Overview of the

1

• Overview of the
• National Economy
• Dr. Barry Weller

Economic Research Institute of Erie, School of
Business, Penn State-Erie
2
Overview of the National Economy

• WHATS UP and WHATS DOWN
• Contractions and expansions
• Total Output or Production (Real GDP)
• Production vs Sales Inventories
• Industrial Production and Manufacturing
• Labor Markets
• Prices and Inflation
• Money, Interest, and the Deficit
• Leading Indicators
• FED Assessment The Current State of the Economy
• 2005/2006 Forecasts for the National Economy

Economic Research Institute of Erie, School of
Business, Penn State-Erie
3
The Business Cycle SinceWorld War II
Economic Research Institute of Erie, School of
Business, Penn State-Erie
4
The Current Expansion in Historical Perspective
Economic Research Institute of Erie, School of
Business, Penn State-Erie
5
Business Cycle Humor
Economic Research Institute of Erie, School of
Business, Penn State-Erie
6
Aggregate Economic Activity ITotal Output of
Goods and Svcs.
2003 2004 20052 RGDP 4.0 3.8 3.6
CONS 3.8 3.8 3.4 RET SAL 7.8 5.5 3.7
DPI 3.8 4.2 -0.7 DB/INC 21.5 21.3 20.9 SVG
RT 1.3 1.3 0.9 CCI 1.3 3.2 1.9
REAL GDP (AR, TRILLION 2000 )
11.2
2003 AVGPC 4.0 2004 AVGPC 3.8 2005 AVGPC 3.6
20052 11.09 TR
10.8
10.4
10.0
9.6
9.2
8.8
1998
1999
2000
2001
2002
2003
2004
2005
Economic Research Institute of Erie, School of
Business, Penn State-Erie
7
Aggregate Economic Activity IIProduction vs
Sales Inventories
2003 2004 20052 I/S RATIO 1.35 1.29 1.29 INVENT
ORY TO SALES RATIO REMAINS LOW. NO INVENTORY
BUILD-UP. SALES INCREASES LIKELY TO RESULT IN
PRODUCTION (AND EMPLOYMENT) INCREASES
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1.44
2003 AVG 1.35 2004 AVG 1.29 2005 AVG 1.29
20052 1.28
1.42
1.40
1.38
1.36
1.34
1.32
1.30
1.28
1998
1999
2000
2001
2002
2003
2004
2005
Economic Research Institute of Erie, School of
Business, Penn State-Erie
8
Manufacturing Sector IIndustrial Production
2003 2004 20052 IND PR 1.3 4.3 2.9 CAP
UT 73.2 76.1 77.4 PMI 53.3 60.5 54.6 PMI
VALUES OVER 50 INDICATE AN EXPANDING
MANUFACTURING SECTOR PMI HAS BEEN ABOVE 50 FOR
26 CONSEC. MONTHS
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120
2003 AVGPC 1.3 2004 AVGPC 4.3 2005 AVGPC 2.9
20052 118.8
118
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110
108
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104
1998
1999
2000
2001
2002
2003
2004
2005
Economic Research Institute of Erie, School of
Business, Penn State-Erie
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Manufacturing Sector IIManufacturing Employment
Hrs
2003 2004 20052 MFG EMP -4.5 0.2 -0.7 WK
HRS 40.3 40.8 40.5 MFG EMP FELL 44 CONS MOS
(LONGEST DECLINE SINCE WWII), 55 OF LAST 60
MOS 3 MILLION MFG JOBS LOST, BUT LOSSES SEEM TO
HAVE ENDED (FINALLY)
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18.0
2003 AVGPC -4.5 2004 AVGPC 0.2 2005 AVGPC
-0.7
17.5


17.0
20052 14.3
16.5
16.0
15.5
15.0
14.5
14.0
1998
1999
2000
2001
2002
2003
2004
2005
Economic Research Institute of Erie, School of
Business, Penn State-Erie
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Output, Employment Productivity
2003 2004 20052 OUT/HR 5.0 2.6 2.7 (NON-FARM)
OUT/HR 5.8 5.3 4.1 (MFG) STRONG PRODUCTIVITY
GROWTH EXPLAINS, IN PART, BEHAVIOR OF MFG
EMPLOYMENT
140
2003 AVG PC 5.0 2004 AVG PC 2.6 2005 AVG PC
2.7
20052 2.2
135
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125
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115
110
105
1998
1999
2000
2001
2002
2003
2004
2005
Economic Research Institute of Erie, School of
Business, Penn State-Erie
11
Labor Markets IEmployment (Non-Farm Payrolls)
2003 2004 20052 TOT EMP -0.1 1.6 1.7 MFG
EMP -4.5 0.2 -0.7 AS OF JULY, EMP UP 26
CONSECUTIVE MONTHS (RISING SINCE MAY 2003)
ALMOST 4 MILLION NEW JOBS STRONG JULY EMPLOYMENT
REPORT 207,000 NEW JOBS, (BUT NONE IN MFG)
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134
2003 AVGPC -0.1 2004 AVGPC 1.6 2005 AVGPC
1.7
20052 133.4

