Macro- Final Prep

What was the amount exported to Mexico in 2016?

"2016 exports to Mexico: $92.7B"

What % of content of US imports from Mexico is of US origin? (Kaplan)

40%

Why does macro matter to you: Job seeker?

As a job seeker, you want to understand the health of the labor market

Why does macro matter to you: Manager?

As a manager, you want to understand how the aggregate economy will impact your business

Why does macro matter to you: generally educated person?

As an educated person, you want to be able to discuss economic condi)ons

Why does macro matter to you: interviewee?

As an interviewee, you want to be able to answer ques)ons about the economy

How substantial is the skills gap disparity? (Kaplan)

BIG Nat'l Federation of Independent Business: i. 46% of small businesses indicated that they were unable to find qualified applicants to fill job openings b. CEOs report difficulty hiring i. For middle-class wage jobs 1. Nurses, construction workers, truck drivers, oilfield workers, automotive technicians, web developers, etc.

What is the most volatile spending section of US GDP?

Business spending

Are externalities good or bad?

Can be seen as positive or negative.

What is capex?

Capital expenditure, or CapEx, are funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. It is often used to undertake new projects or investments by the firm.

What are Kaplan's main concerns about globalization as it impacts the US economy?

Economies, financial markets and companies are more closely intertwined a. E.g., More than 40% of content of US imports from Mexico is of US origin i. We have integrated production chains and logistics ii. This has increased US competitiveness (increasing jobs) 2. Trade and globalization have yielded net economic benefits for U.S. economy, but they also create severe local hardships a. Need to figure out how to reap benefits of globalization while addressing disruptions that it creates i. Failure to address issues will hurt growth

Why does macro matter to you: investor?

you want to be able to iden)fy growing, profitable markets

"What are the Four Broader Secular Trends (Need Structural Reforms / Fiscal Policy) Kaplan wants us to work on?"

"A. Aging-Workforce Demographics in US and Across Major Economies B. Limits to the Sustainability of the So-Called Debt Super Cycle C. Globalization D. Technology-Enabled Disruption"

In June, FOMC raised the Fed funds rate to....

"In June, FOMC raised the Fed funds rate to range of 100 bps to 125 bps"

What is TFP and what does it include?

"Total factor production can be thought of as any of the following: a. Innovation b. New ideas c. Combination of capital + education"

What are other ways of measuring unemployment slack? (Kaplan)

"U-6 unemployment rate (unemployed + p/t for economic reasons + discouraged workers) i. Now at 8.6% 1. Pre-recession low was 8.1% 2. We're getting close to full employment b. Labor force participation rate. Now 62.8% 1. Was 66% in 2007 a. Majority of decline is due to aging population 2. Over next ten years, expect rate to be < 61%"

What's the average pace of job gains in 2017 compared to 2016 (Kaplan)?

"Update: Average job gains: 184K in 2017 vs. 187K in 2016 b. Expect job growth to slow due to less slack in market"

How do you calculate the U-6 unemployment rate?

(unemployed + p/t for economic reasons + discouraged workers)/total in the workforce

What could help/hurt GDP growth according to Kaplan?

. Changes in fiscal policy and structural reforms could provide upside b. US policy uncertainty and rhetoric regarding policies could negatively impact propensity of some groups of consumers to spend

What was the job unemployment rate and # of jobs created in June and July?

. June: +222K jobs; unemployment rate of 4.4% 11 i. Update - July: +209K jobs; unemployment rate 4.3%

How is nominal GDP calculated?

. Nominal GDP is calculated using prices at the time of sale

Why do some say China's economy is large?

. Some commenters say China's economy is larger based on purchasing power parity

What % of Texas employees work on manufactured goods exports?

1 MM, 8.2%

What was the outline of Kaplan's essay?

1. Intro (US and Texas info) 2. Discussion on energy 3. Eleventh district info including Mexico's impact on it. 4. The US (GDP growth, unemployment rates, skills gap problem, inflation) 5. Non-US (China, Brexit, Mexico) 6. Four trends where we need fiscal reform 7. Current stance of Fiscal monetary policy

What does the business cycle look like?

