The Current Economy

Econ 102 Spring 2009 Macroeconomics The Current Economy Steven W. Rick University of Wisconsin 1 Unemployment Insurance Claims (Gauge of Labor Market Conditions) Web: www.ows.doleta.gov/unemploy/claims_arch Minor revisions Very timely ?coincident? indicator of new filings for unemployment benefits (social safety net) reported by state agencies around the country to the Labor Department. Use a 4-week moving average to smooth out erratic weekly numbers. Large filing increases => dampen consumer spirits => slash in consumer spending => paring back of business investment spending => lower future economic activity. Unemployed workers may be eligible to qualify for unemployment benefits for up to 26 weeks in most states. During economic slowdowns, laws are passed to extend the pay period another 13 weeks. Recent graduates who enter the workforce but are unable to find work are ineligible to receive benefit payments. Every state offers jobless insurance programs which conform to federal rules. Claims normally peak 2-3 months before the bottom of a recession and the beginning of a recovery phase. If claims > 400,000 for several weeks, then economy is slowing and close to a recession => increase in the Household Survey unemployment rate. If claims < 400,000, then the economy is entering a growth phase. If claims < 350,000, then expect the Establishment Survey to show a jump in payrolls. Continuing claims > 3 million and climbing is a sign of a malfunctioning economy and strained federal and state budgets (from the state financial support) ------------------------------------------------------------------------------------------------------------------------------------------------ Market Analysis: Bonds: If D claims > 30,000 => ? DY/Y => ? DP/P => ? DBonds => ? iBonds Stocks: If claims continuously ? => ? DY/Y => ? profits => ? PStocks Dollar: If claims continuously ? => ? DY/Y => ? iBonds => ? dollar Economic Indicator 1 2 I ni ti a l J o bl es s C l a i m s 2 0 0 , 0 0 0 2 5 0 , 0 0 0 3 0 0 , 0 0 0 3 5 0 , 0 0 0 4 0 0 , 0 0 0 4 5 0 , 0 0 0 5 0 0 , 0 0 0 5 5 0 , 0 0 0 6 0 0 , 0 0 0 1 / 6 / 1 9 9 0 3 / 6 / 1 9 9 2 5 / 6 / 1 9 9 4 7 / 6 / 1 9 9 6 9 / 6 / 1 9 9 8 1 1 / 6 / 2 0 0 0 1 / 6 / 2 0 0 3 3 / 6 / 2 0 0 5 5 / 6 / 2 0 0 7 2 0 0 , 0 0 0 2 5 0 , 0 0 0 3 0 0 , 0 0 0 3 5 0 , 0 0 0 4 0 0 , 0 0 0 4 5 0 , 0 0 0 5 0 0 , 0 0 0 5 5 0 , 0 0 0 6 0 0 , 0 0 0 6 5 0 , 0 0 0 R e c e s s i o n J o b l e s s C l a i m s C o nti nui ng J o bl es s C l a i m s 2 , 0 0 0 , 0 0 0 2 , 5 0 0 , 0 0 0 3 , 0 0 0 , 0 0 0 3 , 5 0 0 , 0 0 0 4 , 0 0 0 , 0 0 0 4 , 5 0 0 , 0 0 0 1 / 6 / 1 9 9 0 3 / 6 / 1 9 9 2 5 / 6 / 1 9 9 4 7 / 6 / 1 9 9 6 9 / 6 / 1 9 9 8 1 1 / 6 / 2 0 0 0 1 / 6 / 2 0 0 3 3 / 6 / 2 0 0 5 5 / 6 / 2 0 0 7 2 , 0 0 0 , 0 0 0 2 , 5 0 0 , 0 0 0 3 , 0 0 0 , 0 0 0 3 , 5 0 0 , 0 0 0 4 , 0 0 0 , 0 0 0 4 , 5 0 0 , 0 0 0 R e c e s s i o n J o b l e s s C l a i m s 4.497 million, biggest gain in 30 years Continuing claims > 4 million Uncertainty/cost cutting => few firms hiring 524,000 Severe weakening of labor market Labor market conditions usually lag economic conditions, but this time firms are slashing jobs earlier Expect greater labor market slack to build into 2010 http://ows.doleta.gov/unemploy/wkclaims/report.asp 3 Recent Economic Trends 1. Two fears hang over the U.S. economy, wrenching recession and possible deflation. 