How Low Will The Unemployment Rate Go?

February 23rd, 2011

An issue confronting policy makers that must be confronted is just how low the unemployment rate is able to go. This paper produced by the Federal Reserve Bank of San Francisco addresses this issue directly, and has prompted a lot of comments easily identified online. Many estimates have been in the range of 5.0% to 6.0%, but this paper identifies a rate of 6.7%. The article does a good job of identifying a series of potential reasons for the higher rate, including structural unemployment (a mismatch between the skills of the workforce and the skills in demand). One factor not focused on here is that in general the unemployment increased across most sectors of the economy, seemingly discrediting the structural unemployment explanation. However, in the very competitive global economy operating today, job skills and education will be critical going forward.

The Stock Market

February 23rd, 2011

Here is an interesting column about the future of the stock market: http://www.nytimes.com/2011/02/14/opinion/14Salmon.html?ref=opinion

Uses and Misuses of Statistics

February 7th, 2011

See the following link for an interesting article about these uses and misuses of statistics. Here is the link: http://knowledge.wharton.upenn.edu/articlepdf/1928.pdf?CFID=42704357&CFTOKEN=16905352&jsessionid=a830439903a4610120f34167426bf2d190a7

Statistics and Market Research

February 7th, 2011

One excellent use of nonparametric tests is in the area of market research. It allows you to determine if there is a statistically significant relationship between the characteristics of those who complete market research surveys and their likes, dislikes, interests, related to products.

 

Related to the topic of market research, the following link through the U.S. Small Business Administration (sba.gov) presents a discussion about conducting market research. It is a good brief look at the subject, including the use of statistics in the process.

 

Here is the link: http://www.business.gov/manage/marketing/market-research/

Government Spending

January 6th, 2011

Here is an interesting column about the role of government spending in the economy by a conservative columnist in the New York Times. It makes interesting points about the criteria that should be used related to future government spending initiatives, and areas for common ground. Here is the link: http://www.nytimes.com/2011/01/04/opinion/04brooks.html?ref=opinion

Commodity Prices

December 27th, 2010

The ups and downs in commodity prices affect the cost of doing business and living, but they are just some of these costs. Others are important too, but commodity prices deserve serious attention. Their fluctuations prompt attention from politicians and pundits, but their arguments are usually more driven by politics or some other agenda. The following column does single out some conservatives whose opinions are largely uniformed, but those on the other side can demagogue too. No, what we are seeing is the increasing importance of global economic growth in the determination of commodity prices. Here is a link to a provocative column: http://www.nytimes.com/2010/12/27/opinion/27krugman.html?ref=opinion

Climate Change Paper

December 10th, 2010

Here is an interesting and easily readable paper about the science related to climate change that was produced by the Royal society in London, England.

 

The link is: http://royalsociety.org/climate-change-summary-of-science/

 


 

The Federal Reserve

December 9th, 2010

The Federal Reserve (Fed) is a terrific source of economic data, forecasts, and perspectives on current economic conditions and policy making. The Fed has both regulatory and monetary responsibilities and its reports to Congress and public statements shape policy-making efforts and expectations related to the economy. Understanding these responsibilities and the Fed’s data sources and expectations facilitates long-term planning and decision-making. The following discusses these roles, sources of information, and perspectives on the economy.

 

The seven members of the Board of Governors of the Federal Reserve System (http://www.federalreserve.gov/) are appointed by the President and approved by Congress. They are responsible for formulating policy and implementing these policies through the Federal Reserve Banks. See the following link for information related to frequently asked questions about the Board of Governors (http://www.federalreserve.gov/faqs.htm). The publication, The Federal Reserve System, Purposes & Functions (http://www.federalreserve.gov/pf/pf.htm) includes an overview, and sections on monetary policy and the economy, implementation of monetary policies (open market operations, and changing the discount rate and reserve requirements), and international perspective, and regulatory responsibilities. It also includes a section on the role of the Fed and payment systems in the United States. The website for the Board of Governors is also a very good resource for economic research and data. See this link for details: http://www.federalreserve.gov/econresdata/default.htm. Another excellent source of historical economic data and perhaps the best single site to go to in order to start a research effort is the Federal Reserve Bank of St. Louis. The link is:
http://research.stlouisfed.org/fred2/.

