A Local Look at the

National Economic

Picture:

Drilling Down

Travis Fling

Chief Economist

Madison County Chamber of Commerce

June 2010

Current Leading Economic

Indicators and Unemployment

Approach Shots

• Each topic of discussion – LEI’s and Unemployment

• Why it’s important

• How it works

• Present the Data Set

• Discussion

• Subsequent Presentations

• Previous topics current data

• New topics of discussion

Current Macroeconomics

• Euro Zone currency/lending issues• Hungary

• Germany’s bear/bull debate

• Initiated ban on naked short selling

• Spain and Portugal

• China’s “Protect 8” and currency appreciation

• Japan’s Housing bubble

• 30 year fixed money under 5%, Prime at 3.25%, 3 month Treasury at .15%

• One would think tighter credit standards have prevented unprecedented capital investment

• Surveys from NFIB cite uncertainty of sales revenue as reason

Components of Our Economy

• Gross Domestic Product is Currently at 14,601.4

• National Income comprised of several factors• Consumer Spending – 9368.7

• Investment Spending – 1628.8

• Government Spending – 1144.8 (Fed) + 1785.9 (State)

• Net Exports – is 1956.6 exports and 1564.2 imports net – 392.40

• Numbers are in Billions of today’s USD.

• GDP Per Capita approximately 46,442 in 2009

• Each Factor is adjusted by it’s Multiplier• Multiplier is typically a polynomial multivariate function, whose derivatives

tell us the slope and affect of exogenous variables such as monetary and fiscal policy.

Derivatives of GDP Components

• Taking derivatives of the function tells us the

rate of change and slope of the function.

• This shows maximization and elasticity

inflections.

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Economic Indicators

• Applied research on the effects of multipliers on

specific indicators determine consistency

• Consistent indicators tracked to determine efficacy

• Derivatives show whether indicator is leading,

lagging, current, and its cyclical nature.

• Forecasting uses leading, pro-cyclical and counter

cyclical indicators.

• Pro-Cyclical will rise, relative in scope, approximately 6-12

months prior to GDP fluctuations.

Leading Economic Indicators

Leading Economic Index Factor• Average weekly hours, manufacturing 27.25%

• Average weekly initial claims for unemployment insurance 3.22%

• Manufacturers' new orders, consumer goods and materials 8.09%

• Index of supplier deliveries – vendor performance 7.15%

• Manufacturers' new orders, nondefense capital goods 1.92%

• Building permits, new private housing units 2.63%

• Stock prices, 500 common stocks 3.73%

• Money supply, M2 32.48%

• Interest rate spread, 10-year Treasury bonds less fed funds 10.58%

• Index of consumer expectations 2.95%

Sept. Oct. Nov. Dec. Jan. Feb. March

Leading index 104.2 104.7 105.8 107.1 107.7 108.1 109.6

Percent change 1.1 .5 1.1 1.2 .6 .4 1.4

Data from St. Louis Federal Reserve Board – April 2010

Yield Curve as a Leading Indicator

• Interest rate spread between 10 year treasury

note and 3 month treasury bill

• Originally discovered by Mishkin and Estrella

• Pits the best minds of the Federal Reserve

against the efficiency of the free market

• Spreads Expected Inflation, Capital Investment

Unemployment

• Labor force in the United States of 154.5 Million

• Structural Unemployment• Result of Labor Market Dynamics

• When Labor force requires differing skill set required by Employers

• Can be hedged through training and development

• Frictional Unemployment – typically 2-3%• “Normal Unemployment” results from people changing jobs,

careers, relocating for family, etc.

• Reporting data-set• Actively seeking employment?

• Underemployed?

• Temporary to Permanent?

State of Ohio

• Leading Economic Indicator (compiled index) for the State of Ohio up to 88.1, from 87.9

• Peaked in 1999 during most recently elevated economic times

• Employment up from 4996.6 to 5001.5 (Millions)

• If Ohio were a country it would have the 23rd

largest economy in the world

• Right behind Sweden, but ahead of Saudi Arabia

Madison County• Currently Unemployment at 10.6% and falling

• Foreclosure Filings up 38% - Lagging, contra cyclical indicator

• To 83 from 61 last year – January to March

• Job creation and retention• Madison County one of four counties to experience net job growth

over the last decade.

• Local jobs particularly important because of their multiplier• Local Jobs > Local Spending > Local Tax & Revenue > Local Capital

Investment & Infrastructure > Local Jobs

• Logistics• Ship Yards => Train Yards => Trucking

• If Madison County were a country we would be the 182nd

largest country by GDP rank• Between British Virgin Islands and Comoros

Recession Lesson

• Companies that survive recessions typically become

profitable in the recovery through effective positioning

• Acquisition of inexpensive capital

• Lean Management – Expense Management

• Cash/Asset Management

• Human Capital Acquisition and Management

• Marketing efficiently

• Additional consumer base due to less competition

• Consumer loyalty

• Brand Integrity

Conjecture

• Rates remain low in the short term

• Inflation fears cause rates to rise, pushed by the

Federal Reserve OMC and other actions

• Home sales lag until investment (cash) comes

into play from the sidelines

• Look at average bank deposits for forecasting

• Continued decline in housing prices of up to 6%

prior to recovery

Business Owner’s Advice

• Correlate rates on Capital Investment to forecast horizon, or determinate length of the going-concern

• Manage Cash effectively

• Pay attention to your balance sheets, covenants

• Police receivables frequently and discount appropriately with age and feasibility

• Sector ETFs – Spiders and Vipers useful for gauging sector activity

• Keep a sharp eye out for opportunity

• Meet with your business partners, coaches, mentors, networks, and be present in your business and decisions

Thank you and good luck!

• Sincere appreciation to The Madison County

Chamber of Commerce facilities and staff, as

well as Gary Branson and the London Public

Library staff and facilities for allowing access to

data sets and research.

• Questions?