The U.S. Bureau of Economic Analysis (BEA) has issued the following news release today:
Real gross domestic product — the value of the production of goods and services in the United States, adjusted for price changes — increased at an annual rate of 2.2 percent in the fourth quarter of 2014, according to the “second” estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 5.0 percent. See figure below.
Read the release here.
Paul Hannon of the WSJ reports here that the threat of deflation has increased across Europe. Indeed, consumer prices in the 23-member EU fell at the fastest pace since 1997. Eurostat on Tuesday reported that consumer prices in the EU fell 0.5 percent in January from a year earlier. See the chart below.
Economists and central bankers worry that if households and businesses become accustomed to falling prices, they will cut back on spending, which would lead to a decrease in GDP and employment. Discuss the logic behind this worry.
Christian Berthelsen is a commodities reporter for the WSJ. Today’s report is on cotton; read it here. Cotton prices have gained 13 percent since hitting a 5½-year low in late January. The price rise was because of increased overseas sales of U.S. cotton. However, the market appears to be changing once again.
Two recent events are most dominant. First, on Friday, government data showed a large number of orders for U.S. cotton were canceled. Second, on Thursday, federal forecasters said growers would likely plant more acres with cotton this spring than previously projected.
1) Sketch a supply and demand diagram for the cotton market.
2) Discuss the impact that “a large number canceled orders” has on the market for cotton. Discuss which curve moves, where it moves, and why it moves.
3) Discuss the impact of growers planting “more acres with cotton this spring than previously projected” has on the market for cotton. Discuss which curve moves, where it moves, and why it moves.
4) Given the combined effects, discuss how you expect cotton prices to change.
The figure below shows the monthly year-on-year change in the number of nonfarm employees in the U.S. (blue line), Massachusetts (purple line) and the Boston metro area (green line) between January 2000 and January 2015.
Massachusetts and the Boston Metro area has experienced monthly increases in this employment measure since April 2010 and the U.S. has experienced a monthly increase in this employment measure since August 2010.
The most recent data reveal that year-on-year employment growth continues in the Boston metro area (2.3 percent, December 2014), Massachusetts (1.8 percent, December 2014) and the U.S. (2.3 percent, January 2015).
As of December 2014, the number of nonfarm employees in the Boston metro area is 43,800 greater than the peek level observed prior to the great recession in November 2000.
Greg Ip has a very interesting article in the WSJ today titled: Economy’s Supply Side Sputters. Read it here.
Ip writes that as the demand side of the economy shows signs of strength, but the supply side of the economy shows signs of weakness.
The two most important indicators for Ip are: the labor force and productivity. The relevant data are reported in the figure below.
The labor force participation rate is the share of the population that is either working or looking for work. This ratio has fallen from 66 percent to 62.9 percent. Many first thought the collapse was because of the Great Recession. It turns out, according to a Congressional Budget Office (CBO) report, that only 0.5 of a percentage point can be explained by people who want a job but are not part of the labor force. More than half the drop has to do with changes in demographics—the baby boomers are retiring.
The point Ip makes is that a stronger economy will pull some back into the labor force, but any increase in entrants will be overwhelmed by retirements. Indeed, the CBO forecasts that the labor force participation rate will fall to 62 percent by 2019. This point is troubling because long-run economic growth requires this ratio to increase, not to decrease.
Productivity is defined as how much workers produce per hour. And over time, what workers earn, adjusted for inflation, should track productivity. Here is the problem. Productivity has risen only 1.3 percent since the end of the last expansion. This is the weakest rate since the 1970s. Worse, productivity did not increase at all in 2014! Ip writes: “productivity is notoriously hard to predict, a big rebound looks unlikely.”
Both trends signal trouble for the long-term growth prospects for the US economy.
List current public policies that 1) boost the supply of workers and 2) contract the supply of workers.
Boston metro area’s Case-Shiller housing price index (HPI) from January 1987 to November 2014 is shown in the figure below.
Boston’s pre-recession housing market peak was November 2005. Similar to the rest of the U.S., Boston’s housing market declined after 2005 and it has subsequently recovered.
If the Boston housing market is split into thirds, the pattern observed is similar to that of other U.S. housing markets: relative to the high and middle tiers, the low tier experienced the greatest decline after the housing bust and is now experiencing the strongest growth rate.
The top third of Boston’s housing market—the high tier segment—reached a maximum index value of 167 in September 2005. The high tier declined 18 percent to reach its lowest HPI value of 145 in May 2009. As of November 2014, this segment of Boston’s housing market has increased 18 percent from its 2009 low.
