Econ 102
Spring 2012
Macroeconomics
The Current Economy
Steven W. Rick
University of Wisconsin
Unemployment Insurance Claims
(Gauge of Labor Market Conditions)
Web: www.ows.doleta.gov/unemploy/claims_arch
Minor revisions
Economic
Indicator 1
Very timely “coincident” indicator of new filings for unemployment benefits (social
safety net) reported by state agencies around the country to the Labor
Department. Use a 4-week moving average to smooth out erratic weekly
numbers.
Large filing increases => dampen consumer spirits => slash in consumer spending =>
paring back of business investment spending => lower future economic
activity.
Unemployed workers may be eligible to qualify for unemployment benefits for up to
26 weeks in most states. During economic slowdowns, laws are passed to
extend the pay period another 13 weeks.
Recent graduates who enter the workforce but are unable to find work are ineligible to
receive benefit payments.
Every state offers jobless insurance programs which conform to federal rules.
Claims normally peak 2-3 months before the bottom of a recession and the beginning
of a recovery phase.
If claims > 400,000 for several weeks, then economy is slowing and close to a
recession => increase in the Household Survey unemployment rate.
If claims < 400,000, then the economy is entering a growth phase.
If claims < 350,000, then expect the Establishment Survey to show a jump in
payrolls.
Continuing claims > 3 million and climbing is a sign of a malfunctioning economy and
strained federal and state budgets (from the state financial support)
------------------------------------------------------------------------------------------------------------------------------------------------
Market Analysis:
Bonds: If D claims > 30,000 =>  DY/Y =>  DP/P =>  DBonds =>  iBonds
Stocks: If claims continuously  =>  DY/Y =>  profits =>  PStocks
Dollar: If claims continuously  =>  DY/Y =>  iBonds =>  dollar
Initial Jobless Claims
700,000
700,000
650,000
650,000
600,000
600,000
550,000
550,000
500,000
500,000
450,000
450,000
400,000
400,000
350,000
350,000
300,000
300,000
Recession
250,000
250,000
Jobless Claims
200,000
200,000
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
Continuing Jobless Claims
7,000,000
7,000,000
Recession
Jobless Claims
6,500,000
6,500,000
6,000,000
6,000,000
5,500,000
5,500,000
5,000,000
5,000,000
4,500,000
4,500,000
4,000,000
4,000,000
3,500,000
3,500,000
3,000,000
3,000,000
2,500,000
2,500,000
2,000,000
2,000,000
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
2
13
Recent Economic Trends
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
The longest, deepest, and broadest recession since the
Great Depression has passed it nadir and is moving
toward recovery, but deflation remains a possibility.
Debt deflation, deleveraging and the credit reckoning
process continues.
The labor market has stabilized but job creation is both
a necessary and sufficient condition for a selfsustaining recover.
U.S. fiscal budget concerns could lower the value of
the dollar and raise interest rates.
The Federal Reserve will maintain its massive
injection of reserves into the banking system to interest
rates low for the next two years.
Government intervention into the economy has proved
to be less than effective and may have many
unintended consequences.
Public debt will continue to rise as private debt
continues to fall.
Falling home prices will continue into 2012.
Loan credit quality will continue to improve through
2011 and lending underwriting standards will remain
tight
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.
Quarterly % Change in U.S. Economic Output
(Real GDP - Chainweighted 2005$)
Below trend growth
•Falling stimulus spending
•Less inventory rebuilding
•Slowing Euro-Zone
•Financial crisis
•Deleveraging households
•Rising savings rates
10%
9%
Maximum Sustainable
Growth Rate = 3%
8%
7%
6%
5.1%
5%
4%
3%
4.2%
3.3%
3.0%
2.7%2.6%
3.2%
2.7%
1.8%
2%
3.9%3.8%
3.8%
3.6%
3.0%
2.1%
2.5%2.3%
1.7%
1.6%
1.7%
1.3%
0.5%
1%
3.5%3.5%3.5%3.5%
3.0%3.0%
3.0%
3.0%
2.5%
1.8%
1.3%
0.4%
0.1%
0%
-1% 04:1
05:1
06:1
07:1
-2%
08:1
09:1
-0.7%
-1.8%
-5%
Falling Potential Growth Rate
•3.5% to 2.5%
-6% •Less investment spending
-7% •Lower leverage in post-credit era
-8% •Suppressed demand
•Negative demographic trends
-9% •Lower total factory productivity growth
-10%
11:01
12:01
13:01
Recession Factors:
-3%
-4%
10:1
-3.7%
-6.7%
-8.9%
•Loose monetary policy
•Poor regulation
•Lax bank supervision
•Opaque derivatives
•Shadow banking system
•Lax investor diligence
•Poor governance
•Misaligned incentives
•fraud
Source: Department of Commerce.
