Economic Indicators
The million (or should we say 'billion' now)
dollar question is whether or not the
United States' economy will stay in
it's record 107 month expansion (according
to the index of leading
indicators) or come out of the boom and take a downturn
into a recession.
Nobody, including the Chairman of the Federal Reserve, Alan
Greenspan has
a crystal ball to provide insight as to what will happen if
interest rates
are raised, lowered, or left alone. However, Economists have
developed a set
of indicators to aid in predicting when a recession is about to
occur and
when the economy is in one. Indicators should not be mistaken for
predictors.
They are simply forecasting tools, and like any forecast can be
misleading.
The index of leading indicators that is reported in the popular
press shows
our economy is still in an expansion. For the purposes of our
evaluation of
the economy, we chose the Principle Economic Indicators tracked by
the Bureau
of Economic Analysis and the U.S. Census Bureau under the Economics
and
Statistics Administration at the U.S. Department of Commerce. There
are
thirteen Principle Economic Indicators, and they fall into five
major
categories: National Output and Income; Orders, Sectoral Production,
and
Inventories; Consumer Spending; Housing and Construction; and Foreign
Trade.
National Output and Income The first of the five major categories
directly
relates to measuring the growth of the U.S. economy. National Output
and Income
consists of the Gross Domestic Product (GDP), Personal Income, and
Corporate
Profits measurements. GDP is the primary measurement of growth
and measures the
total amount of goods and services produced by governments,
businesses, people,
and property located within the United States. Both real
(adjusted for
inflation) and nominal (current value in dollars) data is
collected for
computing the GDP. The base year for the real data is 1997. The
GDP is normally
reported as an annualized quarter-to-quarter change. The
reason this measurement
is vital to tracking the growth of the U.S. economy
is self-explanatory. When
the economy is growing, both total income and total
output are increasing.
Furthermore, a steady increase in the GDP is
healthy for the economy. According
to the U.S. Department of Commerce, U.S.
economic output has grown at an annual
rate of 2.5 to 3.5 percent since 1890.
The preliminary estimate of GDP in the
fourth quarter of 1999 rose at a 6.9
percent annual rate, which is the strongest
gain since a similar increase in
mid-1996. This is an increase from the initial
estimate of 5.8 percent and is
consistent with the expectations of analysts. It
is also a reflection of the
widespread upward increases among the major spending
components, including
consumer spending, goods exported, and state and local
government spending.
In the third quarter of 1999, GDP rose 5.7% as a result of
increases in
Personal Consumption Expenditures, nonresidential fixed investment,
and
exports. Personal Income is a measurement of total pretax income earned
by
individuals, non-profit organizations, and private trust funds. It is
expressed
at an annual rate also. The more Personal Income increases the
greater the
potential for the American people to spend and save money, which
directly
influences the growth of the U.S. economy. Personal Income rose .7
percent in
January, following an increase of .3 percent in December. The
average monthly
increases in 1999 were .5 percent. Some extenuating factors
affected income in
recent months, including cost of living increases in
federal transfer payments,
a federal pay raise, and agricultural subsidy
payments in January. Real
disposable income, income after taxes and adjusted
for price changes, increased
by .7 percent. There was no change in December.
The individual personal saving
rate rose from 1 percent in December, which
was its low, to 1.4 percent in
January. Savings rates generally go down
in the months October through May due
to Holiday spending (includes "paying
off" credit cards). There are
two methods in which Corporate Profits are
reported by the government.
"Tax-based" profits are derived from corporate
tax returns, and
"adjusted" profits reflect earnings from current production.
Just as
increases in Personal Income are vital to the growth of the U.S
economy,
increases in Corporate Profits are just as important on an even
larger scale.
The greater the profits, the more potential for growth.
This in turn has a
direct effect on employment rates, spending, etc. Profits
reported from current
production increased $3.7 billion in the third quarter
of 1999. This is a
dramatic improvement from a decrease of $6.5 billion in
the second quarter.
Profits would have been about $10 billion more than
they were in the third
quarter if not for the effects of Hurricane Floyd.
