Transcript Retail Sales

Retail Sales
(Measures changes in Consumer Spending Patterns)
Web: www.census.gov/svsd/www/advtable.html
Economic
Indicator 3
Large revisions with annual changes in March
Retail sales represents 1/3 of consumer spending, PCE, which makes up 70% of the economy
Census bureau surveys 5000 retailers 3 days after month end for their latest sales numbers.
Retail sales represent spending on goods only, not services – air travel, medical care, dental care, haircuts, insurance, movies, etc. – which represent 2/3 of personal
expenditures.
Measured in nominal/current dollars PtYt (not inflation adjusted) so don’t know if change is due to change in prices, change in volume or both. But economic
performance is based on real growth rates (volume effect). So subtract percentage change in consumer price index to get good approximation of real
percentage change in sales.
Retail sales = Total sales receipts – returned merchandise – rebates – sales tax – excise tax – finance charges.
Adjusted for seasonal variations (holidays, winter, etc.)
Use a 3-month moving average to get more accurate sense of underlying trend.
Strong correlation between change real retail sales and real GDP
(DGDP/GDP)Et+1 = F [PCE = f (retail sales)]
Subtract out the large (25%) but volatile motor vehicle category to better track underlying consumer spending trend.
Watch for changes in gas prices which can change retail sales.  PGas =>  retail sales but  non-gas retail sales
D(PY) = DPY1 + DYP1 + DPDY
D(PY) = DPY1 + DYP1 + DPDY
P1Y1 P1Y1
P1Y1 P1Y1
D(PY) = DP + DY + 0
P1Y1 P1
Y1
if DP and DY are small
DY = D(PY) – DP
Y1
P1Y1 P1
-------------------------------------------------------------------------------------------------------------------------Market Analysis
Bonds:  retail sales =>  DY/Y =>  DP/P =>  DBonds =>  iBonds
Stocks:  retail sales =>  revenues =>  profits =>  PStocks
Many goods are imported =>  demand for euros/supply of dollars =>  P$
Dollar:  income =>  imports =>  retail sales and trade deficit
Retail Sales (excluding autos)
(year over year % change)
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Chapter 1: The Essence of Economics
Limited Resources => Limited Goods/Services < Unlimited Desires
Scarcity/Constraints
Outputs
Decreasing Marginal Product => Increasing Marginal Cost => Upward Sloping Supply Curve
Y
Production Function,… y = f (x),….technology
X
Inputs / Resources / Factors of Production
Scarcity The situation in which unlimited wants exceed the limited resources available to fulfill those wants.
Trade-off The idea that because of scarcity, producing more of one good or service means producing less
of another good or service.
Scarcity => Tradeoffs => Choice
Economics The study of the choices people make to attain
their goals, given their scarce resources.
Scarcity
Limited Resources => Limited Goods/Services < Wants
Poverty
Limited Resources => Limited Goods/Services < Needs
U.S Poverty Rate
% Below Poverty Level
(46 million in poverty)
16
15.1
15.1
14.8
15
14.5
14.3
14.2
14
13.8 13.7
13.5
13.4
13.0
13
13.3
12.8
13.2
12.7
12.7 12.6
12.5
12.1
11.9
12
12.3
12.5
11.7
11.3
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10
9
8
87
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91
Source: U.S Censu Bureau
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Production Function
4
Output, Y
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Input, X
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Production Function
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Output, Y
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Input, X
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Practice Exercise
Not to be handed in or graded
1. Assume the price of input x (labor) is equal to $1 and constant
over varying levels of production. Assume the following
production function; Y = X0.55. Draw the production
relationship between input X and output Y. Create a table
showing the marginal product for the first 5 units of X. Create
a table showing the marginal cost of the first 3 units of Y.
