Question

desperate!!!!

Housing sales are dropping and many worry this is a sign that the economy is heading into a recession. Discuss an example of how the Federal Reserve may use a tool of monetary policy in this situation and explain the goals of using the tool.

Answer 1

Consumers managed a soft 0.1% gain in April retail sales, which suggests consumer spending is contributing only modestly to second-quarter economic growth. (In comparison, household spending accounted for 2.04 percentage points of the 2.2% increase in first-quarter real gross domestic product.)

But any increase in household spending is somewhat a surprise since worker buying power is falling far behind the rise in inflation.

True, inflation was flat last month thanks to a 2.6% plunge in gasoline prices. But hourly pay and hours worked also flat-lined, meaning real weekly pay was unchanged in April. Since peaking in October 2010, real pay has declined by 1.2%.

To be sure, personal income is made up of more than just paychecks, but wages and salaries still account for the bulk of income totals and are more likely to be spent than items like dividends.

In one sense, the Federal Reserve‘s quantitative easing may have helped investors, but it backfired on workers.

Steve Blitz, chief economist at ITG Investment Research, makes the point that in an open global economy the Fed has managed to raise inflation through its QE programs, but not wages. “As a consequence, consumer growth softens rather than accelerates,” he says.

Blitz cites two reasons for wages’ nonresponse.

First, there is still a huge surplus of labor. Second, firms that are growing are competing globally, either through export or import substitution, and as such, “wages must be internationally competitive on a total productivity basis.”

Real manufacturing wages are especially under pressure since U.S. factory workers are competing with workers in emerging markets.

Capital Economics forecasters told clients that “with political hostility towards the Fed currently high and the possibility that the Fed may want to keep its powder dry in case the U.S. hits a fiscal cliff in early 2013, the Fed may be less inclined to change policy before this November’s election.”

The change in policy discussed in the report is what most call QE3. After a solid start to the year, growth has proven to be uneven enough to revive market speculation that the Fed will provide additional stimulus in the form of bond buying that would expand its balance sheet beyond its current $2.9 trillion.
Be it ever so humble, there’s no place like a rented apartment.

That may be the mantra of U.S. households for the next three years, according to a new study released Tuesday by the Demand Institute division of the U.S. Conference Board. Most Americans still hope to own a home, the study found — but that home will be smaller than the MacMansions of the housing boom.

Housing and the related mortgage industry helped to tip the U.S. into the Great Recession. Data suggest the sector is bottoming out, but its recovery will be unlike that of past business cycles, according to the Demand Institute’s report, entitled “The Shifting Nature of U.S. Housing Demand.”

The first stage of this recovery will be led by rental properties. Past homeowners who lost their houses to foreclosure, young adults who are now living at home or who haven’t saved a down payment, and new immigrants will drive the demand to lease rather than to buy.

As a result, new construction will be concentrated in multi-unit projects, a shift already evident in 2012 data. At the same time, speculators hoping to cash in on increasing rents will buy up vacant properties with an eye to leasing them, helping to pare down the huge oversupply of existing homes on the market