 

The Fed’s monetary policies capture a lot of the attention the public has on the Federal Reserve and the economy. This Board of Governors’ website includes details related to this (http://www.federalreserve.gov/monetarypolicy/default.htm), and this is a very good resource for details related to this issue. Monetary policy decisions are made by the Federal Open Market Committee (FOMC). The FOMC (http://www.federalreserve.gov/monetarypolicy/fomc.htm) includes the members of the Board of Governors and five Reserve Bank presidents. The FOMC meets eight times during the year, and will meet at other times if necessary. The main policy goals of the Fed include balance economic growth, stable prices, and full employment.

 

The Fed uses contractionary monetary policy tools at a time when the economy is in a period of very strong economic growth and inflation expectations are very high. When this occurs, the Fed will sell US Treasury bonds as they raise their target for the Federal Funds rate, increase the discount rate, and on very rare circumstances raise reserve requirements. The impact of this policy is to reduce the money supply and raise short-term interest rates. Higher interest rates will, everything else being equal, lead to decreases in household and business spending and lower the rate of growth of the economy.

 

The Fed employs expansionary monetary policy tools at a time when the economy is in a recession and inflation expectations are very low. In order to do this, the Fed buys US Treasury bonds as they lower their target for the Federal Funds rate, lower the discount rate, and on very rare circumstances lower reserve requirements. This increases the money supply and lowers short-term interest rates. At the same time long-term interest rates may or may not be impacted as these rates will be more dependent on inflation expectations and expectations related to economic conditions. Lower interest rates will, unless the economy is overcome with uncertainty, lead to increases in household and business spending and increase the rate of growth of the economy. As we have seen, during the very sever recession of 2007 to 2009, the twin problems of a serious decline in asset values combined with a financial crisis and uncertainty, make expansionary monetary policies more difficult to implement. Extraordinary efforts were necessary.

 

The Monetary Policy Report to Congress dated July 21, 2010 details the extraordinary efforts undertaken by the Fed to stabilize the economy, and this illustrates the vast array of tools at the Fed’s disposal to deal with the economy. The Fed reported the following, “To support the economic expansion, the FOMC maintained a target range for the federal funds rate of 0 to 1/4 percent throughout the first half of 2010. To complete the purchases previously announced, over the first three months of the year, the Federal Reserve also conducted large-scale purchases of agency mortgage-backed securities and agency debt in order to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets. In light of improved functioning of financial markets, the Federal Reserve closed by the end of June all of the special liquidity facilities that it had created to support markets in late 2007 and in 2008. However, in response to renewed dollar funding pressures abroad, in May the Federal Reserve reestablished swap lines with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. The Federal Reserve continued to develop its tools for draining reserves from the banking system to support the withdrawal of policy accommodation when such action becomes appropriate. The Committee is monitoring the economic outlook and financial developments, and it will employ its policy tools as necessary to promote economic recovery and price stability.” (http://www.federalreserve.gov/monetarypolicy/mpr_20100721_part1.htm).

 

Two reports produced by the Federal Reserve receive a lot of attention. The Beige Book (http://www.federalreserve.gov/fomc/beigebook/2009/default.htm) reports details related to current economic conditions in the districts of each of the twelve Fed banks. As a result it offers information that is useful for those who want to understand current economic conditions. The Monetary Policy Report to Congress (http://www.federalreserve.gov/monetarypolicy/mpr_default.htm) is an excellent resource for those interested in a current overview of the Fed’s monetary policies and economic conditions. It is also one of two resources I suggest for economic forecasts produced by the Federal Reserve System. The second is the Livingston Survey (http://www.philadelphiafed.org/research-and-data/real-time-center/livingston-survey/). This is compiled and produced by the Federal Reserve Bank of Philadelphia and is forecast reflecting the opinions of a large group of economists.

