Economy Assignment 1-7

Assignment 1

Reading #1: Explain the consequences of the drop in rate to the economy”

By Les Christie @CNNMoney May 2, 2013: 11:51 AM ET

Mortgage rates dropped again this week, with the 15-year fixed-rate loan hitting a record low, according to a report from mortgage financier Freddie Mac.

The 15-year fixed rate fell to 2.56% from 2.61%. A year ago, it stood at 3.07.

The most popular mortgage, the 30-year fixed rate, came in at 3.35%, a drop of 0.05 percentage point and only 0.04 percentage point above its record low set the week of November 21, 2012.

The rates provide a welcome boost to the housing market and to the overall economy, according to Frank Nothaft, Freddie Mac's chief economist.

"Residential fixed investment added to overall economic growth over the past eight consecutive quarters and contributed more than 0.3 percentage points in growth over the first three months of this year," he said. "[N]ear record low mortgage rates should further drive the housing market recovery over the near term."

The news came a day after the Fed announced that it would keep buying up to $85 billion in mortgage-backed securities and Treasuries a month. "There was a chance that the Fed would start to taper their purchases as summer approached," said Keith Gumbinger, of HSH.com, a loan information provider. "But that is starting to look less likely, given the still-soft state of the economy. Odds favor that the programs will continue until much later in the year, so mortgage rates should continue to be available at fantastic rates."

Low rates help existing homeowners even if they don't refinance their homes. Affordable loans boost homebuyer demand, sending home prices higher. They've recorded a 9% gain over the past 12 months, according to the S&P/Case-Shiller home price index. The added home values mean some homeowners will no longer be underwater on their mortgages and can cash in the extra equity should they run into a rough financial patch. They can also sell their homes without resorting to a short sale, in which the price paid is less than what they owe on their mortgages. That saves sellers from a big hit on their credit scores.

If homeowners do refinance, they often choose 15-year, fixed loans. They are popular with borrowers seeking to shorten their loan terms -- saving themselves on total interest payments. The record low rates enable them to do that without increasing their monthly payments very much.

Borrowers with three-year-old, 30-year fixed-rate loans at 5% would have a monthly payment of about $537 for every $100,000 borrowed, and would pay out a total of about $93,000 in interest over the course of the mortgage. Switching to a 15-year at 2.57% would increase the payment only to $670 a month but the total interest paid out would come to less than $21,000. Mortgage refinance applications rose 1.8% last week, according to the Mortgage Bankers Association, and account for about 75% of all applications for mortgages

Assignment 2

Instructions:

Reading #2 “GM profit tops view as North America strong, Europe improves”. Explain how GM profit will impact on the U.S. and global economy?

 

By Ben Klayman and Deepa Seetharaman

DETROIT (Reuters) - General Motors Co (GM.N) posted stronger-than-expected quarterly profit on Thursday as the U.S. automaker kept a tight grip on costs in its North American and European businesses. GM shares rose 3.6 percent to $31.27, near their initial public offering debut of $33 in the fall of 2010, and hit the highest point since July of 2011. The increase is welcome news for GM's largest shareholder, the U.S. Treasury, which acquired its stake after a taxpayer-funded bailout. Treasury, which says it will sell its remaining position over the next year, gains almost $250 million for every $1 increase in GM's stock price.

"GM, while still beset with issues, is generally executing better than investors give it credit for," Barclays analyst Brian Johnson said in a research note. The company still expects to return to breakeven by mid-decade in Europe, where it has reported 13 straight years of losses, said GM Chief Financial Officer Dan Ammann.

RBC Capital Markets analyst Joseph Spak welcomed the results, pointing to the company's ability to cut costs. "Better-than-expected results (in Europe) will be well received, giving investors confidence that progress is being made and breakeven by mid-decade is possible," he said in a research note. GM's smaller U.S. rival Ford Motor Co (F.N) last week posted a stronger-than-expected first-quarter profit on strength in North America, but overall costs spiked as it took steps to reinvest in its global lineup and shore up European operations. About $225 million in higher structural costs in the quarter stemmed from Ford's efforts to fix the European business after an economic downturn hit consumer demand for new cars.

'TOO SOON TO CALL A BOTTOM'

Ammann said GM doesn't see any signs of a turnaround in Europe. "It's too soon to call a bottom in Europe." Ford officials have said the European auto industry may see some stabilization toward year-end or early 2014. GM's first-quarter net income attributable to common stockholders fell 13.5 percent to $865 million, or 58 cents a share, from $1 billion, or 60 cents a share, in the year-earlier period. The company took a $400 million hit to earnings due to falling prices for its vehicles and weaker volume.

