Tracking the economy has enabled our nation to accurately predict its state in the following months. Our country’s economy is heavily dependent on its citizens. After all, we are the consumers that make purchasing decisions. Even in the corporate mind frame, there are people making those crucial decisions that impact our economy. In the economic world, success means growth; success means accuracy in predictions. We do this by tracking key economic indicators, which variably are released to the press on a daily, weekly, monthly, or even quarterly time frame. For the past several months, we have been recording these ‘key’ indicators to form our own conclusions about the present state of the economy. The U. S. economy is still spiraling down in a recession, evident from most (if not all) of the recorded indicators. To be technically classified as a period of recession, the economy must experience two consecutive quarters with a decreasing GDP figure. GDP (Gross Domestic Product) is the value of aggregate production of goods and services in a country in a given time period in relation to the prices in a base year. Many think that this is the most crucial and beneficial indicator to study.
The GDP is our best measure of total production available. However, underground activities not recorded on the “books” do not get interpreted with this model because it would be impossible to properly predict such an elaborate and multi-functional scheme. These underground activities include illegal disbursement of money (usually cash) by the means of the illegal drug industry, prostitution, etc. We are coming up with ideas that include ‘smart money’ that would have a barcode on it, therefore keeping track of its every move. This plan is scheduled to be implemented in the not so distant future. Then the GDP would have more integrity in its represented value, because it would force underground activities to be either claimed as revenue, or to be exchanged for other means excluding cash. Our GDP measures the values of farm productions, factories, shops, and offices all linked to prices of a base year. If the GDP increases for two consecutive quarterly reports, it is said that the economy is in a state of expansion. A prime example of this would be in the early part of the 1990’s, when our economy was booming. Much like a roller coaster ride the economy fluctuates up and down with great momentum. The best graphically representation similar to this would be a cosine curve. What our nation is experiencing now is a recession. In the past few years, the nation has been suffering through a bitter recession. Sparked by an already struggling economy, the events of September 11th, 2001 will remain a leading cause to a time of great deprivation. The slow down of production, layoffs, and GDP decreases preceding 2003 had knocked our economy into the pit of the business cycle. But the early evidence of this year seems to indicate we are turning the corner, almost ready to grow towards an expansion. Hopefully we can gain further momentum and prosper in the rewards of an expansion. GDP is also used to track the rate of inflation. The inflation rate is determined by examining the prices of goods in a base year in comparison to prices now. We use 1995 dollars to compare our prices to. This shows the changes of price levels of the goods we purchase. Gross Domestic Product has increased slowly at +0.7% in its latest press release, which is one sign of a recovering (expanding) economy.
The interest rate is also a vital indicator. When the Fed releases the interest rate, it is posting the amount it will charge banks to lend from them. The interest rates have now remained unchanged during the last few months, but Alan Greenspan has indicated that without a positive and drastic change soon, the Fed will most likely again lower interest rates to spark consumer and business spending. We still have these forty year low interest rates and it doesn’t seem like they will increase any time soon. With the reports of GDP very slowly increasing, the Fed would not want to raise interest rates, because that would throw the GDP into a negative percentage area most likely. For that reason, the Fed is considering lowering once again, trying to slowly guide our economy past the first few steps out of the pit. These interest rates are for big expenditure financing, such as car loans, mortgages, and so on. The higher the interest rate, the less willing a consumer will be to take out a loan. At least that is the way it works in our country. In Japan, they have tried almost everything to escape the recession they are facing. But the problem they have is that their short run aggregate supply curve is horizontal, meaning that nothing will change that unless they intentionally deflate the value of their currency, the yen. Some experts indicate that this could happen in the U. S. But if something like that happened here, where our short run aggregate supply curve became horizontal, it would be devastating because that would knock out some of our automatic stabilizers. The interest rate effects that curve because it induces spending. But if the consumers are not confident about the future, they will not consume. During our time tracking the three month interest rate, it has ranged between 1.19 % and as low as 1.07%. These numbers are still extremely low, and will not increase for some time. From January 22 to April 9, the three month interest rate has fluctuated, but only dropped .002% because the Fed has not lowered the reserve rates or their charge on loans. These low rates make consumers finance even when there is no need to spend. Also sparked with fears of eventual rises again in the interest rates, consumers quickly are buying homes, cars, and even refinancing with the record lows. But some consumers are holding out, thinking that the Fed will lower even further the interest rates. We have not seen the 3 month interest rate be below one percent in a very long time, but it may soon happen if the Fed does indeed lower the rates. When these consumers refinance, however, they are actually hurting the economy rather than aiding it, because they are saving money on their payments.
