Notes 2 Flashcards
Unit labor cost
w x l
Y
Compensation =
labor cost per output + output per hour
3.7 = 1.5% + 2.2%
Productivity in Quarter 2
Productivity rose 2.2%
as output growth - 2.4%
exceeded hours worked growth - 0.2%
It is becoming __________ to get additional output from current workers
more difficult
With aggregate demand still rising, firms will have to ___________ hiring in 2012
increase
Hourly compensation
Real Hourly compensation
Hourly compensation - rose 3.7%
real hourly compensation - rose 1.7%
*inflation 2.0%
Growth in ______________ remain weak, giving firms incentive to hire
unit labor costs
Labor?
Labor is relatively inexpensive, leading to higher profits
Since labor is relatively inexpensive
Allows for additional capital for expansion plans to offset tighter credit conditions
wages =
wages = Lcost/unit + output per hour
2nd quarter 2012 wages
2.17% = 0.93% + 1.24%
Increase productivity —–>
increase profits
Price rising ——–> increase profits
Unit labor cost ——->
measure of inflation (roughly)
Single family housing starts =
535,000
5.5% m/m
29% y/y
Single family permits =
512,000
0.2% m/m
25% y/y
Upward momentum is building for ______________
residential construction
Residential construction should add _______________
0.33% to 2012 GDP growth
Residential Construction Factors:
Large inventory of foreclosed homes
homebuilders are more confident home sales on an upward trajectory
low level “dearth”, new home inventory
rising jobs, income, and confidence
Proxy for new housing demand
“measure”
Growth in construction < Growth in households
S (savings) =
= Sprivate + Spublic
= Y (output) - C (consumers) - G (government)
= Investment
Value of total savings must equal ___________________
value of total investment
In U.S., we have an extremely ______ savings rate
low
Slonable funds
Households willingness to save
Government surplus
Dlonable funds
Profitable investment opportunities
∆technology => increase profitability => increase demand for lonable funds => increase LF exchanged and rate=> increase capital stock
Where does purchasing managers index want to be?
over 50
Purchasing Managers Index
Measures nationwide goods producing business activity
Survey of Business Activity asks:
- increase
- decrease
- or no change in inventories
Diffusion Index
% reporting increasing + 1/2% reporting no change
> 50 expansion
< 50 contraction
Current PMI (purchasing managers index)
51.5
What is the current PMI signaling?
Manufacturing is weak but seems to be stabilizing
Manufacturing is weak but stabilizing:
uncertain fiscal policy and global economic growth will weigh on manufacturers
weak foreign demand
New orders are expanding (52.3) => leading indicator
Inventories are rising slightly (50.5)
Production was slightly contracting (49.5)
employment was up (54.7)
prices paid were up (58.0)
New orders are expanding
52.3 - leading indicator
Inventories are rising slightly
50.5
Production was slightly contracting
49.5
Employment was up
54.7
Prices paid were up
58.0
Leading indicators: Two “gaps” are proxies of future production
- New orders - Inventories = 1.8 (good omen for future production)
- Production - New Orders = -2.8 (foreshadows stronger output)
Business have strongly balance sheets and high profits
Record high “quick ratio” = liquid assets (mostly cash) relative to short term liabilities
Say’s law:
supply creates its own demand
Keynes on why GDP fluctuate in short run
aggregate expenditures (demand) determine supply
Budget constraint: Income + ∆debt =
taxes + interest debt + consumption + savings
future income =
∆debt
20 year average monthly change =
in credit
$6.7 billion
August monthly change =
in credit
$18 billion
20 year average Y-O-Y growth rate =
in credit
7.7%
August Y-O-Y growth rate =
in credit
5.5%
Surging credit due to:
rising non-revolving credit (financing for big ticket items)
rising auto loan and government backed student loans
increase debt => increase spending => ∆Y/Y
Supply side of credit
better access to credit to release pent-up demand
Demand side of credit
better labor market => improving financial positions (ability) => rising consumer confidence (willingness) => credit financed consumption
Full capacity utilization =
82-84%
at Y potential
Unemployment rate = 5%
Capacity utilization = 82-84%
U.R > U.R natural =>
Y < Ypotential
In long run, Ypotential =
f( # workers
K stock
technology
*not Price Level
Ypot =
f( - normal production capacity - full employment)
2 simplifying assumptions of static model
no inflation
no change in long-run aggregate supply
Gross debt 2012 =
$16 trillion
Nominal GDP 2012 =
$16 trillion
Debt-to-GDP 2012 =
103%
More important about debt?
debt relative to economy
Fed. Reserve holds
$1.9 trillion
SS trust bonds / treasury bill =>
$2.9 trillion
Public debt 2012 =
$11.2 trillion
Public debt to GDP 2012:
72.5%
Rogoff/Reinhart public debt to GDP limit
90% limit for public debt to GDP
- would slow GDP growth by 1%
from 3% to 2%
Is our D/Y a problem?
