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U . S . F o r eca s t Table 1. U.S. Flow of Funds Household Data (Trillions of dollars) 2005 2006 2007 2008 2009Q1* 2011Q2 Total Assets 71.3 77.7 78.6 65.5 62.8 72.3 Financial Assets 42.9 48.2 50.6 41.2 39.6 49.1 Home Equity 13.2 12.9 10.3 7.0 6.1 6.2 Net Worth 59.1 64.3 64.3 51.5 48.7 58.5 * = Bottom of Financial Crisis A recent (October 2011) Small Business Outlook Survey by the U.S. Chamber of Commerce speaks clearly about what small businesses wants from the federal government. 80% want Washington to “get out of the way” versus 13% who want government to “offer a helping hand.” In another question 86% want “more certainty” versus 7% who want “more assistance.”1 Like Dorian Gray, the economic recovery in the United States cannot escape its past. The legacy of the financial, economic and policy sins that have been committed continue to haunt it, despite the recession having ending 28 months ago. The economic data as of recent months has revealed a recovery that is “withered, wrinkled, and loathsome of visage.” Unlike Dorian Gray, however, the recovery is not dead. Well, at least not yet. Wealth Watching Because of the debt ceiling showdown in Washington, D.C. and the Standard & Poor’s downgrade of U.S. government debt, there has been a resurgence of financial market volatility that was reminiscent of the stomach churning days of the financial crisis in 2008-2009. This decline in stock market values hit households where it hurts, the still festering wound caused by the trillions of dollars of wealth gouged from the balance sheets of households in the U.S. Table 1 displays data from the latest issuance of the Flow of Funds report. As you can see, the level 1 U.S. Chamber of Commerce quarterly Small Business Outlook Survey: nity/quarterly-survey-2 Source: Federal Reserve Board of Governors of home equity is only $6.2 trillion two years after falling to this level at the low point of the financial crisis. Home ownership is one of the main sources of wealth for families in the United States, and the rapid recovery of much of the value of financial assets has simply not transpired in the housing market. In the face of this lost wealth and the return of large swings in the stock market, consumers are not only continuing the process of repairing the damage via higher saving rates, but they have grown more pessimistic as well. Consumer confidence has plunged as these events have unfolded, taking wind from the tattered sails of the largest source of economic activity in the country. Lost wealth is proving to be a stubborn and longlasting legacy of the financial and housing crises. The impact of its absence will weigh on the shoulders of consumers, like the universe on the shoulders of Atlas. The Importance of Being Earnest: The Fed’s New “Twist” on Monetary Policy The Fed announced after the last meeting of the Federal Open Market Committee (FOMC), that it would undertake a new round of asset purchases. This effort would focus on purchases of Treasury Bonds in markets with a longer maturity than previous rounds of quantitative easing along with selling shorterterm bonds. This new policy was summarized in the September 21, 2011 statement released following the FOMC meeting: The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining Institute for Economic Competitiveness 7

U.S. Forecast October 2011

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