The latest quarter included a $162 million noncash charge for the devaluation of the Venezuelan currency. Excluding one-time items, GM earned 67 cents, topping the analysts' estimate of 54 cents, according to a poll by Thomson Reuters I/B/E/S. "We are much more of a formidable competitor now than we have been in more than a generation," Chief Executive Dan Akerson said on a conference call.

Revenue fell 2.4 percent from last year to $36.9 billion, and was just above the Wall Street target of $36.6 billion. GM's North American unit reported operating profit of $1.41 billion, better than the Wall Street estimate of $1.21 billion, according to FactSet StreetAccount. The result was down from a year ago due to higher costs from preparing plants for new vehicle launches, especially the redesigned Chevrolet Silverado and GMC Sierra full-size pickup trucks, as well as lower shipments because the plants were down.

The company also saw a $200 million drop in operating earnings as it was forced to offer pricing deals on its current large truck line ahead of the launch of the new models. Analysts have warned that a weaker Japanese yen and deteriorating European market will likely lead to more competitive pricing in North America. Japanese automaker Nissan Motor Co said this week it was cutting prices on seven models representing 65 percent of its U.S. offerings.

KEEPING COSTS FLAT

GM kept North American costs in the quarter flat, which was better than anticipated. In January, company officials said costs would increase this year. GM officials said while most of the expected increase in costs in North America will occur in the second and third quarters because of the new-vehicle launches, it will benefit from higher prices and lower incentives associated with the new cars and trucks.

RBC's Spak said the North American unit's 6.2 percent profit margin was stronger than the 4.7 percent he expected. Ford had a North American margin of 11 percent in the quarter. GM's loss of $175 million in Europe was smaller than the $469 million loss Wall Street estimated, according to FactSet. In the region, GM cut $300 million in costs and was able to keep the pricing on its vehicles unchanged, both better than anticipated. Ammann said GM will see cost savings in Europe slow as the year progresses, and Edward Jones analyst Christian Mayes said fixing its European operations will be "a long slog."

Morgan Stanley analyst Adam Jonas said in a research note that it was the first time GM's Europe unit topped Wall Street expectations in nearly two years and the first year-over-year improvement in results in five quarters. The international unit, which includes China, had an operating profit of $495 million, while South America recorded a small $38 million loss. Both results were weaker than expected. Ammann said strong results in China were offset by weakness in the rest of the international operations. He said the South America business is expected "to build" this year on last year's profit.

GM said adjusted free cash flow in the quarter was a negative $1.3 billion due mostly to the lower earnings and timing-related items that it said would reverse during the rest of the year. The Detroit automaker ended the quarter with total liquidity of $35.3 billion in its automotive business. Treasury officials declined to say whether the rise in GM's stock price could accelerate the sale of its remaining stake. According to GM's proxy, Treasury still owned more than 241 million shares as of April 17, so it would need to sell at an average of about $79.03 a share to break even. Federal officials said last week that Treasury had recovered about $30.4 billion of its investment in GM as of the end of March. In January, Treasury initiated a prearranged written trading plan to sell the rest of the stake. The government got an 18 percent GM stake following the $49.5 billion bailout in 2009.

(Reporting by Ben Klayman and Deepa Seetharaman; Editing by Jeffrey Benkoe)

Assignment 3

Instructions:

   

1. Carefully explain why a typical demand curve slopes downwards.

2. Distinguish between normal and inferior goods.

3. What are the main underlying determinants of demand for the following:

i. Cars     ii. Cloths    iii. Healthcare

Assignment 4

Instructions:

Read this article and explain the effect of a near $100 per Barrel on oil companies? 

Oil Price Hovers Near $100 a Barrel

Rally Since Early January Spurred by Pipeline Opening; 'Healthy Sign of Bottlenecks Loosening Up'

 

Christian Berthelsen and

Nicole Friedman

Feb. 11, 2014 7:56 p.m. ET

Oil is flirting with the $100-a-barrel mark for the first time this year as improvements to the nation's oil infrastructure alleviate a supply glut in the middle of the country.

Better oil infrastructure is lifting U.S. oil prices. Here, pipelines go into storage tanks in Cushing, Okla. Dan Strumpf/The Wall Street Journal

Prices for the benchmark U.S. oil contract have risen more than 9% since early January. The gains were fueled by the opening of a new pipeline connecting America's biggest oil-storage hub with the main refining zone on the Gulf Coast. In Tuesday's trading, March futures ended 12 cents lower at $99.94 a barrel on the New York Mercantile Exchange. Futures settled on Monday above $100 a barrel for the first time since December.