2. The deleveraging and reckoning process has begun. 3. The labor market has fallen off a cliff with the unemployment rate expected to rise to 9% 4. The government will implement a massive ($800 ? 1,000 billion) fiscal stimulus package 5. The Federal Reserve has implemented a near zero interest rate policy and created new unconventional facilities to liquefy the banking system, stabilize financial markets and monetize the recession. 6. Government intervention into the economy has proved to be less than effective and may have many unintended consequences. 7. Falling home prices will continue through 2009. 8. The housing market is in a severe meltdown 9. Residential mortgage underwriting standards have tightened up. 10. Falling wealth, jobs, income, and confidence will restrain household spending and increase the savings rate. 4 Q u a r t e r l y % C h a n g e i n U . S . E c o n o m i c O u t p u t ( R e a l G D P - C h a i n w e i g h t e d 2 0 0 0 $ ) 1 . 0 % 6 . 3 % - 0 . 5 % 2 . 1 % - 0 . 5 % - 1 . 4 % 1 . 6 % 2 . 7 % 2 . 2 % 2 . 4 % 0 . 2 % 1 . 2 % 3 . 4 % 7 . 5 % 2 . 7 % 3 . 0 % 3 . 5 % 3 . 6 % 2 . 5 % 3 . 0 % 2 . 6 % 3 . 8 % 1 . 3 % 4 . 8 % 2 . 7 % 0 . 8 % 1 . 5 % 0 . 1 % 4 . 8 % 4 . 8 % - 0 . 2 % 0 . 9 % 3 . 3 % - 0 . 5 % - 3 . 0 % - 1 . 5 % - 1 . 0 % 1 . 0 % 1 . 5 % 1 . 2 % -4 % -2 % 0% 2% 4% 6% 8% 0 0 : 1 0 1 : 1 0 2 : 1 0 3 : 1 0 4 : 1 0 5 : 1 0 6 : 1 0 7 : 1 0 8 : 1 0 9 : 1 S o u r c e : D e p a r t m e n t o f C o m m e r c e . Maximum Sustainable Growth Rate = 3.5% 4 Qtr recession,..at least Spending = C + I + G + X ? M % of total = (71.1) (14.5) (17.6) (13.2) (-16.4) Growth rate = (-3.8) (0.4) (5.8) (3.0) (-3.5) Contribution = (-2.8) (0.1) (1.1) (0.4) (0.7) = -0.5% (1+-.005)1/4 -1 = -0.00125 = -0.125% 3rd Quarter 2008 GDP 5 R e al P e r s on al C on s u m p t i on E xp e n d i t u r e s (% chg fr o m quar ter o ne year ago ) 1 3 . 7 3 5 . 9 4 5 . 2 5 4 . 7 2 0 . 7 7 3 . 2 4 2 . 5 2 1 0 . 7 8 7 . 8 3 8 . 8 7 1 1 . 0 4 1 . 2 2 2 . 4 3 5 . 5 3 6 . 7 3 8 . 3 5 9 . 7 6 6 . 0 9 3 . 9 9 5 . 5 8 4 . 2 6 6 . 7 6 6 . 1 7 1 . 1 9 5 . 5 3 3 . 0 3 2 . 5 5 6 . 8 9 4 . 6 2 5 . 4 3 5 . 1 3 4 . 1 6 0 . 7 9 - 1 . 1 3 - 5 . 5 -8 -4 0 4 8 12 16 0 0 Q 1 0 1 Q 1 0 2 Q 1 0 3 Q 1 0 4 Q 1 0 5 Q 1 0 6 Q 1 0 7 Q 1 0 8 Q 1 -8 -4 0 4 8 12 16 D u r a b l e N o n d u r a b l e T o t a l S e r v i c e s (Furniture, appliances, autos) average growth = 6.0% (14%) (Food, clothing, energy) average growth = 3.4% (29%) Services average growth = 2.8% (57%) (Housing, transportation, medical care, recreation) Total average growth = 3.3% Q3 SAAR Durable = -14.8% Nondurable = -7.1% Services = -0.1% Total = -3.8% B u s i n e s s F i xe d I n v e s t m e n t S t r u c t u r e s , E q u i p m e n t & S of t w ar e 1 4 . 3 1 4 . 7 6 2 . 1 5 0 . 8 7 - 4 . 2 6 - 1 3 . 5 7 - 6 . 8 4 - 1 3 . 3 4 - 1 2 . 7 8 - 6 . 0 9 - 1 . 9 6 - 4 . 9 6 - 2 . 6 1 0 . 7 9 . 4 2 . 8 - 2 . 6 1 0 . 7 1 2 . 3 1 0 . 3 3 . 7 6 . 3 6 . 1 3 . 7 1 5 . 9 6 . 4 5 . 3 -1 3 . 4 1 0 . 3 8 . 7 3 . 4 2 . 4 2 . 5 - 1 . 7 -2 0 -1 5 -1 0 -5 0 5 10 15 20 0 0 Q 1 0 0 Q 4 0 1 Q 3 0 2 Q 2 0 3 Q 1 0 3 Q 4 0 4 Q 3 0 5 Q 2 0 6 Q 1 0 6 Q 4 0 7 Q 3 0 8 Q 2 A n n u a l i z e d Q u a r t e r G r o w t h R a t e % C h a n g e F r o m Q u a r t e r O n e Y e a r A g o 6 Co n s u m e r P r ice I n d e x 1 9 7 0 t o P r e s e n t 5 . 