ECON 410 Final Paper

Sierra Van Meter
#003978571
Econ 410
June 4, 2014
Written Report
So you might ask yourself, what exactly is a recession? According to the Bureau of Labor Statistics, characteristics of a recession include: a general slowdown in economic activity, a downturn in the business cycle, as well as a reduction in the amount of goods and services produced and sold. The official arbiter of U.S. recessions, the National Bureau of Economic Research, states that there has been a total of ten recessions between 1948 and 2011. The most recent financial crisis began in December of 2007, this is considered to be the worst financial disruption since the Great Depression of 1929 – 1933. Although these recessions were different in character, both crises were affected by bank failures that led to large declines in the economy. This last recession known as the Great Recession lasted from December of 2007 to June of 2009, the U.S. economy has yet to return to pre-recession economic times but it has seen an increase in economic growth. The most widely recognized indicator of a recession is the unemployment rate. People are classified as unemployed if they do not have a job, have actively looked for work in the prior four weeks, and are currently available for work. (4, pg. 5) Just prior to December of 2007, the unemployment rate was 5.0%, but by the end of the recession in June of 2009; the unemployment rate was 9.5%. We saw during the recession the unemployment rate peak at 10.0%, this was in October of 2009. This was not the highest unemployment ever reached though. Between September 1982 and June 1983, the unemployment rate peaked at an all time high of 10.8%. Not only was the number of unemployed tremendously high, the proportion of long-term unemployed in the recent recession compared to post-recession periods is notable. The long-term unemployment rate is the number of persons employed for twenty-seven weeks or longer as a percent of the labor force. (4, pg. 5) In 2008, more than 1.2 million jobs were lost, the unemployment rate rose to 7.3% during this time. (2) Demographics play a large role in the unemployment rate as well. Historically, minorities such as African Americans as well as Latinos have had a higher rate of unemployment than that of Whites. Although these demographics were true during the Great Recession, the unemployment rates for these minorities remained below the peaks between 1982 and 1983 as well as for the rates of Whites. (11) Gender also is a factor in unemployment rates. Traditionally men’s unemployment rates were lower than women’s both during and between recessions, but since the early 1980s and throughout the Great Recession, men’s unemployment rates have been higher. Other major indicating factors of a recession include inflation and economic growth. As for the inflation rate, this is calculated using the Consumer Price Index (CPI) that is published monthly by the Bureau of Labor Statistics. In December of 2007, when the recession began, the inflation rate was 4.1%. The highest rate of inflation came in July of 2008, when it peaked at 5.6%; the average inflation rate was 3.8% for the year. (20) This was the highest inflation rate our nation had seen in the past 23 years. After 2008 and the housing market crash, the United States was in turmoil. For the first time since 1955 we saw a negative average inflation rate of -0.4%, this came in 2009. Since then, the inflation rate has been about 2% annually, which is considered to be an appropriate rate.
The final indicating factor of a recession that I am going to discuss is economic growth. Gross Domestic Product (GDP) is commonly used as an indicator of the economic health of a country, as well as to gauge a country’s living standards. It represents the market value of all goods and services produced by the economy during the period measured, including personal consumption, government purchases, private inventories, paid-in construction costs and the foreign trade balance. (17) The ideal GDP growth rate is between 2-3%. Anything less than 2% will not create new jobs for a growing labor force compared to an inflation rate greater than 3%, which means the economy is heading towards what is known as an asset bubble. Despite the worst financial crisis since the Great Depression the economy has gradually strengthened since mid-2009. The final GDP rate in 2009 was -2.8%, but by the end of the fourth quarter, GDP had risen to 3.9%. (9) We saw many events happen in the year 2010 after Obama became President. In 2010, with the BP oil spill and passage of Dodd-Frank Act and Obama care, GDP increased by 2.5%. In early 2011 the earthquake in Japan hit, the first quarter of this year saw a very low GDP growth rate of 0.4% as a result. In 2012, we had the Presidential Campaign, at this time the fiscal cliff created business uncertainty. The GDP by the end of 2012 was at 2.8%. Due to the low inflation, the GDP growth in 2013 was only 1.8%.
During this economic hardship, interest rates were dropping. The market clearly was showing how the economy was reacting to this decrease in interest rates. Due to high layoffs and lack of consumer confidence, demand was decreasing causing businesses to suffer the consequences. With businesses not experiencing demand, they were left with the only option to lay off employees. In 2009, on what is known as “Bloody Monday,” over 65,000 jobs were lost. (8) Unemployment benefits were not enough for consumers to maintain their living standards. We saw a dramatic increase in foreclosures of homes, Nevada being the state that suffered the most. (12) As a direct result of decreasing the demand for homes, prices began to decrease, as well as the low interest rates on loans. Consumers with a lack of confidence and wide spread media attention penetrating the minds of consumers about how poor our nation was doing only further worsened economic conditions. Consumers were holding onto any disposable income in fear of layoffs. There was minimal currency in circulation and the national debt was continuing to rise.
