Economic Indicators

Economic Indicators are what tells you in what direction a company could be heading.  It helps you to understand the market that you are in, so you can make clear inform decisions. The following indicators GDP, Inflation, Unemployment, Budget, Ridership, and Oil prices are key to discovering solutions in key business areas that CTA must implement to improve business.  We must first understand the markets, and determine exactly what is affecting them one way or another.

 

Economic Indicators

Gross domestic product (GDP) is a measure of the value of economic production of a particular territory in financial capital terms during a specified period. It is one of the measures of national income and output. It is often seen as an indicator of the standard of living in a country, but there may be problems with this view. The United States of America is the world’s largest energy producer, consumer, and net importer. It also ranks eleventh in the world in reserves of oil, sixth in natural gas, and first in coal. The United States economy appeared to be recovering somewhat, with 2004 real growth in gross domestic product (GDP) running at about 4.4%. This follows real GDP growth of 1.9% in 2002 and 3.0% in 2003.  The U.S. Federal Reserve recently raised its interest rate target slightly, but only to the extremely low level of 1.75%, in a continuing effort to stimulate economic growth without encouraging inflationary pressures. Fiscal policy also remains stimulatory, with the U.S. budget running large deficits. The final print on fourth quarter real GDP growth was unchanged from the preliminary print of 3.8%. Today’s report showed fourth quarter corporate profits from current production rising $150.8 billion.

The unemployment rate is the number of unemployed workers divided by the total civilian labor force, which includes both the unemployed and those with jobs (all those willing and able to work for pay). Measuring the number of unemployed workers actually seeking work is extremly difficult. There are several different methods for measuring the number of unemployed workers. Each method has its own biases and the different systems make comparing unemployment statistics between countries, especially those with different systems, difficult. Some of the likely costs of unemployment for society include increased poverty, crime, political instability, mental health problems, and diminished health standards. Understanding the forces that create unemployment, and then trying to mitigate their negative effects to the greatest extent possible, is a central issue in economics. The U.S. unemployment rate was estimated at 5.4% in December, flat from November, with the economy adding 157,000 net jobs during the month. For the year, the US economy added 2.2 million jobs, the biggest gain since 1999. The last 12 month average was 148,948,625 in labor forces, 141,119,000 employed individuals, 7,829,625 unemployed individuals, and 5.3% as the unemployment rate. Many of this has to do with the lost of almost 150,000 jobs due to the hurricane disasters down south and many worried about inflation going up because of the them.

               The consumer price index (CPI) measures the price of a selection of goods purchased by a "typical consumer". The CPI is a fixed quantity price index and a sort of cost-of-living index. It also can be used to track changes in prices of all goods and services purchased for consumption by urban households. User fees (such as water and sewer service) and sales and excise taxes paid by the consumer are also included. Income taxes and investment items (like stocks, bonds, life insurance, and homes) are not included. In many industrial nations, annualised percentage changes in these indexes are the most commonly reported inflation figure. These measures are often used in wage and salary negotiations, since employees wish to have nominal pay raises that equal or exceed the rate of increase of the CPI. Sometimes, labor contracts include cost of living escalators or adjustments that imply nominal pay raises automatically occur due to CPI increases, usually at a slower rate than actual inflation and after inflation has occurred.
               In the United States, CPI figures are prepared monthly by the Bureau of Labor Statistics (BLS) of the United States Department of Labor. The CPI-U includes expenditures by urban wage earners and clerical workers, professional, managerial, and technical workers, the self-employed, short-term workers, the unemployed, retirees and others not in the labor force. The CPI-W includes only expenditures by those in hourly wage earning or clerical jobs. Recently, the Chained Consumer Price Index C-CPI-U, a chained index, was introduced. The C-CPI-U tries to militate against the substitution bias that is encountered in CPI-W and CPI-U employing a Tornqvist formula and utilize expenditure data in adjacent time periods in order to reflect the effect of any substitution that consumers make across item categories in response to changes in relative prices. On a seasonally adjusted basis, the CPI-U increased 1.2 percent in September. Energy costs increased sharply for the third consecutive month--up 12.0 percent in September--and accounted for over 90 percent of the advance in the September CPI-U.
               Within energy, the index for energy commodities (petroleum-based energy) increased 17.4 percent and the index for energy services rose 4.6 percent.  The index for food, which was unchanged in August, rose 0.3 percent in September, largely reflecting an upturn in the index for fruits and vegetables. The index for all items less food and energy registered a 0.1 percent increase for the fifth consecutive month.  Shelter costs, which were virtually unchanged in August, declined 0.1 percent in September, largely as a result of a 2.5 percent decrease in the index for lodging away from home.  The index for apparel, which increased 1.0 percent in August, declined 0.1 percent in September.  These declines were more than offset by upturns in the indexes for new vehicles, for medical care services, and for communication. Consumer prices increased at a seasonally adjusted annual rate (SAAR) of 9.4 percent in the third quarter of 2005, following increases in the first and second quarters at annual rates of 4.3 and 1.9 percent, respectively.  This brings the year-to-date annual rate to 5.1 percent and compares with an increase of 3.3 percent in all of 2004.

