Fry 2005

Economic Outlook: 

Economic Outlook ROBERT FRY SENIOR ASSOCIATE ECONOMIST Fort Wayne Rubber Group Fort Wayne, Indiana September 8, 2005

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Economics is the science of telling you things you have known all your life, but in a language you can’t understand. -- Dick Armey

US economy has faced series of headwinds.: 

US economy has faced series of headwinds. 1999: Y2K 2000: Bursting of stock market bubble 2001: 9/11 2002: Corporate governance scandals 2003: Iraq war 2004 - 2005: Record oil prices 2005: Hurricane Katrina

And yet . . .: 

And yet . . . 2001 recession mildest on record. Unemployment rate lower than average rate in any of last three decades. Single-family home sales and housing starts at record levels. Motor vehicle sales at or above 17 million for 6 straight years. Inflation still low by historical standards.

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RIP

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But it stops later than you think it will, and the reversal is bigger than you expect. Robert Fry, 1958-

U.S. economy has been amazingly resilient.: 

U.S. economy has been amazingly resilient. Consumer spending has remained strong even though: High gasoline prices reduce purchasing power and consumer spending, especially for low-income households. High oil prices pull down stock prices, dampening consumer confidence. Interest rates have risen and tax cuts have faded into the past. Housing remains strong. Business investment, once the missing piece of the recovery, has become a more important engine of growth. This “mid-cycle slowdown” has been much milder than we expected . . . so far.

But can it continue to weather the storm?: 

But can it continue to weather the storm? The short-term impact of Katrina is decidedly negative. Price increases associated with supply disruptions are much more harmful than those associated with strong demand. Employment and earnings will take a big immediate hit. This is much worse that 9/11. Longer-term, Katrina could become a positive for GDP (but not for standards of living). Rebuilding will boost residential and nonresidential construction in 2006. We thought housing starts had peaked; now we’re not so sure. Katrina shifts the expected slowdown in growth from 2006 to the last four months of 2005, and shifts activity from consumer spending to construction.

U.S. manufacturing has slowed, but not much.: 

U.S. manufacturing has slowed, but not much. Leading indicators turned down in spring 2004. Auto production was cut at GM & Ford in early 2005. In some industries, growth is being supply-constrained. Growth has slowed, but slowdown has been very gradual and year-over-year growth remains above trend. Weaker dollar may be helping U.S. manufacturers; just starting to show up in trade figures. Near-term outlook was improving before Katrina, but storm clouds on the horizon got here sooner than we expected.

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Forecasting exchange rates has a success rate no better than that of forecasting the outcome of a coin toss. -- Alan Greenspan November 19, 2004

Real GDP(Annual % Change): 

Real GDP (Annual % Change)

Global growth stabilizing after slowing.: 

Global growth stabilizing after slowing. After expanding rapidly from mid-2003 to early 2004, global manufacturing slowed in 2004 and early 2005. Growth slowed in most regions. Western Europe hit by strong Euro. Eastern Europe slowed significantly. Asia more dependent on imported oil than are other regions. Growth remains strong in China and India. Growth has reaccelerated in Eastern Europe. There are a few positive signs in Korea, Japan, and Western Europe.

Slide50: 

I can’t retire yet. I have an interest-only mortgage.

Inflation has risen, but may be near its peak.: 

Inflation has risen, but may be near its peak. Prices of crude and intermediate materials rose sharply from 2002 to 2004. Initially, prices of finished goods (ex food and energy) didn’t rise very much. Core inflation accelerated in 2004. Prices of crude and intermediate materials (ex energy) have peaked and turned down. Core inflation may have peaked Slower growth and peaking inflation should prompt Fed to stop raising interest rates.

The global expansion continues, but risks intensify.: 

The global expansion continues, but risks intensify. Annual growth rates will be down in all regions of the world in 2005, but remain near long-term trends despite … Record oil prices Higher short-term US interest rates Tighter credit policies in China A brightening near-term outlook (ex Katrina) suggests that global growth remains close to trend in 2006. But serious risks remain Oil and gas prices Over-dependence on US and China US current account deficit