The economic recovery continues, but is disappointing and is vulnerable to external shocks. GDP is back to its prerecession 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.
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%
4
Business Fixed Investment
(Nonresidential Structures)
40
40
28
24
30
18
20
22
19
16
13
13
10
11
10
8
7
0 0 Q1
0 1Q 1
-10
0
0 2 Q1
0 3 Q 1 - 1- 0
Q1
24
-2
-4
-6
0 5Q
-1
2
1
0 6 Q1
1
0 7Q 1
0 8 Q1
0 9 Q1
10 Q 1
11Q 1
0
-4
-8
-10
- 10
- 11
-20
10
7
4
2
20
11
9
8
5 4
1 2
2
0
30
23
- 14
- 17
- 2-02 0
-20
-25
-30
-30
-31
- 3 -23 3
-33
-20
-40
-40
-50
-50
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 Fixed Investment
(Equipment and Software)
30
30
23
22
20
18
18
15
9
4
2
1 2
0
-10
0 0 Q1
3
2 2 2
5 4
8 9
6
6
4
10
3
0
0 1Q
-1 1
0 2 Q- 1
1
-3
-5
0 3 Q1
-7
- 10
- 14
0 4 Q1
-3
0 5Q 1
0 6 Q1
0 7Q 1
0 8 Q1
-2
0 9 Q1
10 Q 1
11Q 1
0
-4
-10
-8
- 13
-20
-30
20
12
11
8
10
17
14
13 14
12
13
11
-20
-30
-29
-31
-40
-40
Annualized Quarter Growth Rate
% Change From Quarter One Year Ago
Business spending on equipment and software have been very strong, leading to strong labor productivity growth
over the last few years.
5
Real Personal Consumption Expenditures
(Durable Goods)
50
50
Annualized Quarter Growth Rate
3 8 .1
40
40
% Change From Quarter One Year Ago
30
30
2 4 .5
2 0 .2
20
17
17 .
6 .9
10
4 .9
3 .0
1. 2
0 0 Q1
0 1Q 1
0 2 Q1
- 4 .5
-10
8 .1
7. 3
5. 7
4 .3
3 .8
2 .6
4 .2
- 0 .2
0
12 . 1
7. 1 7. 0
20
17 . 2
16 . 5
12 . 3
11. 8
9 .9
8 .8
7. 8
10
6 .1
5. 6
5 .5
1. 7
5. 2
5. 8
4 .1
2 .4
2 .3
0 .3
0 3 Q1
0 4 Q1
0 5Q 1
0 6 Q1
0 7Q 1
0 8 Q1
- 2 .9
0 9 Q1
10 Q 1
11Q 1
- 4 .0- 4 .7
- 5. 2
- 5. 3
- 7. 0
-10
- 9 .6
- 12 . 3
- 9 .8
0
-20
-20
- 2 5. 4
-30
-30
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.
Residential Investment
40
40
30
30
2 2 .8
2 2 .0
20
11.
1. 2
10
10
5. 7
3 .2
0
-10
1. 8
0 .3
0 0 Q1
- 2 .7
2 .2
0 1Q 1
9 .4
6 .3
3 .9
2 .3
11. 3
20
17 . 7
15 . 9
9 .6
7. 5
1. 2
3 . 7 4 .3
4 .1
2 .5
4 .2
2 .4
10
0 .1
0 2 Q1
- 3 .4
0 3 Q1
0 4 Q1
0 5Q 1
0 6 Q1
0 7Q 1
0 8 Q1
0 9 Q1
10 Q 1
- 3 .8
- 4 .2
11Q 1
- 2 .5
- 6 .9
0
-10
- 12 . 0
-20
- 17 . 0 - 16 . 4
- 19 . 6
- 2 1. 2
- 2 4 .1
-30
-40
- 14 . 5
- 19 . 9
- 15 . 3
- 2 7. 7
8 .5
- 2 -92. 3
Annualized Quarter Growth Rate
-20
- 2 1. 3
- 3 3 .2
- 3 5. 4
-30
-40
% Change From Quarter One Year Ago
-50
Housing Market Strengths:
30-year mortgage interest rate = 4.0% (thanks to Federal Reserve)
Falling/low home prices => record levels of affordability
Private sector job growth
Public 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
-50
6
US Payroll Employment
Thousands
Monthly Changes SA
600
600
500
500
400
400
300
300
200
200
100
100
0
0
-100 99
00
01
02
03
04
05
06
07
08
09
10
11
12
-100
-200
-200
-300
-300
-400
-400
-500
-500
-600
Recession
-600
-700
Payroll
-700
-800
150,000 Target
-800
-900
-900
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.
