The Current State of the US Economy

Margaret Pesikov
Ramesh Mohan, PhD

Pesikov 1 Margaret Pesikov Professor Mohan Intermediate Macroeconomics 20 October 2011

STATE
Inflation

OF THE

AMERICAN ECONOMY:

Personal Consumption Expenditure (PCE) measures the percent change each month of consumer spending on durable goods, services, and products. The Bureau of Labor Statistics (BLS) predicts that over the following 9 years, the PCE will increase (Personal Consumption Expenditures). Avi Salzman states that recent sales figure in America indicate that there is an increase in the willingness of consumers to spend money (Salzman). PCE is expected to continue increasing which gives hope that the US will not fall into another recession in the near future. The Consumer Price Index (CPI) is a very common measure of inflation and determines the average change in prices that consumers pay for a basket of goods and services. According to the Bureau of Labor Statistics, the CPI-U has increased .3%. This was largely due to increases in food and energy increases. Core-CPI, however, remains steady and has only increased by .1% (Short). The following graph shows trends in the CPI and the Core-CPI. It should be noted that at the end of the latest recession, CPI increased dramatically for several years.

Pesikov 2 Unemployment Currently, the unemployment rate in the United States is 9.1% which is extremely high. This is due to a lack of labor demand. Many companies are downsizing due to the economy and many people have skills that are no longer in high demand. For example, due to the housing crisis, construction workers have difficulty making a living because the amount of new houses being built has decreased significantly. This is currently a crisis in America because as people find themselves unemployed for long periods of time, they are less likely to be able to get hired in the future. This poses a danger of a plague of long-term unemployment if the government does not tackle this issue effectively and immediately (Wessel).

Productivity When it comes to analyzing the productivity of an economy, it is important to take a look at Business Inventories-to-Sales Ratios. When the ratio is high, it means that businesses are producing more than they are selling. When the ratio is low, this means that businesses are effectively matching supply to the demand for their products. In the following graph, it is evident that during the recession the Inventory-to-Sales Ratio was very high. This is largely caused by people not being willing to purchase the goods that companies were producing because of Americas economic situation at the time. Due to this, sales decreased much quicker than inventories.

Pesikov 3

As seen after the end of the recession, the ratio has returned to being low. This may be deceiving, however, because demand may still be low for products but companies may have adapted their inventories to cater to this demand. Also, this ratio is a lagging indicator because it takes time for businesses to be affected and also it takes time for businesses to adjust. Since the ratio is currently so low, any increase in the demand for goods will be a boost for employment because companies will need to hire more people to meet this demand (Wilson). Various Business Indicators Retail Sales Index In September of 2011, retail sales rose 1.1% which was the biggest jump from February and a number that, while not huge, is normal for a recovery (Murray, Sara, and Ann Zimmerman). This is a fairly good sign for the economy because it shows that consumption is on the rise and people are becoming more comfortable with spending their money.

Pesikov 4

As shown by the graph above, retail sales suffered a lot during the recession and are now on the rise again showing that there have been some improvements in the economy. Consumer Confidence The graph indicated in the previous section is also a good indicator of consumer confidence because when sales increase, that means that people are more confident in the economy. Currently consumer confidence is falling due to rising unemployment, weak economic growth, and squeezed household budgets (Consumer Confidence Falls Again). Many people believe that consumer confidence will remain low for at least half of a year. Leading Economic Indicators LEI Leading Economic Index The Conference Board Leading Economic Index (LEI) for the U.S. increased 0.2 percent in September to 116.4 (2004 = 100), following a 0.3 percent increase in August, and a 0.6 percent increase in July (Chapman). LEI has been continuously increasing which shows promise for the US economy and the likelihood that America will be able to resist slipping into a second recession.

