econ 102 spring 2012 macroeconomics the current economy steven w. rick university of wisconsin
TRANSCRIPT
Econ 102Spring 2012Macroeconomics
The Current Economy
Steven W. Rick
University of Wisconsin
Unemployment Insurance Claims(Gauge of Labor Market Conditions)
Web: www.ows.doleta.gov/unemploy/claims_archMinor 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 claims > 30,000 => Y/Y => P/P => DBonds => iBonds
Stocks: If claims continuously => Y/Y => profits => PStocks
Dollar: If claims continuously => Y/Y => iBonds => dollar
EconomicIndicator 1
3
Initial Jobless Claims
200,000
250,000
300,000
350,000
400,000
450,000
500,000
550,000
600,000
650,000
700,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13200,000
250,000
300,000
350,000
400,000
450,000
500,000
550,000
600,000
650,000
700,000
Recession
Jobless Claims
Continuing Jobless Claims
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
5,000,000
5,500,000
6,000,000
6,500,000
7,000,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 132,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
5,000,000
5,500,000
6,000,000
6,500,000
7,000,000Recession
Jobless Claims
Recent Economic Trends1. The longest, deepest, and broadest recession since the
Great Depression has passed it nadir and is moving toward recovery, but deflation remains a possibility.
2. Debt deflation, deleveraging and the credit reckoning process continues.
3. The labor market has stabilized but job creation is both a necessary and sufficient condition for a self-sustaining recover.
4. U.S. fiscal budget concerns could lower the value of the dollar and raise interest rates.
5. The Federal Reserve will maintain its massive injection of reserves into the banking system to interest rates low for the next two years.
6. Government intervention into the economy has proved to be less than effective and may have many unintended consequences.
7. Public debt will continue to rise as private debt continues to fall.
8. Falling home prices will continue into 2012.9. Loan credit quality will continue to improve through
2011 and lending underwriting standards will remain tight
10. Threats to economic recovery include rising foreclosures, low consumer confidence, weak state budgets, slow job creation, and rising interest rates. Consumers may not be in a good position to accept the “economic growth batton” once government stimulus spending wanes in 2011.
5
Quarterly % Change in U.S. Economic Output(Real GDP - Chainweighted 2005$)
2.7%2.6%3.0%
3.3%
4.2%
3.2%
2.1%
5.1%
1.6%
0.1%
2.7%
0.5%
3.6%
3.0%
1.7%
-1.8%
1.3%
-3.7%
-8.9%
-6.7%
-0.7%
1.7%
3.8%3.9%3.8%
2.5%2.3%
0.4%
1.3%1.8%
2.5%3.0%3.0%3.0%3.0%
3.5%3.5%3.5%3.5%
1.8%
-10%
-9%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
04:1 05:1 06:1 07:1 08:1 09:1 10:1 11:01 12:01 13:01
Source: Department of Commerce.
Maximum Sustainable Growth Rate = 3%
Falling Potential Growth Rate•3.5% to 2.5%•Less investment spending•Lower leverage in post-credit era•Suppressed demand•Negative demographic trends•Lower total factory productivity growth
Recession Factors:•Loose monetary policy•Poor regulation•Lax bank supervision•Opaque derivatives•Shadow banking system•Lax investor diligence•Poor governance•Misaligned incentives•fraud
Below trend growth•Falling stimulus spending•Less inventory rebuilding•Slowing Euro-Zone•Financial crisis•Deleveraging households•Rising savings rates
3rd Quarter 2011 GDP
Spending = C + I + G + X – M % of total = (70.7) (13.5) (18.8) (13.3) (-16.4) Growth rate = (2.0) (-0.9) (-0.1) (4.3) (0.5)Contribution = (1.5) + (-0.1) + (0.0) + (0.5) + (-0.1) = 1.8%
“Change in private inventories” contribution = -1.55% (1+0.018)1/4 -1 = 0.0045 = 0.45%
The economic recovery continues, but is disappointing and is vulnerable to external shocks. GDP is back to its pre-recession 2007 peak. Final sales of domestic product – GDP minus change in inventories – grew 3.6% annualized. Inventories subtracted 1.1% from growth as firms reduced stocks in response to weak first half demand. Stronger aggregate demand will lead to job growth, rising confidence and further spending (a self-sustaining expansion).
The expiry of the pay-roll tax cut and extended jobless benefits in December could shave 2% off 2012 GDP growth.Actual GDP is 5% below potential GDP.
