Running Header: ASSESSMENT OF ECONOMIC INDICATORS

An Assessment of Economic Indicators: New Home Sales, Consumer Price Index and the Unemployment Rate Stephen M. Houserman Microeconomics Professor Christine Farrell April 8, 2013

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Executive Summary All economies, domestic and foreign, rely on the performance of particular economic indicators to maintain stability in the relative market. Economists have identified many of these indicators and study them closely to reach conclusions about the present and future of an economy. First, economists may take a snapshot of the market to gauge economic caliber in the contemporary United States. Economists also conjoin data from the past and present to forecast future tendencies and fluctuations in the market. The three cardinal indicators that are usually considered under economic analysis are the housing market, consumer price index, and the unemployment rate.

Purpose Statement This research report will describe major economic indicators that measure conditions of the U.S. economy. The information contained herein is based on the economic indicators of new home sales, consumer price indexes, and unemployment rates. With relevant data, the topics involved are defined, historically annotated, and forecasted for the intent of observation and focus in the field of microeconomics.

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Methodology Sources included in this research were obtained from various organizations and professionals of economic background. Government reports from the Bureau of Labor Statistics, the Federal Reserve, and congressional legislations were utilized to identify information pertinent to the topics discussed. Public Media provided insight on opinions and analytic perspectives outside of government organization. Personal opinions are included for forecast analysis of the general topics and are a representation of interpreted information by the author. These opinions are also supplemented with prescriptions for future public policy related to the general topics.

Limitations The research process suffered from various limitations that restricted the authors capability of providing appropriate and accurate information. Identifying seasonally adjusted figures in the statistics was a major restriction that was encountered. These reports from government offices were often revised on numerous occasions to accommodate errors that were previously published. A few statistics were broadly rounded and proved to be inadequate to justify the points made throughout the research. Media bias was intentionally avoided in order to provide nonpartisan opinions. Search results commonly led to politically extreme media articles throughout the research phase of this report.

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New Home Sales Definition and Relevance According to Investopedia, the definition of new home sales is the economic indicator that measures the sales of newly built homes (2013). Additionally, it is considered to be a lagging economic indicator1 of demand in the market and that which affects mortgage rates and consumer confidence (Investopedia, 2013). New home sales consists of data compiled by the U.S. Department of Commerce Census Bureau. The elements involved to compile this information include housing prices, homes sold and for sale, and rate of new home construction (New Residential, 2013). The Bureau releases this information on a monthly basis to the public. The significance of this data is relevant to the health of the economy. As prices and sales increase in aggregate, it is typically a reliable indicator that an economy is growing out of a recession. It is common to see the median price of new homes fall as the rate of new home construction increases, in relation to the laws of supply and demand. Economists have identified ways to influence the direction of the housing market. Implementing policies such as tax incentives and regulating mortgage rates for consumers can guide the housing market to maintain stability. Outside circumstances that influence new home sales are vast. Consumer confidence, unemployment, and income dependent on economic growth are just a few of these factors that impact the housing market. All factors have to be kept in check to avoid a stagnant housing market or housing bubble, which may become a substantial dilemma in the future. The United States has already witnessed a runaway housing market in recent history.

A lagging indicator is data that is based off the trends and fluctuations observed in a market. It is the organization and confirmation of long term trends: however, lagging indicators cannot make predictions about the market.

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Historical Assertions The United States has long used the new home sales indicator as a measurement of economic growth. This is because economists and policy makers are aware that the housing market directly reflects the economic environment. The Department of Commerce Census Bureau has recorded the data for new home sales in the United States since 1963. The price of new homes steadily increased up until the collapse of the housing market in 2007. The first time the housing market was seriously considered as an economic growth factor was after the Great Depression in the early 1930s. In retrospect, policy makers implemented legislation that eased homeownership as part of the New Deal by creating Fannie Mae2 (Pickert, 2008). Fannie Mae opened the door to credit financing on homes and made home purchases much easier on working class Americans. In the early 1990s, another significant drop in the housing market sparked concern for potential homebuyers. President Clinton attempted to ease affordability of homes for low wage earners in order to stimulate the housing market. He signed the Financial Services Modernization Act of 1999 and the Commodity Futures Modernization Act of 2000 to accomplish this (Sheppard, 2010). These pieces of legislation put pressure on banks to lend to middle class Americans, and artificially kept interest rates low. Banks were unable to turn away homebuyers even if their income suggested that they could not afford the payments. A housing boom ensued in the early 2000s as new homes were built and purchased all over the United States. Eventually, it was apparent that too many mortgages had gone under water because homeowners were not able to maintain the payments. Banks tried selling off their assets to avoid further loss of principle, which caused a selling hysteria. Prices of homes

In 1938 Fannie Mae was founded as a safety net for mortgages. It is a privately owned corporation that uses stock investments to ensure that funds are available to banks that lend money for home purchases.

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depreciated quickly as the housing market collapsed in 2007. The Census Bureau reported the median home value of new homes as $257,000 in April of 2006. By March of 2009, the average price dropped to $205,100 (Census Bureau, 2013). This was a 20.2%3 depreciation in home value within a couple years. Also, the Census Bureau reported that 1,051,000 homes were purchased in 2006, prior to the collapse. That number dwindled to 306,000 houses purchased in 2011 before the market began to turn around (Census Bureau, 2013). Todays new home sales appear to be inching back to a stable level: however, it is still has much ground to make up to extinguish public anxiety. Forecast and Prescription Forecasting the future of new home sales is a difficult feat for economists because of the ambiguous nature of the market. Additionally, because it is a lagging indicator of the economy it is intended to show the state of the economy, rather than contriving future projections. Nevertheless, economists have been able to assert some predictions on new home sales, with the motivation of easing public anxiety during the recovery of the most recent recession. Some economists speculate that the housing market is still a threat to the economy. One analyst in particular, Rod Dubitsky, suggests that the future of the housing market will become increasingly stagnant because consumer health and the limited availability of mortgages is retraining demand and will keep the housing market generally weak for the foreseeable future. (Touryalai, 2011). He goes on to mention that the revival of new home sales will depend on the current generation of college students. However, he senses that because of the debt the average student accrues in college, it would be near impossible for him or her to afford a new home. Dubitsky also inquires about the rest of the consumer demographic:

This statistic is not adjusted for inflation.

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It could be more than a decade for many consumers to come up with the 20% down payment on a median-priced home. In fact, someone making $48,000 after taxes would have to wait 16 years before putting a down payment on $158,700 priced homes. (Touryalai, 2011) Analysts on the opposite side of the argument have a more optimistic view. According to the Census Bureau, a reported 25% jump in new home sales occurred this year since 2011. A real-estate CEO, Douglas Yearley, finds solace in this fact because new home development is on the rise. He is quick to admit that it is nowhere near previous levels of solvency: however, this time it is making gains, without the juice of the mortgage bubble (Gross, 2012). I do not have full confidence that new home sales will fully recover without going through another economic downturn. It is likely that the U.S. will see a spurt of growth around 15% in the housing market in the next year because of stimulus incentives. However, the housing market will experience, at minimum, 20% decrease in new home sales after the effects of artificial growth wears off further down the road. Even though new home sales is a lucrative market right now, outside influences such as income taxes, have proved to be a burden on middle class investors. The high earners of the middle class are the key to improving new home sales, but they are financially restricted in some cases. Lastly, no lesson was learned by the government or lending agencies to avoid another housing bubble. Homes are still sold to those who cannot afford them with artificially low interest rates. Mortgages need to be administered responsibly in order to avoid another collapse. I do not suggest Washington achieves this through more handson legislation. Instead, They can influence interest rates and banks ability to lend responsibly through conservative monetary policy, which is a roundabout way to achieve the same result.

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Consumer Price Index Definition and Relevance The Mariam-Webster dictionary defines Consumer Price Index (CPI) as the measure of living costs and inflation based on changes in retail price (CPI, 2103). This is important because CPI can measure inflation which is a threat to a healthy economy. There are also several types of CPIs that can measure different groups such as urban populations, rural populations, and age (Britannica, 2013). Economists do this by using the price of common goods and services and by prioritizing them in proportion to the relevance of the economy. Economists can observe how the economy has shifted by comparing this data to previous years. Of course, these indexes have to be constantly revised because new products and changing spending habits alter the results (Britannica, 2013). Consumer price indexes do have a couple issues, as stated above. Gauging the economic shift from year to year is hard to quantify because of changing habits in spending. Britannica makes an excellent example out of this situation by stating: One may wish, for example, to ascertain whether an urban family with an income of $20,000 in 1985 was better off than a similar family with an income of $8,000 in 1965. One may find that the consumer price index rose so much that, despite an increase in money income, the family was slightly worse off. (2013) This deficiency suggests that consumers in 1985 had the same products available to them as in 1965. Economists have tried to circumvent this problem by employing a constant-utility index (Britannica, 2013). This type of index accounts for the subject preferences of consumers rather than specific products. Still, it is not completely accurate as it does not account for consumer tastes, which are likely to change over time (Britannica, 2013).

