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Diplomacy in Action

Update on U.S. Economy for Second Half of 2011

Kenneth Goldstein, Economist and Lynn Franco, Director, Consumer Research Center
New York, NY
July 12, 2011

Date: 07/12/2011 Location: New York, NY Description: Kenneth Goldstein, Economist and Lynn Franco, Director, Consumer Research Center, give an update on U.S. economy for second half of 2011 at the New York Foreign Press Center - State Dept Image

12:00 P.M., EDT

MODERATOR: I’d like to welcome you all to the New York Foreign Press Center and for taking the time to come out here on probably one of the hotter days that we’ve had so far this summer, and I know it’s not because of the Foreign Press Center as much as it is the people who are going to be doing the presentation today. So today, we have economist Ken Goldstein and Consumer Research Center Director Lynn Franco of the Conference Board. They’re going to present an update of the U.S. economy for the second half of 2011.

So with that, and so it’s their time and yours, I’m going to just say it’s my pleasure to introduce you to Ken Goldstein and Lynn Franco.


MR. GOLDSTEIN: Thank you. You told me to prepare to speak for only about 10 or 15 minutes, and my colleague usually says it takes me 10 minutes just to say hello, so I’ll just jump right into it.

U.S. economy and, in fact, the global economy is really two years out from the end of recession. And yet – and you’re going to hear this from Lynn – a lot of the consumers have been saying it still feels like one out there. Well, the difference is that we had a very slow recovery. And we have a very slow recovery, and we will have a very slow recovery because we’re not only recovering not just from any recession, but from the worst recession we’ve had in almost a century. As bad as that would be, they tell us that any time we’re recovering from a financial collapse, it takes longer to recover.

And as if all that wasn’t enough to deal with, we’re also undergoing some very strong, very sharp structural changes to the economy, so that the economy that we had in the United States and perhaps maybe the global economy that existed in 2005 and 2006 is gone. It no longer exists. This is a different world. And on top of all of that, we had these headwinds that we have been sailing into. We certainly had the weak consumer confidence, we have weakening business confidence, we have a sustained lousy housing market in the United States; we’re not the only country. In fact, Australia is now undergoing something of – beginning to undergo something of what we’ve been going through for the last four years.

We also have the high sustained energy price and food price. Energy prices are starting to back off a little bit, not so much food price. We have the – in the United States, at least, we had the state and local economies that are in austerity programs – not just the state of Minnesota, which is now in day 13 of their shutdown. But it’s Minnesota, it’s Michigan, it’s California, it’s my state, New Jersey. And on top of all of that, we have all of this – I don’t know, do we have any Japanese here? Do we all understand what kabuki is? Do we understand what farce is? Okay. We have a farce in D.C. And then we have a lot of freakishly bad weather, and the hurricane season just began in June, and then on top of that, certainly the triple disaster in Japan.

Now, some of this we knew was going to happen or we knew was happening. Housing was no secret; consumer was no secret. Nobody ever predicted or would have predicted a nuclear meltdown in Japan. So some of this we knew, some of this we got blindsided by, and this combination of a weak recovery, weak cyclical force, strong structural change, and on top of that, these headwinds have put the U.S. economy into a soft patch. That’s exactly what it is, a soft patch. This is not going to continue. Now, that doesn’t mean that the economy is going to take off and grow by 3, 4, 5, 6 percent. We might recover all the way up to maybe 2 percent. And in fact, this is basically not only in our forecast, but this is what we see is happening throughout the globe.

So that one of these structural changes – and we’re adjusting to these changes – is this economy where not just the United States, but where developed economies are really growing, at best maybe 2, maybe 2.5 percent while we have some of the emerging countries – certainly China, certainly India, certainly Brazil, maybe Indonesia, maybe Chile – growing two to three times faster and sustaining that kind of difference maybe through mid-decade, maybe through the end of the decade, and that’s only one of the big changes that we’re going through across the globe.

Where we are right now – and I’m trying to show you here this is a chart of the Leading Economic Index, LEI, Leading Economic Index – not just for the United States, but really these are for the developed economies. This is not the whole world. This only represents about 70 percent of global GDP. But what you see is not the kind of decline that we went into going into recession, but really kind of moderation.

So that what we’re looking at right now not just in the United States, but this is a global trend of where the industrial core of all of these industrial countries – not that’s in decline, but that’s cooling off, being cooled off by these different forces. And of course, what starts in the industrial core spreads to the immediate services, to transportation, wholesale trade, retail trade, and then out to the rest of the services. But I’m telling you, this is a window, this is a soft patch – not a soft trend, a soft patch. We’re not going to stay here, not for very long. That’s what the Leading Economic Indexes are pointing to.

