1

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

2

Income

Wages & Salaries

Interest & Dividends

Rental Income

Proprietor's Income

Transfer Payments

Taxes

Allocation Options

Spending Saving & Investing

Giving

Pay Back Debt

Borrowing

3

State of the Economy Income

Financial MarketsSaving & Investing

Interest Rates

Interest & Dividends

Borrowing

4

Economic Growth

Is economic activity increasing or decreasing?How much?

5

6

Inflation

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

7

Yearly Inflation Rate, 2001 to 2012

8

Unemployment Rate

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

9

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 (%

)

10

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

11

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

12

13

S&P 500January 2004 – January 2013

14

Dow Jones Industrial Average

“the Dow”

stock market index

30, large, publicly traded firms

representative of US industry

15

Dow Jones Industrial AverageJanuary 2004 – January 2013

16

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

17

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

18

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

19

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

US Government Savings Bond

20

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)

21

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

22

The Market for Loanable Funds

More Savings More Funds Available Cheaper to Borrow

More Borrowing Less Funds Available Dearer to Borrow

23

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%

24

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

25

The Federal Reserve

monetary policy

recessions lower rates increase econ activity

inflationary times raise rates decrease activity

26

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

27

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

28

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

29

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

30

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