Insurance companies paid
benefits resulting in about $8 billion in reduced
profits, with uninsured losses
attributing the other $2 billion. Profits
before tax increased $18 billion in
the third quarter, compared with an
increase of $17.7 billion in the second
quarter. In light of all data
relating to National Output and Income, increases
in all measurements suggest
the U.S. economy continues to grow at a rapid pace
in the first quarter of
2000. Orders, Sectoral Production, and Inventories The
three measurements
that make up this major category are Durable Goods;
Manufacturers'
Shipments, Inventories, and Orders; and Manufacturing and
Trade
Inventories. Durable Goods measures the volume of orders place with
U.S.
manufacturers for goods with a life expectancy of at least three years.
These
goods include primary metals, consumer hard goods, transportation
equipment,
military hardware, and machinery. A large percentage of durable
goods purchases
in any given year give economists an idea of how many more
durable goods will be
purchased in the following year. These items don't
break down as easily and are
not consumed at the time of purchase, so it is
unlikely that a consumer of
durable goods will buy that same item again
within three or more years. This can
affect the economy through the
industries that manufacture and sell these items.
If they stockpile too
many durable goods, there will be more available than
there is demand. As a
result manufacturers will incur higher inventory costs,
while the price for
the items will drop because too many are available. This
indicator can change
if new models or new technologies are introduced that
drives consumers to
seek replacements for existing items, or if high
unemployment or high
inflation drives consumers to retain their existing durable
goods. This is an
indication of trends in consumer preferences for big-ticket
items.
Manufacturers' Shipments, Inventories, and Orders are indicators due to
being
tied to consumer expectations and new orders for consumer goods, as well
as
inventory levels. Since this category includes durable and non-durable
goods,
it encompasses a large percentage of economic activity. Manufacturers
ship
materials and maintain them in inventory based on the number of orders
they
anticipate they will receive. It also involves production workers, who
are
required to take in orders, maintain inventories and perform shipping
functions.
If there is a large degree of shipments and inventories to
maintain, more
workers are required. A decrease in orders, inventories and
shipments can result
in a decrease of personnel required. This affects the
economy if unemployment
results and potential consumers are unable to
purchase as much as they would
like. If shipments are delayed, deliveries
from suppliers may suffer because
they don't have the raw materials on hand
to fill requests. In turn, orders from
the manufacturer can be slowed,
resulting in customer dissatisfaction and order
cancellations. If orders are
cancelled after the item is manufactured, then the
manufacturer now has
additional inventory to maintain, and they may have to hire
additional
workers or find additional inventory space. This indicator can change
as a
result of consumer preferences, employment trends affecting the number
of
skilled workers available for hire, and governmental regulations that can
affect
methods of shipment. The Manufacturing and Trade Inventories report
indicates
the level of business stocks at the retail, wholesale, and
manufacturing levels
in book value terms. It is essentially a measure of
finished goods, not raw
materials. If there is a high level of inventory at
the retail and wholesale
level, this can indicate that consumers do not have
sufficient disposable
income. This can lead to a downturn in the economy, or
it can mean that prices
are inflated. It can also mean that a shift in
consumer preferences has
occurred, e.g. preference for IBM computers versus
Apple. A high level of
inventory at the manufacturing level indicates that
orders are slow or the firm
is overstocking inventory. Since inventory space
is costly, poor inventory
management can result in the need to expand
warehouse storage and can result in
a decrease of profit. Inventory surpluses
at any level affects the economy when
stores, wholesalers or manufacturers
have to liquidate finished goods at less
than the intended selling price,
thereby reducing forecasted profit margin.
Changes in this indicator are
driven by consumer demand and references, which
can rapidly deplete inventory
or cause inventory to stagnate, and technologies
that streamline inventory
management and control. New orders for durable goods
declined 2.3 percent in
February. They dropped 2.2 percent in January following
a 6.5 percent
increase in December. The February decrease was a reflection of
large
declines in orders for transportation equipment, mainly civilian
aircraft,
and industrial machinery. Despite the volatility of orders and
shipments,
manufacturing activity appears to be expanding at a good pace in
the first
quarter of 2000. The Federal Reserve's index of industrial
production suggests
that manufacturing production in the first quarter is
growing at its strongest
pace since 1997. Consumer Spending Two of the
thirteen principle economic
indicators tracked by the Bureau of Economic
analysis fall under the category of
Consumer Spending. Consumer spending
includes Retail Sales and Personal
Consumption Expenditures. The Retail
Sales economic indicator measures the sales
of retail establishments,
adjusted for normal seasonal variation, holidays and
trading-day differences,
and are not annualized. In recent months retail sales
have increased faster
than expected. February saw an 11.1 percent increase where
a 0.9 percent
increase was expected, marking the third strong gain in the last
four months.