Again, not that we’re going to come roaring out of this, but that this kind of very slow growth, at least for the United States generating only net – what, 18,000 jobs – we might get maybe one more month of that, not more than that. But when we come out, again, coming back up to maybe 150-, maybe 175,000 jobs, it’s not going to be 3- and 400, but I wish – I would love to be wrong about this. But I think coming back to those kinds of numbers, once we finish with getting through the soft patch, one of the things that tells us that are these Leading Economic Indexes, and I want you to note – not just the U.S. or North America – but look at how tight the fit is. This is one thing that for all the changes in the economy really has not changed, and that is the kind of momentum, either positive momentum or negative momentum, in North America – lending momentum to Europe, lending momentum to Asia, coming right back to North America. That has not been broken. And so part of what all this leads to in terms of the United States, again, we’re talking about maybe 2.2 percent GDP growth, maybe it’s going to be 2.3, maybe it’s going to be 2.1. It is not going to be 3, but it is also not going to stay as slow as what we have just had.

One of the keys here is what also happens to inflation, to pricing power. If business can get a price increase to generate more revenue, they can use that revenue to make a new hire. They’re not hiring right now precisely because they don’t see the revenue – not the revenue they gained last quarter, but the revenue for the next quarter and the quarter beyond, in order to make that hire and be able to sustain that hire.

Just maybe one last chart: I keep talking about how we’re going through not just cyclical change, but structural change. This is not the only one. We’re also getting an increase – a permanent increase – in the savings rate in the United States.

Here’s another one: Every time that we’ve had a price spike in the past, price of crude oil went up, price of natural gas went up, price of coal went up. Not this time around. So that pattern has been broken. Price of crude went up to $110 a barrel. Price of natural gas that two winters ago, right here, was maybe $12 or $13, this winter $2.65, because we found new gas, number one. Number two, the shale oil that we knew was down there 30 years ago, 40 years ago – we knew it was there, we also knew how to get it. It was just tremendously expensive relative to burning oil. Today, new technology, they can make money – $2.65 and they’re making money.

So that we have broken this pattern between what happens to crude oil, what happens to natural gas – price of natural gas – what happens to the price of coal, and this is before we had the real generation in terms of being able to get wind power and solar power at relatively the same price, because we’re using all of this to keep these lights on, to keep this room air conditioned. Right now, it would cost more to do this from solar power or wind power. That price is going to come down at the same time that the price of oil is going to come up. That’s going to cross at some point. And at that point, we’re looking at a huge change in the global economy.

So the last thing I’m telling you is we’ve gone through these cyclical changes, we’re going through these structural changes, we’re going to continue to go through these structural changes. The next big one is going to be in terms of energy, and it’s causing all of the – the adjustment to these changes is part of the reason that we have fallen into this soft patch. We could fall into another one. There’s no guarantee. There’s no guarantee in economics anywhere. But that this combination of cyclical change, of structural change, and these headwinds – slow economy right now, but it’s not going to continue.

And on that note, I’ll let my friend tell you all about the American consumer.

MS. FRANCO: Thanks, Ken, and good afternoon. I think our consumer confidence and the consumer in general, as Ken has pointed out, is suffering from not only a lack of confidence, but also a lack of job security. And this is having a significant impact not only on spending decisions but in overall sentiment. What we have here are the two sub-indexes that make up our overall consumer confidence index. The red line is our present situation index, which is made up of people’s expectations – or actually, their assessment of current business conditions and current employment conditions – and the blue line, which is our expectation six months out regarding jobs, income, and business conditions. And I’ve chosen to highlight these two because they behave very differently during periods in the economic cycle. And that’s why I think it’s a little important to look just beyond that top layer of just the consumer confidence index to really understand what’s happening at this moment. And given this sort of era of uncertainty that surrounds us, it’s very important, I think, to keep our eye on what’s happening here.

As you can see, traditionally what we’ll see is at the onset of the recession, which is the shaded areas, both the present situation and the expectations tend to decline very sharply and simultaneously. As we approach a bottom and begin to enter the recovery phase, they behave quite differently. What we’ll often get is a very sharp increase in consumers’ expectations. Then that index tends to sort of level off and even decline during a recovery. The present situation tends to lag a bit because it’s really driven by what’s happening in the labor market. And I think what’s very interesting here is that while we did have some of that behavior coming out of this great recession, we did have a very sharp spike in consumers’ expectations, it’s really leveled off.

And I think this brings up sort of the question of the structural change. It used to be in past recoveries, consumer confidence would reach 90, would reach a hundred, 120. We’ve not gotten to those levels now, and it’s more than two years since the recession has ended. So that’s a question I think we’re facing too, as the economy is facing structural changes, is consumer confidence and the consumer in general. Is – we hear about 50 is the new 30; well, maybe 80 here might be the new 60. We’re not quite sure, but I think time will definitely tell, as we progress, whether or not we’re seeing shifts in the index and the signals that it’s sending us.

