Term Paper: Supply Side Wealth Housing Activity Was Strong

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Supply Side Wealth

Housing activity was strong for a second successive year in 2003. Following a rise of 7% in 2002, actual expenditures on construction of residential houses spurted more than 10% in 2003. These benefits were done notably by the lowest rates of mortgage interest rates in more than forty years that as per the views of the Michigan SRC's survey of consumer feelings, raised consumer attitudes for purchasing homes round the year. The average rate on thirty-year fixed rate mortgages fell down a great deal during the first half of 2003 and attained a low of 51/4% during June. Even though the thirty-year rate later firmed to some extent, it stayed less than 6%, on average, during the second half of previous year.


Due to higher profits, it permitted several funds to finance capital spending with internal funds and debts in businesses went up just a little speedier compared to the depressed rates in the year 2002. Besides, shortage of cash-financed takeover and acquisition exercises restricted the need to issue debt. Issue of gross equity was very weak during the first half of the year but gained in the second half in response to the Bull Run in equity prices. Yet, for the year taken as a whole, the companies used up more equity compared to what they issued. The speed of issue of bonds of companies was reasonable during the beginning of the year, but went up in the later part of the spring as companies took the benefit of low bond yields to pay for short-term debt, to refund the ongoing long-term debt and to raise cash with the hope of future spending.

Issue of bonds by investment grade companies became sluggish following midyear as companies amassed a large cushion of liquid assets and with interest rates on higher-quality debt backed up. But, issue of speculative category of companies went on briskly, with the yields on their debts going on to come down noticeably due to heightened optimism of the investors regarding the economic outlook and increased readiness to accept risk. The total of Bank loans and Commercial Paper -CP outstanding that characterizes the substantial elements of the short-term business debt entered into contract all through the year. In greater part this decline showed persistent substitution towards bond financing, but it also was guided by the softness of fixed investment early in the year and the liquidation of inventories through major part of the year.

Near-term spending needs of individuals:

During the initial part of the year 2003, expenditure by the consumers was on the path of rise and approximately at the identical reasonable speed as in 2001 and 2002. During the later part of spring nevertheless, there was an increase in the spending by the households. Due to this, in the second half of the previous year, actual personal consumption expenses went up at an annual rate of 4ae percent after going up at a rate of just below 3% during the first half. Even though earnings from wage and salary went up during greater part of the year, the reductions during the midyear in the rate of taxes and the advance of rebates in favor of households qualifying for child tax credits extended a considerable boost in case of post-tax income. During 2003, actual disposable personal income went up 31/4% subsequent to a rise of 31/2% during 2002.

Low rates of interest gave further thrust to domestic spending by lowering costs of borrowing in case of new procurements of houses and durable items. Besides, they also indirectly stimulated spending by facilitating a huge quantity of mortgage refinancing. The personal rate of savings has been volatile within a moderately narrow range roughly 2% since the past three years. Even though households went to witness the net-worth of their homes increase in value, they too were adjusting to the considerable plummeting in equity wealth which happened following the new high of the stock market in 2000. In itself, a decrease in the ratio of domestic wealth to income of the extent which the households felt within 2000 and 2002 may have resulted an obvious rise in the personal rate. But, in this case the propensity in case of households to save increasing amounts while their wealth goes down seems to have been in a disposition to some extent by their readiness to take benefit of the attractive pricing structure and financing setting for consumer goods.

There was a real climb-up of the consumer expenditures in case of durable goods by more than 11% during 2003. Sales of new motor vehicles was high as a lot of consumers were interested in the low financing rates and several incentive offers which the manufacturers gave away throughout the year. Due to the falling prices electronic equipment were sought after by the consumers, and buying home furnishing possibly got an impetus from the power of home sales. On the whole, real outlays for furniture and domestic equipment shop up 131/2% in the year 2003. On the other hand, real consumer expenses on nondurable goods and services went up a reasonable speed, on balance last year. Allocation for food and garments went up a little rapidly compared to 2002, and the continuous upward trend in spending for medical services was properly sustained. But, consumers reacted to the higher price of energy by observing austerity in spending on gasoline, fuel oil and natural gas and electricity services.

Monetary Policy:

During the initial months of 2003, the softness in economic situations was worsened by the considerable doubt in the looming of war in Iraq. As regards financial markets, the increased sagacity of vigilance among the investors formed demands of a safe-haven for Treasury and other fixed-income securities and prices of shares plummeted. The Federal Open Monetary Committee -FOMC kept its 11/4% target in case of federal funds rate to give support for a more robust economic expansion, which seemed probable to happen. The Committee observed that the current increased extent of geopolitical insecurity made intricate any evaluation of possibilities in case of the economy, and members abstained from verbalizing a commitment regarding the balance of risks with respect to its objectives of maximum employment and steady prices.

Concurrently, the Committee decided to augment its close watch of the economy that assumed the category of a sequence of conference calls in later part of month of March and early April to seek advice regarding developments. When military act in Iraq assumes reality, financial markets started to rally, with risk spreads on corporate debt securities reducing and broad equity indices making registering significant gains. Indicators of the economy during the May 6 FOMC meeting went to recommend just mild growth. Insecurity as regards the financial markets had come down and mounting consumer confidence and a wave of mortgage refinancing seem to be supporting consumer spending.

Economic conditions:

The policy makers at the Federal Reserve hoped that the economic growth will be there at a rapid speed during the year 2004. The central tendency of the prediction of the changes in real GDP prepared by the members of the Board of Governors and Federal Reserve Bank Presidents is 41/2% to 5%, calculated from the last quarter of 2003 to the last quarter of 2004. The complete series of these forecasts is rather broad from 4% to 51/2%. The members who had participated in the FOMC hope that the anticipated rise in the real economic operation will be linked with an additional slow decline in the rate of unemployment. They anticipate that the rate of unemployment that has shown an average of 5 ae percent in recent months will remain between 51/4% and 51/2% during the fourth quarter of the year.


Utility from assets purchased via borrowed funds:-

Borrowing in the year 2003 was ramped in response to the sharply broadening federal budget deficit and federal debt held by the public as a percent of nominal GDP went up for a second year in succession following having trended down over the earlier decade. Since this has been the situation in the year 2002, the Treasury was coerced to choose accounting instruments during the spring of 2003 while the upper limit of statutory debt came to be a constraint but debt markets were not disturbed visibly. During May, the Congress made the debt ceiling higher from $6.4 trillion and to $7.4 trillion. While huge deficits hoped to persist, the Treasury performed a number of corrections to its usual borrowing program, together with reintroducing the three-year note, rising to monthly the frequency of five-year note auctions, restarting the ten-year note during the month after every new quarterly offering and adding another auction of ten-year inflation indexed debt.

Due to these alterations, the average maturity of outstanding Treasury debt that had plummeted its lowest level in decades, started to go up during the second half of 2003. States and local governments were confronted with another tough year in 2003. The tax receipts on income and sales went to… [END OF PREVIEW]

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