.

Progress Toward Rebalancing: A Falling
Federal Deficit Has Boosted Gross National Saving 20Source: Bureau of Economic Analysis In 2014:Q3, gross national saving edged up to reach its highest level as a share of GDP since the end of 2006. Gross national saving as a fraction of GDP has increased 4.4 percentage points since its 2009 trough. 12 14 16 18 20 22 24 26 1970:Q1 1980:Q1 1990:Q1 2000:Q1 2010:Q1 Gross National Saving Percent of GDP 14:Q3

Progress Toward Rebalancing in the
Private Sector: Corporate Balance Sheets Are Healthier Than Any Time in the Last Decade 21Source: Federal Reserve. In the second quarter of 2014, the non-financial corporate debt-to-equity ratio was 33 percent, the lowest since 2000. 20 30 40 50 60 70 80 2000:Q1 2003:Q1 2006:Q1 2009:Q1 2012:Q1 Nonfinancial Corporate Debt-to-Equity Ratio Percent 14:Q3

Progress Toward Rebalancing Among Households:
Required Debt Service Payments are Near Record Low 22Source: Federal Reserve. 8 9 10 11 12 13 14 1980:Q1 1990:Q1 2000:Q1 2010:Q1 Household Debt Service Payments Percent of Disposable Income 14:Q2 Lower debt levels and low interest rates have led to historically low debt service burdens in the aggregate, but the health of personal finances varies substantially across households.

The Rise in Home Prices
Has Continued to Reduce the Number of Underwater Mortgages 23Source: Core Logic; Zillow; LPS Analytics; Federal Reserve Board. The number of underwater mortgages has been cut from a peak of over 14 million to less than 4 million as of 2014:Q2. 0 2 4 6 8 10 12 14 16 2005:Q1 2007:Q1 2009:Q1 2011:Q1 2013:Q1 Number of Mortgages Underwater Millions 2014:Q2

The Share of Loans in
Serious Delinquency or Foreclosure Has Been Cut in Half 24Source: Mortgage Bankers Association. The share of mortgages 90 days past due or in foreclosure has fallen to 4.6 percent in the third quarter of 2014, down from a peak of more than 9 percent. 0 1 2 3 4 5 6 7 8 9 10 11 2000 2002 2004 2006 2008 2010 2012 2014 Mortgages 90 Days Past Due or in Foreclosure Percent of All Mortgages 2010-Q1: 9.7% 2014-Q3: 4.6%

The Medium-Term Growth Outlook Has
Been Downgraded in Many Key Economies Around the World – Especially in the BRIC Economies 25 In the most recent World Economic Outlook, the IMF noted that the BRIC economies have been responsible for half of the IMF’s global growth forecast errors from 2011-14, despite representing just over a quarter of global GDP. 2.4 1.7 1.7 1.2 2.2 1.3 2.5 9.5 8.1 4.1 5.0 2.6 1.0 1.6 1.3 1.9 1.1 2.4 6.3 6.7 3.1 2.0 0 2 4 6 8 10 12 Forecasted in April 2010 Forecasted in October 2014 Five-Year-Ahead Growth Forecasts in Selected Economies Percent Advanced Economies Emerging Markets Note: Five-year-ahead forecast is for year-over-year growth in 2015 (blue bars) and 2019 (red bars). Source: International Monetary Fund, World Economic Outlook (April 2010 and October 2014 editions).

Growth in Europe and Japan
Has Been Sluggish, and Many Countries Are Only Just Beginning to Dig Out of Large Holes 26Source: Bureau of Economic Analysis; national sources via Haver Analytics; CEA calculations. 85 90 95 100 105 110 0 4 8 12 16 20 24 28 Real Gross Domestic Product in Selected Economies Index, pre-crisis peak=100 Quarters from peak France Germany U.K. Sum of Italy, Spain, Ireland, Greece, Portugal U.S. Japan Real GDP in the euro area is still more than 2 percent below its pre-crisis peak, including nearly 10 percent below its pre-crisis peak in Italy. Japan’s recent slowdown has also now knocked its real GDP slightly below the pre-recession peak.