And the key factor, really, for this very, very low rate of consumer confidence that we’ve been seeing now for several years is the labor market and perhaps the lack of what’s happening in the labor market. We are not having strong enough job growth, really, to boost confidence levels, to allow consumers to begin to feel a little bit more comfortable, a little bit more secure, and a little bit more in sort of a spending mode.

Now, we ask a job – one of the jobs questions that we ask about jobs hard to get. That’s the blue line here, and that’s the percent of consumers saying jobs are hard to get. And as you can see, that correlates very well with the unemployment rate that’s put out by the Bureau of Labor Statistics. Both have recently uptick, a sign that yes, we have more entrants coming into the labor force, but at the same time the labor situation is really quite difficult. And while we don’t expect 18,000 to be the norm, we’re seeing something – probably projecting something in about the 150-to-160,000 per month rate of gain here. It’s still not going to be enough to really boost confidence levels. We’ve got one of our other indicators, our employment trends index, which is predicting a little bit of an uptick, which Ken referred to. But again, we’re not going to get strong enough job growth that it’s going to have a significant impact on consumer confidence.

And so that in itself, because income really – jobs are the primary source of income, this tremendous job losses that we went through, the tremendous drop in financial assets and home values, really impacted consumers’ perspective regarding their income and their earning potential. And I think what’s quite striking is this is the question that we ask in our consumer confidence survey on expectations six months out about income. This recession was the first time ever where we saw the number of pessimists outnumber the number of optimists. And that gap was extremely wide following the Lehman collapse and the onset of the financial crisis. It since has narrowed tremendously.

But today, still, pessimists outnumber optimists. And I think that really speaks to the severity that we saw at the beginning of this recession with the pullback in consumer spending. It really captures how consumers are feeling today. They’re still very uncertain and very insecure about earnings, both short term as in terms of wages, and also longer-terms because, yes, we have had a bounce-back in the financial markets, but for some that’s not been enough. We still have housing, which has been a drag on the overall portfolio. And so consumers sort of faced a double whammy, I think, this recession both in terms of short-term earnings and longer-term earnings. So there’s a very, very pronounced sense of caution, which I think is going to take quite some time to dissipate.

And further complicating the matter is that we’re seeing, not only in this recovery but in the prior recovery, that it’s taking longer and longer to get back to the job levels that we were prior to the onset of recessions. In fact, we just did a webcast a few weeks ago, and one of the forecasts is that it will take us five years to get back to where we were prior to the recession, which means we’ve got another three years to go, which means we could be having a very bumpy ride in terms of consumers’ confidence or lack thereof. But I think this is very telling to watch as we move forward too, because this is going to have a significant impact on spending decisions. The way consumers feel about their income expectations is very highly correlated with personal consumption expenditures.

So right now, what we’re seeing is a very cautious consumer, and one that’s not likely to spend unless there’s sort of a good incentive. We saw that with the first-time homebuyer’s credit, we saw it with autos, but other than those sort of special discounts or special once-in-a-lifetime offers, I think consumers right now are pretty content to sort of sit on the sidelines and carefully weigh any spending decisions before taking on more debt.

And what’s interesting is – and I, again, think this speaks to the wealth effect – is sort of now the contrast that we have between consumer confidence for those earning 50,000 and over and those earning under 50,000. But still striking, and I’d like to point out, even at the higher end, the 50,000 and over, we had a decline of almost a hundred points. So both consumers across the board have felt a tremendous impact from this recession. We’ve seen, thanks to the wealth effect and the bounce-back in the financial markets, that the upper-end consumers are feeling more confident, still far from where they were prior to the onset of the recession, but this has sort of translated into some of the bounce-back that we’ve seen in high-end luxury goods while those retailers are now beginning to sort of bounce back.

On the lower end, we’re seeing sort of the big box stores faring well too, because consumers are still really out there looking for bargains. Ken already spoke about higher food prices, higher energy prices, so that’s really impacting consumers’ budget for those on the lower end. So there’s less discretionary dollars and much more conservative spending.

And expectations here – we ask a question about inflation. That doesn’t go into the overall index, but I think this gives us a pretty good perspective on yet another factor that’s at play. Over the last several months, as we saw sort of this run-up in gas prices when it went above $4, we saw a severe spike in consumers’ inflation expectations. And it’s come down a little bit, which is sort of good news, but I still – it’s still relatively high. And I think when you take sort of this apprehension about prices, whether it’s at the gas pump or filling up the grocery cart, you combine that with these negative sort of expectations that you have regarding your earnings, what you’re seeing here is consumers feeling that their purchasing power has greatly diminished. And under those circumstances, again, it’s just one more headwind that’s facing consumers, that’s going to restrain spending for several quarters. And given the environment that we’re operating in, while we might see somewhat of a downtick in inflation expectations, I don’t think that’s going to go a long way to boosting spending.