The recent beating that the American public is taking in gasoline
prices is
undoubtedly the cause for a 4.3 percent increase in service station
sales and
one reason there has been a strong over all retail sales gains.
February
sales reached $265.7 billion, an increase of 9.4 percent compared
to
February of last year. The 11.1 percent average sales increase for
January and
February has risen at an annual rate that is on track for the
largest quarterly
growth in the last year. With the exception of six points
of quarterly data
retail sales have increased a minimum of 5 percent and as
much as 13 percent per
quarter as compared to the prior quarter since 1994.
This steady increase in
retail sales indicates public trust in the current
American economy. Their
willingness to spend their hard-earned money in the
retail market instead of
acting with increased caution by hoarding funds
could be an indication that the
general public also has faith that the
American economy will continue to prosper
in the future. Increased retail
sales are a direct reflection of the level of
Personal Consumption
Expenditures. Personal Consumption Expenditures economic
indicator measures
consumer spending for all goods and services in the economic
market. These
expenditures comprise approximately two-thirds of the total GDP.
When
viewed as a running average, nearly every quarter since 1995, Real
Personal
Consumption Expenditures have realized quarterly gains compared
to each previous
quarter. With the recent increases in retail sales and the
continued levels of
Personal Consumption Expenditures there is no reason
to doubt that our economy
can continue it's creditable levels of growth.
These levels of fiscal activity
have been and will continue to keep funds
moving regularly through the financial
sector within the circular flow.
Housing and Construction Housing Starts and
Building Permits are the
economic indicator used to measure privately owned
housing units started and
privately owned housing units authorized by building
permits. These are
considered good leading indicators of home sales and spending
in general.
Housing Starts are used to predict the residential investment
portion of the
GDP. Building Permits usually become Housing Starts in about
three to four
months. Building Permits are also a component of the leading
economic
indicators index. Single-family starts account for approximately 74
percent
of all starts, and Multi-family units account for the rest.
Monthly
construction spending data produced by the Census Bureau are key
source data for
the GDP. The monthly construction spending data is used as a
measure of
production in the construction sector. Data on private residential
spending are
a source for the GDP residential investment component;
nonresidential spending
data, for nonresidential investment; and public
construction spending data, for
structures components within government
consumption expenditures and gross
investment. Analyst use economic data to
forecast other economic series by
monitoring various behavioral links due to
one type of economic activity
generally having an impact on another type of
economic activity. For example, an
unexpected increase in housing sales will
lead to a drop in houses for sale as
well as in the months' supply of houses
for sale. If housing stocks decline
below desired levels, then builders take
out housing permits, initiate housing
starts, and work toward completing
houses by construction spending. This cycle
can differ when production is
based on expected changes in the business cycle.
Furthermore, housing
stocks may be built up in anticipation of housing sales
rather than housing
being replenished after a rise in sales. Building permits
are one of the
indicators of the current status of the economy. The number of
residential
building permits issued is an indicator of construction activity,
which leads
to other types of economic production. Before building residential
or
commercial structures the builder must apply for a building permit. Usually
a
contractor will apply for a permit at least 6 months in advance. By looking
at
the number of building permits that have been granted, economist can
predict the
amount of construction that is likely to begin in the next 6 to 9
months. This
is only a prediction, and it could be inaccurate. Acquiring a
building permit
does not require the contractor to build. Housing starts
increased 1.3 percent
to 1.78 million units at an annual rate in February,
which is the highest level
since January 1999. Single family starts declined
3.9 percent in February, their
second decline after hitting a twenty-one year
high in December. The
multi-family starts jumped 19.2 percent in February,
following a 20.4 percent
jump in January. Multi-Family starts have risen to
their highest level in eleven
years. The tightening of credit in private
sector is likely to slow housing
activity in the next few months. The
interest rate on fixed-rate mortgages has
averaged 8 ¼ percent so far this
year, marking its highest rate since the
middle of 1996. The homebuilders'
index of prospective buyer's traffic has been
on a downslide since last
spring, and sales of new and existing homes have
declined since the summer.
