Summary:
To look at the overall U.S. economic activity, the Gross Domestic Product must be examined. This is a measurement of the market value of all final goods, services, and structures produced in one year by labor and property located in the United States. GDP is divided into four distinctly separate categories:
After nearly two years of sluggish economic growth, the pace of economic expansion has finally began to accelerate. Today the U.S. economy is strong and getting stronger. After experiencing a series of significant shocks during the previous years - recession, dot-com collapse and stock market meltdown, terrorist attacks, and corporate wrongdoing, the American economy has managed to remain optimistic. Over the past three quarters, real GDP has grown at the fastest pace in nearly twenty years. Job creation is moving into full gear. The economy has posted steady job gains for each of the last ten months - creating more than 1.5 million new jobs since August. Inflation remains low by historical standards, with the CPI (Consumer Price Index) and the core finished-goods PPI (Producer Price Index) both rising only 1.7 percent over the last 12 months (www.bea.gov). Even interest rates remain near historic lows. Many factors contribute to the rise in economic growth. Economists are able to predict whether our future economy will be one of prosperity and success or one of despair and decline after careful analysis of these factors takes place. Interpreting the major economic indicators of the past year, Americans can make the case for optimism toward a recovering and flourishing economy.
To look at the overall economic activity, the Gross Domestic Product must be examined. This is a measurement of the market value of all final goods, services, and structures produced in one year by labor and property located in the United States. GDP is divided into four distinctly separate categories: consumption, investment, government purchases, and net exports. This will be explained in more depth later. Real GDP growth picked up sharply in the middle of 2003 and since then has grown at an annual rate of 5.4% (www.bea.gov). Early 2004 GDP growth shows relatively steady rates averaging 4.6%. One explanation for this deceleration is due in part to the increased number of imports the United States had during the second quarter.
To comprehend GDP as an indicator of economic activity, we must fully understand each of its four sub-categories. Consumption is the spending by households on goods and services, with the exception of purchases of new housing. Personal consumption expenditures are broken down into durable goods, nondurable goods, and services. The Bureau of Labor Statistics states that personal consumer expenditures have been increasing every quarter from August of 2003 to August of 2004 with a gradual deceleration. The percent change from August 2003 to August 2004 on all item expenditures is 2.1%. The majority of these expenditures are found in services. According to The Heritage Foundation, Policy Research and Analysis, the workforce is transitioning. Already over 80 percent of United States workers are in the service industry, mostly with high skills and pay. Manufacturing jobs have declined from 17 million in the late 1990s to 14.4 million jobs today. Knowing that our economy is putting continual emphasis on service business, it easy to understand why this area of the economy is where most of Americans money is spent. Nondurable goods follow close behind; as they seem to contain the necessities and fundamental expenditures every household endures. These include food, clothing, gasoline, and fuel oil. Gasoline and fuel oil prices have risen dramatically over the past year, leading to higher nondurable good expenditures.
N. Gregory Mankiw defines investment as the spending on capital equipment, inventories, and structures, including household purchases of new housing (p.209). Nonresidential fixed investment has increased since August 2003, however, there are no signs indicating significant housing spending or consistency in this area. The average annual rate for housing purchases continues to increase from the first quarter of 2003 to the present day, demonstrating a continual desire for people to build new homes. We can confirm this by noting the increased number of neighborhoods constructed within the past economic period.
The third sub-category under GDP is government consumption expenditures. Government purchases are the spending on goods and services by local, state, and federal governments. Federal spending has increased at a steady and fairly significant rate from the second quarter of 2003 to the second quarter of 2004. This may be due to the increase in national defense for the War on Terrorism and War on Iraq. It is believed by some economists that this government expenditure will continue to rise until the war is declared over.
Net exports, the last factor in GDP, are the spending on domestically produced goods by foreigners (exports) minus the spending on foreign goods by domestic residents (imports). The United States imports more than it exports which is why the annual rate for net exports is a negative number. This excess of imports over exports is called a trade deficit. The Bureau of Labor Statistics shows an increasingly negative number in net exports, which indicates the intake of more imports than exports. This negative number decreases GDP, and therefore has a contrary effect on the measure of economic growth. The greater the number of imports into the United States, the lower the annual rate of GDP will be, holding all other variables constant.
"A job loss means a lower living standard in the present, anxiety about the future, and reduced self-esteem" (Mankiw 303). Not only does the unemployment rate convey signs of economic growth and the standard of living in an economy, but also personal accomplishment and contentment among its inhabitants. One of the most important and favored statistic used by economists is the total non-farm employment. According to the Bureau of Labor Statistics the non-farm employment rate continues to rise, increasing by 96,000 in the third quarter of 2004, and averaging 103,000 the previous three months. The Department of Labor's Current Population Survey, says that over 139 million Americans are working today - more than at any other time in United States history.
Since August 2003, the economy has created over 1.5 million private sector jobs. Many of the jobs that are being created are industries that pay above-average wages, and the employment recovery is broad based. The Bureau of Economic Analysis reports taking inflation into account, take-home pay (after-tax personal income) has grown 3.8% over the past year. This is a faster annual pace than the average pace during the 1970s, 1980s and 1990s. Hourly compensation over the past year has grown at 2.7%, more than twice the average annual pace of the 1990s (1.3%) and four times the average annual pace seen during the 1980s (0.65%), inflation adjusted.