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Historical Assertions CPI evaluations can be found at the U.S. Bureau of Labor Statistics, which has been published monthly since 1919 (BLS, 2007). This economic indicator has gone through multiple changes and continues to be improved with more algorithms to accurately calculate the standard of living and inflation in the United States. In the mid 1930s, the first change came because economists realized a change in buying habits was altering the results (BLS, 2007). Another significant change occurred during World War 2 because commodities were scarce and being rationed (BLS, 2007). There is evidence of inflation during this time. The BLS reported that 18.000 cents in 1945 was the equivalent of 13.900 cents in 1939 (BLS, 2007). This data suggests that the economy was taking a hit because of the cost of the war. Furthermore, the same observation is evident in the early 1930s, which reflected the Great Depression. The United States is currently inching its way out of a recession and the government estimates that Consumer prices are rising at less than 2% a year. (Lourosa-Ricardo, 2013). That may not be very reliable since most commodities have all been over 2%, save a gallon of milk at 1.5% (Lourosa-Ricardo, 2013). The biggest impact of annual inflation rate hit college tuition (7.3%) and health insurance premiums (7.4%) (Lourosa-Ricardo, 2013). The slight inflation the U.S. is experiencing is causing consumers to scale back on their purchasing power. Forecast and Prescription Contemplating the future of CPI and inflation is difficult for analysts because it is merely a reactive statistic. However, economist Joseph Haubrich estimates that the recent price increases are only temporary (Haubrich, 2011). His expectation of the long-term CPI is fairly stable, while the short term data may suggest erratic fluctuations. This is because the main goal of the Federal

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Reserve4 is to stabilize prices, and that motivation will iron out jumps in inflation in the distant future (Haubrich, 2011). MoneyWatch analyst, Kathy Kristof, has a grim forecast on CPI and inflation. She reports that while inflation may stay relatively stable for the next few years, it will skyrocket once banks begin to lend (Kristof, 2012). A massive wave of cash flow is to be expected, since the Federal Reserve has pumped money into the economy and banks are still reluctant to lend. Once the banks begin to finance more consumers, its likely to boost American buying power by about 40% from todays levels, which is a precursor to run-away inflation. (Kristof, 2012). She concludes that this new purchasing power will raise inflation and CPI by roughly 15% across the board within the next decade (Kristof, 2012). Due to skewed statistics and an overhaul of quantitative easing efforts, I believe it is only temporary that the United States will experience nominally average inflation. The Federal Reserve and the Bureau of Labor Statistics have not provided honest data to the American public in order to encourage consumer confidence in the market. For example, the Federal Reserves unemployment rate (7.7%) is much higher than reported, since it excludes displaced workers (14.7% total) (Ferrara, 2012). Similarly, the BLS has watered down CPI and understates inflation. I think this is a recipe for disaster and it is circumventing the design of the free market. Prices are going to continue to rise and inflation will be well above 10%. Consumers are going to see a brief period of economic prosperity into the next fiscal year, but after the effects of the stimulus wanes, the United States will most likely dive into a state of stagflation.

The Federal Reserve is the Central Bank system of the United States. The key objectives of the Fed include maximizing employment, stabilizing prices, and moderating long-term interest rates.

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Unemployment Rate Definition and Relevance In the United States, the unemployment rate measures the number of citizens actively searching for employment as a percentage of the labor force (Investopedia, 2013). Specifically, the Bureau of Labor Statistics defines unemployed persons as persons 16 years and older who has no employment, but is available for work and has made efforts to find employment within a 4-week period (Investopedia, 2013). This is considered another lagging indicator of the economy. A raising unemployment rate indicates that the economy is recessing. Lowering the unemployment rate is a serious issue in Washington because the economy needs employed citizens to make purchases. These purchases are what manage cash flow and it is a sign of rearing economic effervescence. The unemployment rate published by the Bureau of Labor Statistics has been under scrutiny because of the methods they use to provide the percentage is sometimes considered misleading. The unemployment rate that is most often recognized by the media and government is called the U-3 report. Another type of rate, the U-6, is a broader measure of the unemployment rate in the United States (Manuel, 2013). It includes two other groups of unemployed persons that the former omits. The first is displaced workers, which are persons who are not actively looking for employment because they feel they will not find a job. The second group is comprised of persons who hold part-time employment but would like to attain a full-time position (Manuel, 2013). Excluding these groups of people significantly lowers the unemployment rate for the U-3 report. For example, the U-3 report suggests unemployment is currently at 7.6%, while the U-6 report declares 14.6% (Unemployment, 2013). The government quantifies every other indicator as a roll-up report. Why is it not so for the unemployment rate?

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Historical Assertions The United States has encountered roughly 10 recessions since World War II. In every instance, the unemployment rate during those recessions increased dramatically due to the recession of the economy. A report written by professor David Scalia in the Washington Post analyzed the history of the unemployment rate. Starting in the 1940s the United States was coming off of the effects of a postwar economy. President John F. Kennedy responded to the brief recessions by expanding Social Security and unemployment benefits and by cutting taxes. (Scalia, 2013). The unemployment rate eventually lowered to the historical average from 7% to 3.6% by 1970 (Scalia, 2013). Unfortunately, the low unemployment rate was short lived. After Arab oil embargos were put in place in the early 70s the economy began to sink while the unemployment rate soared. The economy began to experience a state of stagflation5, which raised the unemployment rate to nearly 10% by 1982 (Scalia, 2013). When President Reagan was nominated, he squeezed inflation out of the economy and signed the Emergency Jobs Appropriation Act (Scalia, 2013). According to Scalia, this act was not [t]erribly ambitious because the administration was firmly committed to limited government and allowed the market forces to pick up the slack. (2013). Since the Reagan years, the U.S. witnessed relatively stable unemployment rates up until the recession in 2007. The collapse of the Internet and housing bubbles caused unemployment to jump to 9% in 2010 (Scalia, 2013). President Obama implemented stimulus spending on multiple occasions, however the lingering effects of the housing market stifled economic growth. Since then, the unemployment rate has trickled down to 7.6% to date.

Stagflation is a term in economics that defines a state of an economy when it has high interest rates and shows relatively slow economic growth. This is considered the worst scenario in terms of economic downturn because it is hard to manage once it takes hold of an economy.

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Forecast and Prescription The Bureau of Labor Statistics has a detailed report of employment projections up until 2020. They forecast that job growth would increase steadily by 14.3% over the next decade in the health and construction sectors (Employment Projections, 2012). However, the labor force is not expected to meet the demand of job growth. The BLS anticipates slower population growth and a decreasing overall labor force. (Employment Projections, 2013). The Obama administration has reported a net gain of 6.3 million private-sector jobs since his inauguration (Bespoke, 2013). The administration assures the public that this trend will continue in the future as the U.S. climbs out of the recession. There is some skepticism to Obamas job creation that suggests it may not be as high as reported. It is my belief that the unemployment may start to slowly decrease, but it will not reach the historical norm of roughly 3%. Instead, I forecast that the new normal average will hover around 5-6% by the end of this fiscal year. I feel that this situation could be worse if it were not for the last generation of the Baby Boomers retiring in the next decade or so. The replacement jobs that will be available will help drive down the unemployment rate. There are some factors that will translate into fewer job opportunities in the future, such as the evolution of automation in the work place. Technology has proven throughout the years that with each new innovation comes efficiency. One of the easiest ways for government and business to save money is by implementing Lean Six Sigma to cut the fat out of their budget. Unfortunately, this can lead to lay-offs because specific jobs can be automated or condensed. Lastly, the health of the economy in the next decade is going to play an integral role in the future of unemployment. My previous projections are only under the event that the recession tapers off and economic growth picks up.

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If the United States experiences a double-dip recession, then the unemployment rate will potentially surpass 10% unemployment. To mitigate the effects of further decline in unemployment, the U.S. must reconsider the dynamics of a post-developed consumer economy. Since the postwar era began, the U.S. has scaled back on exports and production and has transitioned to a consumer economy. It is essential for the U.S. to adopt policies that capitalize on its producer capabilities. Approval of the Keystone Pipeline, extending our auto industry to the global market, and adjusting for emerging markets is a good start to getting Americans back to work.

Conclusion Various perspectives from respectable analysts have interpreted the economic indicators described within this document. While proving the ambiguous nature of the U.S. economy, it is conclusive that new home sales, consumer price indexes, and unemployment rates all play an equally integral role in our society. Furthermore, it is obvious that these indicators are interdependent of each other. Researchers are still inquiring on how this information can be manifested to provide a more perfect representation of the economy. My interpretation of these economic indicators suggests that our economy is not yet on course to sustained prosperity. The government has played a significant role in recent events because of an austere monetary policy. I believe the most recent recession was prolonged due to the after-effects of the housing bubble and reckless stimulus spending. It has cost jobs, homes, and higher living expenses in an economy that is weighed down by $17 trillion debt. The United States will continue to see short-term bursts of growth followed by extensive economic recession until it can get its spending under control.

