Outlook for the Economy in 2009
Steven Kyle Cornell University December 2008
Christmas Spending Plans Year 2008 2007 2006 2005 2004 2003 2002 2001 2000 Average Spending $431 $859 $907 $942 $1,004 $976 $1,037 $1,052 $968 Percent Change - 50% - 5% - 4% - 6% + 3% - 6% -1% + 9% + 3%
1999
1998
$939
$928
+ 1%
+ 34%
American Research Group Survey Nov10-13; Tel. Interview with 1,100 Adults
The Gap in Demand
• GDP = C + I + G + Net Exports • C is down – People have rediscovered savings • I is down – Why invest if nobody is buying? • NX is down – The rest of the world is in recession also • That leaves only G able to expand
What Kind of Stimulus?
• DO
– Make it soon – Contribute directly to immediate spending
• • • • Extend Unemployment Aid to state government Aid to already-in-the-pipeline projects Try to promote long run growth where possible
• DON’T
– – – – Make it piecemeal Think that tax cuts will necessarily be spent Imagine that incentives to lend = actual lending Implement permanent programs unless they contribute to long run growth and productivity
How Much?
• Historical Context
– WW2 is what got us out of the Great Depression – Deficits ranged as high as 20% of GDP – That was likely more than enough but still, it was huge – Chinese just announced stimulus of 20% of GDP
• Goldman Sachs estimate of current gap at around 10% of GDP • Too much less dangerous than too little
NAHB Housing Market Index – Builder Confidence J F M 60 62 56 66 70 36 20 A 59 61 55 69 67 M 58 61 60 69 70 J 59 61 63 68 72 28 18 J 57 61 65 67 70 24 16 A 59 55 67 70 67 S 55 63 67 67 65 O 46 61 69 69 68 N 48 62 68 70 61 D 55 63 69 71 57
2001 52 58 2002 58 58 2003 62 63 2004 68 66 2005 70 69
2006 57
56 54
51
33 20
46
30 19
42 39
33
22 16
30
20 17
31
33
33
18
2007 35 39 2008 19 20
19 19 14 9
Source: Builders' Economic Council (BEC) Monthly Surveys