fed challenge meeting october 8
TRANSCRIPT
FED CHALLENGE MEETING
OCTOBER 8, 2012
WEEK 3Review of Leading Economic Indicators
LEADING ECONOMIC INDICATORS
Gross Domestic Product (GDP)* Consumption
(Fixed) Investment Change in Inventories*
Government Consumption Net Exports
Price Deflators of GDP Personal Savings Rate
Car Sales National Association of Purchasing Managers
Employment - Payroll Jobs* Unemployment Rate
Average Hourly Earnings* Real Earnings
Initial Jobless Claims Employment Cost Index (ECI)
Producer Price Index (PPI)* Retail Sales
Industrial Production Capacity Utilization
Housing Starts (/Building Permits) Consumer Price Index (CPI)*
(Business) Productivity and Costs Durable Goods Orders
Business Inventories (and Sales) Wholesale Trade Sales
Personal Income and Consumption Expenditures
Index of Leading Economic Indicators*
Philadelphia Fed Survey New Home Sales
Existing Home Sales Housing Completions
Construction Spending Factory Orders (and Manufacturing Inventories)
International Trade (Exports, Imports, Trade Balance)
Import/Export Price Indexes Current Account
Consumer Confidence Consumer Credit
Beige Book Report Monetary Aggregates
*Discussed in this Presentation
GROSS DOMESTIC PRODUCT (“GDP”) –
MOST IMPORTANT ECONOMIC INDICATOR
Measure of overall income and production
GDP – Market Value (“MV”) of current, final, domestic production for a given time interval
Prepared Quarterly by the Bureau of Economic Analysis (“BEA”)
Volatility = Moderate
Compiled from sources such as:• (i) tax returns;
• (ii) labor and price data; and
• (iii) Census Bureau information.
GROSS DOMESTIC PRODUCT BREAKDOWN
Gross Domestic Product
Gross – Total amount of output, regardless of existing stock of past
outputs
Domestic –Production within national borders,
regardless of foreign ownership with country or domestic ownership
of foreign capital
Value – Amount of money actually paid by
transactions.
Current – Production measured during a set
period of time
Final – Sales of good in intermediate stages
are disregarded. (avoids double
counting)
CAUTIONS OF INTERPRETATION
Not designed to measure economic welfare Some measures of economic welfare not included.
Definitions should be examined closely Appropriate application of definitions.
Real vs. Nominal GDP Price data needs to be dependable
Data comes to BEA from other agencies Some data may be inaccurate / not well-suited for NIPA
METHODS OF MEASURING GDP
Two ways of measuring GDP:
Income Approach
Expenditures Approach
Theoretically equal because every
financial transaction entails expenditure for the
buyer and revenue for the seller.
INCOME APPROACH
Compensation of Employees
Profits
Other forms of Income
Non-Income Items
GDP
Wages / salary / fringe benefits /
payments to Social Security /
unemployment insurance taxes
Corporate tax returns
Non-incorporated businesses /
Rental income / Royalties /
Interest Income
Indirect taxes /
State and Local taxes
EXPENDITURES APPROACH
LIKELY IMPACT ON FINANCIAL MARKETS
Example – Unexpectedly high Quarterly Growth
Interest Rates:
Stock Prices: Ambiguous. E(growth) = increase ∏
E(inflation) = increase I
Exchange Rates: Appreciation of exchange rate
Bond Prices Drop
Interest Rates and
Yields Rise
Inflation –
Fed may
raise Fed
Funds Rate
US HISTORY AND GDP
Traditionally, average growth rate ∈ ( 2.5% , 3% )
Economic growth above this „natural‟ rate cannot be
sustained for too long
Fed Reserve would increase Fed Funds Rate
→ (tight monetary policy)
During Recession Fed decreases Fed Funds Rate
→ (expansionary monetary policy)
CHANGE IN INVENTORIES (“∆ INVENTORY”)
Smallest component of GDP, usually < 1% *Much more important than weight in GDP
Signals changes in Aggregate Demand – future
economic activity
∆Inventory = ∆stock of unsold goods
Published on a quarterly basis
Volatility = high
LIKELY IMPACT ON FINANCIAL MARKETS
Interest Rates : Indicates expectations for inflation
Stock Prices : Ambiguous as shown below
Exchange Rates: No strong effect.
Inventory
Interest Rates
Bullish effect on Stock Price
Interest Rates
Expectations for Recession
Corporate Profits
EMPLOYMENT – PAYROLL JOBS
Most significant monthly economic indicator reported
Provides a signal early each month about the employment conditions in the previous month
Moderately Volatile
Referred to as “the king of kings,” provides for:
(i) Employment;
(ii) Average Workweek;
(iii) Hourly earnings; and
(iv) The unemployment Rate
LIKELY IMPACT ON FINANCIAL MARKETS
Interest Rates: