Ahead of the Curve: Making Sense of Macroeconomics

Ahead of the Curve:Making Sense of Macroeconomics Judson Russell, Ph.D., CFA

How Do You “See” the Economy?

Agenda • “Seeing” the Economy • Consumer Economics • Business Economics • Creating a Cohesive View of the Pieces

“Seeing” the Economy • With all of the economic data released data and confusing relationship with markets, it is no wonder that it is difficult to ‘see’ the economy. • Should Friday’s report on unemployment influence your decisions today? • Chicken and the egg • Getting the data into sequential order will help you ‘see’ the economy

“Seeing” the Economy • Economic growth is the rate of change in the nation’s total demand for and output of goods and services. • Chronology of the Economic Cycle • We start with the consumer, consumers’ spending on goods and services • Then on to production of goods and services, • Then capital expenditures for machinery and equipment, office buildings, and factories. • This cause and effect relationship has proven successful in over four decades and eight economic cycles of tracking.

“Seeing” the Economy Inflation Inflation Interest Rates Consumer Borrowing Individuals’ real hourly earnings Real Consumer Spending Industrial Production & Services Real capital spending Individuals’ hourly earnings Stock Market Corporate Profits Individuals’ hourly earnings Employment (jobs)

“Seeing” the Economy Inflation Inflation Interest Rates Consumer Borrowing Individuals’ real hourly earnings Real Consumer Spending Industrial Production & Services Real capital spending Individuals’ hourly earnings Stock Market Corporate Profits Employment (jobs) Individuals’ hourly earnings

Consumer Spending Impact on Economic Growth Consumer Confidence at 5-month Low Consumer fears that things may get worse and concern over having enough in the bank are part of the reason the U.S. is in so much trouble today and faces the prospect of more pain in the years ahead. May 29, 2012 NEW YORK (CNNMoney) -- Consumer confidence fell to a five-month low in May, according to a closely watched survey that showed Americans less optimistic about current labor market and business conditions, as well as the short-term outlook. The survey released Tuesday by The Conference Board, a business research firm, showed an overall index reading of 64.9, down from 68.7 in April. Economists surveyed by Briefing.com had expected confidence to tick up to 69.4 in the latest survey. When asked about what they expected for six months in the future, only 16.6% said they thought business conditions would be better, while only 15.8% said they expected there to be more jobs. Both those readings were the lowest results since late last year. There was one slight sign of improvement: 15.2% of those surveyed by the Conference Board said they thought their own income would be better in six months than it is today, up from 13.9% in April. More of those surveyed are planning to buy cars and major appliances of one sort of another sometime in the next six months. "The softening in [consumer confidence] suggests that the pace of economic growth in the months ahead may moderate," said Lynn Franco, the director of economic indicators at The Conference Board.

Personal Income & Confidence Drives Consumer Spending Wages per worker Number of workers Total Wages and salaries Other income Personal income = + = X Real Consumer Spending Personal income Personal taxes Disposable income Personal savings - - = =

U.S. Real Average Monthly Hourly Earnings – seasonally adj.

U.S. Labor Force Participation Rate

Other Factors Impacting Consumer Spending In addition to changes in real hourly wages, there are additional factors which impact real consumer spending to include: Initial wealth, or stock wealth effect Savings rate Tax regime Consumer credit Consumer confidence

U.S. Personal Savings

Role of Taxes The Bush tax cuts are set to expire at the end of the year unless Congress extends the current lower rates. Source: International Strategy & Investment report, June 5, 2012

Role of Consumer Credit Consumer Credit Debt Grows At A Slower Rate In April June 7, 2012 – Huffington Post WASHINGTON -- U.S. consumer borrowing increased more slowly in April, restrained by a sharp reduction in credit card debt. The report suggests Americans may be resisting their credit cards after seeing employers pull back on hiring this spring. The Federal Reserve said Thursday that consumers increased borrowing by $6.5 billion in April. That's just half the March gain. The increase was driven by a $9.96 billion rise in a category that measures auto and student loans. That offset a $3.4 billion drop in credit card debt, the first decline since January.

Consumer Installment Credit to Personal Income Ratio

Consumer Confidence

U.S. Personal Consumption Expenditures

U.S. Industrial Production

U.S. Corporate Profits

Capital Goods Orders

U.S. Overtime Hours

U.S. Temporary Workers Index

U.S. Unemployment Rate

U.S. Inflation Rate

“Seeing” the Economy Inflation Inflation Interest Rates Consumer Borrowing Hourly Earnings Individuals’ real hourly earnings Real Consumer Spending Industrial Production & Services Real capital spending Part. Rate Savings Rate Taxes Cons. Conf. Individuals’ hourly earnings Stock Market Corporate Profits Employment (jobs) Individuals’ hourly earnings Overtime Hrs Temp Worker

Ahead of the Curve: Making Sense of Macroeconomics

Ahead of the Curve: Making Sense of Macroeconomics

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