Unemployment Rate
18
17
16
15
(Percent)
14
18
17
Unemployed
Involuntarily working part-time
Marginally attached (want jobs but haven’t searched in a month)
16
15
14
13
13
12
12
11
11
10
10
9
9
8
8
7
7
6
6
5
5
4
3
2
1
Recession
Unemployment
4
Underemployment (U-6)
Full Employment (NAIRU)
2
3
1
0
0
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
Source: Department of Labor.
Structural Unemployment Disease: Joblessness is becoming chronic with the average unemployment at 40 weeks. Longterm 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.
7
Consumer Price Index
1970 to Present
14Annual Percentage
13Change
13.3
12.5
12.3
12
11
10
9.0
8.7
9
8
6.9
7
8.9
6.7
6.1
2.5% Target
5.6
6
4.9
5
4
3.83.84.0
3.8
3.33.4
4.7
4.44.4
3
4.1
3.33.5
2.5
2.4
1.9
1.6
3.4
2.6
3.3
3.12.9
2.72.72.5
1.71.6
2
2.8
3.0
1.4
1.1
1
0
70
-1
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
-0.1
08
10
12
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.
Inflation (CPI)
(year over year % growth)
6%
5%
4%
3%
2%
1%
0%
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
-1%
-2%
-3%
Headline
Core (excludes food and energy)
Monetary policy options to prevent deflation and increase inflation expectations
1.
Quantitative easing: print money to buy long-term government debt
2.
Buy private-sector debt
3.
Change expectations by announcing it will keep short-term rates low for a long time
4.
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
8
11
12
Interest Rates and Recessions
1988-2012
10
10
9
9
8
8
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
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
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
6
6
Yield to Maturity
June 07
August 2011
Jan-12
5
5
4
4
3
3
2
2
1
1
0
0
1 2 3
5
10
15
Years to Maturity
20
25
9
30
The Housing Bubble Has Popped
(Nominal Annual Home Price Increases)
20%
14.0%
13.5%
15%
13.0%
11.1%
10.0%
10%
8.4%
7.9%
7.4%
6.7%
6.4%
5.8% 6.2%
7.2%
5.0%
5%
4.7%
4.3%
4.1%
3.1%
2.4%
2.3%
1.8%
1.0%
1.5%
7.9%
7.6% 8.0%
6.6%
6.0%
5.1%
4.9%
3.2%
1.5%
0%
-1.0%
-2.0%
-5%
-5.0%
First time since Great Depression
-6.7%
-10%
-13.2%
-15%
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Source: National Association of Realators.
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.
The Housing Cycle
(Inflation-Adjusted Annual Home Price Increases)
15%
9.5%
10%
6.5%
5%
5.5%
4.7%
3.1%
2.6%
1.4%
0.9%
0.1%
2.0%
2 .0%
1.7%
2.0%
0.1%
6.5%
5.7% 6.1%
4.3% 4.2%
3.5%
2.9% 3 .3%
-0.1%
0%
-0.4%
75767778798081828384858687888990919293949596979899000102030405060708091011
-0.8%
-0.8%
-0.9%
-1.3%
-1.4%
-5%
-2.8%
-4.2%
-4.8%
-4.5%
-5.0%
-8.0%
-10%
-10.8%
Real Home Prices
Inflation
-15%
-14.2%
Source: National Association of Realators.
