This is a seven page paper concerning the economy for the past three years and a two year future prediction. It will cover the Federal reserve, GDP, CPI , PPI, inflation, interest rates, political changes, money supply, taxes, government spending, economic cycles and trends and international trends. The Airline Industry will be looked at in terms of competition, market share and developments. There are nineteen references used.
The past three years have been a roller coaster ride for the economy. The changes that have been seen are a new President, the stock market dropping, interest rates at a 30 year low and unemployment rates rising. The Airline Industry has also seen changes. There are fewer people flying, and some airlines have had to file for bankruptcy protection.
1999-A Strong Economy
1999 was a year that saw three interest rate increases from June to December by the Federal Reserve Board (2000). The gross domestic product (GDP) slowed to 3.2 percent after rising at least 4 percent in each of the previous three years (2000). The stock market was doing well this year. The Federal Reserve Board Discount rate, which is "the rate of interest set by the Federal Reserve that member banks are charged when borrowing money through the Federal Reserve System (2001)" was 4 ? % in August and 5% in November. Due to the increased U.S. interest rates, European stocks were firmer. The dollar was stronger with European government bonds which matched U.S. Treasury bonds. For the first time in the 1990's, British interest rates were
lower then the US's (1999). The amount of money in circulation (in millions) by March 31,
1999 was $517,829.0 (2002). The consumer price index (CPI) was 2.7 % (2000). The CPI measures inflation and is the "the broadest gauge of prices in the economy (2002)." The Producer Price Index (PPI) fell 0.1 % in June (1999). Retail sales were very strong, the economy grew at 4.2% and unemployment was 4.1% (2000).
2000-Worries about a Recession
By 2000 the economy was breaking records and it was predicted to continue strong. However, the economists were predicting at least two more interest rates hikes by the Federal Reserve Board (2000). In February the rate was increased by a quarter-point to 5.75 percent. However, it remained unchanged in December (2000). They were also predicting the growth would slow to 3.8 percent. There was fear the stock market may fall, however, there were six dates on which there were +7 % changes in the market. In October, the jobless rate was at a 30 year low of 3.9 percent (2000). The hourly rate rose by 0.4 percent to $13.94 (2000). The economy was at risk of being in a neutral bias, in which it would be between inflation and too-slow growth. This was a precursor of more interest rate cuts by the Fed. Household and business spending were beginning to soften. The overnight rate for banks was at a 10-year high of 6.5 % to try to decelerate inflation (2000). President Clinton said the economy was doing well despite Republican worries about a recession (2000). There was a budget surplus this year and the jobless rate was at a 30 year low of 3.9%. The amount of money in circulation by March 31, 2000 (in millions) was $562,949.0 (2002). The CPI and PPI rose in March and April, but fell in
May after oil prices dropped. American companies' earnings were weak from international activities and there were countries that went into deep recession after joining their currencies to the U.S. dollar (2000).
2001-A New Political Party and New Economic Problems
The Republicans took office this year and quickly enacted tax cuts. The economist were predicting the economy would slow in growth 3 percent. In April, the Federal Reserve Board made a surprise interest-rate cut (2001). This caused the NASDAQ to rise 8.12 percent making it the "fourth-largest percent-gain ever (2001)." The highest gain was on January 3rd of this year at 14.17 % (2001). Oil prices soared and in June and July the economy became sluggish with manufacturing slowing down. U. S. Treasury bonds rose and there wasn't much confidence in the stock market. By August, the Federal Interest rate had been cut 7 times by a total of 2.75 %. This year, the budget surplus disappeared with the war on terrorism and tax-rate reduction. Workers weren't putting in as many hours, plants were shut down and there were numerous layoffs (2001). The amount of money in circulation (in millions) by March 30, 2001 was $585,916.0 (2002). The monetary base in July was up 5.3 % from the previous year. The funds rate by August was higher than the growth of the GDP (2001). Economic growth was 0.5 % and the jobless rate was 5.7%. The overnight lending rate was at a four decade low of 1.75%. Energy prices were blamed for the increases in the PPI and the CPI, which grew 1.6%, and caused the stock market to fall in February (2002).
The Next Two Years
The Federal Reserve is expected to leave the interest rates unchanged until economic recovery is
well under way. The economy is expected to grow 3.7% in 2002 while the jobless rate is expected to fall to 5.6% in 2002 and 5.4% in 2003. The overnight lending rate is expected to rise to 2.75% by the end of 2002. The Federal Reserve rate is expected to be 4.25% by the end 2003. The CPI is expected to rise 2.3% in 2002 and 2.4% in 2003 (2002). While the Republicans are in office, a personal tax increase is unlikely. The budget deficit is likely to continue due to National Security.
The Airline Industry and Worries about Mergers
Early in 2001 American Airlines and Trans World Airlines went before the Senate Commerce Committee with a proposed merger. Eight months earlier, United Airlines and US Airways submitted a merger proposal before the same committee. The committee was concerned about how this would affect passengers, since the proposed mergers would mean 2 airlines would have control of almost 50 percent of the U.S. airline market. Meanwhile, Delta was talking to Northwest and Continental Airlines about a possible merger. Congress felt that there needed to be more "competition in the airline industry, not less (2001)." With the mergers, American-TWA would control 22.6 percent of the market, while United-USAir would control 27 percent.
American Airlines said they felt forced into the merger to protect itself from the competition of the proposed United-US Airways merger. They also said that by merging with TWA, the consumers would benefit, due to broader travel on the one airline. With the merger of TWA, American would also own 49 percent of the new DC Air, which was based in Washington, DC
and served around 3 million passengers a year.
Both consumer groups and Congress were concerned the mergers would mean less service and higher airline fares. They were worried consumers would pay if there was less competition due to a dozen airlines condensing down to 3 or 4 (2001).
The Low Cost Airlines
Southwest Airlines became the nation's second largest passenger carrier in 1999, by offering low fares and flights into cities that were previously dominated by the larger carriers.
There were other low fare carriers who, after improving for two years, outperformed the major carriers. Frontier Airlines reported record profits, while Vanguard reported a 39% increase in airline traffic and AirTran recorded three consecutive profitable quarters (1999)
In 2001, a deal announced by Boeing stated that American, United and Delta Airlines agreed to minority stakes in Connexion and to install the Airbus system on 1,500 of their planes. This system will allow passengers to download live television and give them internet access. The cost is expected to be $20 an hour for passengers (2001).
The proposed United-USAirways merger was just approved as a partnership where they will share airline codes. The proposed Delta-Continental-Northwest merger is now in similar talks about a partnership and code merging. With the code sharing, these five airlines will control 60 percent of the market (2002). American did buy the financially troubled TWA.
On August 11th, 2002, US Airways which is the seventh-largest carrier in the U.S. filed for bankruptcy. The number two airline, United, is also predicting it will file for bankruptcy if the
labor costs can't be reduced. They are hoping their newly approved partnership will lift them out of the financial hole they are now in by giving them 20 percent of the market (2002).
Asking for Help
The airlines are finding themselves struggling after the terrorism attacks of September 11th. Even though Congress approved a $5 billion bailout and a $10 billion loan guarantee program (2002), low passenger volume, higher fuel cost and additional security is expected to create a loss of between $6.8 and $7 billions this year alone. The airlines are asking the government to pay for more of the security cost and insurance and the lower…