6 3 . 3 3 . 4 8 . 7 1 2 . 3 6 . 9 4 . 9 6 . 7 9 . 0 1 2 . 5 8 . 9 3 . 8 3 . 8 4 . 0 4 . 4 4 . 4 4 . 7 6 . 1 3 . 1 2 . 9 2 . 7 2 . 7 2 . 5 3 . 3 1 . 7 1 . 6 2 . 6 3 . 4 1 . 6 2 . 4 1 . 9 3 . 3 3 . 5 2 . 5 4 . 1 - 0 . 1 1 . 0 1 3 . 3 1 . 1 3 . 8 -2 0 2 4 6 8 10 12 14 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 082.5% Target Annual Percentage Change I n f la t io n ( CP I ) ( y e a r o v e r y e a r % g r o w t h ) - 1 % 0% 1% 2% 3% 4% 5% 6% 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 H e a dl i ne C ore ( e x c l ud e s f oo d a nd e ne r gy ) 1982-84 = 100 12 month Growth Rate 3-Month Growth Rate (annualized) 1-Month Growth Rate (November) CPI (211.5) -0.1 -12.7 -0.7 Core CPI (216.8) 1.7 -0.3 0.0 7 US P a y r o ll E m p lo y m e n t M on th l y C h an ge s S A - 600 - 500 - 400 - 300 - 200 - 100 0 100 200 300 400 500 600 J a n - 9 9 J a n - 0 0 J a n - 0 1 J a n - 0 2 J a n - 0 3 J a n - 0 4 J a n - 0 5 J a n - 0 6 J a n - 0 7 J a n - 0 8 T h ou s an d s U n e m p l o y m e n t R a te 0 1 2 3 4 5 6 7 8 9 10 11 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 ( P e r c e nt ) R e c e s s i o n U . S . S o u r c e : D e p a r t m e n t o f L a b o r .Structural Unemployment Frictional Unemployment Cyclical Unemployment Full Employment 5% 150,000 Target Labor market is in a self-reinforcing wrenching recession 2.6 million job loss in 2008 (biggest 12 month loss since WWII) 1.5 million job losses in Q4 Best indicator of recession Expect to lose 3 million in 2009 ?December -524,000 (largest 12/74) ?Broad-based losses across service (273k) and goods producing (251k) ?Job losses increasing at an increasing rate ?Government, healthcare and education are adding jobs. ?Average workweek dropped to lowest ever (33.3 hrs) ?Layoffs + fewer hours + pay cuts => lower income => lower spending ? December 7.2% (highest since 12/92) ? LF = Employed + Unemployed ? D Labor force = -173k (154.4 million) ? D Employment = -806k (143.3 million) ? D Unemployment = 632k (11.1 million) ? 13.5% unemployment rate (discouraged + part time) up from 8.7% 12/07 http://www.bls.gov/CPS/#news 8 F e d e r a l G o v e r n m e n t S u r p lu s /De f ic it ( B i l l i o n s o f D o l l a r s ) - $ 7 4 - $ 7 9 - $ 1 2 8 - $ 2 0 8 - $ 1 8 5 - $ 2 2 1 - $ 1 5 0- $ 1 5 5- $ 1 5 2 - $ 2 2 1 - $ 2 6 9 - $ 2 9 0 - $ 2 5 5 - $ 2 0 3 - $ 1 6 4 - $ 1 0 8 - $ 2 2 $69 $126 $236 $127 - $ 1 5 7 - $ 3 7 4 - $ 4 1 2 - $ 3 1 9 - $ 2 4 8 - $ 1 6 3 - $ 4 5 5 - $ 1 , 2 0 0 - $ 2 1 2 - $ 1 , 4 0 0 - $ 1 , 2 0 0 - $ 1 , 0 0 0 - $ 8 0 0 - $ 6 0 0 - $ 4 0 0 - $ 2 0 0 $0 $200 $400 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 S o u r c e : C o n g r e s s i o n a l B u d g e t O f f i c e . U.S . F e d e r a l B u d g e t S u r p lu s o r Def ic it (a s a % o f G D P) 0 . 1 - 0 . 6 - 1 . 3 - 0 . 8 - 0 . 9 - 0 . 2 - 0 . 5 - 1 . 1 - 2 . 9 0 . 3 - 0 . 3 - 2 . 1 -2 - 1 . 1 - 0 . 4 - 3 . 4 - 4 . 2 - 2 . 7- 2 . 7 - 1 . 6 - 2 . 7 - 2 . 6 -4 -6 - 4 . 8 - 5 . 1 -5 - 3 . 2 - 3 . 1 - 2 . 8 - 3 . 9 - 4 . 5 - 4 . 7 - 3 . 9 - 2 . 9 - 2 . 2 - 1 . 4 - 0 . 3 0 . 8 1 . 4 2 . 4 1 . 3 - 1 . 5 - 3 . 5 - 3 . 6 - 2 . 6 - 1 . 9 - 1 . 2 - 2 . 9 - 8 . 