Pesikov 5

ECONOMIC IMPACT:
Oil/Gasoline Prices According to the Financial Post (Reuters), producer prices in September in the United States recorded their biggest increase in five months as gasoline prices increased significantly. The increase in gasoline prices was 4.2%. Across the US, the price of oil has been increasing as a steady rate. Economists predict that the price of gasoline will continue to rise in the near future. The Chicago Tribune believes that this increase in gasoline is a direct result of an increase in US exports of fuel to other countries. This leaves the United States supply more vulnerable to sudden price bumps if there are any refinery outages or jumps in the price of crude oil(Tribune Staff Report). High gasoline prices have an impact on the economy because people are more likely to resort to using public transportation. The American Public Transportation Association has found that $4 per-gallon gas prices could result in an additional 670 million public transit passenger trips. If pump prices jump to $5 a gallon, the report predicts and additional 1.5 billion passenger trips can be expected (Johnson). Housing Market and Sub-Prime Mortgage Financial Crisis The sales of new homes in America have been decreasing. This is primarily due to the Sub-Prime Mortgage Financial Crisis in 2008. As a result of poor lending habits in banks and an excessive amount of Sub-Prime Mortgages in the economy, the United States was faced with a recession. There was a significant drop in the amount of new houses being built. The following graph depicts this decrease:

Pesikov 6 Housing construction continues to drop because of more strict requirements for lending and due to the simple fact that many American citizens cannot afford purchasing a home in this economy. This is having a serious effect on the economy because since people are not purchasing housing, construction workers and real estate agents are finding themselves out of work which is also contributing to unemployment. People are also not willing to purchase housing because since the prices of homes continue to fall, it would not be a good idea to invest in the housing market at this time. Recent Government and Fed Intervention QE3 In an attempt to stimulate the economy, the Federal Reserve is considering a third round of quantitative easing (McBride). The FOMC may decrease the interest rate that is paid to banks that have excess reserves so that this money could be pushed back into the economy. Or, instead of this, the Federal Reserve can keep the federal funds rate relatively low for a certain period of time. This would attempt to control interest rates and inflation in such a way that optimizes the chance of job creation. Most people are very skeptical of the potential benefits of this policy. Also, the impact on the economy is unlikely to be significant because effects of quantitative easing have a history of being temporary. Operation Twist Operation Twist is the changing of the government bonds held by the Fed in an attempt to stabilize the economy. The Federal Reserve thought that if it changed the bonds that they held that there would be a positive impact shown in the economy. Most people had very little faith in the program when it was announced but data from October 2011 signifies that it may have had an impact. Stocks increased 5.8% in October 2011 which is a good sign. Several economists, however, believe that this increase in the stock market is largely caused by external factors such as the current crisis in Europe.

FUTURE OUTLOOK

AND

INVESTMENT RECOMMENDATIONS

Though the future currently looks grim for America, some indicators suggest a glimmer of hope for the US economy. With consumer confidence on the rise and an inventory-to-sales ratio on the decline, it seems that there may be a reduction in unemployment soon to come. Also, it seems that it is possible that our country may be able to avoid a second recession. On the other hand, the housing market is still struggling and it is not recommended to invest in property until housing prices begin to increase.