132
130
128
126
124
1998
1999
2000
2001
2002
2003
2004
2005
Economic Research Institute of Erie, School of
Business, Penn State-Erie
12
Labor Markets IIThe Unemployment Rate
2003 2004 20052 UN RT 5.9 5.5 5.1 INI
CLM 402 343 325 TOT EMP -0.1 1.6 1.7 MFG
EMP -4.5 0.2 -0.7 WK HRS 40.3 40.8 40.5 AS OF
JULY, EMP UP 26 CONSECUTIVE MONTHS (RISING SINCE
MAY 2003) ALMOST 4 MILLION NEW JOBS STRONG JULY
EMPLOYMENT REPORT 207,000 NEW JOBS, (BUT NONE IN
MFG)
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6.4
2003 AVGPC 5.9 2004 AVGPC 5.5 2005 AVGPC 5.1
20052 5.1
6.0
5.6
5.2
4.8
4.4
4.0
3.6
1998
1999
2000
2001
2002
2003
2004
2005
Economic Research Institute of Erie, School of
Business, Penn State-Erie
13
Prices and InflationConsumer and Producer Prices
2003 2004 20052 CPI 2.0 3.0 3.1 CPI
LFE 1.2 1.9 2.3 PPI FIN 3.5 4.1 4.2 SOME
SUGGESTION OF BUILDING INFLATIONARY PRESSURES.
STILL WEAK
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Economic Research Institute of Erie, School of
Business, Penn State-Erie
14
The FED, Money, andInterest Rates
Economic Research Institute of Erie, School of
Business, Penn State-Erie
15
Money and Interest RatesFederal Funds
FED FUNDS RATE CUT 13 TIMES SINCE MAY
2000 DROPPED 5.5 POINTS JUNE 2003 RATE OF
1.0 WAS LOWEST IN 45 YEARS RATE HAS BEEN RAISED
10 TIMES SINCE JUNE 2004, NOW STANDS AT 3.50
(AUG 2005)
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Economic Research Institute of Erie, School of
Business, Penn State-Erie
16
Money and Interest RatesAverage Prime Rate
AVERAGE PRIME RATE CHANGES MATCH FEDERAL FUNDS
RATE CHANGES (ADD 3 PERCENTAGE POINTS)
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Economic Research Institute of Erie, School of
Business, Penn State-Erie
17
The Deficit
DEFICIT REDUCTION DUE TO GROWING
ECONOMY IMPENDING SLOWDOWN IN ECONOMY MAY LEAD
TO DEFICIT INCREASES SPENDING INCREASES?? FURTHE
R TAX CUTS??
Economic Research Institute of Erie, School of
Business, Penn State-Erie
18
Leading Indicators
2003 2004 20052 CLI 7.2 5.7 1.3 LEADING
INDICATORS SUGGEST ECONOMY SLOWING, BUT STILL
LIKELY TO GROW AT LEAST THROUGH THE REMAINDER OF
2005
Economic Research Institute of Erie, School of
Business, Penn State-Erie
19
FED AssessmentState of the National Economy

• FOMC Statement, Aug 8, 2005 (my emphasis)
• The Federal Open Market Committee decided today
  to raise its target for the federal funds rate by
  25 basis points to 3-1/2 percent.
• The Committee believes that, even after this
  action, the stance of monetary policy remains
  accommodative and, coupled with robust underlying
  growth in productivity, is providing ongoing
  support to economic activity. Aggregate spending,
  despite high energy prices, appears to have
  strengthened since late winter, and labor market
  conditions continue to improve gradually. Core
  inflation has been relatively low in recent
  months and longer-term inflation expectations
  remain well contained, but pressures on inflation
  have stayed elevated.

Economic Research Institute of Erie, School of
Business, Penn State-Erie
20
National Forecasts 2005
Economic Research Institute of Erie, School of
Business, Penn State-Erie
21
National Forecasts 2006
Economic Research Institute of Erie, School of
Business, Penn State-Erie
22
Employment Projections for the Erie Regional
Economy
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Business, Penn State-Erie
23
Employment Projections for the Erie Regional
Economy

• Erie Total Employment
• Service Sector Employment
• Wholesale and retail trade
• Education and health care
• Leisure and hospitality
• Other Services (primarily finance, insurance,
  real estate and government)
• Goods Sector Employment (manufacturing,
  construction, mining and natural resources)

Economic Research Institute of Erie, School of
Business, Penn State-Erie
24
Erie Employment Projections IChanges in
Employment
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Business, Penn State-Erie
25
Erie Employment Projections IIEmployment Levels

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Business, Penn State-Erie
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Economic Research Institute of Erie, School of
Business, Penn State-Erie