-20%
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 incomes
Home Price Bottom Brings Clarity to:
•Home Equity, MBS Collateral, Bank/CU Asset Values, Bank/CU Capital Levels
10
Negative Downward Spiral
Falling
Home Prices
Falling Household
Wealth
•Lower fed funds interest rate
•$300 billion FHA mortgage bailout
Falling Household
Spending
 HELOC
•Salaries
•Commissions
•Bonuses
•Tips
Lower income
Economic Stimulus Plan
$600 Tax Rebates
Obama Stimulus Plan
Rising Inventories
•Self-reinforcing spiral
•Feedback Loop
•Multiplier Effect
•Sum of an
Infinite Geometric Series
Increase unemployment
Lower Factory
Production
National Savings Rate
[3-month moving average (Personal Savings/DPI)]
10
10
9
9
Greater economic stability
Equity capital gains
8
8
Foreign savings/capital inflow
7
7
New Mortgage Products
6
6
5
5
Low interest rates
4
3
2
1
4
3
Paradox of Thrift
Everyone increasing their
savings leads to a recession
2
1
0
0
-1
-1
Financial Stress
-2
-2
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
The “De” Era
Debt => Deleveraging => Deflation => Defaults => Depression
Some CU members may be experiencing rising real debt burden (Debt/Income)
 wages, hours, prices, profits =>  income =>  real debt burden
Household Debt
(As a Percent of Disposable Household Income)
140%
130%
120%
110%
100%
90%
80%
Rising real debt burden (Debt/Income)
=>  spending to service debts => slower economy
Or
=>  defaults => weaker financial system => slower economy
70%
60%
50%
40%
79
82
85
88
91
94
97
00
03
06
09
12
Source: BEA & Federal Reserve.
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.
12
Consumer Confidence &
Sentiment Index
150
150
140
140
130
130
120
120
110
110
100
100
90
90
80
80
70
70
60
60
50
50
40
40
30
30
20
20
10
Re ce ssion
Confide nce
10
Se ntime nt
0
0
95
96
97
98
99
00
01
02
Source: Conf erence Board & University of Michigan
03
04
05
06
07
08
09
10
11
12
13
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)
9%
9%
8%
8%
7%
5%
4.5%
4%
3% 2.3%
3.6%
3.5%
2.9% 3.1%
2.9%
2.5%
7%
6.2%
6.1%
6%
5.0%
4.6%
4.2%
3.7%
3.1%3.2%
4.7%
4.3%
1.9%
2%
1%
6%
5.3%
4.4%
2.6%
2.5%
1.9%
1.6%
2.2%
1.7%
1.6% 1.5%
1.5%
1.3%1.1%
1.1%
0.8% 0.9%
0.1%0.2%
3.0%
5%
3.3%
2.5%
1.2%
1.2%
0.9%
0.9%
3%
2%
1%
0.3%
0%
-1%
4%
0%
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 08:3-0.2%
09:1 09:3 10:1 10:3 11:1 11:3
-1.1%
-2%
-1%
-2%
-3%
-3%
P roduct ivit y
Unit Labor Cost s
Wages
-4%
-4%
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.
13
Oil Price per Barrel
(West Texas Intermediate Crude)
150
140
130
120
Price per barrel
110
100
90
80
70
60
50
40
30
20
10
0
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
Recession
Nominal
Real
Oil Economics
Poil = 10 => PGas = 0.25 =>  growth 0.3-0.5%
S&P 500 Stock Index
(monthly average)
1900
1900
1800
1800
1700
1700
1600
1600
1500
1500
1400
1400
1300
1300
1200
1200
1100
1100
1000
1000
900
900
800
800
700
700
600
600
500
500
400
400
300
300
200
Nominal
Recession
200
Real
100
100
0
0
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
6 Positive Stock Factors:
1.
Low cash/money market rates => stock rally (putting money back to work)
2.
Rising economic growth and profit expectations
3.
Low inflation expectations and interest rates will keep borrowing costs low
4.
Fed “Quantitative Easing” => lowering L.T. interest rates => stock rally
5.
Liquidity – rather than fundamentals – may be driving the market
6.
Market could be exposed to a violent reversal (without warning)
08
09
10
11
14
12
13
Federal Government Surplus/Deficit
(Billions of Dollars)
$500
236
$250
126
CBO's Baseline
Budget Projection
128
69
$0
80
82
-74-79
-128
84
86
88
90
92
96-22 98
94
00
-107
-150
-153
- 155
-164
-185
-203
-208
-212
-221
-221
-255
-269
-290
-$250
02
04
06
-158
-$500
-$750
10
12
16
-322
-380 -402
-459
•Bank stock purchases (TARP)
•Stimulus plan
•Mortgage bailout plan
•Income-support programs
•Recession-induced falling revenues
-$1,000
14
-161
-248
-318
-378
-413
$53 Trillion
unfunded liabilities
08
-623
-973
-$1,250
-1,284
-1,294
Source: Congressional Budget Of f ice.
