Measuring the US
Economy
Economic Indicators
Understanding the Lingo

Annualized Rates
Example: GDP Q3 (Final) = $11,814.9B (5.5%)
Q2: GDP = $2,914.38 B X 4 = $11,657.5 B
Q3: GDP = $2,953.73 B X 4 = $11,814.9 B
($11,814.9 - $11,657.5) X 100 = 1.35% X4 = 5.5%
$11,657.5
Understanding the Lingo

Annualized Rates
Supposed that prices increased by .3% during
the month of November.
The annualized inflation rate is .3%X12 = 3.6%
Understanding the Lingo

Nominal (Current) Dollars vs. Real
(Constant) Dollars
Example:
GDP(Q2) = $11,657.5
GDP(Q3) = $11,814.9T (5.5%)
CPI(Q2) = 111.2
CPI(Q3) = 112.4 (4.3%)
Real GDP(Q2) = (11,657.5/111.2)*100 = $10,483.36
Real GDP(Q3) = (11,814.9/112.4)*100 = $10,511.47
($10,511.47 - $10,483.36) X100 X 4 = 1.07%
$10,483.36
Understanding the Lingo

Seasonally Adjusted
Retail Sales
370000
350000
330000
310000
290000
270000
250000
01 -01 -01 l-01 -01 -01 -02 -02 -02 l-02 -02 -02 -03 -03 -03
r
r
r
v
v
y
y
y
n
n
n
p
p
Ja Ma Ma Ju Se No Ja Ma Ma Ju Se No Ja Ma Ma
Understanding the Lingo
The X12 method estimates changes that occur in the
same month each year and are generally of the same
magnitude/direction. This seasonal component is
then subtracted out.
Retail Sales
355000
335000
315000
NSA
SA
295000
275000
May-03
Mar-03
Jan-03
Nov-02
Sep-02
Jul-02
May-02
Mar-02
Jan-02
Nov-01
Sep-01
Jul-01
May-01
Mar-01
255000
Jan-01

Understanding the Lingo

Moving Averages
Example: Consider the following monthly
Inflation Statistics (Monthly % Changes)
May
.6
June July
.3
-.1
Aug. Sept. Oct. Nov. Dec.
.1
.2
.6
.2
.2
Understanding the Lingo

Moving Averages
A moving average takes out the volatility by averaging several
observations. For example, a MA(3) would average the current
observation with the previous 2 observations.
MA
May
June
July
Aug.
Sept.
Oct. Nov.
Dec.
1
2
3
.6
.3
.45
-.1
.1
.27
.1
0
.10
.2
.15
.07
.6
.4
.3
.2
.4
.33
.2
.2
.33
.3
.17
.2
.275
.3
4
Understanding the Lingo

Revisions
ALL ECONOMIC DATA IS CONSTANTLY
BEING REVISED!!!
Example: GDP is reported three times
Q3(Advance): 3.7%
Q3 (Preliminary): 3.9%
Q3 (Final): 4.0%
Understanding the Lingo

Consensus Forecasts
Most of the news services construct consensus surveys by polling
economists for their predictions on key indicators
GDP
Advance
Actual
3.7%
Consensus
4.3%
Preliminary
3.9%
3.7%
Final
4.0%
3.9%
Understanding the Lingo

Benchmarking
Some indicators are reported relative to some
benchmark.
Example: Consumer Confidence in December was 102.3
(1985 = 100)
Example: The CPI in November was 191.0 (1982-1984 =
100)
Understanding the Lingo

The Business Cycle
Since WWII, the US has
experienced 10 Business
cycles with the average
recession lasting 10
months.
The most recent cycle was
2001:

Peak (March 2001)

Trough (November 2001)
So Many Statistics….So Little
Time!