A “balance sheet recession” is the process whereby households and companies pay down debts rather than embark on new spending. The lack of demand for loans is due to the debt-strapped private sector.
6
Business Fixed Investment(Nonresidential Structures)
8
1816
2
-11
1 2
-33
-20-20-17
-6-4
13
-1-2-2
5 4
0
7
-2
-8
2
1922
10
1
11
28
24
8
1
9
-4
-10
-32-33
-20
-31
-25
74
11
-14
23
13
-50
-40
-30
-20
-10
0
10
20
30
40
00Q1 01Q1 02Q1 03Q1 04Q1 05Q1 06Q1 07Q1 08Q1 09Q1 10Q1 11Q1
-50
-40
-30
-20
-10
0
10
20
30
40
Annualized Quarter Growth Rate
% Change From Quarter One Year Ago
Business Fixed Investment(Equipment and Software)
18
15
1 2
-1
-14
-10
-3-5
-1
4
-7
0
1113
8
-3
131412
2
911
3
18
2 2 25 4
34
-2
-8
-13
-29-31
-4
6
12
2223
14
8 96
17
-40
-30
-20
-10
0
10
20
30
00Q1 01Q1 02Q1 03Q1 04Q1 05Q1 06Q1 07Q1 08Q1 09Q1 10Q1 11Q1
-40
-30
-20
-10
0
10
20
30
Annualized Quarter Growth Rate
% Change From Quarter One Year Ago
Business investment spending has been strong and firms still have lots of cash to invest and hire.
Business spending on equipment and software have been very strong, leading to strong labor productivity growth over the last few years.
7
Real Personal Consumption Expenditures(Durable Goods)
24.5
-7.0
7.1
3.0
7.0
-0.2
4.9
38.1
-4.5
4.2
12.3
-5.2
1.2
17.617.9
3.85.7
2.6
8.17.3
4.3
12.1
5.8
-9.8
16.5
0.3
6.15.65.15.75.2
2.3
-9.6
-2.9
-12.3
-25.4
2.4
-4.0
20.2
-4.7
9.97.88.8
17.2
11.8
-5.3
4.1
-30
-20
-10
0
10
20
30
40
50
00Q1 01Q1 02Q1 03Q1 04Q1 05Q1 06Q1 07Q1 08Q1 09Q1 10Q1 11Q1
-30
-20
-10
0
10
20
30
40
50Annualized Quarter Growth Rate
% Change From Quarter One Year Ago
Residential Investment
3.2
-2.7
-6.9
0.31.8
5.7
2.2
-3.4
11.110.2
2.3
6.33.9
9.4
22.0
11.3
3.7
15.9
4.13.2
7.59.6
4.1
0.1
-4.2
-17.0
-21.2-19.6
-16.4
-12.0
-24.1
-29.3-28.5
-14.5
-19.9
-33.2-35.4
-21.3
17.7
-3.8
-15.3
22.8
-27.7
2.5
-2.5
4.22.4
-50
-40
-30
-20
-10
0
10
20
30
40
00Q1 01Q1 02Q1 03Q1 04Q1 05Q1 06Q1 07Q1 08Q1 09Q1 10Q1 11Q1
-50
-40
-30
-20
-10
0
10
20
30
40
Annualized Quarter Growth Rate
% Change From Quarter One Year Ago
Weak fundamentals are restricting sales:Few new jobs, low income growth, high unemployment, low and volatile wealth, limited access to credit, deleveraging and low confidence consistent with a deep recession.Factors supporting consumer spending:Private sector job growth, consumer are fixing their budgets, falling debt payments through debt reduction and refinancing, consumers who have stopped making mortgage payments but not yet defaulted have extra cash.
Housing Market Strengths:30-year mortgage interest rate = 4.0% (thanks to Federal Reserve)Falling/low home prices => record levels of affordabilityPrivate sector job growthPublic and private foreclosure mitigation efforts.Housing Market Risks:•Expiration of tax credits in April 2010 (pulled forward demand)• foreclosure sales (2.5 million in 2010) => PH
•Buyers expectations of future lower home prices => lower demand•Double dip recession => housing crash
8
US Payroll Employment Monthly Changes SA
-900
-800
-700
-600
-500
-400
-300
-200
-100
0
100
200
300
400
500
600
99 00 01 02 03 04 05 06 07 08 09 10 11 12
Tho
usan
ds
-900
-800
-700
-600
-500
-400
-300
-200
-100
0
100
200
300
400
500
600
Recession
Payroll
150,000 Target
Unemployment Rate
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
80 8182 83 84 8586 87 8889 90 9192 93 94 9596 97 9899 00 0102 03 04 0506 07 0809 10 11 12
(Perc
ent)
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Recession
Unemployment
Underemployment (U-6)
Full Employment (NAIRU)
Source: Department of Labor.
