The Economic & Financial Environment Trends, Indicators, & Forecasts : The Economic & Financial Environment Trends, Indicators, & Forecasts IAS BusEcon Ira A. Silver, Ph.D.
iasilver@yahoo.com
www.business-econ.com 2004 Southwest CUNA Management School
M.J Neeley School of Business at TCU
July 16, 2004
Agenda – Answer These Questions: Agenda – Answer These Questions Economic & Financial Indicators
What are the important indicators?
How are the measured?
Where can I get them?
What are the current trends?
What are the important relationships?
What are the short-term forecasts?
If time permits, what are the long-term challenges?
What’s a good place to start? Let’s start with the goals for the economy.
Primary Economic & Financial Goals: Primary Economic & Financial Goals Economic growth
High growth in real gross domestic product
High employment
Unemployment as low as possible without causing inflation to increase to the point where it affects decision making
Stable prices
Inflation rate that does not impact decision making
Secondary Economic & Financial Goals: Secondary Economic & Financial Goals Moderate long-term interest rates
Interest rates low enough to support investment by individuals and businesses
Sustainable federal budget deficit
Deficit that does not crowd out private investment
Sustainable trade balance
A trade balance that does not lead to a sharp drop in the value of the dollar
How Indicators are Reported: How Indicators are Reported Seasonally adjusted
Real
Annual rates
Since seasonal adjustment is the most complex, I will start with it!
General Merchandise Store Sales Seasonal Pattern Repeats Every Year: General Merchandise Store Sales Seasonal Pattern Repeats Every Year Easter Mother’s day Back to school Christmas Christmas
General Merchandise Store Sales Month-to-Month Percent Change: General Merchandise Store Sales Month-to-Month Percent Change These percent changes are not very useful as indicators of current business
General Merchandise Store Sales Seasonally Adjusted & Not Seasonally Adjusted : General Merchandise Store Sales Seasonally Adjusted & Not Seasonally Adjusted Seasonal adjustment removes the impact of things that occur around the same time every year (holidays, weather)
General Merchandise Store Sales Month-to-Month Percent Change: General Merchandise Store Sales Month-to-Month Percent Change Comparing successive months using seasonally adjusted data does indicate current business conditions What’s the most important indicator?
Gross Domestic Product (GDP): Gross Domestic Product (GDP) Definition: market value of final goods and services (goods and services used by consumers, businesses, governments, and for export) produced within the borders of a nation
Source: Bureau of Economic Analysis
www.bea.gov
Frequency: Quarterly
Reported: 3-4 weeks after the end of the quarter
How is it reported?
Gross Domestic Product (GDP): Gross Domestic Product (GDP) Real GDP
Price increases removed to see quantity (unit) growth
Annual rate reported to show growth that would occur if the change in the quarter continued for three more quarters
Seasonally adjusted to make it possible to compare one quarter with the previous quarter Do you have an example?
GDP, Real & Annual Rates: GDP, Real & Annual Rates Real %Change = Nominal %Change - Price %Change
%Change, annual rate = %Change, simple X 4
Gross Domestic Product – Pickup in Growth: Gross Domestic Product – Pickup in Growth Source: the Dismal Scientist from www.Economy.com
Price: about $250/year
GDP Recovers & Expands: GDP Recovers & Expands 4.8 4.3 Yr-to-Yr %Change compares a quarter with the same quarter in the previous year – just like businesses do with sales and profits
Not Bad, Considering: Not Bad, Considering September 11
Anthrax scare
War with Afghanistan
Corporate scandals & stock market weakness
War with Iraq & oil price increases
North Korea
Middle East instability
Sarbanes-Oxley
Ph.D. in Economics What about the long run?
Stellar Long-term Performance The Pessimists are Usually Wrong Real Gross Domestic Product, % Change: Stellar Long-term Performance The Pessimists are Usually Wrong Real Gross Domestic Product, % Change Recession year How does this compare to other countries?