3 - 1 0 -8 -6 -4 -2 0 2 4 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 3% Euro-Zone Fiscal Rule 5% Macro Economic Danger Zone 9 I n v e r te d I n te r e s t R a te s a n d R e c e s s i on s 1 9 8 8 - 2 0 0 8 0 1 2 3 4 5 6 7 8 9 10 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 0 1 2 3 4 5 6 7 8 9 10 R e c e s s i on B aa F e d F u n d s 10- yr T r e as R ea l F ed F unds ( f e d f u n d s - c or e C P I ) -8 -6 -4 -2 0 2 4 6 8 10 12 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 0.25% - 2.0% = -1.75% 4% = Recession causing level Forecast 10 T h e Ho u s in g B u b b le Ha s P o p p e d ( N o m i n a l A n n u a l H o m e P r i c e I n c r e a s e s ) 7 . 9 % 8 . 4 % 1 3 . 5 % 1 4 . 0 % 1 1 . 1 % 5 . 0 % 1 . 5 % 4 . 1 % 4 . 3 % 5 . 8 % 7 . 4 % 6 . 2 % 6 . 4 % 6 . 7 % 1 . 0 % 3 . 1 % 2 . 3 % 2 . 4 % 1 . 8 % 4 . 7 % 3 . 2 % 4 . 9 % 5 . 1 % 6 . 0 % 7 . 9 % 7 . 6 % 6 . 6 % 8 . 0 % 1 0 . 0 % 1 3 . 0 % - 2 . 0 % - 6 . 7 % - 1 3 . 2 % 7 . 2 % - 1 5 % - 1 0 % - 5 % 0% 5% 10% 15% 20% 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 S o u r c e : N a t i o n a l A s s o c i a t i o n o f R e a l a t o r s .First time since Great Depression T h e Ho u s in g Cy c le ( I n f l a t i o n - A d j u s t e d A n n u a l H o m e P r i c e I n c r e a s e s ) 1 . 4 % 3 . 1 % 6 . 5 % 4 . 7 % -1 . 4 % -4 . 2 % -2 . 8 % 0 . 9 % 0 . 1 % 2 . 6 % 5 . 5 % 1 . 7 % 2 . 0 %2 . 0 % -5 . 0 % 0 . 1 % -0 . 8 % -0 . 4 % -0 . 8 % 2 . 0 % -0 . 1 % 2 . 9 % 3 . 5 % 3 . 3 % 4 . 3 % 5 . 7 % 4 . 2 % 6 . 1 % 6 . 5 % 9 . 5 % -4 . 5 % -1 0 . 8 % -1 4 . 2 % -4 . 8 % -2 0 % -1 5 % -1 0 % -5 % 0% 5% 10% 15% 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 R e a l H o m e P r i c e s I n f l a t i o n S o u r ce : N a t i o n a l A sso ci a t i o n o f R e a l a t o r s. 11 Falling Home Prices Falling Household Wealth Falling Household Spending Rising Inventories Lower Factory ProductionIncrease unemployment Lower income Negative Downward Spiral ?Salaries ?Commissions ?Bonuses ?Tips Economic Stimulus Plan $600 Tax Rebates Obama Stimulus Plan ?Lower fed funds interest rate ?$300 billion FHA mortgage bailout ? HELOC ?Self-reinforcing spiral ?Feedback Loop ?Multiplier Effect ?Sum of an Infinite Geometric Series 12 Re t a il S a les ( e x c lu d in g a u t o s ) (ye a r ove r ye a r % c ha ng e ) -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Long-run average = 5.5% C o n s u m e r C o n fi d e n c e & Se n ti m e n t I n d e x 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 110 115 120 125 130 135 140 145 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 110 115 120 125 130 135 140 145 R e c e s s i on C on f i d e n c e S e n t i m e n t S o u r c e : C o n f e r e n c e B o a r d . D e c e m b e r = 3 8 13 H ou s e h ol d N e t W or th ( 4 - q u a r t e r p e r c e n t c h a n g e ) - 2 0 - 1 6 - 1 2 -8 -4 0 4 8 12 16 20 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 - 2 0 - 1 6 - 1 2 -8 -4 0 4 8 12 16 20 S ou r c e : FR B Fl ow of Fu nd s S & P 5 0 0 S t o c k I n d e x ( m o n t h l y a v e r a g e ) 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 N om i n al R e al 14 N a ti o na l Sa v i ng s R a te [3 -m o n th m o v i n g a v e r a g e (P e r s o n a l S a v i n g s / D P I )] -2 -1 0 1 2 3 4 5 