US Economy: A Forecast for 20062007

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US Economy A Forecast for 2006-2007

• The Americonomist Group
• (TAG)
• Manoj, Fatima and Jay
• MBA501R2

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TAG
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Agenda

• Thesis
• Introduction
• US Economy History and California Economy
• Statistics (GNP, GDP) set 3.1, 3.5, 3.6
• Issues/Problems/ Opportunities/ unemployed
• Analysis (unemployed) (inflation) (3.4 business
  cycles 4.1, 4.2, 4.3
• Recent Happening
• Forecast 3.4 assumption 3.7 4.4 4.5 4.6 4.7 4.8
• Implications for an alternative energy company
• Conclusion
• References

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Thesis

• In an optimistic scenario, U.S. economic growth
  could pick up to 4.4 in 2006 and stay above
  trend, at 3.9, in 2007 and core inflation will
  remain subdued.
• What are the implications of this for a
  particular industry.

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US Economy the beginning

• The US Economy started as an agrarian economy.
• Gold rush and homesteads
• Rapid industrialization started after the civil
  war.
• The transcontinental railroad stimulated growth
  and the US became a major player in world
  economy.

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US Economy - Major factors in the 20th Century

• Crash of 1929
• Great Depression
• World War II
• Post War Boom and the cold war
• The Great Society
• Oil Crisis
• Impact of Japan
• Supply side economics and Reaganomics
• Internet Revolution and e-commerce

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US Economy in the 21st Century

• Terrorism and the War on Terror
• Natural Disasters Katrina etc.
• Oil price surge and depletion of resources
• Emergence of Europe and the Euro
• Increasing impact of China, India, Brazil and
  Russia.
• Outsourcing and Globalization
• Promises of Nanotechnology and Genetics
• The challenge of global warming

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Californian Economy - Strengths

• 5th largest economy in the world
• 13 of US GDP
• GSP for 2005 was 1.4 trillion (Wikipedia)
• Entertainment industry in Southern California
• High Tech in Northern California
• Farming in Central Valley

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Threats and weaknesses of the Californian economy
Probably worse than you thought!
Huge deficits Surging Population Outsourcing of
jobs Energy crisis Environmental
Crisis Infrastructure that needs
repair Possibility of natural disasters
earthquakes, tsunamis, wildfires Terrorism is a
wild card
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To forecast economic trends, we need to first
understand

• What is the economic system
• What are its drivers
• How do you extrapolate

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A brief preview of economic systems

• What is a market economy?
• What is a command economy?
• What is a mixed economy?
• Keynesian economy
• Supply side economics

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Rival Economic Theories

• Adam Smith
• 1723-1790
• Inquiry into the Nature
• Causes of
• The Wealth of Nations

• Karl Marx
• 1818-1883
• The Communist Manifesto

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Market Economy vs Command Economy

• Market economy relies on the basic laws of
  economics supply and demand to drive the
  economy.
• Adam Smiths Wealth of Nations
• Capitalism
• US, Western European Nations, Japan

• Command Economy where the economic policy is
  decided and fully controlled by the state. State
  owns all means of Production.
• Karl Marxs Communist Manifesto and Das
  Capital
• Communism
• Old Soviet union, Cuba, Vietnam (and China)

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With a little help from the government--

• Keynesian economic theory
• Government as a force for change
• Driving idea of new deal and great society
• Government using policies to stimulate the
  economy
• Fiscal Policy
• Monetary Policy

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John Maynard Keynes 1883-1946

• English economist
• Advocate of
• interventionist government policy
• One of the main founders of macro-economics

• Keynesian Economics
• Promotes mixed economy
• Aggregate demand drives economy
• Said to have influenced new deal

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The government is the problem--

• Supply Side Economics
• Small Government
• Reduce Tax
• Less dependence on welfare schemes
• Stimulate Growth
• New conservatism
• Trickle down economics?

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Supply Side Economics

• Lowering Taxes can increase revenue by causing
  stronger economic growth
• Reductions in marginal income tax and capital
  gains taxes to encourage allocation of income to
  investment

• Increased investment would increase supply
• Increased supply would lower inflationary price
  pressures.
• Reaganomics cited as an example of supply side
  economics.