The rally is the latest example of how the boom in North American oil output is no guarantee of abundant—or cheap—U.S. crude. The increasing number of barrels that are making it to Gulf Coast refiners are being processed into fuels and exported to other countries. Meanwhile, a cold winter is helping to drive up consumption of distillates, a category of fuel that includes heating oil, at home.

"The recent rise is a healthy sign of some of the bottlenecks loosening up," said John Brynjolfsson, chief investment officer of hedge fund Armored Wolf LLC, which manages about $1 billion.

Mr. Brynjolfsson is wagering that U.S. oil futures on Nymex will increase, outperforming Brent, a benchmark for European crude that many investors use as a gauge of global oil prices.

Nymex crude currently trades at a discount to Brent of almost $9 a barrel, down from $15 in early January, a reflection of the difficulty in bringing oil from Cushing to where it is needed. Mr. Brynjolfsson expects the spread to continue narrowing in the next couple of months and eventually to disappear.

The gap between the two contracts was wider than $25 a barrel at times in 2011 and 2012, before much of the storage and transportation infrastructure to manage rising U.S. oil output was built.

Mr. Brynjolfsson isn't the only one betting on higher U.S. oil prices. In the aggregate, the number of bullish bets held by hedge funds and other money managers in the $163 billion U.S. oil-futures market is at a five-month high, according to the latest data from the U.S. Commodity Futures Trading Commission.

Despite climbing U.S. crude production, oil isn't as abundant as it was in the early stages of the boom. U.S. crude-oil inventories hit a 22-month low in mid-January and are still down 3.7% from a year ago. Distillate supplies hover just above a five-year low touched in November.

"This is the system rebalancing itself," said Jan Stuart, head of energy research for the fixed-income division of Credit Suisse Group AG CSGN.VX +2.11% .

Some traders and forecasters expect crude's rise to be short-lived. The U.S. Energy Information Administration in its monthly outlook released Tuesday predicted prices would average $93 a barrel in 2014. Refiners once again are ramping down as spring-maintenance season approaches, and analysts are expecting crude-oil inventories to rise. Maintenance will be "fairly heavy" in the Gulf Coast in March, reducing demand for crude shipments from Oklahoma to Texas, said Katherine Spector, head of commodities strategy at CIBC World Markets.

"We will see how much crude can continue to flow to [the Gulf Coast] even when they don't really want it, so to speak," she said. "That will be a test."

Analysts are expecting a nationwide increase in oil supplies in weekly U.S. government data to be released on Wednesday. The average forecast in a Wall Street Journal survey is for inventories to rise by 2.5 million barrels for the week ended last Friday, while fuel supplies are expected to drop.

Still, investors are betting improvements in oil infrastructure will at least temporarily result in higher U.S. oil prices.

In the past week, "there's been an enormous amount of activity" in trading the difference between Nymex and Brent oil prices, said Mark Vonderheide, managing partner of proprietary trading house Geneva Energy Markets.

The trade is "clearly being driven by the perception that the logistical problems of getting crude out of Cushing are gradually going to get solved," Mr. Vonderheide said.

Assignment 5

.

NEW YORK (AP) — Whether to allow more exports of U.S. oil and natural gas has become a matter of political debate in Washington. But to economists, the answer is clear: The nation would benefit.

The vast majority of economists surveyed this month by The Associated Press say lifting restrictions on exports of oil and natural gas would help the economy even if it meant higher fuel prices for consumers.

More exports would encourage investment in oil and gas production and transport, create jobs, make oil and gas supplies more stable and reduce the U.S. trade deficit, they say.

As domestic energy production has boomed, drilling companies have pushed to be allowed to sell crude oil and natural gas overseas, where they can command higher prices. Such exports are restricted by decades-old energy security regulations.

Those opposed to opening trade say exports could make it more expensive for Americans to heat their homes and fill up their cars.

But even economists who think exports might increase fuel prices for U.S. consumers — an open question — say the overall benefit to the economy would outweigh any possible harm. It would be better to allow the exports and use tax breaks or other methods to help those struggling with higher prices, they say.

FILE - This Nov. 10, 2010 file aerial photo shows oil refineries, in Deer Park, Texas. The vast majo …

"The economy in general is better off if we can sell something to someone and bring money into the economy," said Jerry Webman, chief economist at Oppenheimer Funds. "I'd rather deal with any side effects directly than limit our ability to do business with the world."

The AP survey collected the views of private, corporate and academic economists on a range of issues. Of the 30 economists who participated, nearly 90 percent responded that more exports of oil and gas would help the U.S. economy.

