W+M Lesson 1 and 2

Housing Starts

-A monthly report issued by US CEnsus Bureau jointly with the US Department of Housing and Urban Development -The data in the monthly report comes from surveys of homebuilders nationwide providing 3 statistics: housing starts, building permits and housing completions. -Defined as beginning the foundation of the home itself. -Releases on or around the 17th of each month at about 8:30am EST. -Covers info about previous month. -Leading indicator -Strengths: ---Very forward looking, especially for building permits, and it's a good gauge for the future real estate supple levels. ---Can be used to identify business cycle pivot points. ---Covers approximately 95% of all residential construction in the US. -Weaknesses: ---No differentiation between size and quantity of homes being initiated. ---Only focuses on one area of the economy.

Weaknesses of Consumer Confidence Index:

-A subjective survey that only reaches a small sample. -Survey results may often contradict other indicators.

How is the Consumer Confidence Index found?

-A survey is taken of 5000 households on a monthly bases -consumer opinion is gauged and turned into a number that represents: ---opinion about Current Condition (40%) ---Predictions about future conditions (60%) -The CCI was set at 100 in 1985 and is adjusted monthly. -The all time high of the index was 144.7 in 2000. -The record low occurred in 2009 when it hit 25.3.

Consumer Confidence Index

-A survey that measures the degree of consumer optimism or pessimism toward the current economic condition. -Released monthly by the Conference Board, a non-profit business group respected by the Federal Reserve and investors.

Jobless Claims Report

-A weekly release by the US Dept. of Labor that shows the number of first-time filings for state jobless claims nationwide. -The data is adjusted seasonally, as certain times of the year are known for above-average hiring for temporary work. -Examples are holidays and months of harvest. -The jobless claims benchmark for real job growth or job loss in the economy is 300,000 or more.

What is Producer Price Index?

-A weighted index of prices measured at the wholesale or producer level. -PPIs measure price changes from the perspective of the seller. -The PPI looks at three areas of production: industry-based. commodity-based, and stage-of-processing-based companies.

Existing Home Sales

-An economic indicator for the number and prices of existing single-family homes, condos and co-op sales over a one-month period. -The home sales report is published monthly by the US National Association of Realtors. -Tends to react after change in mortgage rates. -Doesn't reflect the sale of new homes. -Considered leading indicator b/c higher levels are typically reached when the economy is coming out of a recession. Strengths: ---Large Sample size ---Leading indicator and predictor of future consumer purchases. ---Shows level of demand within housing market. Weaknesses: ---Subject to large bouts of seasonality ---No detailed info on types of homes.

Industrial Production

-An important tool for forecasting future GDP and economic performance. It is, however, declining in importance as the years pass due to a shift to a more services-oriented economy. -Industrial production figures are also used by banks to measure inflation. -The industrial production figures are considered coincident indicators, meaning that changes in the levels of these indicators, usually reflect similar changes in overall economic activity. -The FEderal Reserve watches this figure closely because it understand that inflation shows itself at the industrial level when supplies of basic materials get tight.

Retial Sales Reports

-Considered a vital pre-nflationary indicator. Because of thius, wall street interests are heavily pressnt in this market report. The COnference Review Board relies on this report and uses it to track data for the Federal Reserve Board's directors. -The release contains two components: a total sales figure (and related % change from the previous month), and one "ex-autos" figure, due to the seasonality of the enormous car sales. This Method exists in order to prevent disproportional figures.

Money Supply

-Defined as the entire quantity if bills, coins, loans, credit, and other liquid investments in a country's economy. -Money is divided into multiple categories (m0, M1, M2) depending on the type and size of the account in which the instrument is kept. -Money supply is important in evaluating the impact that policies will have on interest rates and economic growth.

What are the three separate headline figures for the Consumer Confidence Index?

-Index of consumer sentiment -Current Economic Conditions -Index of consumer expectations

Why should we not worry about deflation?

-It is easy to fight by increasing the money supply. -easier to fight than inflation. -You can still increase the money supply by buying assets, even if interest rates are very low.