Comparative Growth Rates: Comparative Growth Rates
Comparative Growth Rates: Comparative Growth Rates
Comparative Growth Rates: Comparative Growth Rates
Comparative Growth Rates: Comparative Growth Rates
Output Indicators: Output Indicators Real Gross Domestic Product (GDP,Q) – BEA
Consumption & Income (M) – BEA
Retail Sales (M) – Census
Conference Board Consumer Confidence Index (M) – Google
Industrial Production (M) – FRB
Shipments, Orders, & Inventories (M) – Commerce BEA = Bureau of Economic Analysis (www.bea.gov )
BLS = Bureau of labor Statistics (www.bls.gov );
Commerce = Department of Commerce (www.commerce.gov );
Census = Census Bureau (www.census.gov ); Google = Search for name (www.google.com )
FRB = Federal Reserve Board (www.federalreserve.gov );
Consumer 70% of GDP: Consumer 70% of GDP Income & Consumption (M) – BEA
Retail Sales (M) – Census
Conference Board Consumer Confidence Index (M) – Google
BEA = Bureau of Economic Analysis (www.bea.gov )
Census = Census Bureau (www.census.gov )
Google = Search for name (www.google.com )
Income & Consumption Growth Strong: Income & Consumption Growth Strong
Retail Sales Weaken From Strong Q1-04 (M/M % Chg., SA): Retail Sales Weaken From Strong Q1-04 (M/M % Chg., SA)
Retail Sales Growth Slows, But Remain Strong (Year to Year % Chg., SA) : Retail Sales Growth Slows, But Remain Strong (Year to Year % Chg., SA)
Consumer Confidence Improves Sharply: Consumer Confidence Improves Sharply
Manufacturing: Manufacturing Industrial Production (M) – FRB
Shipments, Orders, & Inventories (M) – Commerce BLS = Bureau of labor Statistics (www.bls.gov );
Commerce = Department of Commerce (www.commerce.gov );
FRB = Federal Reserve Board (www.federalreserve.gov )
Industrial Production: Industrial Production
Industrial Production Recovery Year/Year % Change: Industrial Production Recovery Year/Year % Change
Shipments, Orders, & Inventories Slow: Shipments, Orders, & Inventories Slow
Employment & Labor Costs: Employment & Labor Costs Employment (M) - BLS
Unemployment Rate (M) – BLS
Productivity and Costs (Q) - BLS
BLS = Bureau of labor Statistics (www.bls.gov )
Employment Surveys: Employment Surveys Payrolls – Reports on payroll employment from a sample of 350,000 establishments
Employment change
Wages
Hours worked
Household – Telephone survey of 50,000 households
Unemployment rate
Characteristics of the unemployed
Unemployment Rate: Unemployment Rate Unemployment Rate (UR) = Unemployed Employed +Unemployed When times are bad: People stop looking for work and are no longer counted as unemployed (discouraged workers) → Lowers UR When times are good: People start looking for work and are counted as unemployed (discouraged workers become the unemployed)
→ Raises UR
Employment Growth Strong in 2004: Employment Growth Strong in 2004
The Unemployment Rate is Low : The Unemployment Rate is Low Unemployment Rate
The Unemployment Rate is Low But People Are Out of Work Longer: The Unemployment Rate is Low But People Are Out of Work Longer Median Weeks Unemployed Unemployment Rate Suggests that job losses are permanent and reemployment requires new company or new profession What about the jobless recovery?
What’s Happening GDP Grows & Employment Declines: What’s Happening GDP Grows & Employment Declines How can this happen?
Higher Real GDP Without Hiring It’s Called Productivity!: Higher Real GDP Without Hiring It’s Called Productivity! Output/Hour
Percent Change But, I thought productivity is good?
Unit Labor Costs Decline Percent Change: Unit Labor Costs Decline Percent Change Lower unit labor costs allow companies to raise real wages and earn more profits without raising prices
Higher Productivity & Lower Costs (% Chg., SAAR) : Higher Productivity & Lower Costs (% Chg., SAAR)
Unit Labor Costs Drive Prices (Yr/Yr % Change): Unit Labor Costs Drive Prices (Yr/Yr % Change) Lower unit labor costs prevent inflation!
Inflation: Inflation Consumer Price Index (CPI,M) - BLS
Producer Price Index (PPI,M) - BLS
Productivity and Costs (Q) - BLS BLS = Bureau of labor Statistics (www.bls.gov );
Consumer Price Inflation Accelerates: Consumer Price Inflation Accelerates
Producer Price Inflation Moderates %Change From Prior Month: Producer Price Inflation Moderates %Change From Prior Month
Does Strong Growth Lead to Inflation??: Does Strong Growth Lead to Inflation??
The Federal Reserve Is Watching : The Federal Reserve Is Watching
Past Monetary Easing – Future Tightening What Will the Federal Reserve Do????: Past Monetary Easing – Future Tightening What Will the Federal Reserve Do???? 99/04 89/95 Recession trough – lowest point ? Too Much Too Soon?