The government releases over 50
statistics per month/quarter!! They can be
roughly divided into 5 categories
Consumer Sector
 Business Sector
 Public Sector
 International
 Prices

Major Indicators

Consumer Sector (70% of Economic Activity)







Retail Sales (Census Bureau)
Consumer Credit (Federal Reserve)
Personal Income and Spending (BEA)
Employment Report (BLS)
New Claims For Unemployment Insurance (Dept of Labor)
Consumer Confidence/Sentiment (Conference Board/U. of
Michigan)
Auto Sales (Dept. of Commerce)
Major Indicators

Business Sector(17% of Economic Activity)





Industrial Production (Federal Reserve)
Capacity Utilization (Federal Reserve)
ISM Index (Institute for Supply Management)
Durable Goods Orders (Census Bureau)
Factory Orders (Census Bureau)

Housing Starts (Census Bureau)
New/Existing Home Sales (Nat. Assoc. of Realtors/Census
Bureau)
MBA Mortgage Applications (Mortgage Bankers Assoc.)

Business inventories (Census Bureau)


Major Indicators

Public Sector(19% of Economic Activity)



Construction Spending (Census)
Federal Budget Report (Treasury Dept)
International Sector (-6% of Economic Activity)


Net Exports (Bureau of Economic Analysis)
Current Account (Bureau of Economic Analysis)
Major Indicators

Prices





Consumer Price Index (BLS)
Producer Price Index (BLS)
Employment Cost Index (BLS)
Non-Farm Productivity (BLS)
Import/Export Prices (BLS)
Criteria For “Good” Indicators

Accuracy:

Most economic data is compiled through surveys –
larger survey pools are more accurate.



To measure consumer confidence, the conference board
polls 5,000 households per month.
To measure prices, the bureau of labor statistics polls 28,000
retail outlets per month! (on 80,000 products)
Some statistics are subject to large revisions.

Housing starts are rarely revised while the monthly
construction spending report often gets substantial revisions
Criteria For “Good” Indicators

Timeliness
The BLS employment situation report comes
out a week after the end of the month, while
consumer credit is reported on a two month
delay.
Predictive Ability


Blue Arrow = Peak
Red Arrow = Trough
Predictive Ability


Blue Arrow = Peak
Red Arrow = Trough
Predictive Ability


Blue Arrow = Peak
Red Arrow = Trough
Criteria For “Good” Indicators

Business Cycle Stage

During recessions, we’re looking for signs of
recovery
 Housing
Starts
 Auto Sales
 Employment

During expansions we tend to be more
concerned with inflation
 CPI
 Employment
cost index
Criteria For “Good” Indicators

Who Are You?
Stock markets are most concerned with
consumer/business spending which drive
corporate profits (Employment, Retail Sales)
 Bond Markets worry about inflation (CPI, PPI)
 Foreign Exchange Markets (Current Account,
GDP, Productivity)

A Shortcut

Index of Leading Indicators (Conference Board)










Average Hourly Workweek in Manufacturing (19.7%)
Weekly Unemployment Claims (2.5%)
Manufacturers’ New Orders – Consumer Goods (5.9%)
Manufacturers’ New Orders – Capital Goods (1.5%)
Vendor Performance (Delivery Time Index) (2.9%)
Building Permits for New Homes (2%)
Index of Consumer Expectations (1.9%)
S&P Index (2.9%)
Real (inflation adjusted) M2 Money Supply (27.7%)
Interest Spread Between 10 Yr. Bonds & Fed Funds Rate (33%)
Index of Leading Indicators


Blue Arrow = Peak
Red Arrow = Trough
The Most Influential U.S.
Economic Indicators
The Big One: Employment
What is it: Total (Non-Farm) Employment, Unemployment
Rate, Average Duration, etc…..Are people
working?
Release Time: 8:00AM, the first Friday of the month
following the coverage month
Frequency: Monthly
Source: Bureau of Labor Statistics
Revisions: Frequent Revisions…sometimes major!
The Household Survey

Each month, the BLS contacts 60,000
households (95% response rate) and places
each in one of four categories:
A.
B.
C.
D.
Under 16 or institutionalized (or military)
Choose not to work: Not in Labor Force
Choose to work and are working: Employed
Choose to work, but can’t find a job: Unemployed
Unemployment Rate = D/(D+C)
Household Survey





US Population: 290M
Civilian Population: 220M
Labor Force: 147M
Employment: 139M
Unemployment: 8M
Participation Rate
(147M/220M)*100 = 66%
Employment Ratio
(138M/220M)*100 = 62%
Unemployment Rate
(8M/147M)*100 = 5.4%
UR = 1 – (ER/PR)
US Participation Rate
US Participation Rate
Establishment (Payroll) Survey

Each month, the BLS contacts 400,000
firms!! (60% - 70%) response rate. Each
firm is asked to report total employment.