New Housing Sales have not reacted the way we would have liked to see. Anticipating at least a minimal gain over the past few months wouldn’t have been a far reach. But in January, New Housing Sales dropped 15.1% from December. New housing sales are an important indicator because it shows that the consumers do have confidence in the economy, and that they are spending if that percentage increases. However, even with the lowered interest rates, there still seems to be a steady decline in new housing starts. Perhaps this is because people opt to refinance rather than buy a new house. After that very slow start to the year, new housing sales again took a dive in February with an 8.1 % decrease. After a house has been sold, then they begin to build. Thus, we are presented with another indicator, noted as New Home Starts.
New Home Starts is another indicator that exposes the relationship between housing and the economy. For January, new housing starts rose 0.2%. The following month new housing starts declined by 10.4%, a result of the lack of New Housing Sales in January. And in March, again the new houses started fell, this time at a rate of 8.3%. Perhaps this happened because we are still in a recession, and in a recession, people don’t spend. If the consumers don’t purchase houses, companies will not build them. I do however believe that this indicator will begin to rise because the interest rates are remaining the same, at least for now. After Greenspan’s recent comments that there may be a need to lower the rates once again, consumers might then decide to buy, realizing that it will probably never get to that low of rates ever again. However, once these interest rates do rise again, people will be turned away from spending on credit loans because they will think that the rates are too high. The current rates have definitely spoiled the consumers.
Another indicator in the housing segment is the building permits indicator. This indicator shows us the permits obtained by developers in order to build. So without the building permits, the previous two indices are useless. In March of this year, building permits fell 7% from the previous month. And, again in April the building permits indicator fell, this time by 3.3%. So if the number of building permits applied for is decreasing, that means that the developers haven’t been shown any signs by the consumers that they will spend money on building. Also, this index is important because if this keeps decreasing, it means that there will be far less construction spending.
Construction spending is the measure of how much is spent on construction related objectives. This is important because it shows us what is being built or upgraded. A decrease in construction spending typically means consumers aren’t spending. In January, the construction spending index increased 1.7%. In February, it rose 0.2%, and in March it decreased by 1.0%. The construction spending increase early in the year may be a result of the new year starting or perhaps because of atypically nice weather for the month of January. No other indicator shines light as to why the construction spending would have risen like this.
The Purchasing Managers Index is another very important indicator, because it is used to depict contraction and expansion. If the purchasing managers’ index is below 50, it is said to be in a contraction. This is one of the keys to the manufacturing side of the economy. In November 2002, the index was at 57.4, a sign of manufacturing expansion. In December it was still above 50, sitting at 54.7. In January, yet again it was above that pivotal mark, this time at 53.9. In February however, it neared the 50 mark with a 50.5 showing. In March, this index fell below 50 for the first time in several months, coming in at a disappointing 46.2. Economists looked for a rebound in April, but instead it was at 45.4. So it would seem that February was definitely a turning point for the economy into the negative direction. However, one must also consider that November, December and January are all holiday months and therefore this index will be higher in those months. Hopefully our economy can recover from the sub-50 level because it would mean more products would be manufactured, possibly creating more jobs and put more money into the economy. The Leading Economic Index is important because it represents a composite of multiple indices that we have been tracking. The leading index seems to be holding steady at around zero percent, even though it had negative percentages over the past few months. In January, the index yielded a -0.1% composite, followed by a -0.4% showing in February, and a -0.2% in March.