And I think Ken referred to this, too; we’ve seen sort of this great difference in consumer sentiment versus CEO sentiment. Part of that is because we’ve seen profit gains in double digits, and that has not trickled down to the bottom line. So consumers have not benefited from the great profit growth that we’ve seen over the last few quarters. However, we also do a survey of CEOs, our CEO confidence survey, and we just released our results last Friday. And we’ve seen a pretty dramatic decline here as well. It’s still above sort of 50, which indicates that CEOs expect the economy to continue to grow, but the measure itself has dropped from a reading of about 67 to about 55.

In a separate question we asked them, they still expect the profits – seem to remain positive, probably not as strong as growth as we’ve already experienced. But here too, now, we’re seeing signs of sort of caution beginning to emerge, and that’s going to have a direct impact on hiring plans down the road. So it’s almost like we’ve got a Catch-22 situation here where now we’re losing traction with CEOs, that’s going to translate into a decline in hiring, and that’s going to further suppress consumer confidence.

So I guess in a nutshell, what we’re seeing here is really a very cautious consumer. We don’t expect that scenario to change anytime soon. While we expect spending to remain somewhere in the range of about 2 to 2.5 percent over the second half of the year, they’re going to weigh their spending decisions very, very cautiously – probably shy away from very big-ticket items, even though we’ve seen the debt picture brighten a little bit. But there’s just not enough momentum, either in the economy or in particular in the labor market, that’s going to alleviate some of these concerns that consumers are expressing.

And I think that’s it for the good news. Did we have any? (Laughter.)

MR. GOLDSTEIN: Maybe just to go back to one note, in this kind of an environment, there’s always – I’m not – nothing’s always – a lot of times you wind up with what we can call asymptomatic response. In other words, people don’t respond normally the same way to a piece of good news or a piece of bad news. In some cases, people pay more attention to the good news. In some cases, they pay more attention to the bad news. Right now, we’ve had so much bad news, you could speculate that another piece of bad news on industrial production or CPI or employment, and consumers say, oh, that’s just more of the same. But a good report, maybe all of a sudden people start to wake up and pay attention to, at least a little bit more.

So we’re – we could well be into that kind of a season, where more bad news just simply gets short shrift, and a piece of good news, people will latch onto. And perhaps that could change the environment a little bit. But again, one of the things we both agree on, nothing’s going to push this thing into a rip-roaring recovery. That’s just not going to happen.

MS. FRANCO: Right. I mean, what we’ve seen, though, is, like Ken just said, you’ve got spurts where we’ll see confidence, in particular a pickup for a few months, but it really is not able to sort of gain and sustain that momentum going forward. So we’ve sort of been moving sideways now for a few years. And I think until we begin to see, really, in particular the labor market and some wage gains coming back, I don’t think we’re going to have sort of the robust rebound that we’re used to in terms of consumer confidence.

MR. GOLDSTEIN: It’s as if all Americans are now from Missouri. People in Missouri say “Show me.”

Any questions?

MODERATOR: Before we go into questions, please state your name and the media organization clearly. Thank you.

QUESTION: Hi. Robert Doredos, Slovenian Press Agency. Mr. Goldstein, you mentioned the kabuki theater in Washington, right? So could you describe this for me, please?

MR. GOLDSTEIN: You’re going to get me in trouble.

QUESTION: (Laughter.) What would be the consequences for the U.S. and the world economy if those –

MR. GOLDSTEIN: Catastrophic. Catastrophic --

QUESTION: And where do those --

MR. GOLDSTEIN: -- which is exactly why it will not happen. So I would very comfortably predict there may not be the grand bargain, so maybe they’ll come to something just simply to get through the impasse, but they will get through the impasse. And in fact, that’s not just my position. I looked this morning. The 10-year – the yield on a 10-year Treasury bond was down to 2.9 percent. Last week, it was like 3.05 or something. So it’s as if the bond market – people who were buying bonds, putting their money in bonds are sort of assuming we’re not going to jump over the cliff and that those bond yields aren’t going to go up to 5 and 6 percent.

As to what the bargain will be, look, number one, make sure you put this down: I’m an economist, not a politician. Because one of the proposals is to – there’s a tax treatment of a yacht, that if it has a bedroom and a bathroom, it can be treated as a dwelling. If it’s a dwelling, it can get the same tax break that you get on a house. So one of the proposals to increase revenue is to get rid of that deduction. The Republicans are saying we can’t do that, because if you do that, you’re taking money out of the pocket of the people who create jobs. They’re right.

However, on the other side of the coin, we’re talking about two or three or four trillion dollars out of spending, which takes money out of people who would either create jobs or spend the money to create jobs. See, from an economic point of view, whether it’s a dollar on the spending side or a dollar on the tax side, it’s the same dollar. It’s just a fight over whose pocket we’re going to come out of. That’s why there’s is a political fight or a kabuki.