UnemployedInvoluntarily working part-timeMarginally attached (want jobs but haven’t searched in a month)
Structural Unemployment Disease: Joblessness is becoming chronic with the average unemployment at 40 weeks. Long-term unemployment is harder to cure because workers’ skills atrophy (human capital degradation) and they become detached from the work force. High long-term unemployment decreases future economic growth, raises future deficits and decreases social order.
Employment growth averaged 137,000 in 2011, below the 200,000 needed to meaningfully lower the unemployment rate.Average workweek rose 0.1% to 34.4. A greater workweek plus more payrolls lead to 0.5% rise in total hours worked.Average hourly earnings ($23.24) rose by 0.2% m/m and 2.1% y/y, indicating little evidence of wage pressures and below 3.4% inflation.Forward looking indicators (temp hiring and average weekly hours) suggests additional hiring in coming months.
9
Consumer Price Index 1970 to Present
5.6
3.33.4
8.7
12.3
6.9
4.9
6.7
9.0
12.5
8.9
3.83.84.04.44.44.7
6.1
3.12.92.72.72.5
3.3
1.71.6
2.6
3.4
1.6
2.41.9
3.33.5
2.5
4.1
-0.1
2.8
1.4
3.03.8
1.1
13.3
2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5 2 .5
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
2.5% Target
Annual Percentage Change
Inflation (CPI)(year over year % growth)
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
HeadlineCore (excludes food and energy)
Monetary policy options to prevent deflation and increase inflation expectations1. Quantitative easing: print money to buy long-term government debt2. Buy private-sector debt3. Change expectations by announcing it will keep short-term rates low for a long time4. Raise its long-run inflation target (encourage borrowing, discourage cash hoarding)5. Reduce the interest rate paid on excess reserves.6. Move from inflation targeting (rate of change) to price level targeting
December Data:Inflation = 0.0% m/m, 3.0% y/y, (due to falling energy prices: gas; natural gas; electricity)Core inflation = 0.1% m/m, 2.2% y/y, (close to Federal Reserve’s target)Expect lower inflation in 2012 as retail energy prices decline.Lower inflation will boost real disposable income.If inflation deceleration is too great expect the Federal Reserve to implement another round of quantitative easing
“QE-3” (print money to buy assets)Businesses are unlikely to slash prices (deflation) because inventories are lean.
10
Interest Rates and Recessions 1988-2012
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 11 12
0
1
2
3
4
5
6
7
8
9
10
Recession Baa Fed Funds 10-yr Treas
Asset-Shortage Theory: U.S. Government bond yields are low because of a worldwide shortage of safe assets (MBSs and PIIGS sovereign debt are no longer considered safe assets) and a glut of global savings (business parking surplus cash and consumers savings more). Is the savings glut temporary? We could go from fretting about scarce assets to about scarce capital and the accompanying rising interest rates.
Bond yields today are not a true “market price” since central banks are such big players in the market.
Asian central banks are helping to keep interest rates low as they recycle their foreign exchange reserves into government bonds.
Treasury Yield Curves
0
1
2
3
4
5
6
1 2 3 5 10 15 20 25 30Years to Maturity
Yie
ld t
o M
atu
rit
y
0
1
2
3
4
5
6June 07 August 2011 Jan-12
11
The Housing Bubble Has Popped(Nominal Annual Home Price Increases)
7.9%8.4%
13.5%14.0%
11.1%
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%
10.0%
13.0%
-2.0%
-6.7%
-13.2%
1.5%
-1.0%
-5.0%
7.2%
-15%
-10%
-5%
0%
5%
10%
15%
20%
75 767778 798081 8283 848586 878889 9091 929394 9596 979899 000102 0304 050607 080910 11Source: National Association of Realators.
First time since Great Depression
The Housing Cycle(Inflation-Adjusted Annual Home Price Increases)
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%
-10.8%
-14.2%
-1.3%-0.9%
-8.0%
-4.8%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
75767778798081828384858687888990919293949596979899000102030405060708091011
Real Home Prices Inflation
Source: National Association of Realators.