Employment: 131M??
???
The US Labor Market

Labor markets are difficult to characterize
because they are always in motion…..
EMPLOYED
NOT IN
LABOR
FORCE
UNEMPLOYED
Average Turnover is around 2.5 Million people per Month!!
Duration

Most unemployment spells
in the US are short.
<5 Wks:
5-15 Wks:
+ >15 Wks:
Total:


2.9m
2.2m
2.9m
8.0m
Average duration in the US
is approx. 19wks
Median: 9wks
Average Duration
In 1 year, how many people
are unemployed for 5 wks?
(52/5)*2.9M =
30.1M
How many people are
unemployed for 10 wks?
(52/10)*2.2M =
11.4M
For 20 wks?
+(52/20)*2.9M =
7.5M
Total
49M
AD = (30.1/49)*(5wks) +
(11.4/49)*(10wks) +
(7.5/49)*(20wks) = 8.5wks
Unemployment Duration
Unemployment Duration
What’s “Normal” in the Labor
Market?
Frictional Unemployment: Currently unemployed, but in
the process of getting a job (i.e., short term
unemployment):
3.5%
+ Structural Unemployment (chronic unemployment): 1.5%
“Natural Rate of Unemployment”:
5%

Given the current unemployment rate of 5.4%, we
currently have a cyclical unemployment rate of .4%
12
/1
/9
0
12
/1
/9
1
12
/1
/9
2
12
/1
/9
3
12
/1
/9
4
12
/1
/9
5
12
/1
/9
6
12
/1
/9
7
12
/1
/9
8
12
/1
/9
9
12
/1
/0
0
12
/1
/0
1
12
/1
/0
2
US Unemployment Rate: 1990-2002
9
8
7
6
5
4
3
2
1
0
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
1969
1966
1963
1960
1957
1954
1951
1948
Is the “Natural Rate” Growing?
12
10
8
6
4
2
0
The cost of unemployment

“Capacity Output” of an economy is the level of
output associated with full employment (i.e.,
unemployment is at the natural rate)



The “output gap” is the difference between capacity
output and actual output
Okun’s law states that every 1% increase in cyclical
unemployment increases the output gap by 2.5%.
Therefore, our current .4% cyclical unemployment
rate implies an output gap of 1% GPD ( Roughly
$110B! )
GDP (Gross Domestic Product)
What is it: Current dollar value of all goods and service produced in the
US
Release Time: 8:30AM, The final week of the month
following the covered quarter (each quarter has three
estimates: Advance, Preliminary, Final)
Frequency: Quarterly
Source: Bureau of Economic Analysis
Revisions: They usually get it right by the final revision.
Calculating GDP

If our economy was horizontally oriented
(i.e. everyone produces final goods)
economy, calculating GDP would be easy:
GDP = Price*Quantity (Added up over all goods)


Our economy is vertically oriented (some
manufacturers produce intermediate
goods). Therefore, we must avoid double
counting.
Each manufacturer reports output on a value
added basis
National Income and Product
Accounts
GDP (2003)
Consumer
Goods:
Investment
Goods:
Government
Expenditures:
Net Exports:
Income (2003)
$7,752.2B
$1,667.5B
GDP:
- Net Factor Payments: $37.9
GNP:
$10,946.0
-
Depreciation
NNP:
-
Indirect Taxes:
National Income:
$2,055.7B
-$491.5B
$10,983.9
$10,983.9
$1,370.1
$9,575.9
$834.4
$8741.5
National Income and Product
Accounts
Income (2003)
GDP:
$10,983.9
- Net Factor Payments: $37.9
GNP:
$10,946.0
-
-
Depreciation
NNP:
Indirect Taxes:
National Income:
$1,370.1
$9,575.9
$834.4
$8741.5
Income (2003)
Wages:
$6,039.5
Proprietor’s Income:
$774.6
Rental Income:
$127.9
Corporate Profits:
$1,294.2
Interest:
$546.9
National Income:
$8,783.1
Statistical Discrepancy: 41.6B
Real vs. Nominal

