The Optimal Bundle is a student publication run by the Penn State Economics Association’s Print Education Subcommittee. It centers on a single economic topic covered in-depth from multiple perspectives.
This edition of the Optimal Bundle features the U.S. Tech Industry, as the tech-heavy NASDAQ broke 5,000 for the first time since the dotcom bubble in 2000.
This is an online version of the print edition of the Optimal Bundle.
By Joe Kearns
It was the best of times. It was the worst of times. Good news was bad news. Bad news was good news. By March 5, the U.S. unemployment rate had fallen to 5.5%. Though workers could rejoice at improved labor market conditions, there was one group of people that panicked upon learning this news: Wall Street. In fact, the Dow decreased by 279 points and the S&P 500 fell by 1.4% when the unemployment data was available to the public.
Surely, this was a mistake! How could improvements in the labor market and other parts of the U.S. economy possibly be bad news? The answer lies in investors’ expectations of changes in monetary policy.
“Given updated labor market conditions, we expect the probability of the Fed lifting policy rates in June is now 55%,” wrote BlackRock portfolio manager Rick Rieder.
Investors feared that good news would eventually bring an end to the Federal Reserve’s accommodative monetary policy that had been boosting the stock market. Since 2008, the Federal Reserve has held the federal funds rate between 0 and 0.25%. According to Investopedia, the federal funds rate is the “interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution overnight.” Keeping the federal funds rate near the zero bound has made it cheap for banks to borrow money from the Fed. In turn, consumers can borrow money from banks at low interest rates, which allows consumers to spend more and the stock market to rally. This is precisely what has happened in the U.S. economy, as the Dow Jones Industrial Average eclipsed 18,000 in December.
One word epitomized the anxiety of investors: patience. Previous FOMC Meeting Statements included a significant sentence: “Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.” “Patient” came to an end on March 19—at least, in the sense that the FOMC Meeting Statement no longer included the word.
Yet, despite the exclusion of the word “patient,” stock prices surged. Among other comments in the statement, this one suggested the elimination of the word “patience” did not equate to a signal that the Fed would soon increase the federal funds rate target: “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.” Fed chairwoman Janet Yellen even remarked, “Just because we removed the word ‘patient’ from the statement doesn’t mean we are going to be impatient.”
The moral of the story is this: Don’t read too much into specific words. When it comes to predicting what the Fed will do next, let economic data speak for itself.
Sources
http://money.cnn.com/2015/03/06/investing/stocks-market-jobs-fed-rate-hike/
http://www.federalreserve.gov/newsevents/press/monetary/20150318a.htm
http://www.federalreserve.gov/newsevents/press/monetary/20150128a.htm
By Cole Lennon
China’s economy still packs a punch. Despite this self-evident fact, The Economist writer Simon Rabinovitch predicts an era in which China’s recent slowdown will get much more unpleasant as the Chinese economy takes harsher hits to economic growth. Rabinovitch’s argument falls flat, as it neglects to note more recently aggressive monetary policy, plans for more growth-enhancing fiscal policy, and a lack of perspective on how China relates to other economies. China’s economy is not just staving off decline, it is building a better future compared to the rest of the world.
The Chinese government plans to use monetary and fiscal policy to revive massive economic growth. The People’s Bank of China (PBOC) recently has been cutting interest rates and plans to cut even more to evade deflation. Inflation has risen from 0.8% in early 2015 to 1.4% now, so its plan looks promising. Fiscal policy should also provide more gains. Chinese officials recently cited $18 billion of previously unallocated spending, as well as an additional $258 billion in deficit spending next year. It is doing so to boost growth from the current rate of 7.4% and overall demand. Economist Alexander Wolf cites low demand as one of China’s biggest problems, and these measures are expected to help solve it. China’s economy is also favorable to many economies worldwide, as its 7.4% growth is higher than the average for every continent on Earth. It ranks in the top 20 among countries and only falls behind double-digit growth in much smaller economies. China’s stature still leaves room for optimism.
Changes in China’s economy are ultimately a sign that economic progress is here to stay. China’s more stimulative monetary policy will ensure that growth can stay above an already high percent. Its fiscal policy will also support high growth, as it has already pumped hundreds of billions of dollars into China’s $10 trillion economy. The Chinese economy’s 7.4% growth rate is also impressive when considering the massive struggles advanced economies in Europe have faced to achieve even 1% growth. China is primed for a second round knockout.
