Supply Side Wealth Housing Activity

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.

Risk:

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.

Demand

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 be retrained by the cowed operations of the economy. In spite of subsequent attempts to control spending, the average net savings, as estimated in the NIPA attained a low of negative $40 billion or negative 0.4% of GDP during the first quarter of the year. A majority of these authorities are subject to balanced -budget necessities and added rules which need them to respond to fiscal disturbances. Hence in addition to decreasing operating expenses, government relied on reserves, introduced bonds in the market, sold assets and performed lot of one-time corrections in the timing of payments to balance their books.

Of late, a lot have even enhanced taxes and fees thus countering the trend towards lower taxes, which existed during the late 1990s. Latest indications have been that the fiscal stress in this sector has started to relieve. The enhancement shows a perceptible upturn in collections of taxes in recent quarters whereas control on operating expenses on the whole remains in place. Based on NIPA, actual spending on compensation and on goods and services procured by the state and local governments was a bit altered during the second half of 2003. As regards the third quarter of 2003, state and local net saving had gone back into encouraging territory. Total issuance of debt by the state and local governments was rather good the previous week. Weak tax receipts from a slow economy, substantial demands for investments on infrastructure, and low interest rates, everything had a part to play to massive speed of borrowing. Borrowing was the strongest during the second quarters of the year, since governments took benefits of the extremely low longer term rates to invest in capital expenditure and to give refund existing costly debt.

Due to the financial stresses encountered by these Govts, the credit ratings of a number of States importantly, California were lowered last year. Even though bond downgrades were more compared to the upgrades for a sector in total, the imbalance among them was smaller compared to what it was in the 2002. Since the first three quarters of 2003, The U.S. current account deficit became more in respect to the comparable period in 2002, a gesture mainly showing developments in the deficit on trade in goods and services. The total investment earning went up during the same time, as receipts from overseas went up and payments to foreign investors in the United States became low. The trade deficit became more remarkable during the first half of 2003 but became narrow a bit in the third quarter since the value of exports rebounded in response to strengthening foreign economic operations and the depreciation of the dollar.

Restrictiveness of non-price conditions on borrowed funds:

Weak tax receipts from a slow economy, major demands for infrastructure investments, and low interest rates, everything played a part to the heavy pace of borrowing. Borrowing was forceful during the second quarter of the year while governments took benefit of the extremely low longer-term rates to finance capital expenditure and to advance refund existing higher-cost debt. Due to the financial pressure confronting these Governments, the credit ratings of a lot of states most importantly California were lowered in the previous year. Even though bond downgrades were more in number meant for the sector as a whole, the imbalance among both of them was lesser than compared to what it was in the year 2002. Since the first three quarters of 2003 the U.S. current account deficit widened as against the comparable time period in 2002, a gesture mostly showing developments in the deficit on trade in goods and services. Total investment income went up in the same period, with the increase in receipts from overseas enhanced and payments to foreign investors in the United States went down.

Economic Conditions:

The federal budget deficit went on to broaden in the fiscal year 2003 due to sluggish rise in nominal incomes, outlays linked with the war in Iraq, and legislative actions that lowered taxes and improved spending. The deficit in the combined budget totaled $375 billion, up considerably from the shortfall of $158 billion reported during the fiscal year 2002. The Budget Office of the Congress is anticipating that combined federal deficit will go up more in fiscal 2004, to more than $475 billion. Federal receipts have come down in each of the past three years; the slump of approximately 4% in the fiscal year 2003 pulled the ratio of receipts of GDP to 161/2, 2 percentage points below the average for the last thirty years. Approximately, 50% of the decrease in receipts the previous years was an outcome of legislation that shifted due dates for corporate payments between fiscal years. Apart from that, collection of personal income tax plummeted sharply due to the gradual rise in nominal wages and salaries, reduced capital gains collections in the year 2002, and the tax cuts passed under the Jobs and Growth Tax Relief Reconciliation Act of 2003.

The act gave refund checks to households qualified for the 2003 increment to the child tax credit and brought outcome in reduced withholding schedules for individual taxpayers. The act also lengthened the partial-expensing incentive for companies, however since corporate profits hastened sharply in the previous year, corporate tax receipts went up significantly following adjusting for the changes in the timing of the payments. Concurrently, federal outlays apart from interest expense went up at a great pace for the second successive year in fiscal 2003; those outlays went up about 9% after rising 11% in fiscal 2002. Incited by the actions in Iraq, spending on defense went up again, and outlays for homeland security went up a more. Expenses for income support like unemployment insurance, food stamps, and child credits under the earned income tax credit, also showed a substantial hike. The continuous hike in the cost and utilization of medical services were persistent in propelling up spending for Medicare and Medicaid.