Federal Open Market Committee Report

Prepared by: Dana Ratliff, Micah Reeves, Denise Rhone and Keary Rudolph

Grand Canyon University

Economics 601

9/15/2010

Gross Domestic Product (GDP)• Estimated Real GDP for Q2 2010 is 13,191.5 billion, which is an

increase of 1.6 percent over last quarter and continued the upward direction for the fourth consecutive period. .(Mataloni and Hodge, 2010)

• The GDP growth was less than expected by many in the financial world for Q2 and predications for future growth have been adjusted to show a more modest increase for 2010.

• The slowing of growth “reflected a sharp acceleration in imports and a sharp deceleration in private inventory investment that were partly offset by an upturn in residential fixed investment, and acceleration in nonresidential fixed investment, and upturn in state and local government spending, and an acceleration in federal government spending.”(Mataloni and Hodge, 2010)

Consumer Price Index (CPI)• Seasonally adjusted CPI for all urban consumers increased from

-0.1 percent in June to 0.3 percent in July (monthly) and by 1.2 percent from July 2009 (yearly). July 2010 reflects an increase in CPI after three months of decreases. (Reed, 2010)

• In the long run CPI is predicted to remain at its currently level with slight fluctuations.

• CPI shows a slight increase in the average costs of goods. The biggest influence on the change was energy. “The energy index posted its first increase since January and accounted for over two thirds of the seasonally adjusted all items increase.”(Reed, 2010)

Non-Farm Payroll Employment• Due to the recession the numbers are declining and more jobs

are key for strategic plans to counter the issue. The Non farm payroll numbers come from the number of jobs added or lost in the economy.

Industrial Production / Capacity Utilization

• “Industrial production rose 1.0 percent in July after having edged down 0.1 percent in June, and manufacturing output moved up 1.1 percent in July after having fallen 0.5 percent in June.”(Federal Reserve, 2010)

• “Capital spending plans for manufacturers and firms in other industries generally indicate little change or modest increases in coming months, based on reports from the Boston, Philadelphia, Cleveland, Chicago, Kansas City, and San Francisco Districts.” (Federal Reserve Board, 2010)

• “A large contributor to the jump in manufacturing output in July was an increase of nearly 10 percent in the production of motor vehicles and parts; even so, manufacturing production excluding motor vehicles and parts advanced 0.6 percent.” (Federal Reserve, 2010)

Advance Report on Durable Goods Shipments, New Orders and Unfilled Orders

• Today, new shipment orders are being placed. The numbers rose 0.8 percent last month (Department Labor Bureau Statistics). Unfortunately, the numbers have dropped 7.9 percent compared to last year(Department Labor Bureau Statistics).

• In the aircraft market, new orders rose 2.6 percent last month and this has been the largest increase since last year (Department Labor Bureau Statistics) The numbers have increased in increments for items like turbines, railroad equipment, and items in the deep sea building because of the current environmental crisis (Gulf Coast oil spill).

Housing Starts• “According to the U.S. Census Bureau, as of August 17, 2010,

privately-owned housing units authorized by building permits in July were at a seasonally adjusted rate of 565,000. This states that this is 3.1% below the June rate of 583,000 and is 3.7% below 2009 estimate of 587,000.” (U.S. Department of Commerce, 2010)

• “Single-family authorizations in July were at a rate of 416,000; this is 1.2% below the June rate of 421,000. Units with 5 or more were at the rate of 95,000 in July.” (U.S. Department of Commerce, 2010)

• “The general tenor among analysts is that the housing market will continue to improve during 2010. This is based upon low mortgage rates, deflated home prices, improving economy and reduced inventory.” (Hemmerling, 2009)

Retail Sales• “Retail sales increased in July by 0.4%, compared with the prior

revised drop of 0.3% and slightly below median estimates of 0.5%, while retail sales that exclude autos increased by 0.2% also below estimates of 0.3% and up from a revised 0.1% Drop back in June, and retail sales that exclude both autos and Gas decreased in July by 0.1%, compared with the prior reported rise of 0.2%.” (ecPulse.com, 2010)

• While retail sale have seen above expected increases the general expectation is for slow increases over the next several months.