QUESTION: But it will – absolutely has to be done, right?

MR. GOLDSTEIN: Not only has to be, but it will be done. I say so, the bond market is saying so, whether it’s the grand bargain or something to just simply muddle through.

QUESTION: Matthew Murphy from The Age newspaper in Australia. I was just interested to get your view in terms of how you see the depreciating or low U.S. dollar affecting consumer confidence. I mean, is that impacting at all?

MS. FRANCO: I don’t think so. I mean, it really comes down to what’s happening at home, what’s happening to me. And that’s what’s happening in the workplace. And what we’re seeing there is between the loss of jobs, the lack of earnings gains in terms of wage gains, that’s just having a tremendous negative impact. Again, coupled with the depreciation or the losses in the financial markets, consumers have not recouped all of their losses and housing value. So it’s really, I think, more of what’s personally happening to me as opposed to what’s sort of happening on a greater scale.

QUESTION: Hi. Stephanie Fontenoy. I work for La Libre Belgique in Belgium. There is a lot of talk about the debt crisis in Europe, and that –

MR. GOLDSTEIN: Ours or yours?

QUESTION: That’s the question. The U.S. is living with a big debt as well, and my editor told me, describe how that’s – the regular American is impacted by that debt. So can you describe the – how does the U.S. live with such a big debt?

MR. GOLDSTEIN: Well, it’s really two parts. One is: Well, how do people think they’re being impacted? And the answer is they don’t. Indirectly, sure, because what happens in Greece or Portugal – and now they’re talking about Italy – could raise the overall level of interest rates, could make it more costly to float a bond. If it costs more money to float a bond, then all interest rates have to move up. So if I have to go and buy a car, the interest rate that I would be charged on that car is impacted by that. But do I realize that? Do I pay attention to that? The answer is no. So that for the average Texan, they worry more about the drought down there in Texas than about what happens in Greece or what does not happen in Italy.

QUESTION: My name is Angela Hennersdorf. I work for German Business Week. I have a question. Maybe you could elaborate a little bit on – you said it’s not – it’s the bad situation right now; it’s not going to be like that. So what are your main – what are the main drivers? I don’t see any of it.

MR. GOLDSTEIN: This is a great question. Look, if you were in somebody’s backyard in a swimming pool and you have the ball – okay – if you put your foot in that ball, you can push it down and keep it down on the floor. What happens if you take your foot off?

So my answer to your question is not so much what positive is going to drive as the absence of still more negative things that would keep the economy this weak. Something else would have to happen in order to keep the economy as weak as what we saw in May and in June, so that that combination of factors, of tornadoes and hurricanes and what happened in Japan shutting down a factory in Buffalo, New York because they couldn’t get the part – so you would need more negative factors. The absence of more negative alone would be enough to allow the situation to be alleviated at least a little bit – like that ball, at least come closer to the surface.

Then on top of that, the idea that the consumer is still spending, slowly but still spending – two years ago in the middle of the recession, they weren’t spending anything. They were basically saying we’re going to pay for the – pay the car note, the mortgage, we’ll put food on the table, and anything else that we can’t – absolutely don’t have to do, we’re not going to do. So here we are two years later, consumer confidence you saw is still very low, it’s as if, yes, we’re still going to pay the rent and the car note and put food on the table. And we’ll buy a little bit but not too much, because we’re worried. Having gone through everything we’ve gone through and worried about what might be coming next, it’s as if the husband is telling the wife or the boyfriend telling the girlfriend, honey, we need a bigger piggybank, and/or we need to buy that car, that sofa, that – whatever. We don’t have to do it right now; we can wait. And that’s basically what they’re doing.

So the absence of still more negativity may tell at least some of those folks to do a little bit of some of that stuff that they’ve been putting off or telling themselves we don’t have to do. And that gets us out of the soft patch.

QUESTION: Thank you.

QUESTION: Maurizio Guerrero, Mexican News Agency. What about the regulations of the financial instruments that some say caused the recession? There was something done at the beginning of the recovery in Washington, D.C.

MR. GOLDSTEIN: Yeah. It was called Dodd-Frank.

QUESTION: Yeah. And now the momentum seems lost.

MR. GOLDSTEIN: No, no, no, no, no. I – you’re talking about the – a lot of people say that Wall Street caused all this. Well, they didn’t make it any better. They didn’t do us any big favor. But I don’t know that all of this can be put at the doorstep of Wall Street. Makes a good movie, but I’m not sure that that’s – and at heart, the idea that we had swung too far to deregulation – and not that we need to go back to regulation, but we need to bring them – bring it back a little bit. And so part of that is the Dodd-Frank bill, which said in part we need to write some regulations about blah, blah, blah, blah, blah. So since that happened – I believe that’s about a year and a half since Dodd-Frank passed; I might be wrong about the timing – they’ve been writing those regulations.

