Transcript How Long Can the Business Expansion Continue?

How Long Can the Business
Expansion Continue?
Robert J. Gordon
Stanley G. Harris Professor in the Social
Sciences, Northwestern University, and NBER
BAC Meeting, Northwestern, April 7, 2005
To Look Forward, We Need Two
Components
• First, to understand late 1990s boom and
subsequent 2001-2004 U. S. slowdown,
recession, and subsequent slow recovery
• Second, to decompose the conflicting
elements in today’s U. S. economy and
predict out over the next two years.
Real GDP Growth:
A New Era of Stability since
1985?
Understanding the 1996-2000
Boom: The Virtuous Triangle
• The “triangle approach”
– Why the ICT investment
boom and bust?
– Stock market: causes
and effects
– Economy-wide factors:
productivity growth,
inflation, monetary
policy
Part 1. The Investment
Boom, Collapse, and Recovery
6
Net Investment rat io
(right scale->)
15
4
2
10
0
5
-2
0
-4
Real GDP Growt h
(<-lef t scale)
-5
1960
1965
1970
1975
1980
1985
1990
1995
2000
-6
2005
Net Investment Ratio (percent)
Real GDP growth (percent)
20
12
600
Household saving rate
580
10
560
540
8
520
6
500
480
4
460
Houshold Net Worth /
Disposable Income
440
2
420
0
1970
1975
1980
1985
1990
1995
2000
400
2005
Ratio of Household Net Worth to Disposable
Income (in Percent)
Household saving rate(percent of disposable
income)
Part 2. The Consumer Keeps
Buying and Stops Saving
Part 3. Productivity Growth
Takes Off after 1995
and again after 2001
6
5
Actual
4
Trend
3
2
1
0
1948
-1
-2
1953
1958
1963
1968
1973
1978
1983
1988
1993
1998
2003
Part 3. The Biggest Event,
A Non-event: Inflation
did not Accelerate
12
10
Unemployment Rate
Percent
8
6
4
Inf lation Rate
2
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
Effects of Low Inflation
• Normally low unemployment would create
faster inflation, cause Fed to tighten monetary
policy
• With low inflation, no need to tighten
• No change in interest rates, 6.0 percent in late
1994, 6.5 percent in mid-2000
• Compare to early 1980s, late 1980s
Low Inflation Prevented
the Fed from Ending the Party
18
6
16
4
14
2
Percent
12
0
10
-2
8
-4
6
-6
4
2
0
1980
-8
Federal f unds int erest rat e (Lef t Scale <-)
-10
1984
1988
1992
1996
2000
2004
Log Output Ratio
Log Out put rat io (Right Scale ->)
What Dragged Down the
Economy?
• End of Hi-Tech Investment Boom
• Stock Market Crash
• Strong Dollar
• “Multiplier” Effects
Why Was the Recession
so Short and so Mild?
• The speed and extent of the Fed’s cuts in
interest rates
– Housing refi boom
– Zero percent auto loans
– The impact continues to this day
• Less important, Bush tax cuts
– Effect diluted by giving so much away to the top 1%
– 90-90-90
By a Standard Monetary “Rule”
the Fed has been Off the Charts
Why Did the Recovery Pause
in late 2002, First Half 2003?
• Consumption
– Auto Sale Payback
– Overextended Consumer debt
• Investment Hangover Continued
• State and Local Government Spending
– “Watching the S&L Finances Implode is like watching
a multiple-car auto wreck happen in slow motion”
• Slow Growth in U. S. Export Markets
If Everything was So Dire, How
Come the Recovery Continued?
The Bond Market Gyroscope!
• Signs of Weakness? Bond Market yields tank
• A Housing Refinance Boom follows, money
flows to consumer pockets, the economy is not
weak after all
• Bond Market Reached low in June 2003, just
before GDP growth took off
• Bond Market Gyroscope is a key Explanation of
Greater Economic Stability since 1985
The Surprising Bond Market
Fueled the Expansion in 2003-04
Reasons for Fast Growth
after mid-2003 Continue
•
Continued Effects of Low Interest Rates
– On Consumption
– On Residential Investment, now at record levels
•
Recovery of Hi-tech Investment
– Users can delay replacement only so long
– Continuing innovation, albeit less revolutionary than late 1990s
•
Federal Budget Deficits continue to pump spending into the
economy
•
Effect of Falling Dollar on Net Exports
Fiscal Policy
• Federal Government Deficit:
– Surplus of $236 billion in FY2000
– Projected Deficit of $426 billion in FY2005
– Turnaround = $ -662 billion!
• Unprecedented shift from fiscal restraint
to stimulus
The Falling Dollar
• Dollar Appreciated 1995-2002
• Dollar has Weakened 2002-2005
• Dampened Effects, why?
– Fixed Exchange Rate with China and Hong Kong
– Managed Exchange Rate with rest of Asia (they
manage it, not us!)
• Nevertheless a source of stimulus
Remaining Sources
of Weakness
• State and Local Government cutbacks: offset 1/3 to ½ of
Federal Stimulus
• Upward Creep of Interest Rates
– Consumers have Bought Too Many Cars
– Housing Finance Boom Depends on Falling Interest
Rates, Housing Re-fi is Over but New Construction
Continues
– Real mortgage rates are still low, especially compared with
soaring house prices
• Last but not Least: Oil Prices!
Nominal and Real Oil Prices:
Why Minimal Effect on Inflation?
45
40
Oil price per barrel (in dollars)
35
30
25
20
Nominal oil price
15
10
Real oil price (1972 Dollars)
5
0
1970
1975
1980
1985
1990
1995
2000
2005
So Far Inflation
Has Hardly Budged
12
10
Unemployment Rate
Percent
8
6
4
Inf lation Rate
2
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
Why the Small Impact
of Oil Prices?
• The percentage increase in real oil prices has
been much smaller than in 1973-75, 1979-81
• The U. S. is much less dependent on energy
– BTU use per $ of Real GDP is only 45 percent of
1972
• Minimal impact on overall economy doesn’t
spare transportation industry from painful
impact
The Consensus Forecast
• Very stable quarter-by-quarter, 3.5
percent real GDP growth through 2005
• Overall CPI 2.7 in 2004, 2.5 in 2005, 2.3
in 2006
• Unemployment rate flat throughout 2005
Reasons for Skepticism?
• Usually I’m a skeptic, but since mid-2003 I’ve
been on board, and the consensus has been
right (steady real GDP growth, tame inflation,
gradual decline unempl)
• This time: too sanguine about inflation?
• Ignoring future interest rate effects?
• But one leading forecaster has 2005:Q1 at 4.5
Guiding Star: the “Big Mo”
• History Since 1985 is that Real GDP Growth Hovers
around 3.5 percent unless disrupted by a big shock
• The main part of the oil shock has already happened
• InvestmentConsumptionExport Mutual Feedback
• Investment Boom will eventually Fade Away, starting with
Residential, but that takes us well beyond the Two-Year
Horizon