Economic Indicators and Personal Financial Literacy Katherine M. Sauer

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Economic Indicators and

Personal Financial Literacy

Katherine M. SauerMetropolitan State University of Denver

dr.katherine.sauer@gmail.com

3rd annual “Fiscal Fitness for You and Your Students Workshop”Colorado Jump$tart Coalition | Great-West Financial

January 24th, 2013 – Denver Federal Reserve Bank

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Income

Wages & Salaries

Interest & Dividends

Rental Income

Proprietor's Income

Transfer Payments

Taxes

Allocation Options

Spending Saving & Investing

Giving

Pay Back Debt

Borrowing

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State of the Economy Income

Financial MarketsSaving & Investing

Interest Rates

Interest & Dividends

Borrowing

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Economic Growth

Is economic activity increasing or decreasing?How much?

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Inflation

Is the cost of living increasing or decreasing?By how much?

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Yearly Inflation Rate, 2001 to 2012

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Unemployment Rate

Of the people who want jobs, what percent don’t have one?

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Monthly Unemployment Rate, 2012U

nem

ploy

men

t Rat

e (%

)

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01 02 03 04 05 06 07 08 09 10 11 12 130.0

2.0

4.0

6.0

8.0

10.0

12.0

Unemployment Rate by Year2001 – 2013

(January Rate)

Year

Une

mpl

oym

ent R

ate

(%)

*

*Dec. 2012 rate

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S&P 500

stock market index

used as a measure of the general level of stock prices

includes the stock prices of 500 publicly traded companies

representative of US industry

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S&P 500January 2004 – January 2013

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Dow Jones Industrial Average

“the Dow”

stock market index

30, large, publicly traded firms

representative of US industry

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Dow Jones Industrial AverageJanuary 2004 – January 2013

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Nasdaq Composite

National Association of Securities Dealers Automated Quotations

stock market index

all the firms traded on the NASDAQ stock exchange

over 3,000 firms

technology companies and growth companies

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Bull Market vs Bear Market

Bull Market = upward trend in stock market, optimism about continued gains

Bear Market = downward trend in stock market, pessimism about future

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Bond Market

certificate of indebtedness

terms are fixed in advance but price varies with the market

can be sold at face value (par), a discount, or a premium

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Issue price: $18.75Issue date: May 1978Maturity date: May 2008Interest over 30 years: $87.92 Treasurydirect.gov

US Government Savings Bond

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Treasury Securities T-bills (mature in less than a year) T-notes (mature in 2 to 10 years) T-bonds (mature in 20 to 30 years)

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Financial Intermediaries

match those with excess financial capital to those who wish to borrow money

interest rate market for loanable funds expected inflation credit risk

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The Market for Loanable Funds

More Savings More Funds Available Cheaper to Borrow

More Borrowing Less Funds Available Dearer to Borrow

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Expected Inflation

lenders factor inflation into interest rates

3% rate of return + 5% expected inflation = 8% interest rate

With higher-than-expected inflation (10%): rate of return on the loan = 8% - 10% = -2%

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Credit Risk

lenders factor the riskiness of a loan into the interest rate

demand higher rates of return on riskier loans

7% rate of return + 5% expected inflation = 12% interest rate

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The Federal Reserve

monetary policy

recessions lower rates increase econ activity

inflationary times raise rates decrease activity

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Interest Rate Terms

Discount Rate = interest rate charged by the Fed to banks who need to borrow money

Federal Funds Rate = interest rate charged by banks to each other

Prime Rate = interest rate charged by banks to their best customers

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The Big Mac Index compares foreign currency value versus the US

dollar

January 2012 Big Mac Prices US: $4.20 Russia: 81 rubles

exchange rate: 1 dollar to 31.8 rubles

81rubles x 1 dollar 31.8rubles

= $2.55

$2.55 < $4.20 … ruble should appreciate

January 2013 exchange rate: 1 dollar to 30.2 rubles ruble appreciated vs dollar

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Men’s Underwear Index Alan Greenspan

to men, underwear is a necessity, not luxury

sales are consistent, except in down economic times when purchases are delayed

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The Lipstick Index

in a weak economy, cut back on non-essentials but find “little luxuries” to spend on

recent recession: nail polish, boxed hair dye

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Economic Indicators WorkshopMarch 2nd

www.CCEE.net

Katherine M. SauerMetropolitan State University of Denver

dr.katherine.sauer@gmail.com

3rd annual “Fiscal Fitness for You and Your Students Workshop”Colorado Jump$tart Coalition | Great-West FinancialJanuary 24th, 2013 – Denver Federal Reserve Bank