So the one piece of your question that I would disagree with is that there’s no momentum. So that what’s happened is sort of while you reporters are not reporting about it, the statisticians and the bureaucrats and so forth are sitting down trying to write the rules – write them, put them up for comment, get feedback, get pushback, and see what changes need to be made about what the regulations should be and then implement it. And that’s what’s been going on since then, so that in actual fact, what got all the headlines was Dodd-Frank. The real action is what happens now with Dodd-Frank, what are those regulations? That’s going on and that’s going on right now, and it’s irreversible.

QUESTION: So do you think a recession like the one that happened two years ago could not be possible in this decade again by –

MR. GOLDSTEIN: I would say this: We will not make the same mistake, which doesn’t mean we won’t find another way to make a mistake. And in fact, that’s – you’re going to see all the Gordon Gekkos try to figure out, what can we do now?

Can we get a microphone?

QUESTION: Stephanie from German financial daily Borsen-Zeitung. Well, you just mentioned Gordon Gekko. What do you think about the current – well, second new economy bubble, like all those IPOs? Does it have any really effect on, like, labor market, consumer confidence, or do we expect another crash from that area?

MR. GOLDSTEIN: One, is it really a bubble? Two, even if you stipulate that it is, is it anywhere close to as big a bubble as the ones that burst? And clearly, the answer is no. So I think that at least right now, in part, one of the benefits of the economy being as weak as it is is that a bubble either can’t get that big, or if it does pop, doesn’t have the same impact.

And for example, part of what happened is in the United States – Germans would never do this; I don’t know about Mexicans – we borrow too much money. The consumer did, business did, states and locals did, federal government did. So where we are right now is where consumers, as you’ve heard – if we’re paying down debt and building up savings, that means that we’re reversing course a little bit. So you’ve got consumer in austerity, you’ve got states and localities in the third year of austerity. That’s what they’re talking about in DC is austerity. And business, sitting on a trillion dollars in retained earnings, is not running to the bank to borrow money.

So you can’t generate that same bubble because the consumer’s not coming in, business isn’t coming in, state and local isn’t coming in, federal isn’t – is not coming in. Again, you could make a mistake here, but we’re not going to hit that same kind of bubble, at least not in the United States. And I would suggest to you that the example of what’s going on right now in the Australian housing market is suggestive that not only we’re not building new bubbles here; we’re not building new bubbles period, or at least we’re not building new big bubbles.

QUESTION: Tim Schaefer, Finanzen Verlag in Germany. If Barack Obama were to ask you today what should he do to improve the economy, what kind of steps?

MR. GOLDSTEIN: You guys are just trying to get me in trouble here. (Laughter.) I can’t understand why Obama is not on TV, saying “Do you want to go back to that?” I don’t – if it were me – and, of course, this is exactly why he’s got the job and I don’t – I would be a lot more forceful. What he’s trying to do, when you’ve got a polarized country – the United States is more polarized today than it was during the Civil War, which means that there’s so little middle ground, there’s so little common ground, and I think that one of the benefits of his sort of coolness, if you like, is precisely in trying to do the maximum, even if it looks like they’re – he’s allowing them to push him around, to try to form the middle ground. So I think longer-term, it’s exactly what we need to do. But sometimes, you just wish he would just crack the whip a little bit, but that’s exactly why he’s got the job and I don’t.

QUESTION: Hi. Sean O’Driscoll, British Sunday Times. I’m wondering what your opinion is of the failure of economics to predict the recession. And just on a smaller point about the rating agencies, for example, they employed some great economists, and the rating agencies seem to have completely missed everything and they have gone along with the housing market.

MR. GOLDSTEIN: Well, the rating agencies, you could say that they were too busy minding their own profit margins and not paying enough attention to rating. That’s their sin. Our sin is precisely that we didn’t see this coming. And it’s not just that we didn’t see this coming. We didn’t see the bubbles happening, we didn’t see housing – I mean, as sharp an economist as Alan Greenspan, who may be either the best economist or certainly the best statistician in the United States, did not see that the housing bubble was as big as it was and was about to explode and about to lead to a lot of the pain.

So I think that one of the big questions coming out of all of this is certainly – I mean, it’s one thing to just simply say, look, the stupid economists didn’t see this coming; why should we pay any attention to what they say? Okay. And that’s fair. But separate from that is what are the lessons learned here? And I think that one of the things that the economic profession really should be doing is precisely trying to figure out what did we miss, what didn’t we pay enough attention to, so that the next time – not the next time that there’s a great recession, but the next time the economy – whether it’s the U.S. or China or Brazil or Peru – will we be better able to see what’s coming, because we learned from lessons from this? I hope so. There’s no guarantee.

