..

Emeritus Dean , College of Business & Economics

.
Adjunct Professor of Economics

Dr. Jay L. Tontz

Forecast 2011: Will the Expansion Continue?
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John Maynard Keynes 1936

Recessions are caused by:
1. insufficient aggregate demand and

2. a lack of confidence.

Suggested Government policies:

Monetary Policy - Lowering interest rates to encourage investment spending Institutional policy stabilize financial sector to increase availability of credit and confidence
Fiscal policy increase G and reduce T to increase C and G components of aggregate 2 demand

 Bush response to recession in 2008

U.S. Stimulus followed Keynes

Feb - Econ Stimulus Act of 2008 - Cut taxes $78B Econ Recovery Act of 2008 - Congress authorized the Troubled Asset Relief Program (TARP) to stabilize the financial system. $ 700B saved from financial meltdown December - funds to the auto industry Fed lowered interest rates starting Sept 2007

Obama push for even more fiscal stimulus in 2009

February 17th American Recovery & Revitalization Act of 2009 $ 787 B stimulus program ($827 B) extension unemp. Tax cuts - $ 288 B Further bailouts for autos + cash for clunkers Signed proposals to regulate financial and health
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AGGREGATE DEMAND
CONSUMPTION -- 70 %
f(Income, wealth, consumer expectations)

INVESTMENT -- 16 %
f( Interest rate, expected profits)

GOVERNMENT EXPENDITURES - 17 %
f(political considerations )

INTERNATIONAL TRADE
f(world growth rates, barriers to trade, exchange rates)
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Consumer Expenditures 2011

Disposable income will increase: assumptions Employment will increase -- focus of stimulus package of Dec 2010
Sustain Bush tax cuts Reduce Social Security tax rates from 6.2% to 4.2% After tax Disposable income increased 4th qtr 2010 Increase more with reduced Social Security tax 5 Increased tax write-off of new equipment

The employment turnaround of 2010 Jobs added to U.S. Payrolls:

Jan + 14,000 Feb - 14,000 1st qtr average = + 54,000 Mar + 162,000: vs. 1st qtr 2009 = - 758,000 per mo. Apr + 290,000 May + 431,000 -- + 41,000 private sector jobs June 125,000 -- - 225,000 Census + 83,000 private July 131,000 census + 71,000 private Aug - 45,000 gov. -114,000 private + 67.000 Sept + 64,000 Oct + 82,000 private sector 1,160,000 in 12 months Nov + 93,000 54,000 in small businesses Unemployment rate = 9.4% Dec 2010 6 Dec + 123,000 117,000 in small businesses

Businesses more optimistic

For the first time in three years, a majority of chief executive officers polled by small business group Vistage said they planned to add employees in 2011. In the previous installment of the poll, conducted in September, just 46 percent of CEOs said they planned to add jobs in the next 12 months. In the December poll, 58 percent thought economic conditions had improved from a year earlier, and roughly the same percentage thought things would get Published Wed. 5 Jan better still over the next 12 months. 2011

More jobs in 2011

positive indicators for employment in 2011 -- the National Association of Colleges and Employers says employers plan to hire 13.5 percent more new college graduates in 2011 than in 2010, and the Federal Reserve predicts that in 2011, the unemployment rate may drop below 9 percent for the first time since April 2009 -- the job market will continue to be competitive this year.
careerBuilders.com Dec 28, Tri Valley Herald, Jan 6, 2011

Retail sales
retail sales rose 5.5% in the 50 days before Christmas, according to MasterCard. Since consumer spending accounts for about 70% of GDP growth, rising retail sales will force many economists to raise their 2011 GDP forecasts even higher. Buying increased after consumer confidence climbed in November to the highest level in five months
Louis Navellier Jan 3, 2010

 Wealth will increase -- assumptions

Stock market - will rise in 2011

Consumer Expenditures 2011

Down 33% in 2008, bottomed out March 9th 2009 and continue to rise in 2010 up 11.1% Jim Jorgenson and Louis Navellier bull market 2011 Mfg index > 50 growth

Home prices will rise in 2011 Fed said $600B in gov. bonds to keep mortgage rates low Cash rich builders are buying land again, betting on a turn in the market for new homes. -Increasing supply Existing-home sales, rose 5.6 percent to a seasonally adjusted annual rate of 4.68 million in November from 4.43 million in October
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Consumption spending 2011

Disposable income will increase
More private sector jobs Lower social security taxes

Wealth will increase

Rising stock market Stabilizing housing prices

Consumer confidence will increase Credit will become more available

Consumption sector will add stimulus to AD in 2011

INVESTMENT
THE INTEREST RATE COST OF CAPITAL Historically low interest rates- Dec 14th Fed said would keep exceptionally low levels of interest rates for an extended period of time since March 2009 financial markets
are now extending credit to larger businesses Will move to extend credit to smaller firms as expansion continues

Evidence
Business spending on equipment and software jumped 13.3% in 4th qtr.

4th qtr 2010 was 6th qtr in a row that business spending has increased, after 6 qtrs. of decline.
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INVESTMENT
EXPECTED PROFITS improved as the economy improved
During 2010 earnings have been better than expected. This has been a big boost for morale and the chance that recovery will continue in 2011

With low interest rates, improved business sentiment, and easier access to credit: The INVESTMENT sector should add stimulus to Aggregate Demand in 2011
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Government expenditures
State and local governments in the aggregate will spend less than last year, but as the economy grows their revenues will increase Calif. Plan -- $12.5 B cuts, $12.5 B increased revenue
Education $500 M from each UC & CSU, $400 M community colleges

Federal government budget of $ 3.8T

Government sector will add stimulus to aggregate demand in 2011

Global Recovery started in 2009 After a deep global recession, economic

growth turned positive:
As wide-ranging public intervention has supported demand, and lowered uncertainty and systemic risk in financial markets.

The global economy began expanding again, pulled up by the strong performance of Asian economies and stabilization or modest recovery elsewhere. Global trade is booming
EconomistDec 30, 2010 estimates that the trade Ed Yardeni Louis Navellier, component of GDP could add 1% to 2% to 2011's overall GDP.
International Monetary Fund assessment The Economist 29 May 10
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 Central banks reacted quickly with exceptionally large interest rate cuts, as well as measures to inject liquidity and sustained credit. IMF - World economy forecast: .8% in 2009 + 4.5% in 2010 + 4.3% in 2011 World growth will increase demand for U.S. exports and add stimulus to aggregate International Monetary demand in 2011. Fund global GDP growthsupports free trade Obama is expected to exceed 5% in 2011 Navellier Jan 3
rd

Global Recovery 2009-2010

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International Monetary Fund forecast 2011

7 % 4.3% 2.8%

Assumptions 2011
Fiscal Policy STIMULUS will create jobs and confidence Monetary policy Federal Reserve low interest rate policy will stimulate investment given business optimism No political decisions in Washington will negatively affect the path of recovery No international disturbance will negatively affect the U.S. economy sovereign debt issues in Europe No weather related issues will negatively affect our economy No terrorist actions will negatively affect the aggregate economy 18

Forecast 2011
The economy is in the expansion phase of a business cycle will show continued growth Real GDP 3.8% Unemployment 8.9% Inflation + 2.0% +. 5% Interest rates
Long term Short term
Jan 10, 2011

+ +

1.0% 1.0%

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