Macro Economy

The recurring pattern of expansion and contraction in economic activity, consisting of four phases: expansion, peak, contraction (recession), and trough. Cycles vary in length and intensity, with expansion phases typically lasting longer than contraction phases.

Example: During the 2008-2009 contraction, unemployment peaked near 10% at the trough before declining during...

Economic indicators that move simultaneously with the overall economy, reflecting current economic conditions in real time. The Conference Board tracks four primary coincident indicators: industrial production, nonagricultural employment, personal income (minus transfer payments), and manufacturing & trade sales. These indicators confirm the current state of the economy without predicting future conditions or lagging behind changes.

Example: During a recession, industrial production (a coincident indicator) declines at the same time that no...

A sustained decrease in the general price level of goods and services over time, resulting in a negative inflation rate and increased purchasing power of money. Typically measured by a declining Consumer Price Index (CPI). Deflation often signals economic weakness as falling prices discourage consumption and can lead to deflationary spirals.

Example: During the Great Depression (1929-1933), the U.S. experienced severe deflation with prices falling a...

The target interest rate range set by the Federal Open Market Committee (FOMC) for overnight lending between banks to meet reserve requirements. The actual rate is market-determined through interbank transactions. Serves as the primary tool of U.S. monetary policy and influences all other interest rates in the economy. The FOMC meets eight times per year to set the target range, typically adjusted in increments of 25 basis points (0.25%).

Example: In March 2022, the FOMC raised the federal funds rate from 0.25% to 0.50% to combat rising inflation...

A financial statement showing the Federal Reserve's assets (primarily Treasury securities and mortgage-backed securities purchased through open market operations) and liabilities (primarily currency in circulation and bank reserves). The size of the balance sheet expands during quantitative easing (QE) when the Fed purchases securities to inject money into the economy, and contracts during quantitative tightening (QT) when the Fed allows securities to mature without replacement. The balance sheet grew from approximately $900 billion in 2007 to over $8 trillion by 2022 following multiple rounds of QE.

Example: During the 2008 financial crisis, the Fed dramatically expanded its balance sheet from $900 billion ...

Government decisions about taxation and spending used to influence economic conditions. Controlled by Congress and the President, not the Federal Reserve. Expansionary fiscal policy increases spending or cuts taxes to stimulate growth; contractionary policy decreases spending or raises taxes to slow inflation.

Example: During the 2008 recession, Congress passed an economic stimulus package with tax rebates (expansiona...

The total monetary value of all goods and services produced within a country's borders during a specific period, typically measured quarterly or annually. Calculated as C + I + G + (X - M), where C = consumption, I = investment, G = government spending, X = exports, M = imports. Two consecutive quarters of declining GDP defines a recession.

Example: If nominal GDP is $25 trillion and grows to $26 trillion the next year while inflation is 4%, real G...

A sustained increase in the general price level of goods and services over time, reducing the purchasing power of money. Measured by the Consumer Price Index (CPI) in the United States. Inflation erodes the real value of fixed-income payments and cash holdings.

Example: If inflation is 3% annually, $100 today will only buy approximately $97 worth of goods in one year, ...

Economic metrics that confirm trends and changes in the economy AFTER they have already occurred, typically with a 6-12 month delay. Common lagging indicators include the unemployment rate, corporate profits, labor cost per unit output, and CPI for services. These are the most stable of the three indicator types and are used to verify economic turning points.

Example: During the 2008-2009 financial crisis, GDP began declining in late 2007, but the unemployment rate (...

Economic indicators that typically change direction before the overall economy, helping predict future economic activity 3-12 months ahead. Common leading indicators include stock market performance, building permits, new manufacturing orders, consumer confidence, yield curve, and initial jobless claims. Not perfectly accurate; false signals can occur.

Example: When building permits and new housing starts decline sharply, this often signals an economic contrac...

Actions by the Federal Reserve (central bank) to control money supply and interest rates to influence economic activity. Implemented through three primary tools: open market operations (most frequently used), the discount rate, and reserve requirements (rarely used due to drastic systemic effects).

Example: When the Fed sells Treasury securities to reduce money supply and raise interest rates, this is cont...

The interest rate commercial banks charge their most creditworthy corporate customers, serving as a benchmark for consumer and business loan rates including credit cards, mortgages, home equity lines of credit, and auto loans. Typically set approximately 3% above the federal funds rate. Individual banks set their own prime rates, though most major banks use the same rate published as the Wall Street Journal Prime Rate.

Example: When the Federal Reserve raises the federal funds rate by 0.25%, most banks raise their prime rate b...

An unconventional monetary policy tool where the Federal Reserve purchases large quantities of longer-term securities (Treasury bonds and mortgage-backed securities) to lower long-term interest rates and inject liquidity when short-term rates are already near zero. QE expands the Fed's balance sheet and aims to stimulate economic activity by reducing borrowing costs and encouraging lending and investment.

Example: During the 2008 financial crisis, the Fed launched QE1, purchasing $1.75 trillion in Treasury bonds ...

A significant decline in economic activity spread across the economy, lasting more than a few months. Technically defined as two consecutive quarters of negative real GDP growth. Characterized by rising unemployment, falling consumer spending, declining business investment, and reduced corporate profits.

Example: During the 2008-2009 recession, real GDP declined for five consecutive quarters (Q3 2008 through Q1 ...

A rare and challenging economic condition characterized by the simultaneous occurrence of stagnant economic growth (or recession), high inflation, and high unemployment. Stagflation contradicts the traditional Phillips Curve relationship, which suggests inflation and unemployment move in opposite directions. This condition creates a policy dilemma because measures to reduce inflation (tightening monetary policy) typically worsen unemployment, while measures to stimulate growth (loosening policy) worsen inflation.

Example: The 1970s oil crisis produced classic stagflation in the United States: GDP growth stalled near 0% (...

The percentage of the labor force that is actively seeking employment but unable to find work, calculated monthly by the Bureau of Labor Statistics (BLS). Excludes discouraged workers who have stopped looking for employment. A key lagging economic indicator used to assess economic health and inform Federal Reserve policy decisions.

Example: During the 2008-2009 recession, the unemployment rate peaked at 10% in October 2009, signaling sever...