QUESTION: In connection to the rating agencies, do you think maybe they are now overdoing it, concerning European countries?

MR. GOLDSTEIN: Concerning the European countries?


MR. GOLDSTEIN: Yes, I agree they’re still overdoing it, that they should be more strict. I mean, is it really true that Italy’s next, or Spain, or Hungary, or France? And I have heard all of this. And plus, I’ve heard also that, well, all of this is the fault of the U.S. Federal Reserve. We in Europe wouldn’t be having the problem if the Federal Reserve would get its act together, as if to say – I think one of the things – one of the surprises to me is why, in Europe, we’re not having more of a debate, not about should Greece be kicked out or walk out of the euro, but do we need the one size fits all, and does it work? If you ask the Germans, oh, absolutely it works. I’m not sure that the Greeks or the Spaniards or the Irish or the Italians or the Hungarians or the Slovenians or the Turks either want to stay in or want to get in or think that this is a good idea.

So I think that if, to follow up on another question, if we were to learn some lessons here, it is that the whole euro system needs to be fundamentally changed. Exactly what changes, I’m not sure. Should it be strengthened? Should everybody have to go under one monetary policy? Or one size fits all is never going to work; let’s break up the euro? I don’t know that either of those two are the only alternatives or the answers, but I think that we need that kind of a – I think we need that kind of a debate in Europe, that Europeans should be asking about Europeans. And I think that the absence – somewhat absence; it’s not totally absence – but that the absence of that kind of debate really raise the question not just about Europe, but about everything that’s happened over the last couple of years. Are we really learning lessons here that we can move forward on? It’s a question.

QUESTION: Well, to come back to Barack Obama, you said what you – you would be more forceful. But what do you think of their policy – of the White House policies to try to have –

MR. GOLDSTEIN: This is all – but you said it. This is all about politics; this is about politics. What can he sell to his voters? What can they sell to their voters? Who’s in the middle and who’s selling them some idea that they can – that there is indeed going to be – we all know there’s going to be pain. There’s no way to solve this problem and nobody’s going to pay for it. And there is nobody else. I mean, we can’t say they should go or they should go; it’s going to be shared pain one way or another. And so I think it’s more about – it’s not about what to sell as far as he’s concerned or about John Boehner, but about how to sell it, and I think that that’s where, in the end, we’ll see whether or not there is a grand bargain among the constituents, let alone among the politicians. We’ll see. We’ve had two changing elections in a row; 2012 is very likely to be a third straight one with no real resolution, which means there could be a fourth straight one, but I don’t know. I’m an economist, not a politician.

QUESTION: And what happens on – after August the 2nd if they have come to an agreement. A lot of people or many people discuss nowadays in another economic stimulus.

MR. GOLDSTEIN: No. There’d be no stimulus.


MR. GOLDSTEIN: No – in fact, that part of the reason coming back to the presentation as to why the economy is as slow as it is, it’s going to get no help from the fiscal side – federal, state, or local. And QE3 is as dead as fiscal stimulus. That’s out of the question. They’re talking about cutting; they’re not talking about spending. So I mean, we’re – on a certain level, we’re on our own, which is also why this economy went into a soft patch and why when we come out of it – and we’re going to come out – we’re not going to come roaring out because we’ve got to do it by ourselves.

QUESTION: This is Michelle Qiao from China’s Xinhua News Agency. Do you see any other side challenges for the U.S. economy such as maybe the European debt crisis and high inflation rates emerging (inaudible)?

MR. GOLDSTEIN: Well, one of the things we tried to say here was that this is a global economy. There’s about a $100-, $110 trillion and one of the things just looking at the linkages in terms of the LEIs is how close we all are. So China gets a cold; Japan’s going to get pneumonia. Japan gets pneumonia; it’s going to have an impact on the United States. It’s going to have an impact – what happens in the United States is going to have an impact in Europe, going to have an impact on Latin America. This is a global interconnected world, and by the same token, what happens in the U.S. and what happens in Europe has an impact – is having an impact in China as we speak. It’s part of the reason why Chinese industrial production is slowing down more than what the authorities wanted to cool off the Chinese economy.

So I mean, it doesn’t matter where we are in this globe; we are affected by everything else. But we also affect everything else. So I think it’s all a challenge not just in terms of what bad can happen, but also what good can happen. And so I think that what the LEIs are also telling us is a limited cooling off in terms of industrial production, in terms of bringing inventory level in line with sales more or less and what impact that has on trade and, therefore, on the financing of trade.

And again, sort of the same response as before, that unless more negative things happen, this whole process is going to lift all of these LEIs, and we’re going to see the impact perhaps by – I don’t know – say, October to be talking not about a global slowing down of industrial production, but a global pickup in industrial production. I’m not saying that’s going to happen. I’m saying that’s possible. In every forecast, I’m talking about what could happen. That’s the out that the economists always add.