The Dow Jones Industrial Average (DJIA) tells us how consumers feel about market stability and their eagerness to take the risk of the stock market, which would mean it could be used as a consumer confidence measure. When we started tracking the Dow Jones, it was at 8369.47, on January 24th. The Dow began a decline from that day until March 12th, where it reached a low of 7524.06. Keep in mind that in the summer of 2001, the Dow had numbers well above the 10,000 mark. However, a struggling economy, combined with fear of consumers, triggered a downward spiral in the Dow Jones over the past 18 months. But after its worst showing in years, the Dow began to recover and on April 25th, was sitting at 8440.04, a sign that consumers may be growing more confident, after all of this Enron and Arthur Andersen tribulations have blown over. For a while no one trusted the fluctuations of the open markets, and they had invested in CD’s instead for security purposes, because CD’s are FDIC insured. I do believe that the Dow will now begin to make its way back up to the 10,000 mark, but might take a good time to get there. Overall, the Dow has remarkably almost mirrored itself from January 22nd to April 25th because it was sitting at 8442.90 on January 22nd, and on April 25th sat at a close 8440.04.
Oil is a scarce natural resource that we track because we need it in everyday life. Operating a vehicle is a necessity in this country, and gasoline in the only option. The United States chooses not to use its own oil mines, instead buying the crude resource from Iraq and other Middle East countries. The turmoil that has occurred over that last few months in Iraq was predicted to make a barrel of oil to skyrocket to 40 dollars. It did get within striking distance; however the crude resource did settle down and eventually got back into the upper twenties. When we started tracking oil, it was at a robust 34.61 per barrel. It reached its high on March 10th, when it climbed to $37.78 a barrel. However, the oil price dropped soon there after and as of April 9th, it was at $28.00. Many people predicted that the oil was the reason for war with Iraq, and that doesn’t have a positive impact on the price. Also, when the oil prices are as high as they are, it turns in to less travel done by the consumer, which means that travel industries and vacation industries suffer as a result, further entrapping our economy in a recession.
Gold is the one standard monetary unit that is universal. The precious metal has been used as currency for centuries. Gold is known to be one of the safest investments because of its value physically and its electrical power conductivity. A high price of gold, however, indicates that it would be in higher demand, therefore driving up the price. A reason that gold would climb would be consumer confidence falling because gold is a safe investment. Gold is a unit of money that tends to stay even with inflation, unlike the dollar that has been inflated over the past few decades dramatically. When we started gathering information on January 22nd, the price of gold sat at an outrageously high $357.30. In early August of the year preceding, it was hovering at around $300. That is nearly a $60 jump in 6 months of activity. But Gold wasn’t done yet. It climbed to its peak on February 5th, 2003 with a value of $379.00. But then it took a dive and steadily decreased and at April 9th, it was selling at $322.20. Perhaps the fluctuations are not solely because of American consumer freight, but because the whole world was in a depression.
Another major indicator we keep track of is the value of the Euro in comparison to the U. S. dollar. The Euro was introduced to bring about unity of money in Europe to facilitate trade. When each country is not much bigger than a large U. S. state and they have their own independent currencies, it creates intangible trade barriers. So the Euro was brought about to solve such dilemmas. On January 22nd, the Euro sat at 1.07, or 1.07 times the value of the U. S. dollar. Only recently had the Euro surpassed the dollar in value. The peak of the Euro while we tracked it was on March 12th, when it officially surpassed the dollar with a value of $1.1038. But the weeks following brought the Euro back to reality with it hovering around $1.0718 on April 9th. It did reach a low of $1.0525 when the war officially started on March 25th. Not to mention, the U. S. economy is in a recession. I predict that the Euro will only increase further because the U. S. is not a favorite of several countries around the world now, giving more power to the Euro. The whole notion of the Euro being established as the dominant form of currency is quite disturbing. Who would have ever thought that the dollar would be surpassed by anything? Currently, the European countries seem to be flourishing with expansions. That is another reason possibly why the dollar has been surpassed. With the value of the Euro at $1.10, that means you would need a dollar and ten cents in exchange for a Euro. Not more than 6 months ago, the Euro was still trailing the dollar.
We also track the 30-year bond rates for our country as well as two others. We do this to compare our own country with other ones. The three “Long” Bonds we track are the U.S., the German, and the Japanese. The U.S. long started out up at around 4.90% in late January. The German was at 4.75%, and the Japanese was at a pathetic 1.29% (the Japanese long has less life left on it, however). The U.S. long reached its peak on March 24th, right before the war started, at 5.03%. The German long followed suit with its high on the same day with a 4.974% pay out. The U. S. long was ahead of the German long for pretty much the whole time except one day, March 5th, when the German long was 4.705%, compared to a 4.68% for the U. S. Both of these long term bonds recovered well from their falling rates, ending with 4.92% (U.S.) and 49.4%(German) when I concluded tracking them on April 9th. The Japanese long has been stagnant around 1% because it has a horizontal short run aggregate supply curve. As I wrote before, Japan is in a liquidity trap where there is no fluctuation to its currency. Japan had a low of 1.04%, unheard of for such a developed country, on April 4th. It was yielding 1.11% return when I stopped tracking it on April 9th.
