Andres Martinez Economics 120- Macro Economics Dr.

Todd Myers 15 December 2011 Economic Forecast Paper

The Conference Board Leading Economic Index for the U.S. include: Average weekly hours, manufacturing, Average weekly initial claims for unemployment insurance, Manufacturers new orders, consumer goods and materials, Index of supplier deliveries vendor performance, Manufacturers' new orders, nondefense capital goods, Building permits, new private housing units Stock prices, Money supply, M2 Interest rate spread, and Index of consumer expectations.

After coming close to stagnation, U.S. manufacturing strengthened. The Institute for Supply Management's (ISM) purchasing managers' index rose to 52.7 from 50.8 in October. Any reading above 50 indicates expansion in the sector. The average workweek for all employees on private nonfarm payrolls was unchanged at 34.3 hours in November. The manufacturing workweek was down by 0.2 hour to 40.3 hours. Factory overtime remained at 3.2 hours in November. The average workweek for production and nonsupervisory employees on private nonfarm payrolls decreased by 0.1 hour to 33.6 hours. The unemployment rate fell to 8.6%, the Labor Department reported, the lowest rate since March 2009 and a huge drop from 9% from February. I believe that unemployment fell not only because more people were getting jobs but also because even more people gave up on searching for a job. Men are the ones landing jobs; the unemployment rate for men over age 20 fell to 8.3% from 8.8% in October.

The women's unemployment experienced a much smaller plunge, mostly because more women had left the labor force. Employers have added 120,000 jobs in November. This allowed businesses to report a minor job growth this year. So even as companies are reporting small progress in their hiring levels, more people are saying they're going back to work. A lower-thanexpected unemployment rate or declining trend can cause bond prices to fall and interest rates to rise.

Home prices dropped 3.9% year-over-year, according to the S&P/Case-Shiller national home price index. On a quarterly basis, prices were higher, coming out with an increase in 0.1%. Eighteen of the 20 metropolitan areas that the index tracks faced annual declines in home prices during the month of September. Cities such as: Atlanta, Las Vegas and Phoenix showed record lows. Gross domestic product, the largest measure of the nation's economic output, grew at a 2.0% annual rate in the quarter. That's down from 2.5% growth originally reported last month. Consumer Confidence Index rose to 56.0 in November from 40.9 the previous month, the Conference Board reported. The Present Situation Index, which reflects consumers' attitude toward the current situation of the economy, increased 11.2 points to 38.3. Consumers appear to be more optimistic about the future. The Expectations Index, an outlook on the economy for the next couple of months, rose to 67.8 from 50.0 in October, a huge leap. A higher-than-expected CPI or increasing trend can cause bond prices to fall and interest rates to rise. Likewise, a lower than expected CPI causes interest rates to fall.

The Consumer Price Index, showed prices fell 0.1% in October. Compared to a year ago, prices were up 3.5%. The CPI measure of inflation comes from a variety of goods, ranging from food and gas, to clothing, health care services and cars.

There has also been a fall in gas prices by 3.1%. According to the Adaptive-Expectations Theory, investors would use an inflation expectation of that range when making investment decisions. As interest rates change, so do the values of all bonds in the marketplace. As interest rates go up, prices of bonds will drop. Through these past indicators we have seen that interest rates are likely to increase over the next couple of years. Interest rates directly affect how much money banks can earn, in part because they affect how much capital banks can raise. When interest rates go up, this indicates that saving money is more interesting and the opportunity costs of using the money will increase. As interest rates increase, there will be large inflow of foreign currency into the market coming from foreign investors. This will result in demand for the dollars, causing it to appreciate, meaning it is moderately more expensive to buy from the U.S. thus a fall in exports. In contrast, a decrease in real interest rates lowers the cost of borrowing; that leads businesses to increase investment spending, and it leads households to buy goods, such as cars and new homes. A policy that attempts to keep short-term rates low will eventually lead to higher inflation and higher interest rates, with no permanent increases in the growth of output or decreases in unemployment. Also expectation affects inflation, if people figure there will be higher inflation in the future, they'll ask for bigger increases in salaries. That will raise inflation.