-1,400
-$1,500
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.
U.S. Federal Budget
Surplus or Deficit
(as a % of GDP)
4
4
2.4
2
2
1.4 1.3
0.8
0.3
0.1
0
-2
0
-0.2
-0.6-0.8 -0.5
-0.9 -1.1
-1.3
-0.3
-0.3
-0.4
-1.1
-1.4
-1.6
-2
-2.1
-2.9
-4
-2.2
-2.6
-2.7
-2.7-2.7
-3.4-3.2
-4.2
-2.8
-3.1
-3.2
-4
-4.8 -5
-5.1
-2.9
-3.9 -3.9
-4.5
-4.7
-1.1
-2
-1.6
-1.2
-1.5
-1.9
-2.6
-3.5
-3.6
-3.2
-3.2
-6
-6
-6
-8
-4
-6.2
-8
Deficit-to-GDP
-5% Macroeconomic Danger Zone
-8.5
-8.9
-10
-10
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
Fiscal Stimulus
The risk of inaction may be
greater than the risk of action
Debt-to-GDP < 75% U.S. Today
Debt-to-GDP = 130% post WII
Debt-to-GDP = 180% Japan Today
Ricardian Equivalence Proposition
G=>bonds=>expectations of higher taxes=>
savings rate=>consumption=>no chg AD
Foreign Lenders will finance the large
deficit 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.
Existing Home Sales, Inventory & Prices
(Measure of housing demand)
Web address: www.realtor.org/research.nsf/pages/ehsdata
Small monthly revision, annual revision in February.
Existing home sales are a function of :
•
•
•
Mortgage interest rates ( imort. 1% =>  sales 250,000)
Confidence regarding future job and income prospects
Expectations of future home prices
Economic
Indicator 2
Strong correlation between sales and consumption so series may
portend economic turning point
Sales => unlock/realize capital gains => house trade-up =>  discretionary durable
consumption =>  economic growth
Series is not timely. Sign initial purchase agreement contract, then 1-3 months later is
the actual sale with deed transfer. Housing market conditions may have
changed during the lag period so take care when extrapolating data.
Housing Inventory - number of homes available for sale
•
Harbinger of future housing trends
Inventory-to-sales ratio – number of months to sell off existing inventory
•
•
•
4.5-6 months supply of homes is a balanced market between buyers and sellers
Less than 4.5 is tight supply (sellers market) with increasing prices
Greater than 6 is a soft market (buyers market) with falling prices
Median home prices - changes are a function of changing supply and demand
conditions, the economic climate and the sales mix.
If DPH/PH > DP/P,
then housing considered an attractive investment. Benefit owners, hurt non-owners.
-----------------------------------------------------------------------------------------Market Analysis
Bonds: High sales =>  C =>  DP/P =>  DBonds =>  PBonds=>  iBonds
Stocks: High sales =>  C =>  corporate profits =>  PStocks
Dollar: Low sales =>  C =>  DY/Y =>  Fed funds rate =>  DDollar =>  $
Existing Home Sales (annual rate)
& Inventories
8000
5000
4750
7500
4500
4250
6500
4000
6000
3750
3500
5500
3250
5000
3000
4500
2750
Thousands
Thousands
7000
2500
4000
2250
3500
2000
3000
1750
95
96
97
98
99
00
01
02
03
04
Recession
05
06
07
08
Sales (LHS)
09
10
11
12
13
Inventories (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 = 7
Demand side factors:
1.
Low mortgage interest rates, but tight credit
2.
Rising consumer confidence, but weak job and income growth.
3.
Expect home prices to fall further into 2012, as foreclosed property eventually enters the market.
Supply-side factors:
1.
Large inventory of discounted foreclosed homes (shadow inventory) adds to supply overhang.
2.
Falling inventory of homes
3.
Falling distressed home sales.
Median Existing Home Price
& Months Supply at Current Sales Rate
14
13
12
11
10
9
8
7
6
5
4
3
2
$250
$240
$230
$220
$210
$200
$190
$180
$170
$160
$150
03
04
05
06
07
08
09
Home Prices (LHS)
10
11
12
13
Months Supply (RHS)
17
Homework 1
Due 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.