1. Peak - highest level of GDP before it turns down 2. Recession - widespread decline in real GDP and employment a. 11 recessions since 1948 (one every six years) SLIDE 8 3. Recovery - when economy stops contracting and starts growing again a. In recovery until we hit prior peak b. Sometimes judge recovery by output gap SLIDE 9 4. Expansion - GDP reaching higher levels than prior peak 5. Peak

What are the three types of shocks to supply?

1. Real supply shock 2. Negative shock 3. Positive shock

What is used in the factor income approach to calculate GDP?

1. When a consumer spends money, the money is received by: a. Workers i. Employee compensation equals wages plus benefits b. Landlords i. Rent c. Owners of capital i. Interest d. Businesses i. Profit 2. In other words, we can add up everything we spent for everything we received a. We do have to make some adjustments: i. Sales tax (which is spent by the consumer but not received by workers, landlords, owners of capital, or businesses). ii. Depreciation iii. Statistical discrepancy (in calculating GDP in different ways)

Name 6 of 11 signs of a healthy economy?

1.Growing GDP per capita - so that the standard of living will improve 2.Increasing produc)vity - so that we have growing GDP per capita; higher income 3.Full employment - so that everyone who wants a job has a job 4.Stable prices - so that inflaHon is not too high nor too low 5.Stable fiscal policy - so that we can conHnue to pay for gov't commitments 6.Credible monetary policy - so the financial system can adjust to deviaHons 7.Stable/fair exchange rates - that allow businesses / consumers to plan and so that trade is fair 8.Appropriate regula)on - so that we protect society without overburdening business 9.Quality (fairly priced) educa)on - to maximize the producHvity of the workforce 10.Proper incen)ves - to encourage entrepreneurs and innovaHon 11.Appropriate income inequality - to ensure incenHves while also ensuring that everyone has an equal opportunity to succeed

What is approxtimate size of GDP (2016) in trillions of dollars per OECD and Fed? (China)

11.2

What is approxtimate size of GDP (2016) in trillions of dollars per OECD and Fed? (US)

18.9

What was Mexico's GDP growth in 2017, Q1, expected for the year, and in 2016? (Kaplan)

2.7% in Q1. Expected 2% entire year compared with 2.3% in 2016

What is approxtimate size of GDP (2016) in trillions of dollars per OECD and Fed? (EU)

20.3

What is approxtimate size of GDP (2016) in trillions of dollars per OECD and Fed? (Russia)

3.1

What is approxtimate size of GDP (2016) in trillions of dollars per OECD and Fed? (Brazil)

3.4

What is approxtimate size of GDP (2016) in trillions of dollars per OECD and Fed? (Japan)

5.3

How many fortune 500 companies in Texas?

50

What is the labor force participation rate? And pre-recession? (Kaplan)

62.8% previously 66% in 2017

What percent of US GDP is consumer spending?

70%

What is the U-6 unemployment rate? And before recession? (Kaplan)

8.6%. Pre-recession low was 8.1%

Why is texas important?

8.8% of US GDP b. Largest exporting state in US c. Home to 52 Fortune 500 companies

. In the long term, real growth is a combination of two factors:

A. Growth rate of labor force b. Change in productivity

What is the reasoning Kaplan gives that GDP growth in future will decline?

Aging trend means a reduction in rate of labor force growth ii. Population growth (of working age) has outpaced labor force growth 14 1. This is b/c: a. Increasing number of people 55 - 64 b. Plateauing of rate at which women enter workforce

"With energy, we are close to a fragile equilibrium but not there yet... why?"

Almost in equilibrium because of supply/demand. Thought OPAC would reduce barrel production but no... 1. US oil production has been increasing substantially i. Fall 2016: 8.6MM barrels per day; today: 9.2 million barrels 1. Expect 9.8 million barrels per day by year end ii. Current prices > breakeven - resulting in increased rig count iii. Permian Basic currently produces 2.3MM barrels / day 2.. Question as to whether OPEC agreement will stick i. Before implementing cuts, many nations increased production 3. Record levels of excess global inventories need to be consumed. Expected decline in 2018

What is an externality?