Oil and gas export restrictions went largely unchallenged for decades because consumption in the U.S. — by far the world's biggest consumer of oil and gas — was rising while production was falling. Imports were increasing, and few thought the U.S. would ever be in a position to export oil or gas.

But new techniques have allowed drillers to tap oil and gas in formations once thought out of reach, and U.S. production has soared.

The U.S. still consumes far more crude oil than it produces. But oil companies are producing a light sweet crude that foreign refineries covet and that many U.S. refineries are not equipped to handle. The companies and some politicians have called for lifting oil export restrictions. Proponents concede, though, that that's unlikely in an election year.

FILE - In this Aug. 27, 2008 file photo, an oil tanker makes its way through New York Harbor past the

Seven terminals have received Energy Department approval to export natural gas and are at various stages of planning, permitting, finance and construction of the facilities needed to cool the gas into a liquid for transport. Thirty additional facilities are awaiting approval.

Low natural gas prices in the U.S. have helped reduce heating and electricity prices for residents and given U.S. manufacturers a cost advantage over their competitors in Europe and Asia.

That's one reason Robert Johnson, director of economic analysis at Morningstar, doesn't embrace the idea of unfettered natural gas exports.

"We've already got a few industries building on the concept that we're going to have a long-term energy advantage here, and I'd hate to interrupt those plans," Johnson said.

He also argues that higher energy prices would disproportionally hurt those with lower incomes, who spend a relatively large portion of their paychecks on energy. That leaves them with less cash for other things, which, in turn, hampers consumer spending — by far the biggest portion of the U.S. economy.

View gallery

FILE - In this Nov. 6, 2013 file photo, a Whiting Petroleum Co. pump jack pulls crude oil from the B …

But it is far from clear that exports would raise fuel prices or eliminate the country's competitive advantage. Natural gas is so expensive to liquefy and ship overseas that the delivered cost of U.S. gas will always be far cheaper in the U.S., where it can travel by pipeline, than it would be in Europe or Asia.

Exports are even less likely to affect prices of fuels made from oil, such as gasoline and diesel. U.S. crude oil prices have been about 10 percent cheaper than global oil prices in recent years. But consumers don't enjoy most of that benefit because exports of gasoline and diesel are not restricted.

Refiners have been able to buy cheaper oil in the U.S., which has helped lower their input costs. But they can then sell their fuels anywhere in the world, which allows them to fetch global prices, whether they sell to buyers in Boston or Bogota.

Assignment 6

Instructions:

  Read this article and explain the effect of consumers sending on the US economy?

U.S. consumer spending pauses, but rising confidence offers hope

By Lucia Mutikani August 29, 2014 12:51 PM

.

View photo

Women shop in a store run by clothing retailer Forever 21 in New York August 19, 2013. REUTERS/Lucas …

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. consumer spending fell in July for the first time in six months, but confidence among households hit a seven-year high in August, suggesting the retrenchment would be temporary.

Another report on Friday showed a sharp acceleration in factory activity in the Midwest this month, a further sign the economy remains on solid ground.

"The weakness in spending will quickly subside this fall as consumer confidence is supported by record highs in the stock market, rising housing prices and improving labor market conditions," said Michael Woolfolk, global markets strategist at BNY Mellon in New York.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity dipped 0.1 percent last month after rising 0.4 percent in June, the Commerce Department said. Economists had expected a 0.2 percent gain.

When adjusted for inflation, it fell 0.2 percent.

Spending was weighed down in part by a decline in automobile purchases and a weather-related drop in demand for utilities.

The weakness in spending prompted some economists to lower their forecasts for third-quarter economic growth. Goldman Sachs cut is projection by two-tenths of a percentage point to a 3.1 percent annual rate. Forecasting firm Macroeconomic Advisers cut its forecast by a similar amount, taking it down to 2.9 percent.

The economy grew at a 4.2 percent annual rate in the second quarter, with consumer spending advancing at a 2.5 percent rate.

Despite the tempering of expectations, economists expect another relatively sturdy quarter given the rise in confidence, a strengthening labor market, and gains in manufacturing and business spending. Housing and government spending are also on the mend.

The Thomson Reuters/University of Michigan's consumer sentiment index increased to 82.5 in August, the highest level since July 2007, from 81.8 in July, a separate report showed.

"We expect growth to remain on a firmer trajectory as improving economic fundamentals continue to reassert themselves," said Gennadiy Goldberg, a U.S. economist at TD Securities in New York.

In a third report, the Institute for Supply Management-Chicago said its barometer of Midwest factory activity shot up to 64.3 this month from 52.6 in July. It was the biggest monthly point gain since July 1983 and indicated continued strength.