Why are home prices falling?Demand-Side Effects Supply-Side Effects•Low pent up demand Foreclosed houses•Fewer investors Expected lower future home prices•Tighter underwriting Rising unemployment•Expected lower future home prices•Falling incomesHome Price Bottom Brings Clarity to:•Home Equity, MBS Collateral, Bank/CU Asset Values, Bank/CU Capital Levels
Home price depreciation will continue through early 2012. In 2011, loan processing problems (robo-signing) led to banks and states imposing foreclosure moratoriums which led to an artificial deflation in the number of distressed home sales. In 2012, banks will increase pace of foreclosure processing, increasing supply of homes faster than a reviving economy will increase demand for homes.
Falling Home Prices
Falling HouseholdWealth
Falling HouseholdSpending
Rising Inventories
Lower Factory Production
Increase 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
13
National Savings Rate[3-month moving average (Personal Savings/DPI)]
-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 09 10 11 12 13
-2
-1
0
1
2
3
4
5
6
7
8
9
10
Paradox of ThriftEveryone increasing their savings leads to a recession
Greater economic stabilityEquity capital gains
Foreign savings/capital inflow
New Mortgage Products
Low interest rates
Financial Stress
Household Debt(As a Percent of Disposable Household Income)
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
79 82 85 88 91 94 97 00 03 06 09 12
Source: BEA & Federal Reserve.
The “De” EraDebt => Deleveraging => Deflation => Defaults => Depression
Some CU members may be experiencing rising real debt burden (Debt/Income) wages, hours, prices, profits => income => real debt burden
Rising real debt burden (Debt/Income)=> spending to service debts => slower economy
Or=> defaults => weaker financial system => slower economy
Consumers are deleveraging to work off a mountain of debt. The Great Recession has led to a fundamental attitude shift towards debt. The benign macroeconomic environment of the past two decades masked a buildup of financial instability; it may also have been storing up the elements of prolonged social discontent.
14
Consumer Confidence & Sentiment Index
0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
150
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 130
10
20
30
40
50
60
70
80
90
100
110
120
130
140
150
Recession Confidence Sentiment
Source: Conference Board & University of Michigan
Consumer Confidence Index (reflects mainly labor market) rose to 64.5 in December, lessening the threat of low confidence on spending.Consumers fears remain intense and could threaten spending growth. Consumers are concerned about the state of the economy, job growth, low wage growth, volatile stock prices, falling home prices, Washington policies, high unemployment, limited credit availability and higher gas prices than one year ago.
Consumer Sentiment Index (sensitive to household finances, gas and stock prices) rose to 69.9(5-year inflation expectations = 2.7%, 1-year inflation expectations = 3.1%)
Uncertainty has fed and fed on a weak economic recovery, creating a negative feedback loop that results in a downward economic spiral. The current level of risk aversion is unsustainable.
Labor Productivity and Costs(Nonfarm Business)
(% chg from year ago)
2.3%
4.5%
3.6%
2.9%2.9%3.1%3.5%
6.1%
4.3%4.7%
3.1%
1.9%
3.2%
4.6%5.0%
4.2%3.7%
1.5%1.3%
2.2%
1.1%1.7%1.6%
1.1%1.5%
0.1%
0.8%
0.2%
0.9%
2.6%2.5%1.9%1.6%
0.3%
-1.1%
-0.2%
1.2%
3.0%
5.3%
6.2%
4.4%
3.3%
2.5%
1.2%0.9%0.9%
2.5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
0:01 0:03 1:01 1:03 2:01 2:03 3:01 3:03 4:01 04:3 05:1 05:3 06:1 06:3 07:1 07:3 08:1 08:3 09:1 09:3 10:1 10:3 11:1 11:3
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
Productivity Unit Labor Costs Wages
Source: Bureau of Labor Statistics
• Productivity rose in Q3 2.3% (SAAR) as output growth (3.2%) exceeded labor hour growth (0.8% due to job gains and longer workweek).
• It is becoming difficult to get additional output from current workers as demand increases.• With aggregate demand still rising, firms will have to increase hiring in 2012.• Nominal hourly compensation fell 0.2% (SAAR) in Q3, real hourly compensation fell 3.2%, due to slack labor
markets• Unit labor costs fell 2.5% (SAAR) in Q3 fostering inexpensive labor.• So labor is relatively inexpensive leading to higher profits. Unit labor costs are down 3% from 2008 peak.• This allows for additional capital for expansion plans to offset tighter credit conditions.
