Transcript 23rd Annual Economic Outlook Conference

The Economic Outlook
Orangeburg, SC
November 12, 2008
Dr. Doug Woodward
Director, Division of Research
Professor of Economics
, Division of Research
Overview
• Perspective on the financial crisis
• Perspective on the economic crisis
– U.S.
– South Carolina
• The Fundamentals: Long-term
Competitiveness
Perspective on the Financial Crisis
 A parallel financial industry created,
sold, and bought trillions of dollars
of derivative securities
 based upon "hedging" or "insuring"
the value of a much smaller base of
real assets.
 Akin to gambling: credit default
swaps
 Some versions of these
instruments are imaginary capital.
 These claims overlap on the same
types of mortgages and other
financial instruments.
 TARP’s problem
 Hard to price and sell these
financial products.
Co-Pilots
“Beware …
of geeks … bearing formulas.”
C = S * N(d1) - K * (e ^ -rt) * N (d2)
d1 = ln (S / K) + (r + (sigma) ^ 2 / 2) * t / sigma * sqrt(t)
d2 = d1 - sigma * sqrt(t)
Financial Cycle
• Excitement
• Rational response to
an event or
opportunity
• Euphoria
• Growing confidence
• Excessive risk
• Irrational exuberance
• Leverage
• Bubble
• Revulsion
•
•
•
•
Bubble bursts
Fear sets in
Hoarding
Crisis of confidence
Real Investment Matters
• Financial disorder creates a crisis of
confidence
– Fundamental uncertainty
• Financial crises can have real
consequences
– Consumer retrench
– Loss of confidence and animal spirits
(Keynes)
• Real investment stagnates
– Real investment is plant, equipment, even
housing
– Productivity enhancing investments
decline
• Government fiscal stimulus needed
The Forecast for
the Real U.S. Economy
Recession …
What is a Recession?
Two quarters of declining GDP
Further:
A significant decline in economic activity
spread across the economy
• Consumers retrench and wholesaleretail sales weaken
• Employment losses mount
The Long-run Business Cycle
Real Investment in Peril
The Forecast for the Real South
Carolina Economy
Recession …
South Carolina Economic Barometer
Retail Rebound for Christmas?
• Low gas prices
• Stock market
recovery
• No more financial
shocks
• Rising confidence
• Stimulus checks
Exports Holding Up Manufacturing
• Dollar’s decline helped the S.C. economy
• Growing exports were a central reason
why the S.C. economy stabilized in 2008
• But the latest data show …
– Exports of goods will slow in 2009
– They were growing at double digit rates
BMW’s Cumulative Capital Investment
in South Carolina in 2007 Dollars
Millions
Figure 3
BMW Employment Impact
(2007 Values)
25,000
23,050
20,000
15,000
10,124
10,000
7,526
5,400
5,000
0
Direct
Indirect
Induced
Total
Outlook Summary
• The ongoing financial crises will ensure
a national recession.
• Meager economic gains during 2009.
• Mild recovery possible in mid-2009.
• Local and state government in fiscal
crisis.
Looking further ahead
• A rebound in 2010.
• 2010–15: South Carolina will be a leading state
economy with export clusters.
• More diversified
• Cluster and competitiveness initiatives are still
the key to long run growth.
Thank you!
Additional information available at the web
site for the Division of Research, Moore
School of Business, University of South
Carolina:
http://mooreschool.sc.edu/moore/research/
28th Annual Economic Outlook Conference
December 3, 2008
Marriott Columbia City Center
8:30 am Continental Breakfast and Networking
9:30 am Check-in
10:00 am-12:00 noon "Outlook for the U.S. and S.C. Economy 2009"
Luncheon Speaker: Daniel H. Stern--"Current Status of the Financial
Markets"
Cost is $75 (includes morning program and luncheon.)
Visit Moore School Website or
call 800-393-2362
Deadline to register is Nov. 26