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Current Macro-Economic Conditions and the Business Cycle

US Business Cycles

Introduction

The economists endeavor to unravel the location of the economy, and most importantly, its direction, with the aim of counteracting the possible future events in the economy that will be adverse. In case of a wrong turn in economical events, the economists often employ both fiscal as well as monetary tools in changing the economy’s course. The modern idea concerning economy has the feature of applying these tools (policies) in smoothing out and counteracting the cycle of the business. These policies have been successfully employed by economists to ensure that the U.S. firm dealings, altogether with the life of her citizens (working and saving in the financial markets) become more stable and less turbulent. In view of this, the crucial matters pertaining to U.S. economic recession are hereby covered in details (Gärtner, 2006).

Housing market circumstances responsible for the market collapse

The housing bubble in the United States is that economic bubble having an effect on various sections of the U.S. housing market, including Alabama, New Jersey, Florida, California, New York and Illinois among others. In 2006, the peak in housing prices was experienced, while its decline was witnessed in 2007. This may not have still reached the bottom in 2010. As such it has a direct effect on the home valuations, while also greatly affecting the major stakeholders involved here, including mortgage markets, foreign banks, and real estate. This presents the case for the countrywide recession. Due to this therefore, it is important to investigate the circumstances in housing market that translated into the market’s collapse (Snowdon, 2005).

Deregulation

Earlier on, the sector of finance was highly regulated through Glass–Steagall Act, separating commercial banks and investment banks. The act as well had strict limits in relation to loans and interest rates from the banks. From 1980, significant deregulation by banks took root. The deregulation permitted products with potential risks to exists, for instance the adjustable-rate mortgages, hence creating housing bubble along with easy credit.

Government-mandated loans

Beginning with the 1977 Community Reinvestment Act (CRA), Congress compelled banks to provide loans that they would otherwise not offer. This increased demand while gathering momentum after the exit of the then president Reagan from office. The white house forced the Federal Reserve, attorney general,  as well as all institutions having regulatory authority on banks to force the banks to make loans available for the African-Americans with low incomes (through the aid of racial statistics for determining the compliancy of the banks).

Interest rates on Mortgage

During the upsurge of the dot-com bubble, the Federal Reserve significantly decreased interest rates hence spurring easy credit so that banks could make loans. In 2006, these rates had increased to 5.25%, decreasing the demand and increasing the payments made monthly for the mortgages with adjustable rates. The resultant effect was foreclosure as well increased supply, while further dropping the housing prices. In order to gain more than 1% return which was being offered by the Federal Reserve, the mortgages were sold to investors. While the risky mortgage percentage had gone high, the rating companies insisted they were top-rated. Hence, instead of housing drop being felt in limited regions, it became worldwide, leading to Wall Street and rating companies being blamed for misleading investors (Gärtner, 2006).
Classification of macroeconomic indicators

The macroeconomic indicators are often classified according to their locality, their direction or their timing.  In as far as detailed classification is concerned, classification can be through the local indicators, the direction (encompassing procyclic, countercyclic and acylic indicators), and the timing. The one with the greatest concern here is the classification by timing. Classification by timing involves three categories as per the timing which they occur in the business cycles. These are leading, lagging and coincident indicators.

The leading indicators

These are always indicators that experience a change in advance prior to a change in the whole economy. These are as such the economy’s significant short-term predictors. The returns from the stock market are always a valuable indicator. They always begin to go down before the whole economy declines and begin to flourish prior to a recovery by the whole economy (from slump). Some other valuable indicators include consumer expectation index, money supply, as well as building permits. The Conference Board ensures the publishing of a Leading Economic Index which is composite and which has ten indicators for the prediction of the U.S. economic activity 6 to 9 months in advance. In 2008, the positive contributors, as seen among the leading indicators included real supply of money, the spread of interest rates, manufacturer’s new requests and demand for the consumer goods as well as the materials. The negative ones were average weekly claims for the unemployment insurance, building permits, and stock prices. The leading index recently stood at 102, compared to 100 in 2004 (Sullivan, 2003).