An externality is a consequence of an economic ac)vity that impacts a third person. An externality can be posi)ve or nega)ve. The classic example of an externality is pollu)on. Government onen gets involved so that the polluter bears the cost of the externality (limiHng polluHon or fining polluters).

What are Kaplan's main concerns regarding technology disruption and its impact on the US economy?

Companies are trying to improve competitiveness by replacing workers w/ technology a. You would think that our productivity numbers would be higher... i. But many workers are ending up in low-productivity jobs 2. Many industries are facing a disruptive competitor - threatening their business model by offering lower cost and greater convenience a. Examples: i. Digital camera vs. the old film industry ii. Amazon vs. retail stores iii. Kahn Academy vs. brick-and-mortar schools iv. 3-D printing vs. traditional manufacturing v. Uber and Lyft vs. taxis b. Reduces the pricing power of companies - forcing efficiency 3. This is a separate issue from globalization a. It may help explain why prime-age participation hasn't recovered b. May explain hesitance to make capacity expansion decisions or invest in major capital projects

What are Kaplan's concerns that we need to do something about the aging-workforce?

Creates headwinds to GDP growth a. Because of less labor force participation 2. Also impacts dependency ratio 21 a. Increasing share of population is depending on working age people to pay for medical and retirement benefits 3. These trends will exacerbate issue of sustainability of US gov't fiscal obligations

Dallas Fed's expectation for price of oil.. for rest of 2017?

Dallas Fed's expectation for price of oil: $40s to low $50s for rest of 2017

Why is labor force participation rate declining? (Kaplan)

Due to aging population. Expected to dip below 61% in next 10 years

What's Kaplan's expected GDP growth for remainder of year and why?

Expect GDP for year to be slightly above 2% a. Expect strong consumer i. Consumer in good shape after nine years of deleveraging b. Improvement in nonresidential fixed investment

What's the job growth rate for the 11th district and why?

Expect job growth of 2.5% in 2017 a. Strongest rate in three years i. Improvement in energy sector ii. Growth in state's manufacturing sector iii. Continued strength in services

Has energy sector seen an increase, decrease, or constant amount of capex?

Focused on shale oil production b. Continuing to try to increase efficiencies i. Rather than large capital projects, work on extracting more from known basins

What types of jobs do CEOs report hard to hire for? (Kaplan)

For middle-class wage jobs 1. Nurses, construction workers, truck drivers, oilfield workers, automotive technicians, web developers, etc.

How do you measure GDP growth?

GDP growth = labor force growth + productivity gains

What specifically with the Mexico economy is Kaplan concerned with?

GDP growth of 2.7% in 2017 Q1 a. Expected to grow 2% for full year (vs. 2.3% in 2016) 2. Peso has been highly volatile in past 18 months 20 a. November 2016 - January 2017: declined 15% vs. dollar i. Since January: appreciated 20% 1. Higher than where it was before election b. Prior peso weakness has pushed inflation above 3% target i. Banco de Mexico has raised rates 10 times in 19 months 1. Higher rates (7%) create headwinds 3. Between 2012 - 2014, Mexico had structural reforms to boost productivity: a. Improving labor practices b. Improving fiscal policy c. Liberalizing financial, telecommunications, energy, and education sectors

What does GDP growth tell us?

GDP growth rate tells us how rapidly production is rising/falling. a. We normally measure this in real terms (absent inflation)

What is GDP?

GDP is the value of all goods and services produced within a nation, irrespective of who provided the capital (a domestic company or foreign company)

What is GNP?

GNP is the value of all goods and services produced by the labor and property supplied by a nation's citizens (regardless of where it is produced). SLIDE 1 b. GNP = GDP + Income earned by Americans abroad - income paid to foreigners in US

What % of GDP is debt? (Kaplan)

Gov't debt is 76% of GDP

What is higher GDP associated with?

Higher GDP is associated w/ positive things: longer life expectancy, clean water, better education, etc.

What are Kaplan's concerns with the debt super cycle?

Historically, US and other countries have increased debt to boost growth a. Increased debt through tax cuts and gov't spending 2. There are limits as to how much more debt can be used for this goal a. Gov't debt is 76% of GDP 22 b. Present value of future unfunded entitlements is $46T i. These obligations will work their way into budget deficits ii. Will impact future growth if we don't fix it

What risk is at stake with current Mexico relationship?

