To analyze an economy, certain statistics can be used to predict the economy’s future. This is important because it helps prepare people for prosperity or hard times. Certain indicators can be used to determine the future of aggregate demand and others can be used to determine aggregate supply. Using eight aggregate demand indicators and four aggregate supply indicators we developed a prediction for the economy in the near future.
Changes in aggregate demand are reflected in changes of GDP. To find valuable indicators of the future aggregate demand is to find statistics that tell about change in the components of GDP (C+I+G+Nx). Aggregate supply is influenced by the costs of production to producers and the advent of new or better factors of production and technologies. The indicators we chose as meaningful are also ones used by the Federal Reserve to determine interest rates, automatically validating them as important.
The trade deficit is one of the aggregate demand statistics. It shows the balance between imports and exports of the United States. This is the Nx part of GDP. Recently imports have risen while exports have remained constant, making the trade balance more negative and draining GDP. Consumer Confidence is an important indicator of GDP. This is an index created to reflect the sentiment of consumers and how likely they are to spend. This is the C in GDP. The index of Consumer Confidence has fallen for a fourth month in a row and is at a four year low. This sharp decline means the consumer will be less likely to spend, lowering GDP and aggregate demand. Stock prices are often used to determine aggregate demand. In general, they are a good indicator of the economy and public sentiment for it. If people are confident in an economy, they will invest more in stocks, but if they are wary of an economies future, they are more likely to save their money. Stock prices have been falling after a year of record gains, indicating that the period of economic growth is either slowing or coming to an end. The Industrial Production Index is a good indicator of the I in GDP. This index will reflect growth for producers, whether they are making profits, and if new jobs are being created. After several years of steady increase, Industrial Production is down, hinting that aggregate demand may soon be too. Unemployment is another indicator of aggregate demand. If unemployment is low, many people have jobs, and they will probably be spending, adding to GDP. Unemployment has been at a record low, but recent layoffs in the auto industry as well as other have driven that number up to 4.2 from 4.0. This is still a low figure, but if it continues to rise, that may impact GDP greatly. Disposable personal income reflects how much money people have to spend. Obviously, the more money someone has the more likely that person is to spend it. After many quarters of positive figures for real disposable personal income, those numbers have been dropping, even registering as negative in the last few months. Less income will mean less spending, a lower GDP, and a decrease in aggregate demand. Interest rates are important in two different ways. Since the Federal Reserve controls them, any changes reflect whether they feel the economy is strong or weak. They also influence people’s likelihood to borrow money, which they will eventually spend. Interest rates had been at record highs, but they have been lowered twice in the last month. This shows that not only are not enough people borrowing, but the Fed is worried about a decrease in aggregate demand. Personal Consumption Expenditures is an important figure to go along with personal incomes. It shows of the money people have, how much they are spending. Households are not spending as much and this will hurt GDP and lower aggregate demand.
Overall, these eight indicators are hinting at a decrease in aggregate demand. Since the consumer aspect of GDP is the biggest and most influential, the changes in Consumer Confidence, Unemployment, and Expenditures are the most important because they are affecting the largest part. The only indicator that is not in real trouble is unemployment, which is still at a very low figure, but if that rises again next month, it may be a bad sign.
Productivity is an important indicator for aggregate supply. It reflects producers’ efficiency and how many goods are being put into the economy versus how many could be. Production has been falling, signifying a decrease in aggregate supply. Employment costs are a major cost of production to employers. Increasing employment costs will lower profits and aggregate supply will also decrease. Capacity utilization is another indicator of efficiency. As this number continues to fall aggregate supply will do the same. Producer price index shows the costs of production and changes in price that produce inflation. This index shows little to no change, thus inflation and aggregate supply are not being changed.
All these factors of aggregate supply hint at negative or no change. All these indicators are important in determining aggregate supply because they apply directly to costs of production and efficiency.