The Lagging indicators

They are indicators that the whole economy changes before they do, and are often a year’s few quarters. An instance of the lagging indicator is the unemployment rate, since employment is likely to rise three quarters from a growth in the whole economy. In finance, the Bollinger bands represent a frequently used lagging indicator. As well, the profit received from any business is considered a lagging indicator since it shows the historical performance. This is also the same case with the improved satisfaction of the customer because it is derived from the past initiatives. The lagging indicators’ index has a monthly publishing from the Conference Board. It determines the index values from seven variables in economy. The components include average unemployment duration, industrial loan and outstanding commercial values, and Consumer Price Index change for services. Others include labour cost change per unit output, ratio of sales to manufacturing plus trade inventories, ratio of personal income to the consumer credit that is outstanding, and finally the prime rate averages that banks charge. The lagging index recently stood at 111.6, compared to 100 in 2004. Positive contributors here include average unemployment duration, labour cost per unit output changes and commercial as well as industrial outstanding loans. The negative one was the average of the prime rate that the banks charge. In February the index increased by 0.3 % while in January it was 1% (Ploeg, 2002).

The coincident indicators

These indicators change approximately equally with the occurrence of the whole economy’s change hence providing valuable information concerning the economy’s current state. Various coincident indicators are in existence, ranging from Gross Domestic Product, personal income along with retail sales, to industrial production. The coincident index is applicable in finding out, after facts, peak as well as trough dates in business cycles. The coincident indicator index comprises four statistics. These are employee numbers on the non-agricultural payrolls, Personal income minus transfer payments, manufacturing along with trade sale, and industrial production. In 2008, the positive coincident indicators were personal income minus transfer payments and industrial production. The negative one was non-agricultural payroll employees. The coincident index recently stood at 107.1, compared to 100 in 2004.

Recommendations

The central focus of these suggestions is to stimulate the economic recovery, in addition to enabling America become a nation which is much stronger and with high prosperity rate. The recent economic crisis was the aftermath of several years of irresponsible acts in the government as well as the private sector. Therefore, while focusing on the future, several dimensions of the economic crisis must be confronted while a new dawn’s foundation for transparency as well as responsibility is laid.  Measures necessary include:

Creation of jobs

One of the greatest priorities in confronting this crisis is returning Americans to work. This should involve an act that will promote job creation as it enables long-term investments in education, energy, healthcare, and infrastructure. This recovery plan has to ensure an increase in alternative energy production, modernization and weatherization of homes and other buildings, expand the broadband technology throughout the nation, as well as computerize health care system. As such, the recovery plan ends up creating or saving approximately 3,500 000 jobs as it also invests in the priorities that create a sustainable growth in the economy (for the country’s future).

Expanding Opportunity

A great number of Americans live hopelessly, especially concerning a better future, let alone access to better family- supporting employment. In order to solve this problem, the government has to be deeply committed in creating ample opportunities for all people equally, so that all the Americans can have a hold on the middle class ladder. The expansion of opportunities will entail investment in strategies that make the work pay, expansion of affordable housing access, and assisting the low-income citizens build job skills to have a workforce excellence.

The government also has to provide an act that involves broad investments so as to lessen the poverty caused by the economic crisis. The act should also ensure an increase in funds for job training, the summer jobs specifically for the young people, as well as other opportunities. It should also cater for a better income support, along with an increase for the recipients of unemployment insurance and state expansion incentives.

Creating Financial Markets Stability

The crisis has brought with it a great lesson on the impacts of institutions and financial markets on the working families. The government has to get the credit moving again for small businesses to recover and also hire workers, in addition to families being able to educate their children in college. The accountability as well as transparency on major agencies, especially Washington together with Wall Street, are also necessary and have to be facilitated. Steps have to be taken to make sure that the banks use the taxpayer assistance to enable lending while creating a sustainable growth in the economy. For long term plans, a new framework of regulations has to be created, that which holds the market players accountable for activities they carry out while preventing fraudulent activities (Gartner, 2006).

Developing effective fiscal policy

Effective fiscal policy is quite necessary in reviving the economy. Many years have seen Washington people being divided on whether the government is responsible for the problems or is the solution to the problems. However, in the previous eight years, mostly on the response of Federal Government to Hurricane Katrina; it is clear that bad governance is what disturbs the Americans. As such the government has to   eradicate wasteful redundancy, rationalize government procurement, restructure federal contracting as well as acquisition, place performance first, and use taxpayer dollars prudently on our huge entitlement programs (Mishkin, 2004).

Conclusion

The macro-economic conditions are quite crucial in defining the development and future prospects in a given country, especially considering that this goes far much beyond national and regional boundaries, to a global level. As such, economists are keen to carry out various studies to ascertain the occurrence of future events so as to avoid unwanted occurrences and plan for the best. Leading indicators can be use here to determine the chances of a particular economic situation occurring.



Jun 18 2012 , 11:39
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