How does the Consumer Confidence Index affect the US economy?

-It is watched by stock market analysts and investors to get an idea of whether consumer spending will continue to drive the economy. -Stock market analysts and investors predict the consumers willingness to make major purchases. -If the report is strong, it can make investors more willing to purchase stocks. -It helps predict the Gross Domestic Product since 2/3 of the GDP is based on consumer spending. -Instructs companies on future consumer demand, allowing them to make better business decisions.

What are the consequences of the Fed's main tool?

-Lower interest rates/ more money leads to more spending and investment. -Higher interest rates/less money leads to less spending and investment.

Details about the Beige Book:

-Made public in 1983 -rather than being filled with raw data, the Beige Book takes a more conversational approach. -The book has 13 sections total; 12 geographic regional reports (the only report by geographic region); from each of the member Fed district banks, preceded by one national summary drawn fro the individual reports that follow it. -It provides an original point of view about economic activity and is a marked departure from the dry data releases of the other indicators. -Published 8 times each year. -Contains reports from bank and branch directors and interviews with key contacts such as economists, market experts, and other important sources. -Classifies information by branch and economic sector. -Is available to the public two weeks before every FOMC (federal open market committee) meeting.

Money Supply Info:

-Money Supply is the quantity of money circulating in the economy. -The behavior of banks can influence the quantity of demand deposits in the economy and therefore, the money supply. -Fractional Reserve Banking System: The practice of holding a fraction of money deposited as reserves and lending out the rest (the reserve is usually set at around 10%.) -The supply of money in the economy is affected by the amount of deposits that are kept in the bank as reserves and the amount that is lent out. Loans become and asset to the bank. -Different ways of measuring the money stock in the economy are M0, M1, and M2.

What does the Jobless Claims Report mean for investors?

-New jobless claims for the week reflect an up-to-the-minute account of who is leaving work unexpectedly, reflecting the run rate of the economy's health with little lag time. -Report gets a lot of press due to its simplicity and the theory that the healthier the job market, the healthier the economy: more people working means more Disposable Income which leads to higher personal consumption and gross domestic product (GDP).

Strengths of Consumer Confidence Index:

-One of few indicators that reaches out to average households. -Has historically been an accurate indicator of consumer spending.

What are the 3 tools the Fed has for Monetary Control?

-Open-market operations (buying and selling bonds) -Changing the reserve requirement (increasing or decreasing %) -Changing the discount rate (The interest rate the Fed charges other banks for short-term loans.)

How is the Fed run?

-Run by its Board of Governors: ---Seven members appointed by the President of the United States. ---Each member of the board of governors serves a full term of 14 years. ---The chairman of the board is the most important position: presiding, directing, and testifying about the Fed policy. He/she is appointed by the President. -Federal Reserve System is made up of the Federal reserve Board in Washington, DC and twelve regional Federal Reserve Banks. -Monetary policy is made by the Federal Open-Market Committee (FOMC).

What are the two problems the Fed must tackle to control the money supply?

-The Fed does not control the amount of money that households choose to hold as deposits in banks. -The Fed does not control the amount of money that bankers choose to lend.

What is the Federal Reserve System?

-The central bank of the US -A central bank is the government agency that oversees the banking system and is responsible for the amount of money and credit in the economy. -Privately owned institution, created in 1913 by Woodrow WIlson and Congress to ensure health of the nation's banking system.

What are the 3 objectives of the Fed?

-To keep stable prices -To maximize employment -To moderate long-term interest rates.

What are the 3 primary functions of the Fed?

-To regulate the private banking industry to make sure banks follow federal laws intended to promote safe ad sound banking practices. -Act as a banker's bank, making loans to other banks and as a lender of last resort. -Control of the supply of money, i.e. Monetary Policy.

What are the three types of Market Control?

-monopolies -oligopolies -Perfect competition

The CCI survey is comprised of _____ questions that have not changed since _____. What are these questions?