Important to job growth and competitiveness b. Mexico is important: i. The top destination for Texas exports 1. 2016 exports to Mexico: $92.7B 2. Manufactured goods exports supported ~1MM jobs in Texas in 2015 (8.2% of state's employment) ii. If this trading relationship is severely weakened: 1. US will lose competitiveness and jobs 2. Texas border cities will be hurt a. US-Mexico integration has led to job gains (particularly in service sector) that have resulted in higher wages and standard of living for Texans

How can we remedy skills gap? (Kaplan)

Improve public/private partnerships that focus on skills training b. Invest in programs that: i. Improve early-childhood literacy ii. Enhance level of educational attainment among younger population

"How has the Dallas Fed Trimmed Mean PCE inflation rate changed? (Kaplan)"

Increased from 1.7% to 1.8% during 2016 (was 1.6% in 2015) b. Hit 1.9% in January and is 1.7% in May i. Even though currently weak, I believe we'll reach 2% in medium term as slack continues to be removed from labor market 1. But, I'll be watching to make sure recent weakness is transitory

What does technology disruption potentially explain in our economy? (Kaplan)

It may help explain why prime-age participation hasn't recovered b. May explain hesitance to make capacity expansion decisions or invest in major capital projects

Why does Kaplan think the 2% inflation target hasn't been met yet?

Lately, this has been due to: i. Rising dollar ii. Weaker energy prices iii. Persistent secular forces 1. Globalization 2. Technology-enabled disruption

What is Macro?

Macroeconomics is the branch of economics that studies the behavior and performance of an economy as a whole. It focuses on the aggregate changes in the economy such as GDP, produc)vity, unemployment, and infla)on.

What is a summary of Kaplan's view on current fiscal monetary policy?

Making good progress toward dual mandate a. But, it's been slow on the inflation front 2. There is a cost to excessive accommodation (often only see in hindsight) a. Limits returns to savers b. Creates distortions and imbalances i. Investing ii. Hiring iii. Other business decisions 3. Key secular drivers (discussed earlier) will challenge growth a. As a result, neutral rate is likely much lower 24 4. My conclusion: future removals of accommodation should be done in a gradual and patient manner a. Review incoming economic info and decide i. Don't predetermine moves or be rigid b. We're at 100 bps to 125 bps i. Would like to see greater progress toward 2% inflation 1. Realize pricing power might be limited by technologyenabled disruption c. It will be appropriate to begin reducing balance sheet later this year

Who determines if there is a recession?

NBER determines recession; rule of thumb: two consecutive neg. GDP qtrs. National Bureau of economic research

What are negative shocks to supply?

Negative shocks include: a. Bad weather (particularly in an agricultural economy) b. Higher price of oil or other important input c. Productivity slump/technology slump d. Higher taxes or regulation e. Disruption of production by war, earthquake, pandemic

Are globalization and technology disruption the same?

No they are separate issues

What are some numbers on the peso's volitility? (Kaplan)

November 2016 - January 2017: declined 15% vs. dollar i. Since January: appreciated 20% 1. Higher than where it was before election b. Prior peso weakness has pushed inflation above 3% target i. Banco de Mexico has raised rates 10 times in 19 months 1. Higher rates (7%) create headwinds

What does GDP per capita tell us?

Our best indication of standard of living is GDP per capita.

What is the present value of unfunded entitlements? (Kaplan)

Present value of future unfunded entitlements is $46T i. These obligations will work their way into budget deficits ii. Will impact future growth if we don't fix it

What does real gdp growth per capita indicate?

Real GDP growth per capita is the indication of changing living standards

How is real GDP calculated?

Real GDP strips out inflation to measure the value of production (holds prices constant)

What are real supply shocks?

Real supply shocks are rapid changes in economic conditions that increase or diminish the productivity of capital and labor, which in turn influences GDP and employment a. Unexpected shocks are the most costly to deal with

What would be an added benefit of improving the skills gap? (Kaplan)

Remedying skills gap also has potential to reduce income inequality by: a. Creating broader workforce productivity gains and prosperity

Why is job growth expected to slow? (Kaplan)

Slow due to less slack in the market

What is larger, federal spending or state and local spending?