Graph the marginal cost curve. If 9 units of X are employed,
calculate the average productivity of labor (Y/X). Assume
now an improvement in technology leads to a new production
function represented by Y = X0.65. Create a table showing the
marginal cost of the first 3 units of Y. Graph the marginal cost
curve. If 9 units of X are still employed, calculate the average
productivity of labor (Y/X).
8 Principles of Economic Thinking
1.
The use of scarce resources to produce a good is always costly.
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•
2.
Individuals behave rationally & economize
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3.
Weigh cost & benefits of actions
Maximize utility subject to a budget constraint
Minimize costs subject to a technology and output
Incentives Matter
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4.
Tradeoffs
Opportunity cost
Q. D. = F( P; Income, tastes, expectations,…..)
Q. S. = F( P; technology,……)
Focus on Marginal Changes
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Marginal Analysis: Compare marginal costs to marginal benefits
Optimal decisions are made on the margin,…spend a little more, save a
little less vs. all or nothing
An activity should be continued to the point where the marginal benefit
is equal to the marginal cost.
8 Principles of Economic Thinking
5. Information is scarce => uncertainty is fact of life
6. Economic events => primary and secondary effects
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Law of unintended consequences
Effective policy evaluation looks for indirect effects
7. Value of goods/services are subjective
8. The test of an economic theory is its ability to predict and
explain events in the real world
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Positive analysis: Analysis concerned with what is.
Normative analysis: Analysis concerned with what ought to be.
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Equity: The fair distribution of economic benefits.
Equity Tradeoff: Increase equity => decrease efficiency
4 Pitfalls to avoid in Economic Thinking
1. Violation of Ceteris Paribus.
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2.
Hold “other things equal”
Good intentions do not guarantee desirable outcomes
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Unsound proposal => undesirable outcomes
Political games
3. Fallacy of Composition
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Erroneous view that what is true for the individual is also true for
the whole
Micro vs Macro Economics
4. Association is not Causation
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Logical fallacy: Post Hoc Ergo Propter Hoc
The Scientific Method Applied to Social Sciences
Economic Model – simplified version of reality.
Economic models/theories make behavioral assumptions about economic agent
motives.
5 Steps to Develop and Test an Economic Model
1.
2.
3.
4.
5.
Decide on the assumptions to be used in developing the model.
Formulate a testable hypothesis - is a statement that may be either correct or
incorrect about an economic variable. Economic hypothesis are usually
about a causal relationship; X => Y
Use economic data to test hypothesis – analyze statistics on relevant
economic variables to access the question, did X cause Y?
Revise the model if it fails to explain well the economic data.
Retain the revised model to help answer similar economic questions in the
future.
Interest Rates and Recessions
1988-2011
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Recession
Baa
Fed Funds
10-yr Treas
Real Fed Funds
(fed funds - core CPI)
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4% = Recession causing
level
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0.10% - 2.0% = -1.9%
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Eight Problems when Determining Cause and Effect Relationships
(causal inference)
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8.
Has correlation (happening at the same time) been confused with causation.
Common cause;. X and Y are effects of a common cause Z.
DZ ==> DX
DZ ======> DY
Has temporality (chronological sequence) been confused with causality. This is the
“post hoc fallacy”. Just because X preceded Y, doesn’t mean X caused Y.
Are there significant multiple causes and effects. An effect might have multiple
causes, so treating only one of them might not alter the presence of the effect.
Have cause and effect been reversed; DX => DY,….or maybe DY => DX.
Which way is the causal inference?
The economy is always changing (hard to assume ceterus paribus) and it is virtually
impossible to conduct controlled economic experiments.
Third variable. There may be an omitted variable/factor causing the relationship.
Are there intervening or counteracting causes. Both will reduce causal force brought
to bear on the alleged effect.
If statistical analysis confirms hypothesis, then accept economic model/theory.
Rather than being “accepted”, hypothesis are considered “not rejected” .
The Market A group of buyers and sellers of a good or service and the
institution or arrangement by which they come together to trade.