5; 1967 -Do you think business conditions are currently good, bad, or normal? -Are jobs today plentiful, or hard to get? -Do you think business conditions will be good, bad, or normal in the next six months? -Do you think jobs will be plentiful, not so plentiful, or hard to get in the next six months? -Do you think your income will increase, decrease, or stay the same?

M2

A broader measure of money supply: -M1 + -Savings Deposits + -Small time deposits + -Money Market Mutual Funds + -and other minor categories.

Lagging Indicator

A measurable economic factor that changes AFTER the economy has already begun to follow a particular pattern or trend.

Leading Indicator

A measurable economic factor that changes BEFORE the economy starts to follow a particular pattern or trend.

What is Consumer Price Index?

A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is sometimes referred to as "headline inflation." CPI is one of the most frequently used statistics for identifying period of inflation or deflation.

What economic indicator gives the most insight into future Fed rate moves?

CPI (Consumer Price Index)

How does the Fed generate their own money?

Collect income from sources such as: -Interest on loans to depository institutions. -Income from foreign currency held. -Services provided to banks. -Interest earned on government securities acquired. -Any excess income is funneled back to the US treasury.

Monopoly

Complete control over an industry.

Reserves

Deposits into a bank are recorded as both assets and liabilities, and deposits tat have been received but not lent out are reserves.

What is Economics?

Economics can be defined as the social science governed by the idea of production, distribution, and consumption of goods and services. Economics is based on the idea that one can't provide for oneself everything he desires or wants. The study of economics relies on the principle that humans aim to fulfill their self interests af that humans are rational about fulfilling their desires and needs.

What is the elasticity equation?

Elasticity = (% change in quantity/% change in price)

How does the Fed control Inflation?

Fed can only change rate of inflation. To reduce high inflation, the Fed decreases both spending and the money supply.

About the FOMC:

Federal Open-Market Committee -Must meet at least 4 times a year. -Before each meeting each member of the FOMC receives the Beige, Green, and Blue books. -Has many economic variables, including: ---CPI ---Inflation ---Money Supply ---Unemployment rate ---Net worth of household and non-profit organizations

The _____ _____ has the greatest control over the money supply.

Federal Reserve

How is the GDP calculated?

GDP = C +G + I + NX -C is equal to all the consumer spending and private consumption. -G is equal to the sum of government spending. -I is the total of all the business's spending on capital. -NX is the total net exports: Net Exports=Total Exports-Total Imports

What is GDP?

Gross Domestic Product -The monetary value of all the completed goods and provided services inside the United States of AMerica. -GDP is used as an indicator for the economic health of a country as well as to determine a country's standard of living. -The general consensus is that GDP should be between 2.5%-3.5% for the best overall benefit of the economy. -GDP measures the following: ---Personal Consumption ---Government Purchases ---Private inventories ---Paid-in Construction Costs ---Foreign Trade Balance

Which market usually shows the first sign of stalling after a rate hike by the Fed?

Housing Starts (Make sure of this!!!)

Demand

How much the consumer wants the product or service.

Supply

How much the market can offer to the consumer.

T-Account

Illustrates the financial position of a bank that accepts deposits, keeps a portion as reserves and lends out the rest.

Producers in a perfectly competitive market are subject to the prices determined by the market and do not have any _____.

Leverage

Microeconomics

Looks into similar issues that Macroeconomics does, but on the level of individual people and firms within the economy.

Elasticity

Measures the degree in which consumers or producers change their demand or amount in correlation with the price of the product. It is used to assess the change in consumer demand as a result of the change in a good's price.

The _____ demand, the _____ the price. Most often when there is a _____ demand, there is _____ supply and vice versa.

More; higher; high; less.

What has been the Fed's strategy?

Opportunistic Deflation: The Fed tries to lower inflation if the economy is strong and the opportunity presents itself but don't raise interest rates if the real economy is weak.

What group of people have the greatest problem during periods of high inflation that lasts several years?

People who are retired (make sure!!!)

What is an example of opportunity cost?

Say you go to college and throughout your lifetime you earn $2 million. By going straight to work and bypassing college, you only earn $1 million throughout your lifetime. In this case, your opportunity cost is $1 million.

