GDP SECTOR STATUS REPORTBen Araya- Personal Income

Brett Hart- GDP

Rob Kunces- Index of Leading Indicators

Brad Neumyer- P & C

November 30, 2009

PERSONAL INCOME

Income received by households from employment, investments, and transfer payments.

Wages and Salary

Released monthly

PERSONAL INCOME: WHAT TO LOOK FOR

Trends in personal income growth

Trends in savings rates

Changes in consumer expenditures

Changes in growth in the core PCE deflator

CURRENT SITUATION

Personal income was unchanged in September

Spending declined 0.5%

Savings rate increase to 3.3%

MONTHLY PERSONAL INCOME TREND

Jan Feb Mar Apr May Jun Jul Aug Sep-1.5

-1

-0.5

0

0.5

1

1.5

Income

Income

PERSONAL INCOME LAST 5 YEARS

2004

M10

2005

M1

2005

M4

2005

M7

2005

M10

2006

M1

2006

M4

2006

M7

2006

M10

2007

M1

2007

M4

2007

M7

2007

M10

2008

M1

2008

M4

2008

M7

2008

M10

2009

M1

2009

M4

2009

M7-6

-4

-2

0

2

4

6

8

10

YoY% Change

REAL GDP

Real GDP is an inflation-adjusted measurement of the value of all the goods and services produced in a fiscal year, expressed in base-year prices. This is referred to as “constant-price”

REAL GDP

The US economy expanded 3.5% in the third quarter. The first growth since the second quarter of 08. Growth came primarily from consumer spending, exports, inventory investment, homebuilding and federal government spending.

RECENT REAL GDP

3Q GDP 3.5% Since the latest financial crisis the GDP has

been on a negative decline, until this quarter. Economist feel GDP will continue to grow but

the growth will not be as strong Consumers must sustain their gains in

spending without government help Consumption 09Q2: -.87 09Q3: 3.35 Fixed Res Investment 09Q2: -23.2 09Q3:

23.28 Government 09Q2: 6.72 09Q3: 2.32

Real GDP % change since 2000Q1

CONFERENCE BOARD LEADING INDICATOR

- WHAT IS IT?

A weighted average of 10 key economic data series that is released monthly.

Is a strong predictor of recessions Has successfully predicted each of the eight

recessions since 1950. The 10 variables have historically turned

downward before a recession and upward before an expansion.

Weakness: Lag between the a turn in the index and the economy makes predictions delayed and therefore more difficult to institute a new economic policy.

LEADING INDICATORS UP TO SEPTEMBER 2009

March

April

MayJu

ne July

Augus

t

Sept

embe

r

Octob

er94

96

98

100

102

104

106

97.9

98.9

100.2

101.1

102.1102.5

103.5 103.8

Conference Board Leading Indicator % Change

Conference Board Leading Indica-tor % Change

CONFERENCE BOARD LEADING INDICATOR

March

April

MayJu

ne July

Augus

t

Sept

embe

r

Octob

er0

0.2

0.4

0.6

0.8

1

1.2

1.4

1

1.3

0.9

1

0.4

1

0.3

Conference Board Leading Indicator % Change

Conference Board Leading Indicator % Change

CONFERENCE BOARD LEADING ECONOMIC INDEX

(LEI) for the U.S. increased 0.3 percent in October, following a 1.0 percent gain in September, and a 0.4 percent rise in August.

5.7 percent increase in the LEI since March-2009 continuing a 6 month upward trend.

Index of consumer expectations, building permits, index of supplier deliveries (vendor performance), and manufacturers’ new orders for nondefense capital goods were negative contributors in October.

The LEI has increased 7 consecutive months. LEI is up %4.2 from last year at this time and

is the fastest growth rate since 2005.

ANALYSIS & PREDICTION

GDP growth in the 3rd quarter is expected to reach an annualized rate of 3%.

4th quarter predictions see GDP rate slowing down due to consumer balance sheets still not at their previous levels.

Slow job creation and the end of the clash for clunkers program will see the high numbers of September come back down.

Depending on how fast firms replenish their workforce will determine the length and velocity of the recovery of the economy.

The labor market and slow housing market recovery support the view of a slow paced recovery.

ANALYSIS & PREDICTION CONTINUED…

November and December are expected to be up again to end 2009 but their percent change increase is to be small. Consumer confidence and stability in the

financial market will keep GDP positive but consumer spending is slowed by employment recovery.

High national unemployment in manufacturing will limit growth for the remainder of the year.

The housing market recovery has slowed and is expected to slow recovery in 2010.

CURRENT DATA- PRODUCTIVITY & COSTS

Productivity growth for the 3rd quarter rose 9.5% at an annualized rate

There was a steep drop in unit labor costs Firms cut back on labor at a rapid pace Although there is growth, the gains in

productivity will limit the need for new hires

2000

Q1

2000

Q3

2001

Q1

2001

Q3

2002

Q1

2002

Q3

2003

Q1

2003

Q3

2004

Q1

2004

Q3

2005

Q1

2005

Q3

2006

Q1

2006

Q3

2007

Q1

2007

Q3

2008

Q1

2008

Q3

2009

Q1

2009

Q3110.00

120.00

130.00

140.00

150.00

160.00

170.00

180.00

190.00

Output per Hour vs. Hourly Compensation, SA (2000-2009)

Output- All personsHourly Compensation

CHANGE BY SECTOR

Nonfarm business productivity rose 9.5%

Output in the nonfarm business sector rose 4%

Nonfarm business labor costs fell 5.2%

Manufacturing productivity rose 13.6%

WHY DID THIS HAPPEN? WHERE IS IT GOING?

There has been a steep drop in hours worked relative to output

This signifies a realignment of the workforce is to maximize profits for the time being until aggregate demand begins to increase

Substantial firming of aggregate demand as well as net job growth are expected to take place in mid-2010

TAYLOR RULE

.9735= 1.7 + 2 + .5 (1.7 - 2) + .5 (-2.253 - 2.9)

AGGREGATE DEMAND-AGGREGATE SUPPLY

P

Y

LRAS

SRAS

AD2

AD1

A

BP*

Y*

FINAL POLICY RECOMMENDATION