The Federal Reserve System The Central Bank of the United States: The Federal Reserve System The Central Bank of the United States The Twelve Federal Reserve Districts
Monetary Tools of the Federal Reserve: Monetary Tools of the Federal Reserve
Open Market Operations Increase Economic Activity: Open Market Operations Increase Economic Activity Fed buys treasury securities in the open market Fed pays sellers with newly created money Money supply increases Increased demand for treasury securities increases their prices and lowers interest rates Increased money supply and lower interest rates increase spending, particularly on interest sensitive goods (homes, autos, business investment) Lower interest rates make U.S. securities less attractive to foreigners and lower the value of the dollar, making our exports cheaper and out imports more costly
Open Market Operations Reduce Economic Activity: Open Market Operations Reduce Economic Activity Fed sells treasury securities in the open market Sellers pay the Fed with existing money balances Money supply declines Increased supply of treasury securities reduces their prices and increases interest rates Reduced money supply and higher interest rates decrease spending, particularly on interest sensitive goods (homes, autos, business investment) Higher interest rates make U.S. securities more attractive to foreigners and increase the value of the dollar, making our exports more costly and out imports cheaper
Yield Curves The Fed Doesn’t Control Long Rates: Yield Curves The Fed Doesn’t Control Long Rates Fed Funds rate raised Long-term rates decline
Slide53: http://www.ny.frb.org/research/national_economy/nationalecon_cal.html New York Federal Reserve Indicator Calendar
Slide54: Economic Indicators & Other Sources Output Inflation Employment Real Gross Domestic Product (GDP,Q) – BEA Consumer Price Index (CPI,M) - BLS BEA = Bureau of Economic Analysis (www.bea.gov ); BLS = Bureau of labor Statistics (www.bls.gov );
Commerce = Department of Commerce (www.commerce.gov ); Census = Census Bureau (www.census.gov ); Google = Search for name (www.google.com )
DOL = Department of labor (www.dol.gov); FRB = Federal Reserve Board (www.federalreserve.gov );
ISM = Institute for Supply Management (www.ism.ws/ISMReport ) Payroll Employment (M) - BLS Producer Price Index (PPI,M) - BLS Unemployment Rate (M) - BLS Consumption & Income (M) – BEA Retail Sales (M) – Census Chain store sales (W) - Google Conference Board Consumer Confidence Index (M) - Google University of Michigan Consumer Sentiment Index (2W) - Google Industrial Production (M) – FRB Unemployment, Initial Claims (W) - DOL Shipments, Inventories (M) - Commerce Interest Rates & Money Supply Federal Reserve Releases (W,M) – FRB Data & Misc. Sources Data: Fred II (http://research.stlouisfed.org/fred2/ ) Resources for Economists (http://rfe.wustl.edu/sc.html ) Economic Forecasts Census Population (A, 10Y) – Census Durable Goods Orders (M) - Commerce Manufacturing/Non-Mfg. Index (M) – ISM Business (A, 5Y) – Census
Free (or almost) Data Sources: Free (or almost) Data Sources St. Louis Federal Reserve – Fred II
http://research.stlouisfed.org/fred2/
FreeLunch.com
http://www.economy.com/freelunch/default.asp
Economagic ($50/year)
http://www.economagic.com/
The Outlook: The Outlook
Cost Reductions Increase Profit Margins: Cost Reductions Increase Profit Margins
High Profit Margins Result in Record Profits & Cash Flow: High Profit Margins Result in Record Profits & Cash Flow Corporate Profits Cash Flow
Increasing Profits Drive Stock Prices Up: Increasing Profits Drive Stock Prices Up Dow Jones Corporate Profits Scandals, & wars (=uncertainty) dragged stocks down 9/11
Slide60: + + = Stock Prices Corporate Profits Business Investment
High Profits Lead to Business Investment : High Profits Lead to Business Investment Real Business Fixed Investment
(% change) Corporate Profits Scandals & wars (=uncertainty) kept businesses from investing Why so weak?