Unemployment is a critical rate that almost everyone hears about. It is said that the natural rate of unemployment is 6%, so one could assume that anything below this mark would be a representation of the real GDP surpassing the potential GDP, or long run. The unemployment rate has been below 6 percent for quite some time, and that is definitely a sign of us using our human resources to the maximum. But recently the Unemployment rate reached 6 percent, no surprise here to anyone without a job. With all of the recent layoffs and scandals, companies cannot afford to expand at this time. However, it still hasn’t exceeded 6 percent, which could be devastating. Some experts say unemployment is a good thing. Another way we can track unemployment totals are through the new jobless claims.
New jobless claims tells us what the difference of new jobless claims filed is for a week to week period. When we started tracking on January 24th, new jobless claims were 18,000 more than the previous week’s total. The largest total for this indicator occurred on the March 28th posting, where 38,000 more jobless claims had been submitted as compared to the week previous. The largest decrease occurred on February 14th where 18,000 less than the previous week. For the total column, we started tracking it at zero; so the lowest level it got to was +3,000, and the highest was +70,000, the total on April 4th. After all of the many large corporations file for bankruptcy, they begin to layoff employees. On the local front, Kemper Insurance and United Airlines have been laying off employees for the past several months. The airline industry itself isn’t doing well at all, with American Airlines seemingly close to bankruptcy itself, which could terminate more jobs in the area. Boeing has also experienced some of the airline industry woes, and will most likely begin layoffs soon. Just as unemployment tells us so much, the money supply indicators do as well.
The money supply indicators are used to show the amount of money that is in the economy. There are two parts, the M1 and M2 indicators. The federal government checks up on and adjusts the money supply in the economy. The purpose of the fed is that it promotes effectively the goals of maximum employment, stable prices, and moderate long-term interest rates (http://www.federalreserve.gov). The M1 represents currency, liquid currency, deposits, and other forms of money like traveler’s checks. The M2 column is made up of all of M1 plus small time deposits, saving deposits, money market accounts and other deposits owned by Americans. With these two indicators, we can accurately predict the short term future economic situation. The money supply does the contrary to what interest rates do. If money supply decreases, it means that interest rates will rise. This makes sense because if the interest rates are up, consumers will be less likely to take out loans, therefore decreasing the money supply. Over the months we have been tracking them, M1 and M2 didn’t change much over the whole time period. However, January 24th was a low point at 1198.1 for M1 and 5810.3 for M2. The high for M1 occurred on March 14th, with a 1248.4 value. For M2, its high was 5906.4 on March 28th. This means that on March 14th, the M1 increased at a rate higher than M2. Not only that, but M1 began to fall soon thereafter and was sitting at 1234.6 on April 4th. The statistical information concludes that until March 14th, people were spending many as planned. But soon after, people began saving as evident by the decreasing M1 values after that day. I believe that this is because everyone started not spending because of the war that was about to officially start. People don’t tend to spend money in times of war. One stat that we definitely want to keep low is the inflation rate. We record inflation by producer prices and consumer prices.
Producer prices were unchanged in December 2002. But in January, producer prices soared up 1.6%, followed by a 1.0% increase in February, and a 1.5% increase in March. These numbers are definitely scary because if producer prices were increasing at a rate of 1% or higher per month, that is an annual rate of at least 12%, very unacceptable to economic diplomats. These prices increase or decrease because of raw material costs fluctuating and changing labor and production rates. Inflation in producer prices means that more than likely, the changes in price will be passed on to the consumer at the retail level.
Consumer prices fell in December 2002 by 0.2%. But that soon changed when in January, they increased by 0.3%, followed by a 0.6% increase for both February and March. The producer prices influence the consumer prices and usually the consumer prices are about a month behind. For example, if producer prices rise 1.6% in January, you can expect a good retail price hike in February. And that is exactly what happened, and in fact, also happened in March. However, the small retail price hike isn’t as critical because typically, the wage rates are increasing as well at a similar pace. I feel safe in predicting that the consumer prices will continue to increase producer prices have shown no signs of halting. But beyond the prices, the interest rates have still remained low, and they have pretty much offset each other.