 

For example, the Monetary Policy Report to Congress dated July 21, 2010 indicated the following related to the future direction of the economy, “Looking further ahead, the central tendencies of participants’ projections for real GDP growth were 3.5 to 4.2 percent in 2011 and 3.5 to 4.5 percent in 2012. Participants generally expected a rebound in spending on housing, consumer durables, and business capital equipment as household income and balance sheets strengthen, credit becomes more widely available, and the recovery is seen by households and firms as more firmly established. Nevertheless, participants cited several factors that could restrain the pace of expansion over the next two years, including a rising household saving rate as households seek to make further progress in repairing balance sheets, persistent uncertainty on the part of households and businesses about the strength of the recovery, spillovers from fiscal strains abroad to U.S. financial markets and the U.S. economy, and continued weakness in residential construction. Moreover, despite improvements in the condition of banking institutions, strains in the commercial real estate sector were seen as posing risks to the balance sheets of such institutions for some time. Terms and standards on bank loans continued to be restrictive, and participants anticipated only a gradual loosening of credit conditions for many households and smaller firms. In the absence of further shocks, participants generally expected that real GDP growth would eventually settle down at an annual rate of 2.5 to 2.8 percent, a pace that appeared to be sustainable in view of expected long-run trends in the labor force and labor productivity.

“Participants anticipated that labor market conditions would improve slowly over the next several years. The central tendency of their projections for the average unemployment rate in the fourth quarter of 2010 was 9.2 to 9.5 percent. Consistent with their expectations of a gradual economic recovery, participants generally anticipated that the unemployment rate would decline to 7.1 to 7.5 percent by the end of 2012, remaining well above their assessments of its longer-run sustainable rate. Although a few participants were concerned about a possible decrease in the sustainable level of employment resulting from ongoing structural adjustments in product and labor markets, participants’ longer-term unemployment projections had a central tendency of 5.0 to 5.3 percent, the same as in April.”

 

The following details are reported in the December 2010 Livingston Survey (http://www.philadelphiafed.org/research-and-data/real-time-center/livingston-survey/). The participants in the survey expect very low levels of economic growth during the second half of this year, 2.3% growth, and then a 2.4% rate of growth of real GDP in 2011. The unemployment rate is expected to remain very high (9.7% in 2010 and 9.4% in 2011). This reflects the expectation by the economists that recovery in the labor market will trail the recovery of the economy from this exceptionally bad recession. The economists expect that the inflation rate and interest rates will remain relatively low throughout 2010 and 2011. These low interest rates reflect the expectation that the economy will be relatively weak and that inflation will remain in check.

The Current NABE Forecast

November 30th, 2010

The current and future strength of the national economy following the deepest recession since the Great Depression is a subject that has been publicly debated as policy makers formulate strategies to improve economic conditions, and households and businesses plan for the future. Part of this effort involves looking to experts for forecasts. The Great Recession ended during the summer of 2009, but uncertainty related to future economic growth still prevails and will prevail. Issues affecting this include the weak labor and housing market. The National Association for Business Economics (NABE) is an excellent source of economic forecasts for the U.S. economy.

 

The November 2010 NABE Outlook (see: http://www.nabe.com/) lowered its expectations for the outlook for 2011 as growth prospects have not greatly improved. This is evident in reductions in their forecasts for residential investment and worker compensation. NABE also indicated concerns about the strength of the consumer due to losses in wealth and efforts to unwind private and public debt, and reductions in stimulus. The report also forecasts continued efforts by the Federal Reserve to stimulate the economy with its very expansionary monetary policy. The forecast represents the consensus of macroeconomic forecasts that have been prepared by a panel of 51 professional forecasters.