Strong Cash Flow Exceeds Investment: Strong Cash Flow Exceeds Investment Business Fixed Investment Cash Flow
Strong Cash Flow Reduces the Need to Borrow : Strong Cash Flow Reduces the Need to Borrow Business Fixed Investment Cash Flow C&I Loans at Commercial Banks
Inventories Set For Sharp Growth: Inventories Set For Sharp Growth
The Dynamics of Expansion: The Dynamics of Expansion More Business Investment Go to Forecast
The Nay Sayers: The Nay Sayers Federal Budget Deficit
Trade Deficit
& last but least
Consumer Debt Yea for The Nay Sayers Why?
Uncertainty Breeds Opportunity: Uncertainty Breeds Opportunity Just before the strength of the expansion is obvious to everyone, there is a time when those that believe can take advantage of depressed prices and weak rivals.
Opportunity The Window Stays Open!
Federal Budget Deficit % of GDP : Federal Budget Deficit % of GDP Total – includes social security & other trust funds On-Budget Not so bad, but it assumes sunsets are allowed to remain and taxes increase It’s Been Worse & the World Didn’t End!
The Dollar is Falling Trade Will Improve! : The Dollar is Falling Trade Will Improve! It’s the Way it is Supposed to Work! Real trade weighted $ exchange rate Real exports of good & services
Consumer Debt Will Not Stop An Economy in Early Expansion: Consumer Debt Will Not Stop An Economy in Early Expansion It’s the last bastion of the pessimists! Financial Obligations Ratio
(mortgage + rent + auto lease + property tax + home insurance + consumer debt payments)/Personal Disposable Income It’s moving down!!
Short-term Growth Drivers: Short-term Growth Drivers Tax refunds in first half 2004 - $60 billion
Stock market wealth effect
Temporary business investment tax incentives
Replacement & productivity enhancement investment – competition & profit growth
Inventory building from record low stock/sales ratios
Short-term Growth Drivers: Short-term Growth Drivers Depreciating dollar and foreign growth pickup drive export growth – synchronized expansion
Hiring pickup
Continued low interest rates – low inflation reduces the Fed’s need to raise rates
Defense and homeland security spending
Summary in Numbers: Summary in Numbers
Free Forecasts: Free Forecasts Wachovia Bank
http://www.wachovia.com/corp_inst/page/printer/0,,13_54_1067,00.html
BankOne
http://www.bankone.com/answers/BolAnswersSeg.aspx?top=all&segment=RESEDU&topic=CorporateEconomics&item=
University of Michigan
http://rsqe.econ.lsa.umich.edu/forecast/table.html
BMO Nesbitt Burns
http://www.bmonesbittburns.com/Economics/
Everything Else
http://rfe.wustl.edu/sc.html
Summary in Words: Summary in Words Questions?
The Long-Run Challenge: The Long-Run Challenge Social Security/Medicare
Why?
Baby Boom!: Baby Boom!
Never Before – Never Again?: Never Before – Never Again?
Aging of the Baby Boom Workers/Retirees (16-64/65 & Over): Aging of the Baby Boom Workers/Retirees (16-64/65 & Over) 5.1
Aging of the Baby Boom Workers/Retirees (16-64/65 & Over): Aging of the Baby Boom Workers/Retirees (16-64/65 & Over) Too Many Old People!
Aging of the Baby Boom Workers/Retirees (16-64/65 & Over): Aging of the Baby Boom Workers/Retirees (16-64/65 & Over) Too Many Old People!
The Result Social Security/Medicare - Percent of GDP: The Result Social Security/Medicare - Percent of GDP Income Outgo
Social Security Surplus/Deficit
The Result (Medicare is the Problem) Social Security/Medicare - Percent of GDP: The Result (Medicare is the Problem) Social Security/Medicare - Percent of GDP Income Outgo
Social Security Surplus/Deficit Total (SS+Medicare) Surplus/Deficit
The Productivity Question 5-Year Growth Rates: The Productivity Question 5-Year Growth Rates 2.5% 2.9% 1.5% Will It Stay High? Or Move Back Down? Why Is This So Important? 3.0%
Productivity Is The Solution Real GDP, Trillions: Productivity Is The Solution Real GDP, Trillions +27%
$4.7 trillion +62%
$20 Trillion What a difference 100 Basis Points Makes!
The Economic & Financial Environment Trends, Indicators, & Forecasts : The Economic & Financial Environment Trends, Indicators, & Forecasts IAS BusEcon Ira A. Silver, Ph.D.
iasilver@yahoo.com
www.business-econ.com 2004 Southwest CUNA Management School
M.J Neeley School of Business at TCU
July 16, 2004