State and local

What is Texas' population change and why does it matter?

Texas continues to benefit from migration and immigration a. Texas population increased from 22.8MM (2005) to 28MM (2016)

What's the Fisher equation?

The Fisher equation: (1 + nominal rate) = (1 + real rate)(1 + inflation) a. Can also approximate: nominal rate = real rate + inflation

What's the GDP deflator?

The GDP deflator is the inflation rate used to turn nominal into real GDP

What are the two primary ways to calculate GDP?

The National Spending Approach (Y = C + I + G + NX) B. The Factor Income Approach

What is used in the national spending approach to calculate GDP?

The National Spending Approach (Y = C + I + G + NX) SLIDE 4 1. Consumer spending (private HH spending on final goods and services) a. Durable goods (last three years or longer) b. Nondurable goods c. Services i. All healthcare is included in consumer spending 2. Investment spending (aka business spending) (private spending on tools, plant, and equipment that are used to produce future output) a. Business fixed investment (aka nonresidential investment) b. Residential investment c. Change in inventories 3. Government spending a. Federal spending i. Defense spending ii. Nondefense spending b. State and local spending 4. Net exports a. Exports minus imports

What is the effective federal funds rate?

The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution overnight. The federal funds rate is generally only applicable to the most creditworthy institutions when they borrow and lend overnight funds to each other.

What is the 11th district

This is texas, northern Louisiana and southern New Mexico

According to Kaplan how did GDP grow in Q1?

US GDP grew at 1.4% in Q1 (update: Q1 revised down to 1.2%; Q2 2.6%) 9 a. Weak growth in consumer spending 10 b. Significant inventory deceleration

What is at stake if Mexico trading relationship changes according to Kaplan?

US will lose competitiveness and jobs 2. Texas border cities will be hurt a. US-Mexico integration has led to job gains (particularly in service sector) that have resulted in higher wages and standard of living for Texans

What are the non-US factors Kaplan wants to focus on?

We monitor economic developments outside US that might impact us a. UK's Brexit i. Should be manageable ii. But, watch developments that could create risk of contagion among other European countries b. Emerging-market countries - particularly China 16 i. We have to get used to slower Chinese growth 1. High degree of overcapacity (particularly SOE) 2. High and growing levels of debt 17 - 18 3. Transitioning from manufacturing / export driven to consumer spending / services ii. China is managing capital outflows and currency volatility 19 1. Saw in 2016 Q1 that this can cause market volatility a. Effectively tightens global financial conditions ALSO Mexico is a big factor

What does Kaplan think about our future?

We will have weaker GDP growth in future unless we do something

What contributed to lower than expected GDP growth according to Kaplan?

Weak growth in consumer spending and Significant inventory deceleration

What happens when we can't find people to work jobs because of skill gap? (Kaplan)

When these jobs go unfilled: a. US businesses expand more slowly b. Nation's growth is impeded

What happened to inflation March-May (Kaplan)

YOY headline and core inflation fell in March, April and May a. I believe this is transitory, but I will be open-minded

What is a shock to the economy?

a shock is an unexpected / unpredictable event that impacts the economy.

How do you calculate real gdp growth per capita?

a. = [ (1 + real GDP growth) / (1 + % change in population) ] - 1 b. Can also approximate: Real GDP growth - % change in population

Rank participation rate for these groups: College graduates, attended some college, high school diploma, less than high school diploma, all adults?

a. College graduates: 88% participation rate b. Attended some college: 81% participation rate c. High school diploma: 76% participation rate d. Less than high school diploma: 66% participation rate

What does the Dallas fed perspective add that is unique?

a. Energy b. Trade and immigration c. Regional, national and global economies

Between 2012 - 2014, Mexico had structural reforms to boost productivity. What were these three things?

a. Improving labor practices b. Improving fiscal policy c. Liberalizing financial, telecommunications, energy, and education sectors

What goes into changing productivity?

i. Capital ii. Education (quality of workers) iii. Total factor production (TFP)