U.S. stocks, which hit record highs in recent sessions, traded slightly higher, while the dollar firmed against a basket of currencies. Prices for U.S. Treasury debt were little changed.

SAVINGS RISE

Consumer spending has been sluggish as households have opted to save extra money from steady income gains. Income rose for a seventh straight month in July, while savings hit their highest level since December 2012.

High savings, combined with declining debt burdens, should put consumers in better position to spend.

"Consumers could be positioned to trim savings and tap credit to fuel stronger spending, although it remains to be seen," said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan.

Weak consumer spending left inflation muted in July, giving the Federal Reserve room to keep overnight interest rates near zero for some time.

Consumer prices edged up 0.1 percent, the smallest rise since February, the spending report showed. In the 12 months through July, it was up just 1.6 percent.

Excluding food and energy, prices also rose 0.1 percent, with the 12-month reading holding at 1.5 percent.

The Fed targets inflation of 2 percent.

(Reporting by Lucia Mutikani; Additional reporting by Sam Forgione and Dan Burns in New York; Editing by Tim Ahmann and Paul Simao).

Assignment 7

Instructions:

What are the effects of increasing in government spending both mandatory and discretionary spending on US economy forecast to grow by 1.5%?

US economy forecast to grow by 1.5 percent in 2014

By ANDREW TAYLOR August 27, 2014 11:31 AM

WASHINGTON (AP) — The Congressional Budget Office on Wednesday forecast that the U.S. economy will grow by just 1.5 percent in 2014, undermined by a poor performance during the first three months of the year.

The new assessment was considerably more pessimistic than the Obama administration's, which predicted last month that the economy would expand by 2.6 percent this year even though it contracted by an annual rate of 2.1 percent in the first quarter.

The economy did grow by 0.9 percent during the first half of 2014.

Looking ahead, the CBO said it expected the economy to grow by 3.4 percent over 2015 and 2016, and predicted that the unemployment rate would remain below 6 percent into the future.

The economy went into reverse at the beginning of this year, reeling from an unusually harsh winter that disrupted consumer spending, factory production and other business activity.

Growth in the gross domestic product, the economy's total output of goods and services, recovered in the second quarter, advancing at an annual rate of 4 percent, according to the government's first estimate. That forecast will be revised on Thursday.

Even with the rebound, economists have lowered their outlook for the entire year, given the weak start. Economists at JPMorgan Chase are forecasting that the economy will grow by 1.9 percent this year, when measured from the fourth quarter, down from 3.1 percent in 2013.

The CBO also projected that the government would run a deficit of $506 billion for the budget year that ends Sept. 30. That would be the lowest level of Barack Obama's presidency.

When the deficit is measured against the size of the economy, the comparison used most by analysts, it is within historic levels at 2.9 percent of GDP. Last year's deficit was $680 billion.

The deficit spiked at $1.4 trillion in Obama's first year in office and remained above $1 trillion for his entire first term.

The CBO foresees a slight increase from its earlier $492 billion projection of this year's deficit in part because of a decline in expected corporate tax receipts. But it see modest improvement over the coming decade compared with earlier forecasts, in large part because it predicts lower-than-expected interest payments on the national debt.

Obama inherited a recession and a trillion-dollar-plus deficit picture when he took office in the aftermath of the 2008 fiscal crisis. The economy has recovered more slowly than hoped; some of the recent drop in the jobless rate is due to frustrated job-seekers leaving the labor market.

"There is no question we have made progress — businesses have added 9.9 million jobs over 53 straight months of job growth," said Maryland Rep. Chris Van Hollen, the top Democrat on the House Budget Committee. "But there is more we need to do."

The report confirms a trend of short-term improvement in the deficit but an unsustainable long-term fiscal path if Washington doesn't cut spending or raise additional revenue.

Over the long term, the CBO said "the large and increasing amount of federal debt would have serious negative consequences" including the risk of a crisis that could raise interest rates.

All told, the CBO predicted that the government would add $7.2 trillion to the national debt over the coming decade, bringing the total debt to $26.6 trillion by 2024.

The latest numbers come as the GOP-controlled House and Obama are taking a break from the budget, debt and tax battles that have flared up several times since Republicans won back the House in 2010.

One of the biggest unresolved issue facing lawmakers when they return to Washington next month is the fate of dozens of popular expired tax breaks for businesses and individuals. Those breaks, if renewed, could add almost $140 billion to next year's deficit.

Obama did not see attacking the deficit as a priority during his first term. Republicans forced him to the negotiating table in 2011 and extracted more than $2 trillion in spending cuts over the following decade, though little of that savings came from big benefit programs such as Medicare.

Assignment 8