Employment and unemployment rates go hand in hand. When one is high, the other is low and vice versa. Because the economy is facing economic growth and a high employment rate, unemployment rates will decline. The change from 6.3% in June of 2003 to 5.4% in September of 2004, suggests an increase in employment. This is proven by the Bureau of Labor Statistics' report on employment over the previous year. As we have seen from other statistics in this analysis, the economy seems to have had a surge in economic growth during the third quarter of 2003. This surge of economic growth has held steady throughout the fourth quarter of the 2003 and the first two quarters of 2004.
Unemployment rates have fallen across all levels of education, race, and age over the past year. For people without a college degree, the unemployment rate is down 0.7 percentage points. For both African-American and Latinos, the unemployment rate is down by 1.5 percentage points. For teenagers, the unemployment rate is down 2.2 percentage points. Even though teenagers have the largest decreasing unemployment rate for the previous year, they still have the highest unemployment rates on a whole at about 17% (www.bls.gov). Unemployment also effects gender and surprisingly enough, men have a higher unemployment rate than women. This may be due to a large percentage of homemakers who have just left the labor force, or the large amount of men in the labor force are unable to find jobs quickly or are in the process of looking for jobs.
Another important statistic to keep an eye on is the duration of unemployment. This can by categorized into four groups: less than five weeks, five to fourteen weeks, fifteen to twenty-six weeks, and twenty-seven weeks and over. One question to consider is whether unemployment is typically a short-term or a long-term condition. If it is short-term, which is more often the case, one might conclude that workers may require a few weeks between jobs to find openings that best suit their tastes and skills. The reason therefore, that the less than five week unemployment category is the largest one, is due to frictional unemployment, which states just that. It is the unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills (Mankiw 311). The reason however that unemployment is said to be long-term, is because of the few number of people unemployed for long periods of time that make up a large portion of the unemployment period. July 2004 ironically had the highest number of unemployed people, yet had the lowest average duration in weeks. This is because the more unemployed in the less than five week category than in the higher categories, the smaller the average duration time there will be.
"Because labor is a variable cost, meaning that the number of workers employed varies with changes in the level of production, new claims for unemployment insurance are intuitively appealing as an economic indicator" (Clayton, Giesbrecht 77). New jobless claims then decline during expansionary periods and rise sharply before the recession actually begins. According to Rich Woods of Business Week Online, the Labor Department reported that 362,000 people filed for initial unemployment benefits in the week ended August 28, 2004, up from 343,000 only the previous week. This may indicate some hint of an upcoming recession or slump in the economy.
Beyond employment and unemployment there are still other factors that contribute to economic growth. One of these is production output. Productivity keeps us competitive in an increasingly global economy and leads to higher profits that in turn lead to significantly higher real wages for workers. Between 2000 and 2003, productivity grew at the fastest three-year rate in more than fifty years (www.phil.org). The past year of growth in productivity has surpassed the preceding three years. Today GDP, both real and per capita, are at record highs. The United States produces more than $10 trillion in goods and services every year, making us the world's largest and most powerful economy. The United States economy has stood out as the world's fastest growing major industrial economy during the past three and a half years. GDP per capita was $35,736 in 2003, and in terms of real GDP ($10.398 trillion), no country comes close to America's annual output of goods and services (www.bea.gov). Leading manufacturing is the tech sector, which has seen particularly strong performance in recent months, with a 3.5 percent gain in output in May 2004. This is an industry in which the United States continues to be dominant and which provides many high-paying jobs. High-tech production is also a good indicator of future economic expansion based on these statistics.
The Consumer Price Index (CPI) is a measure of the average change in prices over time of goods and services purchased by households (www.bls.gov). The Bureau of Labor Statistics publishes CPIs for two population groups: the CPI-U for All Urban Consumers and the Chained CPI for All Urban Consumers (C-CPI-U). For the CPI-U, separate indexes are also published by size of city, by region of the country, for cross-classifications of regions and population-size classes, and for twenty-seven local areas. For the C-CPI-U data are issued only at the national level. The CPI-U is considered final when released, however the C-CPI-U is issued in preliminary form and subject to two annual revisions. The average 2003 Consumer Price Index was 183.96, which is well below the range of index numbers found each month from January to August 2004. June had a record high of 189.7 and the year low thus far is in January at 185.2 (www.inflationdata.com). The CPI-U for all item expenditures in August 2004 is 189.5. The percent change of this index from August 2003 is 2.7%. The C-CPI-U on the other hand, has an August 2004 index of 110.3 and its percent change from August 2003 is 2.1%, slightly lower than that of the CPI-U.
"Because the CPI measures the level of prices, it does not directly measure inflation. However, inflation estimates can be derived by computing the change in the level of the CPI from one period to another" (Clayton, Giesbrecht 107). The "core" rate of inflation does not include food and energy price categories. Historical record shows that inflation tends to get worse in the later stages of an expansion, but other than that, inflation has no value as an indicator of future economic activity.
After an analysis of the macro economy from August 2003 to August 2004, one should have a better understanding for what economic indicators are, how they are defined, and how they are measured. Economists use these measurements to explain economic growth and activity and forecast future economic hardships or other important economic conditions. Due to the increasing rates in productivity, employment, Gross Domestic Product, Consumer Price Indexes, and the variety of macroeconomic sectors, one can assume the United States economy is in period of economic growth. Interest rates are low, consumer spending is high, and people are generally satisfied with their lives. Now that there is a better understanding for how the macro economy works, in particular the previous four quarters, people can clearly see how the economy not only affects them, but how they in turn affect the economy.
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