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Components and dynamics of the Economic cycle
CYCLICAL
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Targets of economic policy

• Gross Domestic Product (GDP)
• Measures value added goods and services
  produced in a given year
• Measures percentage changes in Real (
  inflation-adjusted) GDP
• Unemployment Rate (U)
• Measures the percentage of the workforce who
  are actively
• seeking a job, but unable to find one.
• Consumer Price Index (CPI, RPI,..)
• measures the level of prices of these goods
• percentage changes in the CPI is a measure of
  inflation.

??
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Governments role in stimulating economic growth
and taming inflation

• Monetary Policy
• Controlling money supply
• Open Market Operations buy and sell securities
• Reserve Ratio - of banks deposits to be kept
  in reserve
• Discount Rate Interest rates charged by Federal
  Reserve Banks

• Fiscal Policy
• Legislative mandates
• Expansionary
• Contractionary
• Fiscal Policy Tools
• Taxes
• Government Spending

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Effects of Monetary Policy
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Effect of fiscal policy
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Global Economy

• Sources of growth
• Increased capital per head
• related to domestic savings, inflows of
  foreign capital most impact in low pc GDP
  countries
• Increased productivity of capital (and labour,
  ..)
• technical progress, good education, health,
  openness to trade,
• social capital stable government, low
  corruption, small public sector, enforceable
  property rights,

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US Economy Issues, Problems and Opportunities

• Trends
• Slow growth
• Rising productivity
• Lagging job creation
• Lagging business investment

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Californian Economy

• Potential for growth
• Culture of entrepreneurship
• Still the leader in Film and Television
• New technologies
• Ecological awareness
• Alternate energy industries

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Target Company

• Company makes solar panels
• Low key business for last 10 years
• Prospects of expansion are good because of
  increasing cost of oil and decreasing cost of
  Silicon
• Interest rate worries
• Wage increase might be another problem

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Economic Indicators

• GDP
• Unemployment
• Interest
• Consumer Price Index

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US Economy Forecast - Biennial Revenue Estimate
Carol Keeton Strahorn, Texas Comptroller
January 2005
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US Economic Outline(Realtor.org)
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US Unemployment

• US Labor Department report showed the January
  unemployment rate dropped to a 4-1/2-year low 4.7
  percent from 4.9 percent in December 2005. The
  last time the rate was lower was in July 2001
  when it was at 4.6 percent.
• Some 1.98 million jobs were created over the full
  year 2005, 43,000 fewer than reported in Jan 2006
• Average hourly earnings rose to 16.41 in January
  from 16.34 in December. In the 12 months through
  January, earnings have risen by 3.3 percent, the
  largest for any 12-month period in nearly three
  years, since February 2003.
• U.S. employment costs rose 0.8 percent in the
  fourth quarter, just below market forecasts, as
  wage growth picked up and the increase in benefit
  costs slowed, but inflation once again outpaced
  the increase in worker paychecks, a government
  report (Jan 2006)

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Sacramento Forecast ProjectUpdate January,
2006Arthur N. Jensen, Professor of
MarketingQuantitative

• Unemployment Rate
• 1/9/2006   The Unemployment Rate for the U.S.
  ended 2005 (November and December data are
  preliminary) with an annual rate that was almost
  exactly in the middle of the 4.5 to 5.5 range
  that I forecast a year ago an annual rate of
  5.1. I'm going to extend the 4.5 to 5,5 range
  through 2006 because I don't see the current
  conditions changing much over the coming year.

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Sacramento Forecast ProjectUpdate January,
2006Arthur N. Jensen, Professor of
MarketingQuantitative

• Real Growth
• 2/18/2006   The advance results for the 4th
  quarter of 2005 puts the average quarterly growth
  in the economy over the last 4 quarters at a 3.5
  increase, right at the lower edge of the 3.5 to
  4.5 range that I forecasted in January of 2005.
  I'm expecting 2006 to be another solid (the
  annual average since 1929 is 3.55 a year) year
  with growth in the 3.0-4.0 range for the full
  year.

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Sacramento Forecast ProjectUpdate January,
2006Arthur N. Jensen, Professor of
MarketingQuantitative

• Inflation Rate
• 7/14/2005    The Inflation Rate, as measured by
  the percentage change in the Consumer Price Index
  (CPI-U) for 2005 ended up at 3.4. This is right
  in the middle of the range I forecast back in
  January. So...my forecast for the annual average
  Inflation Rate in 2006, is still for a range of
  3.0 - 4.0, a continuation of the slow increase
  of the last several years.