The middle third of Boston’s housing market—the middle tier segment—reached a maximum index value of 186 in December 2005. The middle tier declined 20 percent to reach its lowest HPI value of 149 in March 2009. As of November 2014, this segment of Boston’s housing market has increased 17 percent from its 2009 low.
The bottom third of Boston’s housing market—the low tier segment—reached a maximum index value of 219 in January 2006. The low tier declined 30 percent to reach its lowest HPI value of 154 in April 2009. As of November 2014, this segment of the Boston’s housing market has increased 29 percent from its 2009 low.
The National Association of Realtors released a report Wednesday showing the median sales price of a used home has increased 6 percent from a year earlier to $208,700. See a related WSJ report here.
Of 175 major US metro areas, 86 percent observed an increase in the median sales price. So, why are prices rising in most locals?
The supply of homes for sale in the fourth quarter amounted to 4.9 months—that is how long it would typically take to clear the existing inventory at the current sales price. However, realtors suggest that a healthy market has six to seven months supply. So, the current market is considered tight.
Demand on the other hand had been accelerating because of low interest rates, an improving labor market and a strengthening US economy.
As the demand for used homes increases faster than the supply of used homes, the price of the average used home increases. And that is what the US has been experiencing lately.
On the other hand, 14 percent of major metro areas did experience a median price decline from a year earlier. Among those areas are Hartford, CT.; Reading, PA.; and Appleton, WI.
As the median sales price of a used home increases, how might this impact the future supply of used homes?
Once again, Greece is moving closer to the brink of default and an exit from the euro. Greece’s finance minister Yanis Varoufakis has rejected the 30 percent austerity measures required by an agreement signed five years ago as a condition for international aid. Meanwhile, Germany is showing no willingness to renegotiate the terms of the deal. What happens next is an open question.
Below is a 60 Minutes clip from 2012 that succinctly presents the relevant issues.
The Bureau of Labor Statistics (BLS) released its January 2015 jobs report. Read the BLS report here.
The U.S. added 257,000 jobs in January 2014, compared with an average monthly gain of 336,000 over the prior 12 months. See two related figures from the WSJ below.
The unemployment rate increased in January to 5.7 percent.
Once again, the labor force participation rate in January increased slightly to 62.9 percent and the employment-population ratio was little changed at 59.3 percent.
Here are other highlights from the January report:
The number of long-term unemployed (those jobless for 27 weeks or more) was unchanged at 2.8 million persons. The number of long-term unemployed has decreased by 828,000 over the last 12 months. They account for 31.5 percent of the unemployed.
Individuals working part time because their hours had been cut back or because they were unable to find a full-time job, at 6.8 million persons, was little changed in January.
The number of discouraged workers in January 2014 was 682,000 persons, which was down 155,000 from a year earlier. Discouraged workers are persons not currently looking for work because they believe no jobs are available for them.
China cut its required reserve ratio to 19.5 percent (from 20 percent) on Wednesday. Unlike in the U.S., the required reserve ratio is one of China’s main monetary policy tools. See the figure below. Read more here.
The major reason for the cut is that economic growth in China has slowed to 7.4 percent year, which is the lowest level in 25 years. This monetary policy stimulus has freed up more than $100 billion for banks to lend. Of course, if banks decide not to lend the additional funds, there will be a diminution in the potency of the monetary stimulus.
Discuss how a decrease in the required reserve ratio could lead to an increase in economic growth in China.
Allison Schrager has a nice article in Bloomberg Businessweek on labor market fluidity (more commonly known as churn). Click here to read it.
Schrager reports on University of Chicago economist Steven Davis and University of Maryland economist John Haltiwanger’s newly published paper on labor market churn or what they have labeled job fluidity.
Davis and Haltiwanger calculate job fluidity by adding up the number of new hires, layoffs, and people who voluntarily quit their jobs before comparing that number with the total workforce. By this measure, job fluidity had dropped 18 percent from 2007 to 2010 (a period that loosely covers the great recession)–see the figure below.
Greater fluidity is commonly thought to be a sign of a healthy economy because individuals are willingly seeking better opportunities to improve their labor market skills. The good news is that fluidity has begun to increase once again, although it is well off the high observed prior to the great recession.
It turns out that some of the diminution of fluidity is structural. The workforce is aging and is less mobile. Indeed, the median age of a U.S. worker has risen and the average age of a U.S. company is higher, according to the article. Both are correlated with lower fluidity.
1) Discuss what economists mean by the phase “labor market churn.”
2) Discuss how job fluidity has changed since the end of the great recession. Why?