• Current economic condition shows that Retail sales posted a modest gain in August, helped by the biggest jump in auto sales in more than a year. But there are concerns that spending could falter as the steep slump in housing and financial market turbulence weigh on consumer confidence.

S&P 500 Stock Index• “After pausing during the month of June, the S&P500 continued its

year-long upswing with monthly gains of 7.4% and 3.4% respectively in July and August.” (The Applied Finance Group, 2009)

• “While economic figures have been improving, we believe unsustainable stimulus programs are the drivers behind most of the progress to date, and significant moves from current market levels require stronger 3 to 5 year growth than the economy is likely to deliver.” (The Applied Finance Group, 2009)

• “The July rally was largely attributable to better than expected Q2 corporate profits and the seemingly stalled passing of Cap & Trade legislation and Healthcare overhaul, the August rush resulted largely from better than expected housing data, consumer confidence, and a newly built consensus that the recession is virtually over.” (The Applied Finance Group, 2009)

Conclusions and Recommendations• “The U.S. economy still has a long way to go before it can reach

full stability, where recently economic conditions started to show some deterioration and that seems to have concerned the Fed, as they signaled that the recovery will be “more modest” than projected, and that also forced the Fed to announce further monetary easing in order to help support the recovery and sustain it.” (ecPulse.com, 2010)

• Short-term interest rates should be at the lowest, because the higher the interest rate, the larger the principle will be that the customer has to pay. When interest rates change, or interest rate expectations change, the effects are far-reaching. When rates rise, consumers spend less which causes retail sales to slow.

• The group recommends holding interest rates between 0 to ¼ percent to encourage continued economic growth at this time.

ReferencesBernhard, K. J. (2010, September 14). Retail Sales Beat Expectations - Daily Brief. Retrieved September

15, 2010, from Portfolio.com: http://www.portfolio.com/views/blogs/daily-brief/2010/09/14/retail-sales-beat-expectations?ana=from_rss#ixzz0zd5xx300

ecPulse.com. (2010, August 14). FOMC Announces Further Monetary Easing as Economic Activity Falters. Retrieved September 15, 2010, from www.fxstreet.com: http://www.fxstreet.com/fundamental/analysis-reports/top-fundamental-stories/2010-08-14.html

ecPulse.com. (2010, August 13). Inflation Remains Subdued, While Retail Sales Rise Below Expectations. Retrieved September 15, 2010, from ecPulse.com: http://www.ecpulse.com/en/topstory/2010/08/13/us-cpi-retail-sales-july/

Federal Reserve. (2010). Federal Reserve Statistical Release. Washington: Federal Reserve.

Federal Reserve Board. (2010). The Beige Book. Washington: Federal Reserve Board.

Hemmerling, K. (2009, November 30). 2010 Housing Market Predictions and Forecast: Should One Buy, Sell or Rent? Retrieved September 15, 2010, from Suite101.com: http://www.suite101.com/content/2010-housing-market-predictions-and-forecast-a175262#ixzz0zd1U7U4d

Mataloni, L., & Hodge, A. (2010). National Income and Product Accounts: Gross Domestic Product, 2nd quarter 2010 (second estimate). Washtington: Berau of Economic Analyysis.

Reed, S. (2010). Consumer Price Index - July 2010. Washington: Bureau of Labor Statsitics.

The Applied Finance Group. (2009, September 9). S&P 500 Expectations and Market Analysis. Retrieved September 15, 2010, from Value Expectations: http://www.valueexpectations.com/blogs/monthly-market-review-september-200909092009

U.S. Department of Commerce. (2010). Joint Release U.S. Department of Housing and Urban Development. Washington: U.S. Department of Commerce.