Retail Sales Reports Strengths and Weaknesses:

Strengths: ---Extremely timely, released only two weeks after the months it covers. ---Gets a lot of press and it relates closely to the average customer. ---Info is very detailed allowing the customers to download a full breakdown of component sectors and a historical spreadsheet to examine trends. ---Data is adjusted seasonally, monthly and for holiday differences month to month. Weaknesses: ---Revisions to the report can be very large and the sample size can be relatively small compared to the number of retailers. ---Data can be volatile making trend spotting difficult. ---Indicators are based on dollars spent and does NOT account for inflation making it difficult to make decisions based on the raw data.

Where does the Fed get the money to buy bonds

The Fed creates its own money.

What is the Fed's main tool?

The Federal funds rate, which is an interbank overnight interest rate. The Fed controls it using Open-Market operations. Also, if the FOMC wants a higher federal funds rate, they will sell securities. Likewise, if the FOMC wants a lower federal funds rate, they will buy securities.

Opportunity Cost

The cost of an alternative that must be forgone in order to pursue a certain action. These are the opportunities you could've received by taking an alternative action.

Volatility

The degree of variation of a trading price series over time as measured by the standard deviation of returns. (do more research!!!)

M1

The most familiar form of money supply includes: -M0 -Check deposits -travelers checks

M0

The most liquid form of money supply includes: -coins -currency

Open-Market Operations

The primary way in which the Fed changes the money supply is done through the purchase and sale of US government bonds. -To increase the money supply, the Fed buys gov't bonds from public. -To decrease the money supply, the Fed sells gov't bonds to the public.

How does the retail sales report influence the economy?

The release of the Retail Sales report may cause above-average volatility in the stock market. Due ti its nature of predicting inflationary pressure, it may cause investors to reconsider Federal rate cts. If a shark rise in sales occurs in the middle of the business cycle, this may result in a short-term hike in interest rate by the Fed in an effort to ward off possible inflation. Investors would then sell bonds and cause bond rates to increase.

What is scarcity and provide an example.

The tension between our limited resources and out unlimited wants and needs. Example: A scare things would be land (limited land in the world) but food and clothing wouldn't be scarce. These things are basically unlimited.

Macroeconomics

The total output of a nation and the way the nation allocates its limited resources of land, labor, and capital in an attempt to maximize production levels and promote trade and growth for future generations.

Why are people afraid of deflation?

There were two experiences with deflation in the US: 1873-1895 and 1929-1933. Both resulted from a lack of monetary policy. Deflation was not feared in 1873-1895, but caused great damage during 1929-1933. -Deflation is though to depress demand by creating anticipations of further price decreases. Unexpected deflation might hurt debtors (individuals or businesses that owe money) by increasing the real value of their debt.

The supply relationship is a factor of _____.

Time

Deflation

Two types: Asset price deflation: A fall in asset prices (real estate, investments.) General price level deflation: A fall in the general price level, not deflation in a few prices.

The opportunity cost of an individual's decision is determined by: (Think Wintr!!)

Wants, Income, Needs, Time, Resources. *Opportunity cost is different for each individual and nation.

Equilibrium

When supply and demand are equal, the economy is this.

Elastic; some examples?

When the value of elasticity is greater than one, it suggests that demand from the product is significantly affected by the price. Examples: fancy cars, jewelry, iPhone, any product or service that is unnecessary.

Inelastic; some examples?

When the value of elasticity is less than one, it suggests that demand for the product is hardly affected by the price. Examples: toothpaste, basic clothing, soap, any necessity item.

Perfect Competition

When there are many companies in an industry with a lot of competition.

Oligopoly

When there are only a few companies that make up an industry.

The Law of Demand essentially states that the _____ the price of a good, the _____ people will demand that object.

higher; less. If the price of the object continues to go up, people will eventually avoid buying that object because the money they spend on that object will prevent them from buying something else they want.

The Law of Supply essentially says that when price _____, the amount of goods supplied also _____.

increases; increases. This is because selling more stuff at higher prices increases revenue, which can be used to create more of a product that is in high demand.