MACROECONOMIC OVERVIEW

BY Steven Ricciardi

Mr. Esposito Economics February 12, 1997 Monetary/Fiscal Policy Government monetary and fiscal policies change all the time. These policies are installed or fixed for the betterment of trade, inflation, unemployment, the bu dget, or many other economic factors. In my opinion, it seems like two people h ave the majority of the control when it comes to forming these policies. The fir st person who influences these policies is President Bill Clinton who proposes t ax cuts, to balance the budget (Clinton's budget proposal should be given to co ngress soon), minimum wage increases, or other legislation to improve the econom y. The second person who influences policy is the Federal Reserve Board Chairma n Alan Greenspan who can truly destroy our economy by a slight miscalculation. G reenspan is so influential that the mere speculation of his making a move can ca use panic buying or selling in the open markets. Alan Greenspan has the power to increase or decrease the money supply by changing reserve requirements, by chan

ging the discount rate, or by buying or selling U.S. Securities over the open ma rket. The major governmental problem is trying to balance the budget. The United Stat es government is currently in debt $5,262,697,717,000 as of February 7. This num ber grows about $10,000 per second(see charts 2,3,and 7). President Clinton, Ch airman Greenspan, and Congress are all working towards a balanced budget by the year 2002. As many economists explain , the need is for legislation to keep th e budget balanced for years to come and not look for a quick fix to balance the budget for only a few months to quiet critics. The government takes steps const antly to balance the budget; economists say that the chances of inking a deal th is year are better than ever.

President Clinton has currently proposed an offer of $100 billion in tax cuts th rough 2002. These cuts are aimed at giving relief to middle class citizens. A few of his other proposals include: $500.00 child tax credit, tax deduction for post high school education, increasing the limits of individual retirement accou nts, and elimination of the capital gains tax. Despite these cuts, he still bel ieves a balanced budget will be achieved by the year 2002. Greenspan, in an effort to shave billions of dollars off the deficit, explained to Congress that they are overpaying Social Security recipients. Greenspan's te stimony sets the stage to successfully balance the budget. His reasoning behind these allegations is that the cost of living is overstated and he is urging Con gress to correct the problem which would affect inflation, gross national produc t, and the budget. Inflation The fourth quarter results have been calculated and the economy is in great shap e. The Commerce Department released fourth quarter numbers which show a 4.7% an nual growth rate and a 1.8% rise in inflation. This 1.8% fourth quarter rate i s lower than the 2.1% third quarter rate. The gain in the fourth quarter is due to higher exports and higher consumer spending. The fact of the matter is that 1996 ended with strong growth and no problem with inflation(see chart 6). Many economists showed concern over steady inflation growth and are worried abou t 1997. They believe investors may be tricked because the economy is really hot and it is just a facade. Many are concerned that the impressive growth in 1997 could start a dangerous domino effect that could push up inflation. Demand and production are very strong which is always a good point for economic growth. Many retailers moaned about a slower Christmas buying season but consum er spending showed a rise of 3.4%. Many analysts expected unfortunate product o verloads. It does not look like businesses will be stuck trying to clear out th eir stock rooms. As for 1997, I get mixed reactions. Many investors seem split about their predictions and are not too sure about the future. Where does Alan Greenspan, chairman of the Federal Reserve, stand on inflation? As indicated earlier in this report, a few weeks ago, he urged Congress to reva mp the method by which the government measures inflation. He believes that the c onsumer price index overweighs inflation by approximately one percent per year. He pointed out that the cost of living increases are overstated and urged polit icians to appoint a commission to correct the problem. Gross National Product The gross national product is a measure of the market value of goods and service s produced during a specific time period. The GNP is the most widely used facto r of economic performance. GNP are estimates that are prepared after each quart er. The GNP estimate after the fourth quarter in 1996 was . G NP can be calculated by adding the total cost of supplying the goods and service s, including the income of the producer. An average breakup of Real GNP can be divided as such: 64.5% from consumption of

goods and services, 19.8% from government purchases, 16.6% from gross investmen t, and -0.9% from net exports. It is tough to keep up with technology and the p roducts that consumers spend their money buying. It is tough to tell if the con sumer has the money to buy luxury items or necessities, but there are many goods and services from here and abroad that are readily available and worth looking into. Domestic demand is rebounding and even foreign demand is picking up for our prod ucts. Many manufacturers are feeling the pressure in their order books. Unfill ed orders and consumer demand are increasing and forcing producers to lengthen t heir workweeks; increase their payrolls, and speed up production. Overall order s so far as the fourth quarter can tell are well above their third quarter avera ge. Orders for capital goods are high as well as durable goods, which include l ong-lasting items like air-conditioners, microwaves, stoves, and airplanes. Thi s rebound is why the new year looks to be promising. Consumers have a to do wit h the manufacturing upbeat look. Despite the majority of products being goods and services, Government spending a lso makes up a large part of our GNP. Military is a major spender and with the competition over B-2 bombers, money is being exchanged in large amounts. Presid ent Clinton is also expected to propose a 20% increase in spending for educatio n which would raise the total to some $51 billion. Other examples of Government spending which will be addressed in Clinton's Budget for 1997 will be Internatio nal Affairs, Transportation, and Medicare(to name a few). The prospect of stronger world growth clearly is a plus for exports, especially capital goods. Foreign sales of capital goods have risen 10.4% from a year ago. Cheaper exports means cheaper imports will allow foreign goods producers to ex pand their already record share of the U.S. market. Unemployment The unemployment report is released periodically and it contained a big surprise for many economists in 1996. Over the past months the reports showed the econom y doing quite well. This economy has been doing so well that some economists we re worried about reaching full employment rather quickly. Although the jobless would love that to happen, full employment would lead to high inflation and dest ruction of the economy. The consensus on Wall Street was that the Fed would hav e to raise rates until word got around about the report. By day's end, the mai nstream were afraid of an economy that will grow so slowly that rates will have to go lower. The current unemployment rate is 5.3%. President Clinton is trying to create new jobs to get everyone earning real wages. People want to know that he is openin g job opportunities but he also does not want full employment. This is a prime example of politics. Tell people what they want to hear but do not let the econ omy stagnate. I guess that is his hidden agenda. In effect, Clinton plans to s trengthen employment and business investments in poverty stricken urban areas. He plans to triple funds to lend to city banks in order to foster economic devel opment in poor neighborhoods. He will also try to triple employment in public h ousing projects through a $10 million project involving HUD, Rockefeller Foundat ion, and Chase Manhattan. Many Southern states, seven to be exact, are about to cut their unemployment ins urance taxes by hundreds of millions of dollars. The Southern economy has seen t remendous growth and people are forgetting the bad economic times. The region h as also been adding jobs at a constant pace. Unemployment has dropped to record lows in some of these states. This risky act may spell disaster. New Happenings President Clinton sent his opening proposal to congress in his attempt to balanc e the budget by 2002. Economists say Clinton is right on track with his proposa ls. Areas that are being hit hard are: Medicare, Defense, and Welfare (check ch art one for breakdown). Also new, the unemployment breakdown came out and the e conomy has not lost a step. Despite the unemployment rate increasing from 5.2% to 5.3%, there is no fear of inflation. Payrolls also showed growth while the l

abor force expanded and the workers' hours decreased.