 

Real GDP increased at the meager rate of 0.2% in 2009, and then is expected to have shown improved economic growth equal to 2.4% in 2010 and then 3.0% in 2011. This is a positive trend, but this rate of growth is not strong enough to produce substantial improvements in the labor market. The reason for this is that recoveries from severe recessions that are combined with financial crises are always very difficult. In the recent example the significant decline in housing and financial wealth combined with high levels of private debt seriously constrain consumer spending raising issues about the sustainability of business investment. The inflation rate is expected to average only 1.6% in 2010 and 1.5% in 2011. The low expected inflation rates is based on the expectation that the economy will remain weak by historical standards, and the Federal Reserve is not expected to start tightening until later this year. At the same time, a very positive indication is that the panelists are confident that the economy will avoid deflation.

 

The very weak housing market and the significant decline in wealth due to declining home values will continue to be important contributors to a relatively weak recovery in personal consumption expenditures. Improvements in business investment, especially in inventories, equipment, and software, are expected to continue to be bright spots for the economy at least through 2011. Improved stability in the credit markets and improvements in the stock market are positive indicators as well. On the other hand, significantly below trend levels of housing starts and home prices will occur in 2010 and 2011. Only 550,000 housing starts occurred in 2009 and only 600,000 are expected for 2010, and 720,000 in 2011. The majority of analysts believe the housing market has bottomed, but only a slow recovery is expected. This explains why an increase in residential investment equal to only 5.00% is expected for 2011 following a decline of 3.20% in 2010.

 

The absence of inflationary pressures allows the Federal Reserve to pursue very aggressive monetary policies, including quantitative easing (the purchases of long-term U.S. Treasuries in the bond market). The consensus of the economists who were surveyed by NABE is that the Federal Reserve will not raise the federal funds rate target this year above the current level of .13% this year, and will raise it to only the still very low rate of 0.18% by the end of 2011. The expectation is also that long-term interest rates will also remain relatively low. The yield on the 10-year Treasury note equaled 3.85% at the end of 2009, and is expected to equal 2.58% by year-end 2010 and then only 3.25% by year-end 2011, reflecting the expected very slow improvement in the economy. I have to note that the 10-year Treasury note rate was above the fiscal year-end 2010 forecast indicating that perhaps the forecast was too pessimistic. These relatively low long-term interest rates, party the result of aggressive monetary policies, will contribute to low mortgage rates.

 

The dollar will hold onto some of its recent gains in strength due to weakness in the Euro, but the long-term trends due to persistent trade deficits is for a potentially weaker dollar beyond 2011. One risk beyond these issues is related to uncertainty about whether or not China is experiencing a “bubble”, but the size of this and implications are really uncertain. The dollar strengthened when the financial markets crisis deepened during the second half of 2008. The reason is that global economic weakness and uncertainty led investors to purchase dollar denominated assets to try to hedge against risk. One Euro bought 1.58 dollars in July 2008, but bought only 1.46 dollars in 2009. Since then, improvements in the stability of the global economy led to a resumption of further slight weakness in the dollar, until the Euro crisis too hold in 2010. The economists expect one Euro to be able to buy 1.40 dollars in 2010 and 1.40 dollars in 2011. One note, another risk is related to further uncertainty related to the stability of the Euro especially due to the varying economic problems facing Portugal, Ireland, Greece, and Spain, raise issues about the stability of the exchange between the dollar and Euro. Reflecting the expectation that the economy will continue to strengthen the S&P 500 Index is expected to end 2010 at 1210, versus 1115 in 2009, and end 2011 at 1300.

 

There are other very good resources on the internet for forecasts related to the economy and specific economic indicators. Among the good resources include websites for the Congressional Budget Office (http://www.cbo.gov/), and the Federal Reserve Bank of Philadelphia’s Livingston Survey (http://www.philadelphiafed.org/research-and-data/real-time-center/livingston-survey/).

Immigration and Education

November 24th, 2010

The following reinforces the importance of education and immigrants in our economy. As you read this you will see interesting point at the end regarding half of the great college students who earned Rhodes Scholarships this year. Here is the link: http://www.nytimes.com/2010/11/24/opinion/24friedman.html?hp