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.