15
Oil Price per Barrel (West Texas Intermediate Crude)
0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
150
70 71 72 73 74 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 09 10 11 12 13
Pric
e p
er b
arrel
Recession Nominal Real
Oil EconomicsPoil = 10 => PGas = 0.25 => growth 0.3-0.5%
S&P 500 Stock Index(monthly average)
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 09 10 11 12 13
0
100
200
300
400
500
600
700
800
900
1000
1100
1200
1300
1400
1500
1600
1700
1800
1900
Nominal Recession Real
6 Positive Stock Factors: 1. Low cash/money market rates => stock rally (putting money back to work)2. Rising economic growth and profit expectations3. Low inflation expectations and interest rates will keep borrowing costs low4. Fed “Quantitative Easing” => lowering L.T. interest rates => stock rally5. Liquidity – rather than fundamentals – may be driving the market6. Market could be exposed to a violent reversal (without warning)
Federal Government Surplus/Deficit(Billions of Dollars)
-74-79-128
-208-185-221
-150-155-153
-221-269-290
-255-203
-164-107
-22
69126
236
128
-158
-378-413
-318
-248
-161
-459
-1,400
-1,294-1,284
-973
-623
-380-322
-402
-212
-$1,500
-$1,250
-$1,000
-$750
-$500
-$250
$0
$250
$500
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
Source: Congressional Budget Off ice.
$53 Trillionunfunded liabilities
•Bank stock purchases (TARP)•Stimulus plan•Mortgage bailout plan•Income-support programs•Recession-induced falling revenues
CBO's Baseline Budget Projection
U.S. Federal Budget Surplus or Deficit(as a % of GDP)
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
-3.2-2.7-2.7
-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
-3.2
-8.9-8.5
-6.2
-3.2
-1.6-1.1
-10
-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 10 12 14
-10
-8
-6
-4
-2
0
2
4
Deficit-to-GDP
-5% Macroeconomic Danger Zone
Fiscal StimulusThe risk of inaction may be
greater than the risk of action
Ricardian Equivalence PropositionG=>bonds=>expectations of higher taxes=>
savings rate=>consumption=>no chg AD
Debt-to-GDP < 75% U.S. TodayDebt-to-GDP = 130% post WIIDebt-to-GDP = 180% Japan Today
Foreign Lenders will finance the largedeficit due to their large demand for
“safe harbor” Treasury bills
The government could implement negative real interest rates (nominal rates < inflation) to reduce their debt burden.
The budget deficit will narrow in fiscal 2012 to $1 trillion as spending falls and the recovery boosts payroll, personal income tax, and corporate income tax revenues. Large personal income tax cuts enacted under President Bush are scheduled to
expire at the end of 2012.
Existing Home Sales, Inventory & Prices(Measure of housing demand)
Web address: www.realtor.org/research.nsf/pages/ehsdataSmall 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 PH/PH > P/P, then housing considered an attractive investment. Benefit owners, hurt non-owners.
------------------------------------------------------------------------------------------Market AnalysisBonds: High sales => C => P/P => DBonds => PBonds=> iBonds
Stocks: High sales => C => corporate profits => PStocks
Dollar: Low sales => C => Y/Y => Fed funds rate => DDollar => $
EconomicIndicator 2
18
Existing Home Sales (annual rate)& Inventories
3000
3500
4000
4500
5000
5500
6000
6500
7000
7500
8000
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Th
ou
sa
nd
s
1750
2000
2250
2500
2750
3000
3250
3500
3750
4000
4250
4500
4750
5000
Th
ou
sa
nd
s
Recession Sales (LHS) Inventories (RHS)
Median Existing Home Price & Months Supply at Current Sales Rate
$150
$160
$170
$180
$190
$200
$210
$220
$230
$240
$250
03 04 05 06 07 08 09 10 11 12 13
234567891011121314
Home Prices (LHS) Months Supply (RHS)
The Housing Market in November•4.42 million annualized units sold, up 4.0% m/m, up 12% y/y. Sales are moving in the right direction.•Median home price was $164,200, up 2.1% m/m, down -3.5% y/y.•Months supply of homes = 7Demand side factors:•Low mortgage interest rates, but tight credit•Rising consumer confidence, but weak job and income growth.•Expect home prices to fall further into 2012, as foreclosed property eventually enters the market.Supply-side factors:•Large inventory of discounted foreclosed homes (shadow inventory) adds to supply overhang.•Falling inventory of homes•Falling distressed home sales.
Homework 1Due Tuesday, January 31 in Lecture
Pick one of the economic indicators presented in this handout and write a one page report on what impact it is having on the overall U.S. economy.