References Chapman, John L. "Is Recession Coming? Leading Economic Indicators Say No." Alhambra Investment Partners. Alhambra Investment Partners, 20 Oct. 2011. Web. 21 Oct. 2011. <http://www.alhambrapartners.com/2011/10/20/isrecession-coming-leading-economic-indicators-say-no/>. "Consumer Confidence Falls Again." Personal Finance, Compare Insurance, Financial News | MSN Money UK. MSN Money, 20 Oct. 2011. Web. 21 Oct. 2011. <http://money.uk.msn.com/news/city-news/consumer-confidence-falls-again>. Inman, Phillip. "What Is Operation Twist? | Business | The Guardian." Latest News, Sport and Comment from the Guardian | The Guardian. Gaurdian, 21 Sept. 2011. Web. 20 Oct. 2011. <http://www.guardian.co.uk/business/2011/sep/21/operationtwist-federal-resrve-gamble-us-economic-stimulus>. Johnson, Fawn. "The Impact of High Gas Prices - Transportation Experts." Transportation Experts. 14 Mar. 2011. Web. 21 Oct. 2011. <http://transportation.nationaljournal.com/2011/03/the-impact-of-high-gasprices.php>. Mattich, Alen. "QE Will Fail Especially If It Works." The Source. Wall Street Journal, 20 Oct. 2011. Web. 20 Oct. 2011. <http://blogs.wsj.com/source/2011/10/20/qewill-fail-%E2%80%94-especially-if-it-works/? KEYWORDS=quantitative+easing>. McBride, Greg. "QE3: Feds 3rd Dose of Quantitative Easing? | Bankrate.com." Mortgage Rates Credit Cards Refinance Home CD Rates by Bankrate.com. Bank Rate. Web. 20 Oct. 2011. <http://www.bankrate.com/finance/federal-reserve/qe3-feds-third-dosequantitative-easing.aspx>. Murray, Sara, and Ann Zimmerman. "Shoppers Spend More Despite Dreary Outlook." Wall Street Journal. Wall Street Journal, 16 Oct. 2011. Web. 20 Oct. 2011. <http://online.wsj.com/article/SB100014240529702040023045766307215773367 78.html?KEYWORDS=retail+sales+index>. "Personal Consumption Expenditures." U.S. Bureau of Labor Statistics. Bureau of Labor Statistics, 18 Dec. 2010. Web. 20 Oct. 2011. <http://www.bls.gov/emp/ep_table_405.htm>. Phillips, Matt. "Could 'Twist' Really Be Working?" Wall Street Journal. Wall Street Journal, 19 Oct. 2011. Web. 20 Oct. 2011. <http://online.wsj.com/article/SB100014240529702037526045766433735860240 88.html?KEYWORDS=operation+twist>.

Reuters, Thomson. "U.S. Producer Prices Spike on Gas Prices | Economy | News | Financial Post." Financial Post | Canadian Business News, Investing and Commentary. Financial Post, 18 Oct. 2011. Web. 21 Oct. 2011. <http://business.financialpost.com/2011/10/18/u-s-producer-prices-spike-on-gasprices/>. Salzman, Avi. "Data Suggests U.S. Is Resisting a Double-Dip Recession." Barron's. 14 Oct. 2011. Web. 20 Oct. 2011. <http://blogs.barrons.com/stockstowatchtoday/2011/10/14/data-suggests-u-s-isresisting-a-double-dip-recession/>. Short, Doug. "Inflation Watch: Headline CPI Rises Slightly, Core Remains Steady Seeking Alpha." Stock Market News & Financial Analysis - Seeking Alpha. Seeking Alpha, 20 Oct. 2011. Web. 20 Oct. 2011. <http://seekingalpha.com/article/300814-inflation-watch-headline-cpi-risesslightly-core-remains-steady>. Tribune Staff Report. "Gasoline Prices on the Rise." Breaking Business. Chicago Tribune, 18 Oct. 2011. Web. 20 Oct. 2011. <http://www.chicagotribune.com/business/breaking/ct-biz-gas-prices10182011,0,2450166.story>. Wessel, David. "Untangling Long-Term Unemployment - WSJ.com." Business News & Financial News - The Wall Street Journal - Wsj.com. Wall Street Journal, 20 Oct. 2011. Web. 20 Oct. 2011. <http://online.wsj.com/article/SB100014240529702037526045766411522498051 90.html?KEYWORDS=unemployment>. Wilson, David. "Inventory-to-Sales Ratio May Signal New Jobs: Chart of the Day Bloomberg." Bloomberg - Business & Financial News, Breaking News Headlines. Bloomberg, 2 Aug. 2010. Web. 20 Oct. 2011. <http://www.bloomberg.com/news/2010-08-02/inventory-to-sales-ratio-maysignal-new-jobs-chart-of-the-day.html>.