Sources
By Camille Mendoza
China’s economy looked like its new cities: bright, expensive, but empty. In 2011, China became the world’s leading exporter, and the largest economy, with annual GDP growth at almost 12%. Since then, growth has decelerated to 7%, causing the rest of the world to fixate on China’s economic slowdown. It is easy to see that the Asian Giant’s economic miracle is coming to an end by looking at the export boom and outcomes of countries that have faced banking crises in the past. The miracle is ending for China, and there is nothing it can do.
The International Monetary Fund has noted that over the past 50 years, only four other countries have experienced as rapid a buildup of debt as China during the past five years. All four—Brazil, Ireland, Spain, and Sweden—faced banking crises within 3 years of their supercharged credit growth. This debt paid for China’s boom and exports have sustained it. China’s current surplus of exports points to billions of dollars wasted, as countries are not buying enough Chinese goods. The Wall Street Journal reported that a lone steel production company in Hebei, a province surrounding Beijing, produces twice as much crude steel as the entire U.S., and no longer needs to produce this much. China’s overproduction may be its downfall.
While excessive Chinese exports and consistent declines in GDP explain a bleak Chinese future, the past is also important. Harvard economists Lant Pritchett and Lawrence H. Summers argue that countries that have had long periods of abnormal growth tend to revert to around 2% growth, a meek figure in comparison to China’s current growth rate. This figure has grave implications. Economist Neil Irwin explains if growth reverts to 2%, China’s GDP will be $11.2 trillion by 2033. The effects are already being felt. Wall Street Journal writer Bob Davis explained that what was once a Chinese skyline full of construction projects has become a cluster of empty apartment complexes.
Optimists must have confused China’s economy for a bright dawn instead of a dreary twilight brought on by high levels of debt, dangerous surplus of exports, and the already glaring signs of what China is poised to become: a ghost economy.
Sources
By Rob Gelb
Imagine cities like New York City completely deserted, where the homes of millions of people are either uninhabited or abandoned. A ghost town, if you will. China faces such realities in their country, as demand continues to suffer in the housing market and prices keep falling. Based on data from China’s National Bureau of Statistics (NBS), new home prices fell by 5.1% on average from the year-ago period for a majority of cities. The housing sector is significant in China, too, contributing to around 15% of its economy. Furthermore, housing is so abundant that there are not enough people to live in these properties. That is where “ghost cities” start springing up throughout the country. As business executive Michael Garrity notes, “The problem China has now is large developer inventories. Chinese developers have two to five years of inventory still to sell off.” One of the main responses by the Chinese government has been more stimulus, particularly in the housing sector. While this initiative has been swift–there was a $328 billion surge in new credit two months ago–pumping in so much money to prevent housing prices from falling will not work overnight. Even if China can handle this spending now, who is to say that their money is going where it needs to in the long run?
Sources
By Kevin Grant McClernon
A string of defaults by Chinese firms could spell trouble for the Chinese economy. Debt defaults are never a good thing. They are even worse when the lenders are in “the shadow.” “Shadow lending” is a process by which companies unable to secure traditional financing from banks turn to other companies for loans. Following the international credit crunch after the financial crisis, the Chinese government condoned shadow lending as an alternative means to provide liquidity to a still-growing Chinese economy. Shadow lending increased about 125% in 2010. As of 2015, the total outstanding balance of shadow loans in China is about 22 trillion Chinese yuan (about $3.5 trillion). It is a dangerous practice — the potential repercussions are significant. One firm defaults on a shadow loan, endangering the balance sheet of another. Then another. And another. As the process continues, the theoretical domino effect multiplies and the trouble extends throughout the economy – beyond just the financial system. As China’s government scrambles to save the faltering economy, shadow defaults could be an unanticipated punch in the gut.
Sources
By Joe Kearns
The People’s Bank of China has answered its call to action. Chinese economic growth declined from 14.2% in 2007 to 7.3% in the last quarter of 2014, prompting the PBOC to lower interest rates twice in the past three months. Additionally, the PBOC expanded its medium-term lending facility, a monetary tool from which individual banks can draw reserves for more liquidity. These measures attempt to reverse a declining property market and deflationary pressure induced by falling commodity and oil prices. UBS economist Wang Tao argues, “Against this backdrop, it would seem clear that monetary policy in China should be eased more aggressively.” Investors, however, appear to be comfortable with the current scope of the PBOC’s intervention, as fewer investors are betting that interest rates will change soon. Moreover, Wall Street Journal commentator Greg Ip warns that if the PBOC takes more aggressive actions like currency devaluation, it would not help global markets because China has strict controls limiting capital mobility. Has China resolved its problem or opened Pandora’s box?