Since 2010, the Increase in
Employment in the United States Exceeds All Other Advanced Economies Combined 27 Note: Data for 2014 is a projection based on the October 2014 World Economic Outlook. Source: International Monetary Fund; CEA calculations. This is a disproportionate share of the employment gains, given that the United States represents about 30 percent of the population in advanced economies. United States United Kingdom Germany Canada Japan Korea All Other Share of Net Employment Gain in Advanced Economies, 2010-2014

U.S. Exports Continue to Grow,
but Slowing Growth in Foreign Economies is a Challenge 28 Note: Foreign real GDP growth rates for the euro area and 25 national economies are weighted by export shares used in the Federal Reserve's H.10 release. Source: Bureau of Economic Analysis; Federal Reserve; Eurostat; national sources via Haver Analytics; CEA calculations. -20 -15 -10 -5 0 5 10 15 -6 -4 -2 0 2 4 6 8 2000:Q1 2004:Q1 2008:Q1 2012:Q1 Foreign Real GDP and U.S. Export Growth Percent, year-over-year Percent, year-over-year 2014:Q3 Trade-Weighted Foreign Real GDP Growth (left axis) Growth in U.S. Real Exports of Goods and Services (right axis) While U.S. exports continue to rise and boost growth, real GDP growth among our trading partners has slowed to around 2 percent per year (on a trade-weighted basis).

The United States is Leading
the World in Combined Oil and Natural Gas Production 29 *All data is a 12-month moving average as of August 2014, except Saudi Arabia natural gas production is a 2013 annual average. Source: Energy Information Administration; JODI-Gas database; CEA calculations. Direct employment in oil and gas production has increased by more than 100,000 since 2010, without accounting for positive spillovers on other industries. Oil Natural Gas 0 10 20 30 40 50 60 United States Russia Saudi Arabia Oil and Natural Gas Production (2013-2014*) Quadrillion British Thermal Units

Domestic Crude Oil Production Has
Continued to Rise While Net Imports Have Continued to Fall 30Source: Energy Information Administration. 2 3 4 5 6 7 8 9 10 11 12 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Domestic Crude Oil Production and Net Imports Million barrels per day Oct-14 Net Imports Production The rise in domestic oil production is part of an all-of-the-above energy strategy, as wind power generation has tripled since 2008 while utility-scale generation from solar is up more than tenfold.

Gains in U.S. Oil Production
Now More than Offset Global Production Outages, Putting Downward Pressure on Prices 31 Note: Non-OPEC outage data includes both crude oil and liquid fuels. Source: Energy Information Administration; Haver Analytics. 0 20 40 60 80 100 120 140 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 Jan-11 Jan-12 Jan-13 Jan-14 Growth of U.S. Production and Global Supply Disruptions Million Barrels Per Day Dollars Per Barrel Growth of U.S. Crude Oil Production (left axis, as of Oct.) Growth of Unplanned Global Supply Disruptions (left axis, as of Oct.) Brent Crude Price (right axis, as of Nov.) The price of Brent crude has fallen into the $60 per barrel range in mid-December, down from a recent high of $115 per barrel in June.

The Price of Gasoline is
the Lowest Since 2009 32Source: AAA via Bloomberg. A range of analysts have said that falling gasoline prices will boost the U.S. economy in 2014:Q4 and into 2015. 2.25 2.50 2.75 3.00 3.25 3.50 3.75 4.00 4.25 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Retail Gasoline Price Dollars per Gallon Dec. 14 Dec. 11

Historically Slow Health Care Price
Inflation is Continuing 33Source: Bureau of Economic Analysis; CEA calculations. Since the Affordable Care Act became law, health care prices have risen at the slowest rates in nearly 50 years. A significant fraction of the recent slowdown in health care price inflation can be linked to Medicare reforms in the Affordable Care Act. -2 0 2 4 6 8 10 12 14 1960 1970 1980 1990 2000 2010 Growth in Personal Consumption Expenditure (PCE) Prices Percent, year-over-year PCE Prices for All Goods and Services PCE Prices for Health Care Goods and Services Oct- 2014

Health Insurance Premium Growth Has
Slowed, Saving Money for Consumers and Businesses 34Source: Kaiser Family Foundation/Health Research and Educational Trust; CEA calculations. In 2014, employer premiums grew at a rate tied for the slowest since the KFF/HRET survey began in 1999. If premiums growth had matched its 2000-2010 average since 2010, the average premium would be $1,800 higher today. 11.2 7.9 5.2 3.0 0 2 4 6 8 10 12 14 2000 2000-2010 2010-2014 2014 Growth in Premiums for Employer-Based Family Coverage Average annual percent increase (nominal)

The Affordable Care Act Has
Dramatically Expanded Coverage During 2014 35Source: National Health Interview Survey Data from three different surveys show that approximately 10 million people have gained coverage during 2014. Economic evidence shows that having health insurance improves access to care, financial security, and health and well-being. 10 11 12 13 14 15 16 17 18 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Share of Americans Without Health Insurance Percent 2014:Q2 2014:Q2