6 7 8 9 10 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 -2 -1 0 1 2 3 4 5 6 7 8 9 10 Greater economic stability Equity capital gains Foreign savings/capital inflow New Mortgage Products Low interest rates Financial Stress Ho u s e h o ld De b t ( A s a P e r c e n t o f D i s p o s a b l e H o u s e h o l d I n c o m e ) 40% 50% 60% 70% 80% 90% 100% 110% 120% 130% 7 9 Q 1 8 2 Q 1 8 5 Q 1 8 8 Q 1 9 1 Q 1 9 4 Q 1 9 7 Q 1 0 0 Q 1 0 3 Q 1 0 6 Q 1 S o u r c e : D e p a r t m e n t o f L a b o r & F e d e r a l R e s e r v e . 15 Existing Home Sales, Inventory & Prices (Measure of housing demand) Web address: www.realtor.org/research.nsf/pages/ehsdata Small monthly revision, annual revision in February. Existing home sales are a function of : ? Mortgage interest rates (? imort. 1% => ? sales 250,000) ? Confidence regarding future job and income prospects ? Expectations of future home prices Strong correlation between sales and consumption so series may portend economic turning point Sales => unlock/realize capital gains => house trade-up => ? discretionary durable consumption => ? economic growth Series is not timely. Sign initial purchase agreement contract, then 1-3 months later is the actual sale with deed transfer. Housing market conditions may have changed during the lag period so take care when extrapolating data. Housing Inventory - number of homes available for sale ? Harbinger of future housing trends Inventory-to-sales ratio ? number of months to sell off existing inventory ? 4.5-6 months supply of homes is a balanced market between buyers and sellers ? Less than 4.5 is tight supply (sellers market) with increasing prices ? Greater than 6 is a soft market (buyers market) with falling prices Median home prices - changes are a function of changing supply and demand conditions, the economic climate and the sales mix. If DPH/PH > DP/P, then housing considered an attractive investment. Benefit owners, hurt non-owners. ------------------------------------------------------------------------------------------ Market Analysis Bonds: High sales => ? C => ? DP/P => ? DBonds => ? PBonds=> ? iBonds Stocks: High sales => ? C => ? corporate profits => ? PStocks Dollar: Low sales => ? C => ? DY/Y => ? Fed funds rate => ? DDollar => ? $ Economic Indicator 2 16 E x is t in g H o m e S a les ( a n n u a l r a t e ) & I n v e n t o r ies 3000 4000 5000 6000 7000 8000 95 96 97 98 99 00 01 02 03 04 05 06 07 08 T h o u s a n d s 1750 2000 2250 2500 2750 3000 3250 3500 3750 4000 4250 4500 4750 5000 T h o u s a n d s S a l e s ( L H S ) I n v e n t o r i e s ( R H S ) Source: National Association of Realtors, http://www.realtor.org/Research.nsf/Pages/EHSdata M e d ia n E x is t in g H o m e P r ice & M o n t h s S u p p ly a t Cur r e n t S a les Ra t e $150 $175 $200 $225 $250 03 04 05 06 07 08 2 3 4 5 6 7 8 9 10 11 12 H o m e P r i c e s ( L H S ) M o n t h s S u p p l y ( R H S ) 1994-2003 25% annual increase in subprime mortgage loan originations 17 Homework 1 Due Tuesday, January 27 in Lecture Pick one of the top 10 economic trends I?ve listed on page 1 of this handout and write a one page report on what impact it is having on the overall U.S. economy. Thomas Duffield Georgia Credit Union Affiliates Annual Meeting May 8, 2004