Sources
The Optimal Bundle is a student publication run by the Penn State Economics Association’s Print Education Subcommittee. It centers on a single economic topic covered in-depth from multiple perspectives.
This edition of the Optimal Bundle features the Chinese economy, as it faces an ongoing economic slowdown.
This is an online version of the print edition of the Optimal Bundle.
You have probably heard this one before. A man and a woman work the same job. They have the same qualifications, background, age, etcetera. One difference: their gender. The result? About a 20% income difference, at least. Sounds familiar, right?
Here is a reminder from Exhibit A: Patricia Arquette. She has won nearly every award within her category for her performance in the film “Boyhood,” but at the biggest awards ceremony of the year, the Oscars, here’s what she has to say in her speech: “To every woman who gave birth, to every taxpayer and citizen of this nation, we have fought for everybody else’s equal rights. It’s our time to have wage equality once and for all and equal rights for women in the United States of America.” It is a heck of a platform to do that, and it goes to show that businesses are not the only guilty ones in this troublesome pattern.
Mind you, everyone is different and offers something different, something that can radically impact the difference in salary between one person and another. However, when you start trying to draw the line between dissimilarities in skill set and signs of gender discrimination, things get a bit messy.
If anything, we still get this reminder that while we should be aware of it, we never have a complete idea of how widespread it is. On one hand, the gender gap has been narrowing for over the past 100 years and was up to 0.80. On the other hand, this narrowing has stalled in the late 1990s, and not much has changed since. One could argue that employers have to consider that some women tend to go on maternal leave, and that some never come back, but has the income ratio between men and women reached its peak? Should it be a one-to-one ratio? Many activists argue “yes.” The first step of course is consistent awareness.
If it keeps coming up, what does that tell us in regards to what is being done?
Sources
By Camille Mendoza
A dead whale, animal rights activists protesting outside SeaWorld parks every day, and the CEO stepping down have not deterred SeaWorld yet. But perhaps the 50% fall in stock value will. Following the backlash of a 2013 documentary called “Blackfish,” which details the horrific and inhumane treatment that orcas face in the theme parks, SeaWorld’s revenue fell to $495.8 million in November 2014 from $538.4 million a year earlier, and profit dropped to $87.2 million from $120.7 million. These are a direct result from the 5% decline in park attendance. While these numbers seem hurtful, a company like SeaWorld thrives off sponsorships and marketing deals, but even these seem to be waning.
Corporate sponsors and celebrities are backing out from contracts and endorsements with the marine mammal organization, signaling a deep lack of confidence all across the board. Sponsors such as Hyundai Motor America, Panama Jack, Southwest Airlines, and Virgin America have cut ties with the company, and, perhaps the most shocking organization to end the partnership was the Miami Dolphins, who will not renew its marketing contract with SeaWorld after it expires in March. In today’s society, there are few people who have more influence than celebrities, and some, including Olivia Wilde, Matt Damon, and Ewan McGregor, also spoke out against SeaWorld. All of these unfortunate events lead towards an obvious conclusion: SeaWorld needs some serious damage control.
Before he stepped down in January 2015 after the negative media attention, former CEO Jim Atchison said in a news release, “Clearly 2014 has been a challenging year, but I am confident we are taking the necessary steps to address our near-term challenges and position the company to deliver value over the long term.” Consequently, the company responded to the backlash by announcing $50 million worth of cost cuts, which include laying off an unspecified number of employees, and a $300 million plan to double the volume of its killer whale habitats in all three parks, which should be completed by April 2018. Even so, these measures cannot undo the impact that the documentary Blackfish had on the world. As the public becomes more knowledgeable, the company becomes less profitable. If this trend continues, perhaps a world without unnecessary captivity is nearer than previously thought. The numbers don’t lie, and they are screaming, “It’s time to Free Willy.”
Sources
http://www.utsandiego.com/news/2014/dec/11/SeaWorld-CEO-stepping-down/2/?#article-copy
http://www.utsandiego.com/news/2015/jan/26/seaworld-fourth-quarter-earnings-february/
http://www.cbsnews.com/news/seaworld-continues-to-suffer-after-blackfish/
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