Retail Sales have been erratic in the past six months. In December and January, retail sales were up, as expected by the holiday season. In December, retail sales grew 1.2% and 1.3% in January. But soon there after, in February the retail sales figure took a hit. Retail sales figures dropped 1.6% in February. However, that was rebounded with a 2.1% gain in March. But don’t look at March and think it was a great month. It is a month to month indication, so dropping 1.6% the month before inflated the gain of March. If February hadn’t been so bad, March would have experienced an insignificant gain, if any. People simply don’t want to buy anything. Perhaps this had something to do with consumer confidence.
Consumer confidence shows us how safe consumers believe our economy is to invest in or even to spend. When the Consumer Confidence is high, this means people feel safe and secure with issues such as job security, future economic conditions, and our economy as a whole. When consumer confidence is higher, there tends to be a wave of more loans being taken out, more vacations, and so on. However, when the consumer confidence index is low, people are more prone to save and spend less. The confidence is low, and they will not purchase because of fears of job security or future economic struggles. The consumer confidence index has swayed mightily over the past few months. In December the consumer confidence rating sat at 79.0, not a good indication by anyone’s standards. A 90 in consumer confidence is a good mark. In January it fell to 78.8, showing that consumers are getting a little more scared. In February, the consumer confidence index took a dramatic dive to 64.0, a very poor indication that people just aren’t comfortable spending. And again in March it fell, this time to 62.5. It recovered to 81.0 in April in a late posting. I would be willing to bet that the diplomatic war talks had a lot to do with consumer confidence, leaving a nation divided over our implemented intentions. I say this because as the war winded down in April consumers regained the confidence that we once had. I predict that May will probably be somewhere around 80, because that was quite a hike from one month to another, and I don’t know if that can be repeated again.
Consumer credit is also an important indication to the near future economic situation. In January, there was a reported 9.6% gain in consumer credit. It followed that up with a 0.9% gain in February and a 0.6% increase in March. Since this indicator seems to keep on increasing, I would have to say that it has to do with an assortment of things. First, many people aren’t consuming, so lenders are becoming less strict. And also, the interest rates are so low that most people feel they would be a fool not to finance.
Personal Income is definitely an indicator that we don’t want to see in the negative. In December, personal income for Americans rose 0.3%, a slow yet steady rate. In February, it posted a 0.2% gain. And in March it again increased, this time at a rate of 0.4%. The reason this indicator is always increasing is because people demand higher wage rates to compete with the cost of living. The minimal gains each month merely indicate a small cost of living adjustment to cope with inflation rates. A related rate that we also track is called the Personal Consumption index.
The Personal Consumption index is also important because it measures the increase or decrease in the amount we consume as individuals. If Personal Income rises, yet the personal consumption falls, one could conclude that the money is probably being stored for future use, a sign of troubled times or low consumer confidence, which we have experienced until April of this year. In January when the personal income rose at a 0.3% rate, the personal consumption function actually recorded a decrease with a -0.1% posted. As I explained, the consumers saved to be weary of feared future economic troubles. However, in February the personal consumption level rose at a rate of 0.1%, bring it back to a level it was at in December. In March, this indicator rose a more inspiring 0.4%, a sign that people may be more confident.
Durable goods in yet another indicator we tracked over the spring semester. In January, this indicator increased at a rate of 2.9%. In February, it backtracked itself and fell 1.6%. But it recovered again in March with a 1.5% increase. This is one of those indicators that usually fluctuate between every month from positive to negative.
The Imports/Exports indicator is another indicator that economists study. This is an important indicator because it helps us track jobs. Imports and Exports are the goods going to and from other countries, into and out of the U. S. It is generally accepted that a country would be in good condition if its exports are higher than its imports. Exports are key because that allows us to maintain work here, rather than looking overseas for “imported” goods. The U.S. usually faces a negative value in this indicator, because its exports are far less than its imports. The U.S to many experts, is thought of to be far too reliant on other countries for oil. Technological goods in the Asian market are some of our biggest imports. Capacity Utilization is an indicator not too many people would think of.