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References Bespoke Investment Group. March 10, 2013. Job Creation Under President Obama. Retrieved April 7, 2013 from http://seekingalpha.com/article/1261301-job-creation-underpresident-obama?source=google_news Consumer Price Index. 2013. Encyclopedia Britannica. Retrieved April 1, 2013 from http://www .britannica.com/Ebchecked/topic/134550/consumer-price-index Consumer Price Index (CPI). 2013. Mariam-Webster. Retrieved April 1, 2013 from http://www. 15ritann-webster .com /concise/consumer%20price%20index%20%28cpi%29 Definition of New Home Sales. (2013). Investopedia. Retrieved March 27, 2013, from http://www.inves topedia.com/terms/n/newhomesales.asp Definition of Unemployment Rate. (2013). Investopedia. Retrieved April 2, 2013, from http://www.inves topedia.com/terms /u/unemploymentrate.asp Ferrara, Peter. October 11, 2012. Obamas Real Unemployment Rate Is 14.7%, and a Recessions on the way. Forbes. Retrieved April 1, 2013 from http://www.forbes. com/sites/peterferrara/2012/10/11/obamas-real-unemployment-rate-is-14-7and-a-recessions-on-the-way/ Gross, Daniel. (2012, August 27). The Housing Market is Coming Back. The Daily Beast. Retrieved April 1, 2013, from http://www.thedailybeast.com/newsweek/2012/08/ 26/thehousing-market-is-coming-back.html Haubrich, Joseph G. October 5, 2011. The Future of Inflation. The Federal Reserve Bank of Cleveland. Retrieved April 1, 2013 from http://www.clevelandfed.org/research/ commentary/2011/2011-20.cfm

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Kristof, Kathy. March 15, 2012. Get Ready: Inflation Could Hit 15%. MoneyWatch CBS. Retrieved April 1, 2013 from http://www.cbsnews.com/8301-505144_16257397566/get-ready-inflation-could-hit-15/ Lourosa-Ricardo, Cristina. March 31, 2013. A Reality Check on Inflation. The Wall Street Journal. Retrieved April 1, 2013 from http://online.wsj.com/article/SB1000 1424127887324103504578374640859433174.html Manuel, Dave. April 7, 2013. Definition of U-6 Unemployment Rate. n.p. Retrieved April 7, 2013 from http://www.davemanuel.com/investor-dictionary/u6-unemploymentrate/ Pickert, Kate. (2008, July 14). A Brief History of Fannie Mae and Freddie Mac. Time Magazine. Retrieved from http://www.time.com/time/business/article/ 0,8599,1822766,00.html Scalia, David B. (2013). A Brief History of U.S. Unemployment Rate. The Washington Post. Retrieved April 7, 2013 from http://www.washingtonpost.com/wp-srv/special /business/us-unemployment-rate-history/ Sheppard, Noel. (2010, April 24). Media Heresy: Bill Clinton Helped Cause the 2008 Financial Crisis. NewsBusters. Retrieved March 27, 2013, from http://newsbusters .org /blogs/ noel-sheppard/2010/04/24/media-heresy-bill-clinton-helped-cause-2008-financial-crisis Touryalai, Halah. (2011, July 19). PIMCO: Housing Market Doomed For Foreseeable Future. Forbes. Retrieved April 1, 2013, from http://www.forbes.com/sites/halahtouryalai /2011/07/19/pimco-housing-market-doomed-for-foreseeable-future/ Unemployment Rate. (2013). Portal Seven. Retrieved April 8, 2013 from http://portal seven.com/employment/unemployment_rate.jsp

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United States Census Bureau. (2013). Retrieved March 27, 2013. New Residential Sales Historical Data. Retrieved March 27, 2013, from http://www.census.gov /construction/nrs /historical_data/ U.S. Bureau of Labor Statistics. February 1, 2012. Employment Projections: 2010-2020 Summary. Retrieved April 7, 2013 from http://www.bls.gov/news.release/ ecopro.nr0.htm U.S. Bureau of Labor Statistics. June, 2007. The Consumer Price Index. Retrieved April 1, 2013 from http://www.bls.gov/opub/hom/pdf/homch17.pdf U.S. Department of Housing and Urban Development. March 26, 2013. New Residential Sales in February 2013. Retrieved March 27, 2013, from http://www.census.gov/ construction/nrs/pdf/newressales.pdf