Ridership as defined by the American Heritage Dictionary is, “the number of passengers who ride a particular public transit system.” Alright, but why is ridership important? Positive ridership numbers are important because it means that the particular public transit system is being used. Without ridership, there would not be a need for public transit systems to exist.

Ridership numbers have fluctuated over the years on the CTA. According to the CTA website (http://www.transitchicago.com), the CTA has suffered a steady decrease in ridership over the past two decades. This is not comforting news as Chicago is one of the worst cities in the country for traffic and congestion. The CTA attributes much of the decrease in ridership to the archaic funding system that has prevented significant improvements and innovations to take place in CTA.

               The CTA is in luck though, as the ridership numbers have been steadily decreasing over the last two years. Despite the overall downward ridership trend, the CTA increased its ridership from 419 million in 1997 to 445 million in 2004. Currently, the CTA provides 1.5 million rides on weekdays and appears to be attracting new and returning customers to its systems. Overall, it is beneficial for Chicagoans to pay attention to the life and health of the CTA system as the estimated cost of traffic congestion in Chicago annually is planned to exceed 4.2 billion. With the continued health and growth of the CTA, hopefully, that number will recede.

In an article from the “Terra Daily” Your portal to Earth, dated June 26, 2005.  High oil prices might not be maintained this year partly because speculation is a factor in the surging cost of the fuel, an expert at the Asian Development Bank (ADB) said Sunday. “I doubt if the current very high level of oil prices will be maintained for the rest of the year,” said Masahiro Kawai, a Manila-based economic adviser to the president of the ADB. “The main reason for rising oil prices it that there’s a higher demand for oil in relation to supply….There is also some speculative activity going on in the oil market, so this current high oil price may not be sustained for a long time.” He was speaking at an Asia-Europe Meeting (ASEM) of finance ministers, which brought ministers and other policymakers from 38 countries to the northern Chinese city of Tianjin. But Kawai said it was “very difficult: to predict how long prices will stay high.

In the “Global Insight” High Oil Prices and High Volatility Are Here for a While:

  • High oil prices remain the single-biggest threat to the global recovery over the next couple of years-more expensive oil has already cut world growth by more than 0.5%.
  • With demand still climbing faster than supply, oil markets are tight as a drum-the floor on oil prices is between $40 and $45 per barrel, and is unlikely to be much lower over the next year.
  • Events that threaten oil supplies (e.g., the standoff between Yukos and the Russian government, hurricanes in the Gulf of Mexico, and rebel activity in the Nigerian oil fields) have periodically spiked oil prices to $50 per barrel, a nominal price not seen until very recently.
  • The most likely scenario is for a continuation of these patterns for at least another couple of quarters-the only relief will come from slowing world growth.
  • There is a significant risk that a serious and protracted disruption in supplies could push oil prices into the $60-70 range.

The CTA must have a balanced Budget at the end of each year.  It has two Budgets, an Operating and non-Operating.  The Operating budget is the one that matters.  It’s made up of Revenue received from ridership and state funding through the RTA.  While the non-Operating budget is government and state capital funds used to improve its Bus and Rail fleet and strengthen its Infrastructure.  In 2004, the Operating Budget had a $10 million dollar short-fall, and CTA had to lay-off nearly 1000 non-operating employees and increase fares to achieve a balanced budget.  The same shortfall would have befallen CTA in 2005, if not for $54 million dollars of extra public funding received from the State to achieve a balanced budget.  Again, a shortfall is expected in 2006, as the budget is expected to increase from $900 million to more than 1 billion from 2005 to 2006.  Another fare increase is scheduled to begin January of 2006 by another $.25 and further funding is expected to be received from the state.  CTA hopes that the state will ultimately find a way to permanently increase funding, so they can increase their purchasing power and not have to threaten to cut jobs and service each year.  Until this permanent funding solution is in place, the budget for CTA will continue to be a problem each year.

Overall the current status of these indicators is not very positive.  Collectively they pose a threat to CTA’s business health.  Everything has increased faster than what companies can expect to keep up with.  At this current direction, a new way of doing business must be implemented to offset the negative direction a lot of these indicators are headed.  For instance, maybe investing in a different way of creating an energy that is more cost efficient and supplied in abundance?

 

References

President’s Budget Recommendation. (2006) Steering a Positive Course for Transit. Retrieved November 1, 2005, from www. transitchicago.com

The American Heritage® Dictionary of the English Language. (4th ed.). (2000) New

York, NY: Houghton Mifflin Company.

TerraDaily – Your Portal To Earth.  (2005).  Retrieved November 1, 2005, from www.terradaily.com

Global Insight.  (2005) High Oil Prices and High Volatility Are Here for a While. Retrieved November 1, 2005 from www.globalinsight.com

 

 

 

 

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