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Risks to the Forecast ??Oil prices remain high,
fostering uncertainty among households and
businesses. ??Long-term interest rates finally
begin to rise to the degree forecasters thought
they would in early 2004. ??Expiration of
investment tax credits produces an investment
pothole in 2005. ??Productivity growth starts
to slip, potentially causing firms to raise
prices to offset increased pressure on labor and
non-labor costs.
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IT Outsourcing and the U.S. Economy

• According to the 2005 study by Global Insight,
  The Impact of Offshore IT Software and Services
  Outsourcing on the U.S. Economy and the IT
  Industry, the U.S. economy has much to gain from
  global sourcing and an environment of free trade,
  open markets and robust competition. Benefits
  include job creation, higher real wages, higher
  real GDP growth, contained inflation and expanded
  exports resulting in increased economic activity.
• additional 257,042 net new U.S. jobs in 2005 by
  2010, net new jobs will total 337,625
• With inflation kept low and productivity high,
  worldwide sourcing will increase real hourly
  wages in the U.S. by 0.06 in 2005, climbing to
  0.12 in 2010
• Worldwide sourcing contributes significantly to
  real U.S. Gross Domestic Product, adding 68.7
  billion in 2005. By 2010, the real GDP will be
  147.4 billion higher
• Global sourcing contributed 5.1 billion to U.S.
  exports in 2005, growing to 9.7 billion by 2010

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UCLAAnderson ForecastQualitative

• National Forecast
• UCLA Anderson Forecast Predicts Weakness In The
  National Economy Due To Problems In The Housing
  Market
• A slowdown in housing will produce a slowed
  economy, but without the job losses in the
  manufacturing sector, it wont be a recessed
  economy.

• California Forecast
• California Economy To Experience Similar
  Conditions as States Real Estate Market Cools
  No Recession Forecasted for the U.S. or
  California
• The Forecast calls for a plateau in home prices,
  a moderate decrease in sales and new building and
  two years of weak growth.
• The report also calls for a slowdown in
  construction activity through 2007.

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US Economy Forecast

• Expected Real GDP 4.4(2006),3.9(2007)
• Inflation 2 (2006), 2(2007)
• Wage Rates 3(2006),2(2007)
• Unemployment 4.9(2006),4.7(2007)
• Key Interest Rates 6.8(2006),7.2(2007)
• (prime)
• Exchange Rate ( Vs Yen, Euro and Yuan)
• Yen 120Y(2006), 123Y(2007)
• Euro 0.835Eu(2006), 0.85Eu(2007)
• Yuan 8.02Y(2006), 7.88Y(2007)

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Conclusion TAG Forecast

• U.S. economic growth could pick up to 4.4 in
  2006 and stay above trend, at 3.9, in 2007.
• Sources of upside risk include faster
  productivity gains, stronger growth in business
  investment and exports, a softer landing for
  housing markets, and lower energy prices as US
  explores and mine its own oil resources.
• Positive geopolitical changes, increased
  globalization and strategic alliances could make
  US economy more stable and optimistic by end of
  2007.

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Conclusion - Prospects for California and
Target Company

• California
• Real Estate Boom coming to an end in 2007
• High Tech industries picking up
• Interest rates will not increase as fast as
  2004-2005.
• Power crisis looming
• Deficit crisis not over

• Solar Panel Company
• Fuel cost and power price increase provides
  opportunity
• Interest rate still reasonable.
• Expect decent growth prospects.
• Nanotechnology improvements can drastically bring
  down cost of panels and fuel cells within next
  five years

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• References
• Wachovia securities Economic Forecast, page 3
• Economic Forecasts, Autumn 2005 - 2007 growth
  picks upCorrigendum to the Commissions autumn
  2005 economic forecast
• January 16, 2006By Edward LeamerUCLA Anderson
  Forecast(Commentary published in the Los Angeles
  Business Journal)
• Analysis of the 2006-07 Budget Bill Legislative
  Analyst's OfficeFebruary 2006
• Wikipedia

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