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Research paper example essay prompt: Us Economy Expansion - 1599 words
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US Economy Expansion 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 Per ...
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