QUESTION: What do you think would be a healthy unemployment rate? And when can we reach it? 4 percent?

MR. GOLDSTEIN: Yeah. By 2022. (Laughter.) But I’ll be out fishing by then. I mean, look, you can do the math, right? I mean, suppose we got 200,000 new jobs a month. Wouldn’t that be nice, instead of 18? But if we got 14 million people unemployed, 200,000 a month every month, how – what are we talking about? 2015? 2016 just to get to a 6 percent unemployment rate? So the separate question is not about whether we get to 6 or to 5 or to 4. The separate question at what point are we consistently chopping away at that unemployment rate. And if we can do that much, I think we would start to see consumer confidence not shoot up, but maybe come off of recessionary levels and move back up to where we would normally be a couple years out in recession. So instead of being way down in the red area, we could be above maybe that 80 line. If, number one, we were consistently moving that number however slowly and giving people confidence, we’re going to continue to do that. And I don’t think that’s going to take until 2016. We could be there possibly by the end of 2012. Again, I’m not saying we’re going to; I’m saying we could.

QUESTION: Christoph Gisiger, Swiss financial newspaper, Finanz und Wirtschaft. What about the housing market? How – when is it going to recover, and –

MR. GOLDSTEIN: March 13, 2012 at 2 o’clock. No. But look, the answer – in some sense – what we have right now is we have the lousy housing market that we’ve had for the last four years. That also means that all those kids who graduated from college last June a couple of weeks ago and the June before that and the June before that, who would love to move out and whose parents would love to see them go – (laughter) – okay? But they’re stuck. They can’t go because in this housing market in the United States – and again, we’re starting to see some of this in some other places, like Australia – you can’t go into the bank and get a mortgage unless you can come in with 10, 15, 20 percent down payment. Okay.

So we have some folks who are in the queue, if you like, okay? And we know this because we can look at mortgage applications. The real problem is about the folks who cannot make their payments and who are going to lose their home. We don’t know how many more, we don’t know whether that rate of foreclosure is going – actually, we do know that that rate of foreclosure is going to start to slow. When and by how much is really the answer to your question, and I’m suggesting to you sometimes perhaps in the next six months we’ll start to – again, we’re talking about moving down slowly.

But to start to see that move down so that fewer are the people who are indeed moving – are moving into a foreclosed home because that’s the case, (inaudible) says to the hard hats, “Go out there and build that frame so that we can start to build that new house so that this kid can move out and move into that house.” We could start to see that in the first half of next year. Possible. And I would not be surprised if it happens in March. Maybe it will be February. But I don’t think we’re that far – six months, maybe twelve – from the time of when we’ll continue to see mortgage applications move up, foreclosures move down, and therefore to see housing start to pick up. And again, none of this is going to shoot up. But to start talking about moving up more than say 10- or 15- or 20,000 per month to move fast – a little bit faster than that.

MS. FRANCO: And I think also if you take a look at some of the Federal Reserve data, you can see that while a lot of the credit standards have been somewhat loosened a little bit, there’s just no demand from the consumer end. There’s no willingness to take on additional debt even though sort of the scenarios are, I think, a little bit better than it was two years ago. And that speaks to the structural change. They’re still trying to get their financial house in order and are more prone to saving right now than taking on additional debt.

MR. GOLDSTEIN: Again, you got consumers who are deleveraging, business deleveraging, state and local and now federal deleveraging. So if you’ve got somebody coming in with a mortgage who can make – as long as you can – if you’re the mortgage approval – as long as you can show to your boss, yeah, they can make that mortgage payment, there’s a reasonable chance they’ll be able to make that mortgage payment, they’ll relax some – maybe it’s not going to be 15 percent, maybe the move down to 10 percent down payment, that kind of thing. Now, if the consumer – loan demand was stronger, business loan demand, so forth, maybe they would be a little bit more strict. But precisely because there’s so much liquidity, but nobody wants to borrow, which is why there’s no bubble or few bubbles or small bubbles. They can afford to be a little less strict, but not to go back to where we were in 2005 and 2006. That’s not going to happen. That’s at least one lesson we learned.

QUESTION: Hi. Wen Chen with Beijing Review. Do you see any possibility that the U.S. might default this debt payment.


QUESTION: Thank you.

MR. GOLDSTEIN: I mean, what I’m saying is there could be a – after all of this big fight, there could be a grand bargain. If it’s not a grand bargain, it will be a small bargain. I see very little chance that there will be no bargain at all. Basically, it also – what it really says is certainly the Democrats have no incentive to let the U.S. economy go over the cliff. The Republicans have no incentive to see the economy go over the cliff. Voters in general any more than readers aren’t stupid or viewers.

MODERATOR: Okay. And with that, I’d like to say thank you very much. Ken and Lynn will be available for one-on-one interview requests. Thank you, please.

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