Recall that GDP will grow either because we are producing more, or
because prices are increasing. To correct for this, the BEA, repeats
the previous calculations using a set of “Base year” prices.
GDP (2003 Prices) = $10,983.9
GDP (2000 Prices) = $10,397.2
Note that this implicitly implies a Price index……The GDP Deflator!
P(2000) = 1
P(2003) = $10,983.9/$10,397.2 = 1.056
(i.e. prices increased by 5.6% from 2000 – 2003)
GDP Facts




GDP in 2004 is $11,649.3 Billion while GDP in 1950
was $275.7 Billion. (an increase of 4200%).
Real GDP (2000 $s) in 2004 was $10,788.9 Billion
while Real GDP in 1950 was $1,777.5 Billion (A
600% increase)
Real GDP per capita in 2003 is $36,911 compared
to $10,736 in 1950 ( a 350% increase).
Median real income in 2003 is approximately
$24,000 while median real income in 1950 was
approximately $8,000 (a 300% increase)
CPI (Consumer Price Index)
What is it: The “Average” Price of Consumer Goods in the US
Release Time: 8:30AM, The second or third week following the
covered month
Frequency: Monthly
Source: Bureau of Labor Statistics
Revisions: No Revisions except for an annual correction done in
February.
Fixed Weight Indices



A price index is meant to capture the average price of
goods and services in the economy. Therefore, any
price index should be a weighted average of all (or at
least, most) prices in the economy.
With any fixed weight index, the weights used in the
index are chosen ex ante and remain fixed over time
(hence, the name fixed weight index).
Think of the a fixed weight index as simply defining a
“basket” of goods. The value of that index is the cost of
that basket.
Example: A Fixed Weight Index



Suppose that in 2002, Apples
cost $3 and Oranges cost $5.
In 2003, Apples cost $4 (a
30% increase) and oranges
cost $6. (20% increase)
Let’s define the price index as
.5( Apples) + .5(Oranges)
Usually, prices are in
represented in terms of a
“base year”. This is done by
dividing every year by the base
year price
P(2002) = .5($3) + .5($5)
= $4.
P(2003) = .5($4) + .5($6)
= $5
P(2002) = 1 (or 100)
P(2003) = $5/$4 = 1.25 (or
125)
The Consumer Price Index
16%
Housing
Apparel
4%
40%
1%
Transportation
Medical
5%
Recreation
Education &
Communication
Tobacco & Smoking
Products
Personal Care
6%
6%
5%
17%
Food & Beverage
The Consumer Price Index



The inflation rate is just the percentage change
in the CPI.
The “core inflation rate” is the the percentage
change in the CPI less energy and food prices
(known to be extremely volatile)
The producer price index (PPI) is the corporate
analogue to the CPI
Problems with the CPI

A formal commission
headed by Stanford
economist Michael
Boskin in 1996
determined that the
CPI overestimated by
as much as 2.4% per
year
Formula Bias: .3-.4%
Substitution Bias: .2.4%
Outlet Bias: .1-.3%
New Products: .2-.7%
Quality Bias: .2-.6%
Total: 1 - 2.4%
Variable Weight Indices


Variable weight indices correct for the substitution bias of
the CPI by allowing the weights to vary over time.
The GDP Deflator (or, more commonly, the deflator) uses
actual production of each commodity as a fraction of
total GDP for the weights. Therefore as production (and,
hence, consumption) of a commodity rises, so does its
weight in the deflator.
Chain Weighting
During periods of large relative price
changes, the choice of base year is critical
for determining real growth and the
behavior of prices.
 Chain weighting is a process by which a
range of years is chosen for the “base
year” and that range moves over time.

