dimkoff presentation jan. 2012

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Finance and the Economy

Dr. Gregg Dimkoff

Seidman College of Business

January 17, 2012

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Gross Domestic Product

GDP is the most common way to measure how the economy is performing.

It usually is reported as REAL GDP.

Real GDP removes inflation from its measure of growth.

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GDP DefinitionThe sales value of all final goods and services in the US.

Excludes sales outside the USA by US companies

Includes sales in the US by foreign businesses Measured indirectly – Based on estimates of

wages and salaries received, dividends, personal consumption, etc.

The best overall measure of economic growth

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Historical GDP Growth Rates

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Why is GDP Growth Important?

The higher the growth, The higher the standard of living

The lower the unemployment rate

Higher stock prices

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2012 GDP ForecastsThe Conference Board 1.8%Kiplinger 2.3Org. for Economic Cooperation and Development – OECD 2.0Congressional Budget Office 3.1Wall Street Journal Survey of

Economists 2.4Federal Reserve 2.4 – 2.9

2011 Growth 1.8%

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Conclusions about GDP in 2012

Consensus average is about 2.3%, about 1/3 more than in 2011

2.5 – 3.5% growth is considered to be strong

Economic growth in 2012 will be moderate.

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The Outlook for Interest Rates

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Current Interest Rates – National Averages91-day Treasury bills 0.01%

1-year CDs 0.34

5-year CDs 1.17

30-year fixed mortgage 4.18

15-year fixed mortgage 3.38

10-year Treasury 1.87

30-year Treasury 3.03

10-year Munis 1.78

30-year Munis 3.66%

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What will happen in 2012?No significant increases in interest rates.

Why not? Two reasons:

Economy is still soft – Policymakers will keep the spigots open to keep rates low.

The Federal Reserve has a “hands off” policy as presidential elections approach.

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A Warning

Interest rates are at, or near, lows for the past 60 or more years.

They have one way to change – up.

Once they begin rising, the prices of existing bonds will fall.

The more rates rise, the great the decline in bond prices.

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US Unemployment Rate

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Unemployment

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Unemployment Rate Forecasts – End of 2012Currently 8.5%

Kiplinger 8.5Indiana U economists 8.4Congressional Budget Office 8.2Moody’s Analytics 8.7Federal Reserve 8.5 – 8.7Wells Fargo Securities 9.2Bloomberg News Survey 8.3%

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Unemployment Rates in MI – November 2011

Michigan 9.8%

Ann Arbor 5.2

Grand Rapids – Wyoming 6.5

Holland – Grand Haven 6.5

Kalamazoo – Portage 6.9

Muskegon – Norton Shores 8.4

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Conclusions about the 2012 Unemployment Rate

Most forecasters don’t think the rate will fall much.

If it doesn’t, economic growth – GDP – will grow slowly.

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Federal Debt

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Ratio of Publicly Held Debt to GDP

Greece 144%

US 100

Ireland 94

Portugal 83

Hungary 80

Germany 79

A ratio over 90% constrains economic growth.

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US Debt is Getting Bigger

On 1/1/12,

2011 US GDP was $15,064,816,000,000

US debt was: $15,170,600,000,000

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When Interest Rates Rise

A 1% rise in US Treasury interest rates will add this amount to the national debt:

1% times $15 trillion = $150 billion per year

That’s $1.5 trillion over 10 years.

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What’s the Answer?

Higher economic growth

A cap on spending increases

Changes to Social Security and Medicare

No new expensive social programs

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Stock Market Returns

2011 2010 2009West Michigan -5.7% 41.4% 32.5%

Dow Jones Industrial 5.4 10.1 18.8

S&P 500 - 0.5 11.8 23.5

NASDAQ Composite - 1.916.8 43.9

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The Stock Market

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Dow Jones Industrial Index

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S&P 500 Index

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NASDAQ Composite

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Dow Jones Precious Metals Index

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Concerns for 2012

European recession will affect the US economy

China’s growth appears to be slowing, affecting world-wide demand (GDP)

Gridlock in Washington, D.C. prevents the US from dealing with its problems

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Positives for 2012

Economy will continue to strengthen during the year, with GDP growth stronger than in 2011.

Unemployment rate will continue to fall modestly

Stock prices will be volatile

Manufacturing will continue to be strong

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Final Comments

The economy is recovering moderately.

The unemployment rate will continue to fall slowly.

2012 looks like a good year, and even the real estate industry will recover.