This is a normal cyclical trend, and building and
sales should pick back up
in the spring despite increases in mortgage rates.
Foreign Trade Foreign
trade is the economic indicator that measures our economy
and GNP against
those of other countries the U.S. trades with. The main factor
that is
tracked is the balance of trade; which is the difference between the
value of
goods and services a country imports, and the value of the goods and
services
it exports. This difference will produce what is known as a trade
deficit
(what occurs when imports exceed exports) or a trade surplus (exports
exceed
imports). The flow of the world economy is constantly fluctuating. In
order
to know precisely what our country's global economic position is,
foreign
trade must be measured. The Bureau of Economic Analysis submits
monthly reports
broadcasting the difference between exports and imports in
billions of current
dollars. This report, known as the International Trade
Balance, analyzes the
various international goods and services that are
exchanged between countries.
When paired with the quarterly Current
Account Balance (an updated reading of
trade and other certain seasonally
adjusted transactions), it provides a
powerful tool for economists and
government agencies to calculate foreseeable
trends. It also allows a gauge
for which to adjust shortfalls where economic
weaknesses exist and improve
international standings. Aside from sustaining our
own nations' powerful
trade balance, we provide a positive image with other
countries. The U.S.
promotes peace and goodwill through exchange. These
qualities have an
indirect effect on the economy by ensuring that our trade
partners have faith
in our products and continue to contribute to our economy.
Various
factors can cause the foreign trade indicator to change. Exchange
rates,
quotas, and tariffs are some of the factors that drive change. Whether
a country
runs a trade deficit or a surplus is dependent on the supply and
demand of its
goods and services. Political climates can produce trade
restrictions with other
countries as well. For example, large deficits often
provoke nations to prohibit
imports. This causes negative impacts that offset
the initial purpose of
lowering the deficit, such as reducing domestic
competition and instilling
resentment from other countries. This often leads
to trade wars. Historically,
the U.S. has been an economic juggernaut in the
trade deficit area. During
periods of economic growth, traditionally the U.S.
trade deficit increases.
According to the most recent BEA quarterly
Current Account Balance Report, the
January U.S. trade deficit hit an
all-time high of $28.0 billion, up from $24.6
billion in December. While
exports declined from their December level, imports
continued to trend
strongly upward. The annual rate deficit totaled $336 billion
in January, up
from $268 billion this time last year. Of course, higher oil
prices were a
major contributor to the rising trade deficit. The deficit is
predicted to
remain high, and the U.S. economy will continue to outpace the
economies of
its trading partners. Economic Outlook The overwhelming trend
amongst all
thirteen indicators suggests the U.S. economy will continue to stay
in a
period of economic growth. However, growth leads to increases in
spending,
which in turn leads to higher inflation rates. Inflation must then
be kept in
check by adjusting interest rates. National Output and Income
levels are
increasing at healthy rates suggesting employment rates are
strong. The American
people are working, making and spending money, and
nothing suggests that is
going to change any time soon. Manufacturing
production is growing at its
strongest pace since 1997, according to the
Federal Reserve's index of
industrial production. As long as the American
people continue spending money,
buying goods and services, manufacturers will
continue to produce at increasing
levels. This in turn reflects the increased
levels of Personal Consumption
Expenditures and retail sales. Despite
increases in mortgage rates, housing
starts have increased 1.3 percent to its
highest level since January 1999. The
American population having
increased incomes fosters increased spending,
domestic and abroad. This
increased level of foreign spending continues to widen
the gap in our trade
deficit. Another untapped indicator of a booming economy
may be the large
number of American military members leaving the security of
active duty for
more lucrative opportunities provided by the private sector.
Collectively
all these indicators lead us to conclude the U.S. economy will
continue to
flourish.