Price
Determined by Utility Maximization
Marginal Benefit per unit
Maximum willingness to pay
S
Determined by Profit Maximization
Marginal Cost per unit
Minimum willing to receive
P*
D
Voluntary exchange The situation that occurs in markets
when both the buyer and seller of a product
are made better off by the transaction.
Q*
Quantity Demanded/Supplied
Price
The Market Economy & Resource Allocation
S
Determined by profit Maximization
P*
Determined by Utility Maximization
D
Q*
Quantity Demanded/Supplied
Market economy An economy in which the
decisions of households and firms interacting in
markets allocate economic resources.
X
Production Function
Inputs
Y
Centrally planned economy An economy in which
the government decides how economic resources
will be allocated.
Market
Price
S
Productive efficiency
The situation in which a good or service
is produced at the lowest possible cost.
P*
D
Q*
Y
Quantity Demanded/Supplied
Allocative efficiency A state of the economy in which production
reflects consumer preferences; in particular, every good or service is produced
up to the point where the last unit provides a marginal benefit to consumers
equal to the marginal cost of producing it.
1st Theorem of Welfare Economics
Markets => firm competition & voluntary exchange => Efficient Outcome
Valve = Price
# of threads = elasticity
Quantity Supplied per year
Inflow/Production
Adam Smith’s
Invisible Hand
Water/Inventory/Stock
Equilibrium Condition
Inflow = Outflow
QS = QD
Determines Price/Valve turns
Quantity demanded
per year
Outflow/Sales
Personal Income, Spending & Savings
(Gauge of Economic Activity)
Web: www.bea.doc.gov/bea/newsreleases/rels.htm
Revisions for several months after initial release. Annual revisions done every summer. Benchmarked every 5 years.
Economic
Indicator 4
Income + DDebt = Taxes + Debt Interest + Spending + Savings
Wages & salaries 54%
Proprietors income 9%
Rental income 1%
Dividend income 7%
Interest income 10%
Transfer payments 16%
Other labor income 4%
Durable goods
Nondurable goods
Services
D Debt = borrowing future income for current consumption
Debt Interest = interest payments on consumer loans to creditors (consumption expense). If Interest payments-to-DPI > 2.5%, then households may be experiencing financial stress
and future spending may suffer.
Spending = Personal Consumption Expenditures, PCE, make up over 70% of total GDP
Savings = residual = Y – T – C – I = S – DD. Does not include capital gains on stocks, bonds, real estate.
Spending is a function of income, DWealth and DP/P.
 Incomet =>  C t+1
If  PStock = $1, then  C = 3-6 cents
If  PHouse = $1, then  C = 2-4 cents
Real disposable personal income is a better portent of future consumer demand. Best measure of true consumer purchasing power. Dreal DPI foreshadows D spending
Watch for precipitous changes in savings rates. Indicator of households’ concerns of financial future
 income/job security =>  savings rate =>  C
 optimism =>  savings rate =>  interest rates =>  investment
Durable goods are expensive, often involve financing, and are sensitive to swings in the economy
 income/job stability =>  durable goods orders =>  production
Excellent predictor of economic turning points
 durable good orders =>(6-12 months) recession onset
 durable good orders =>(1-2 months) recession ends/recovery begins
The latest 3-month change in real PCE is a good indicator of quarterly GDP
PCE Price index – Best measure of consumer inflation. Federal Reserve uses when setting interest rate policy. Typically 0.3 percentage points lower than CPI because it takes
account of changing buying habits as relative prices change (substitution effect)
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Market Analysis
Bonds: Strong income/spending numbers =>  DY/Y =>  DP/P =>  Federal Reserve rates =>  DBonds=>  iBonds
Stocks: Strong income/spending numbers =>  DY/Y =>  profits =>  PStocks
Dollar: Strong income/spending numbers =>  DY/Y =>  iBonds =>  DDollar =>  PDollar
Personal Income & Consumption Expenditures
[Year Over Year % Change]
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Recession
Consumption
Income
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