Productivity
What is it: A Measure of Efficiency in the Production Sector
Release Time: 8:30AM, Around five weeks following the covered
quarter
Frequency: Quarterly
Source: Bureau of Labor Statistics
Revisions: Can be substantial….this depends on revisions to both
GDP and Employment
Calculating Productivity
Step #1: Take real GDP and subtract out
government output and farm output
$10,397.2 - $2,079.44 = $8,317.8
Step #2: Divide by Total Labor Hours (in the Employment Situation Report)
(Employment * Average Hours *52 = Total Hours)
$8,317.8/244.3 = $34/hr.
Step #3: Productivity is benchmarked relative to a “base year”
Suppose that Output/hr in 1992 was equal to $28.hr, then
Prod(1992) = 100
Prod(2003) = 100*(34/28) = 121.4
Labor and Multifactor Productivity
Growth Formulas
Y = real output
N= labor hours
K=capital input
Y/N = Labor Productivity
y – n = Labor Productivity growth
(lower case letters = compound annual average rates of
growth)
Y = A KβN1-β = Production function (Cobb Douglas)
A = Y/(KβN1-β) = Multifactor Productivity
a = y – βk – (1-β)n = Growth Rate of MFP
y - n = a + β (k - n) = Growth rate of labor productivity
Labor Productivity, United States,
1919-2000
1919-1929
1929-1941
1941-1948
1948-1973
1973-1989
1989-2000
2.27
2.35
1.71
2.88
1.33
1.97
1973-1995
1995-2000
1.40
2.43
Sources: 1919-48: Kendrick (1961), Table A-23.
1948-2000: Bureau of Labor Statistics: www.bls.gov
MFP
United States, 1919-2000
1919-1929
1929-1941
1941-1948
1948-1973
1973-1989
1989-2000
2.02
2.31
1.29
1.90
.34
.78
1973-1995
1995-2000
.38
1.14
Sources: 1919-48: Field (2003); Kendrick (1961)
1948-2000: Bureau of Labor Statistics: www.bls.gov
Consumer Confidence
What is it: A Measure of how consumers feel about the
economy
Release Time: 10:00AM, The last Tuesday of the month
being surveyed
Frequency: Monthly
Source: The Conference Board
Revisions: Minor
Measuring Consumer Confidence
The board surveys 5,000 households/month and asks the
following questions:
1) How would you rate the present general business conditions in
your area? Good, Normal, or Bad.
2) How about six months from now? Better, Same, Worse.
3) What would you say about available jobs in your area? Plenty, not
so many, hard to get.
4) What about six months from now? Better, Same, Worse.
5) What would you guess your family income to be six months from
now? Higher, same, lower.
Measuring Consumer Confidence
The board surveys 5,000 households/month and asks the
following questions:
Step #1: For each question, the “Neutral” Response is thrown out.
Step #2: The responses are transformed into a percentage
Relative Response = Positive/(Positive + Negative)
Step #3: The Benchmark is relative to 1985.
Benchmarked Answer = Rel. Response (Current)/Relative Response(1985)
Step #4: Average over the 5 questions
Example: Consumer Confidence
Question
Positive
Neutral
Negative
Relative
Benchmarked
#1
#2
#3
#4
3,000
2,000
2,900
1,575
1,000
500
100
1,575
1,000
2,500
2,000
1,850
.75
.44
.59
.46
1.07
1.10
1.18
0.76
#5
Average
1,000
2095
1,000
835
3,000
2070
.25
.50
0.63
.948*100 = 94.8

Relative Values for 1985 are: .70, .40, .50, .60, .40
(Average = .52)
The Bottom Line
Each statistic has its strengths and
weaknesses.
 Rarely will all the indicators “agree” with
one another.
 Each indicator must be looked at in the
context of “the big picture”.