default risk => no
purpose of debt: consumption or investment
Large iD (int. x Debt) => increase Taxes or decrease Government spending
High D/Y => increase int. rates => decrease inventory => decrease Y/L =>decrease ∆Y/Y
Analogy Test:
essential similarities > essential differences
2009 things
decrease in optimism
decrease in wealth
increase in exchange rate
decrease Yrow
Housing Demand drops
decrease Investment residential
shift left AD
Price homes fall, price stocks flat
Wealth decreases
shift AD left
Price of oil increases =. input price increases
shift AS to left
shift AD to left
Decrease Consumer/business confidence
decrease Consumption and investment
shift AD left
Dollar falls =>
increase exports, decrease M
shift AD right
Foreign economies grow 5%
increase exports
shift AD right
Discretionary macro policy response to 2007
Fed Reserve decrease interest rates to move AD right
doesnt work - prices rise
people dont spend because busy deleveraging
Automatic Mechansim
fix itself in time - milton friedman
“long run it will work itself out”
Discretionary Policy
Johy Maynard Keynes
long run we are all dead
Self-adjusting model:
When S curve shifts to the left: wages are falling
- drops morale and worker productivity
in theory:
- workers will accept lower wages
- lenders accept lower interest rates
- producers accept lower price of inputs
Recession:
AD to the left; AS to the left
or
Y potential decreases
Price is low relative to production costs
Expansion:
AD to the right; AS to the right
Price is high relative to production costs
Labor Costs are _____ of total
70%
Equilibrium condition of new orders
new orders = shipments
shipments/sales =
Production - ∆inventory
During Recession:
New and Factory Orders plummeted and companies like Chyrsler and GM had to be bailed out of bankruptcy
shipments =
coincident economic indicator——good measurement of how the current economy is doing
New orders =
Leading indicator of future
Unfilled orders =
leading indicator of future production
Factory orders fell _____ in August
-5.2%
Nondurable good orders rose _______
2.2% (not good indicator)
Durable goods orders fell _______
-13.2%
Core capital goods new orders
rose 1.1%
business investment:
non defense capital goods, excluding aircraft
Leading indicator of future hiring
Core capital goods
Business investment spending
slowed preupitously in the 3rd quarter
Above 50 Business Baromete Index
expansion
Below 50 Business Barometer Index
contraction
Business Barometer Index: survey of business activity asks
Increasing
Decreasing
or No change
Business Barometer Index: assyne
increasing = 44.7%
No change = 10%
Decreasing + 45.3%
Index = 44.7 + 5 = 49.7
Business Barometer Index in September
49.7 (contraction territory)
Manufacturing in Midwest is _________________
contracting for the first time in 3 years
Vehicle production is _______________
moderating - still growing but slowing down
Rising uncertainty over (bbi):
Global Economy
Fiscal Cliff
Slumping foreign demand for (bbi):
industrial equipment
New orders (bbi):
47.4
leading indicator says a turnaround is not imminent, new orders falling
Production (bbi) =
55.4
firms are keeping production in line with new orders
Order backlog (bbi) =
41.6
signals weak production levels in future
Employment (bbi) =
52.0
firms are hiring to ramp up production to meet demand
Inventories (bbi) =
51.1
inventories are still rising
Prices paid (bbi) =
63.2
building input price pressures with little “pricing power” - falling profits
Pricing power
If you have this you can raise the price without losing business
New orders - inventories (bbi)
-3.7
Negative gap is omen for weaker production
New orders - Production (bbi)
-8
negative gap foreshadows weaker production
Shipments
Production - change in inventories
Production =
F(employment)
Increase in expected future price level would _____________
shift supply curve to the left
Closed Economy investment
Y - C - G
A manufactuerer’s unfilled orders will be unchanged if during the month
New Orders = Shipments
Investment in Closed Economy
Y - C - G
What increases the equilibrium interest rate?
Increase in the budget deficit
The demand for durable goods
declines by a greater percentage than does GDP during a recession
The response of investment spending to an increase in the government budget deficit is called __________
crowding out
What happens to unemployment as an economy begins to emerge from a recessionary phase of the business cycle
unemployment continues to rise
What will raise consumer expenditures?
An increase in expected future income
A decrease in the growth rate of domestic GDP relative to the growth rate of foreign GDP would ________
shift demand curve out
When a government runds a budget deficit, we expect ________________
investment will fall
Financial intermediary’s main function:
match households with excess funds to firms who want to borrow funds
An increase in the price level will
Move the economy up along a stationary short run aggregate supply curve
The international trade effect states that:
An increase in the price level will lower net exports
When price level in US rises to the price level of other countries
Imports will rise
exports will fall
net exports will fall
National income =
Consumption + Savings + Taxes
Labor Productivity
The quantity of output produced in one hour by one worker
The 45-degree line shows points such that
Real aggregate expenditure equals real GDP
Increase expectation in inflation results in:
shift the short run aggregate supply curve to the left
Private savings
Y + Tr - C - T
Countries with a strong rule of law:
have a faster economic growth
Increase in aggregate demand causes:
Increase in real GDP in short run
Increase in price level in short run and long run
Best Measure of the standard of living
real GDP per capita
Potential GDP
The level of GDP attained when all firms are producing at capacity
wL =
70% of total costs
wage/salary costs (70%)
rose 1.7% y-o-y
Benefit costs (30%)
rose 2.1% y-o-y
Total Compensation rose
1.8%
.7 x 1.7% + .3 x 2.1%
Employment Cost Index:
This will:
- Contain broader inflationary pressure
- Allow FED to maintain low interest rate policy
Rising __________________
retirement and health benefits
Firms are focusing on ___________________________
containing wage growth in an attempt to save costs and remain profitable
Firms health insurance costs are ______________
slowing as they pass along benefit costs to employees
_____________ will keep consumers’ spending under pressure
slow wage expansion
_________________________ will limit wage gains going forward
Labor market slack and extended periods of weak job growth
________________ will push wages and salries lower and slow benefit growth
Deficit 2009 =
$1.4 trillion
1993 Deficit reduction act
Increase Taxes
Cap growth of government spending
Debt
sum of all deficits
Deficit
G - T in given period
If deficit to GDP = 3%
Debt
GDP
is constant
If deficit to GDP < 3%
Debt
GDP
is falling
When unemployment reaches _________, deficit to GDP rises above 3%, increasing Debt/GDP to 90%
6%
AFDC example of
transfer payments
___________ helps the US economy to be self correcting
The Federal Budget