The Congressional Budget Office report examines the impact on the federal budget by presenting projections of federal spending over the coming decades. Under current laws and policies, an aging population and rapidly rising health care costs will sharply increase federal spending for health care programs and Social Security. The federal government has recorded the largest budget deficits. As a result of those deficits, the amount of federal debt held by the public has increased tremendously. By the end 2008, that debt equaled 40 percent of the nation's annual economic output. The Congressional Budget Office projects that federal debt will reach 62 % of

GDP by the end of this year, the highest percentage since WWII. The high marks were due to higher federal spending related to the recent recession in financial markets, as the economy is recovering budget deficits will probably decline over the next few years. The CBO projects that if current laws under Barack Obama dont change, federal spending on health care programs will increase from 5% of GDP today to about 10% in 2035 and will continue to increase there-after. The CBO also projects that Social Security spending will increase less dramatically, from less than 5% of GDP today to about 6%in 2030 and then stabilize at roughly that level. With the aging of the population and the rising cost of health care, this will cause spending on the major mandatory health care programs and Social Security to grow from roughly 10% of GDP today to about 16% of GDP 25 years from now. A large debt can create significant negative effects on the economy: large budget deficits would reduce national saving, leading to higher interest rates, more borrowing from abroad, and less domestic investment, thus lowering the income growth in the United States. It can also reduce policymakers abilities to respond to economic downturns and other challenges. A higher debt would increase the probability of an economic crisis in which investors would lose confidence in the government's ability to manage its own budge.

Keeping deficits and debt from rising to an uncontrolled level would require raising revenues as a percentage of GDP. Making these changes would probably slow the economic recovery. The sooner changes to spending and revenues are agreed on, the smaller the damage to the economy from its growing debt. U.S. trade deficit fell in October to the lowest level of the year, suggesting a drop in imports. The trade deficit shrank 1.6% to $43.5 billion. Decreasing from September's figure of $44.2 billion. A decrease in exports of goods suggested decreases in industrial supplies, consumer, foods and other resources. October 2011 showed an increase in imports of goods,

showing surpluses with countries such as: Hong Kong, Australia, Singapore, and Egypt. The biggest deficits were with China, European Union, Japan, Mexico and Germany.

Overall the future of the economy looks pretty bright to me, the economic indicators are in favor of the people so far: manufacturing is growing, unemployment is falling, home prices are dropping, Consumer Confidence is increasing, the Expectation Index is increasing on how people feel about the economy, Consumer Price Indexes are falling and interest rates are rising, meaning saving is good. The bad news is with an increase in interest rates inflow of foreign currency into the market coming from foreign investors. This will result in demand for the dollars, causing it to appreciate, meaning it is moderately more expensive to buy from the U.S. thus a fall in exports. Federal spending is going to increase a lot because of Healthcare and Social Security, increasing deficits and debt for a long period of time, unless present economic policies are dealt with in the immediate future, Earlier action would require more sacrifices by earlier generations to benefit future generations, but it would also permit smaller or more gradual changes and would give people more time to adjust to them. If the dollar does appreciate this will lead to an increase of foreign investment, meaning it is moderately more expensive to buy from the U.S. thus a fall in exports. There is still hope for this country to rise from rubbles left over by the recession, and people are well on their way to get jobs and not have to worry about feeding themselves or their families anymore. Considering the resources at my disposal, this is the most accurate forecast I was able to make, I am not sure if it is right or wrong, but by the looks of these present figures in the economic indicators, I do hope its right.

Works Cited

http://www.standardandpoors.com/indices/sp-case-shiller-home-priceindices/en/us/?indexId=spusa-cashpidff--p-us----

http://www.federalreserve.gov/econresdata/releases/statisticsdata.htm

http://www.conference-board.org/data/consumerconfidence.cfm

http://www.conference-board.org/data/eti.cfm

http://www.conference-board.org/data/bcicountry.cfm?cid=1

http://www.ism.ws/ismreport/mfgrob.cfm

http://www.cbo.gov/doc.cfm?index=11579

http://www.tradingeconomics.com/united-states/balance-of-trade