Capacity Utilization is a measure in percentage of the factory or plant that is being used. During the duration of this semester, I have noticed that it has remained around 75 for the most part. In January, the rate was 75.7%. In February, it was at 75.6%, meaning it decreased by 0.1%. By March it was down again, this time to 74.8%, a loss of 0.8%. Perhaps this loss occurred because people didn’t spend as much in February, when the retail sales took a dive. That made companies slow down production in attempt to avoid a surplus. Also, there were fewer employees in these factories because as the new jobless claims show, people were being laid off for the past few months at a record pace. However, I do think that the capacity utilization will increase because Factory orders went up in March.
Factory orders are recorded by the percent change in factory orders received. A negative value would mean production slows down, and a positive value means it has increased. In January, Factory orders increased 2.1%. In February, the lowest while recorded, it dropped 1.0% from the previous month. This could be because January was so strong and it couldn’t keep pace. In March, factory orders again surged up, this time 2.2%. This increase shows that people are beginning to want to buy. Factory orders would not increase if people are not buying. If a factory keeps receiving negative totals from month to month, it begins to lay off the workers, decreasing capacity utilization as well. But Unfilled Orders are also important to track.
Unfilled Orders represent all of the orders taken that have not been shipped out. In other words, it means the back-up, or inventory that is waiting to be sent out after the sale. For January, this indicator grew 1.2% from the previous month. In February, it grew only 0.4%. Industrial Production is also a key component to economists’ ability to predict the short term economic future.
Industrial Production is also measured in percentage form. This indicator measures the production change from month to month. In January, this index rose at 0.7%. In February and March it declined though. It posted a -0.1% for February and -0.5% for March. This truly indicates that the production is slipping, meaning the companies have laid off their workers or no longer are demanding the heavy workload available usually with an industrial type job. The strongest decrease occurred in March, possibly because of all of the layoffs recently.
Inventory to Sales ratio is also an indicator that we have kept track of during this semester. It records the value of what is in stock as compared to what has been sold for a given month. For January, it was at 1.21, meaning that there is about $1.20 of inventory for every $1 in sales. In February, it was recorded at 1.36, a less hopeful indication that inventories are becoming larger while sales are shrinking. I believe that with the strong retail sales increase in March, the future inventory to sales ratio will begin to slowly decrease, eliminating inventories piling up.
With all of this taken into consideration, I would believe that the economy will grow (GDP up) over the next few months. I say this because many of the indicators showed positive results in March or April. Factory orders, Consumer Credit, Retail Sales, New Housing Starts, Durable goods, Consumer Confidence, Personal Income, and Personal Consumption all gave us signs of future economic expansion rather than contraction. I say this especially because of the dramatic increase in Consumer Confidence in April. People become more confident, and they spend. The more people spend, the more companies are willing to spend, and increase production. With the inflation rate in check and the interest rates still low, I believe that the economy will make a small stride forward over the next few months.
Six months from now, I believe that the economy will finally be leaving this recession for good. As I just stated, all of those indicators were positive indications for things to come. That consumer confidence is crucial because many people benefit from confidence. If I were congress, I would start to spend more to create jobs while consumer confidence is high. Consumer confidence being high shows that people are growing optimistic, and creating jobs would just further that increase. The budget deficit for this year will be mighty (war already cost mega millions) and it will only further increase our national debt. However, the news of the tax cuts to be implemented may also spark a fire under the economy because it will pump money into confident consumer’s pockets. That is also definitely a good thing. Either way, through spending or tax cuts, the economy should respond well, based primarily on the consumer confidence level. I do believe that the unemployment rate will rise once more, but will fall back soon there after to below the 6% threshold. The Fed has talked of lowering the interest rates if no positive signs are obtained in their next meeting, but I am confident that the economy will respond. In fact, when word got out that the fed was thinking of lowering the rates because of hard times, stocks rallied and signs seem to be pointing up, not down (thestreet.com).
I do also believe that the U.S. should decrease international trade because it creates much needed jobs for so many laid off workers here in the U.S. I would still invest in stocks rather than bonds, because the market has shown signs of getting back to the 10,000 level in the near future. There definitely are some “hopeful signs” that allow us to make “bullish forecasts” (Hayswire at cnnmoney.com)
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