Although the nation’s economy has declined due to recession, the Federal Reserve (Fed) has exercised its privilege to stabilize our economy. Due to the substantial losses banks encountered from people being unable to repay their mortgage loans, banks were in need of additional funds. The loans they were issuing at this time were considered “subprime.” The people who borrowed were not qualified to take out these loans and the banks were the ones who got stuck with this debt. Banks began to borrow from the Fed through what is known as the discount window, commonly for just one night. At this window banks were able to borrow unanimously to ensure consumer confidence in the institution. The first major federal policy that was enacted because of bank’s needs was the Terms Auction Facility (TAF). What this policy did was allowed banks to borrow at a very low interest rate, and extended the borrowing period from overnight to as many as thirty days, unanimously. This was later changed to twenty-eight days.
The Federal Open Market Committee (FOMC) who is the monetary policymaking body of the Federal Reserve System is composed of 12 members, lead by the Chairman of the Board of Governors. The FOMC is responsible for fighting inflation and dealing with unemployment. The FOMC adjusts interest rates by setting the target for the Federal Funds Rate, even though banks actually are the ones that set the final rate. (10) This is the rate that banks charge other banks to borrow overnight usually to meet the required reserve. In early 2008, the FOMC lowered the federal funds rate to 3% because of the distress in the market as well as tight credit conditions in the lending process. After lowering the target for the Federal Funds Rate, ATF was extended for about six more months. This allowed for many more financial institutions to receive aid from the Fed.
Another federal policy that the Fed has enacted since 2007 was by the Article 13, Section 3, of the Federal Reserve Act. The Federal Reserve Board under this act bailed out American International Group (AIG). (15). The board decided that failure of AIG would have significant effect on financial markets. Failure would result in higher borrowing costs, reduction of household wealth, and ultimately a weaker economic performance. By loaning AIG the necessary $85 billion to stay afloat, AIG was able to continue operating and our nation was freed from decreased economic hardships.
Since the financial crisis, through what is known as quantitative easing, the FOMC has expanded its use of Open Market Operations. Quantitative easing is an unconventional monetary tool used by central banks to stimulate the economy. (1) Since March of 2009, the FOMC has set the range for the federal funds rate to fall between 0.00% - 0.25%; this is the current target rate now in 2014. To ensure this rate stays where it needs to be, the Fed can buy and sell U.S. Treasury Securities. The Fed has the ultimate goal of ensuring a positive upswing in our nations economy. Since President Obama has been elected, one thing he encouraged was Education Policy Programs. There were seven key areas he focused on to promote change. These included: Standardized Testing, School Choice, No Child Left Behind, College Funding and Affordability, Improvement to Science, Technology, Engineering, and Mathematics (STEM) Education, and lastly Merit Pay. This policy area has had a large effect on the economy receive both support and criticisms. This is one of the major Federal Policies that we saw last year. In 2013 the national unemployment rate was 7.35%, compared to the current U.S. unemployment rate which is steady at 6.7%, we can see our nation is experiencing economic growth. In California our unemployment rate is 7.8%, this is among the highest of unemployment rates in the nation. As for inflation in 2013, the average rate was at 1.47%, as of April 2014, the rate has risen to 1.95% here we see an increase in inflation. (19) A little inflation is okay in economies, but too much can be a terrible thing. The ultimate indicator to asses how our nations’ economy is doing is by assessing GDP. United States GDP shrank at a rate of 1.0% in the first quarter of 2014 due to a sharper fall in private inventory investment and a bigger trade deficit, leaving the current GDP at -1.0% compared to the average GDP in 2013, which was 2.6%. (7). Negative growth in a nation’s GDP not only strikes fear into investors and consumers, but it is one of the main factors that contribute to a recession. Today consumers aren’t recognizing this negative growth because the real value of wages is increasing. In California specifically, our minimum wage is $8.00 per hour, this is greater than the federal minimum wage that stands at $7.25 per hour. In September 2013, California passed House Bill AB10, which approved the minimum wage increase to $9.00 per hour effective July 2014 increasing again in January 2016 to $10.00 per hour. (3) This increase in wages hinders the ability to focus on what is really happening in the economy of our nation.
My recommendation for Monetary Policy in these next 6-12 months would be to continue operating at the same level it has been. Like stated above, since the end of 2013, the national unemployment rate has dropped from 7.35% to 6.7%. More jobs are becoming available due to consumer confidence and increased demand for goods and services. As for the inflation rate, the target rate is set at 2%, we are right at this level and should continue to do what we are doing with possibly a slight increase to boost the economy. With a current inflation rate of 1.95%, we see that prices are minimally rising. Usually if prices go up, demand is increasing which may lead to increase in employment opportunities and wages. As for GDP, we saw that this past quarter there was a 1.0% decrease. I believe that the most effective way to increase this is through government purchases. They should engage in more open market operations by purchasing U.S. Treasury Securities to increase the money supply. The Fed only buys in the secondary market, which means that current bond holders who have bonds whose maturity is not up yet should sell them to the Fed. As a result of this, banks will have excess liquidity and more lending opportunities will become available to consumers, ultimately increasing the money supply.

References

1. Brad Plumer, “What is quantitative easing? And how will it help the economy?” The Washington Post, September 13, 2012, (accessed @ www.washingtonpost.com/blogs/wonkblog/wp/2012/09/13/qe3-what-is-quantitative-easing-and-will-it-help-the-economy/)

2. “Databases, Tables & Calculators by Subject,” Bureau of Labor Statistics, November 27, 2012, (accessed @ data.bls.gov).
3. “Federal & State Minimum Wage Rates, Laws, And Resources,” (accessed @ www.minimum-wage.org/states.asp?state=California)

4. “How the Government Measures Unemployment” February 2009, (accessed @www.bls.gov/cps/cps_htgm.htm)

5. Jason Delisle and Clare McCann, Issue Brief, “Federal Education Budget Update: Fiscal Year 2013 Recap and Fiscal Year 2014 Early Analysis,” April 30, 2013, New America Foundation, (accessed @www.newamerica.net)

6. Joana Taborda, U.S. Commerce Department, Trading Economics, “United States Bureau Labor Statistics”, May 2, 2014, (accessed @www.tradingeconomics.com)

7. Joana Taborda, U.S. Commerce Department, Trading Economics, “United States GDP Growth Rate,” May 30, 2014, (accessed @ www.tradingeconomics.com/united-states/gdp-growth)

8. Julianne Pepitone, “Bloody Monday: Over 65,400 jobs lost,” CNN Money, Time Warner Company. January 30, 2009, (accessed @ money.cnn.com).
9. Kimberly Amadeo, “U.S. GDP by Year,” last updated February 5, 2014, (accessed @useconomy.about.com/od/GDP-by-Year/a/US-GDP-History.htm)

10. Kimberly Amadeo, “What is the FOMC?” Federal Open Market Committee, last updated March 19, 2014, (accessed @ useconomy.about.com/od/governmentagencies/p/FOMC.htm)

11. Labor Force Statistics from the Current Population Survey, Graph: “Unemployment rates by race and Hispanic or Latino ethnicity, January 1972 – December 2011, seasonally adjusted,” last modified May 22, 2014 (accessed @ www.bls.gov/cps/demographics.htm)

12. Les Christie, “Foreclosures: ‘Worst three months of all time,” CNN Money, Time Warner Company. October 15, 2009, (accessed @ money.cnn.com)

13. Michael D. Hurd, Susann Rohwedder, “Effects of the Financial Crisis and Great Recession on American Households,” September 2010

14. “Press Release: Release Date January 30, 2008,” Board of Governors of the Federal Reserve System, January 30, 2008, (accessed @ federalreserve.gov).

15. “Press Release: Release Date September 16, 2008,” Board of Governors of the Federal Reserve System, September 16, 2008, (accessed @ federalreserve.gov).

16. Press Release, Release Date: September 24, 2009, Board of Governors of the Federal Reserve System, (accessed @ www.federalreserve.gov)

17. Ryan Barnes, “Economic Indicators: Gross Domestic Product (GDP),” (accessed @ www.investopedia.com/university/releases/gdp.asp)

18. "The Recession of 2007 – 2009” February 2012, (accessed @www.bls.gov/spotlight)

19. Time McMahon, “Historical Inflation Rate,” May 15,2014, (accessed @ inflationdata.com/Inflation/Inflation_Rate/HistoricalInflation.aspx)

20. US Inflation Calculator, “Historical Inflation Rates: 1914-2014,” last modified May 15, 2014, (accessed @ www.usinflationcalculator.com/inflation/historical-inflation-rates/).

References: 1. Brad Plumer, “What is quantitative easing? And how will it help the economy?” The Washington Post, September 13, 2012, (accessed @ www.washingtonpost.com/blogs/wonkblog/wp/2012/09/13/qe3-what-is-quantitative-easing-and-will-it-help-the-economy/) 2 5. Jason Delisle and Clare McCann, Issue Brief, “Federal Education Budget Update: Fiscal Year 2013 Recap and Fiscal Year 2014 Early Analysis,” April 30, 2013, New America Foundation, (accessed @www.newamerica.net) 6 7. Joana Taborda, U.S. Commerce Department, Trading Economics, “United States GDP Growth Rate,” May 30, 2014, (accessed @ www.tradingeconomics.com/united-states/gdp-growth) 8 9. Kimberly Amadeo, “U.S. GDP by Year,” last updated February 5, 2014, (accessed @useconomy.about.com/od/GDP-by-Year/a/US-GDP-History.htm) 10 15. “Press Release: Release Date September 16, 2008,” Board of Governors of the Federal Reserve System, September 16, 2008, (accessed @ federalreserve.gov). 16