Social Security: Is There a Crisis or Not?

Transcription

1 Economic Newsletter for the New Millennium.. Volume 2005: Issue 3 August 3, 2005 Editor Donald R. Byrne, Ph.D. Associate Editor Edward T. Derbin, MA, MBA Social Security: Is There a Crisis or Not? Introduction If the current tax benefit structure were maintained, nearly all people, fifty and above today, would be able to collect their benefits until they died. However, those younger than fifty the kids, grand kids and great-grand kids, well they face an entirely different picture. They are seeing rates of return in contributing to the Social Security System falling every year. It s expected that in 50 years, those just retiring, would begin to realize a negative rate of return in real benefits. Secondly, young people are beginning to realize that the rate of return they can achieve via self-direction is far better than under the existing system, where surpluses are invested in low interest-bearing special issues of U.S. government debt. They love you mom and dad, grandma and grandpa, but you have to sit down with them and get your elected representatives to introduce more balance in to the system. Remember, that the age group of 65 and above will peak at around 21% of the population. This is still a democracy, not a gerontocracy! THE NATURE OF THE SOCIAL SECURITY CRISIS Is there a Social Security crisis? Emphatically, yes! But the crisis is different for different groups, e.g. the seniors versus the younger people. The actual crunch is about 12 years away depending on what aspect of the crisis you are considering. That seems like a long time but as time passes, without taking actions, the easier options to solve the problem disappear. The remaining options become harsher and harsher and fewer are left. On the Web at

2 There are several causes of the crises. We will analyze these causes first and then discuss some salient issues. The Social Security program has several aspects to it. By adding new areas of benefits over the years, it has become a combination of Old Age, Survivors, Disability Insurance, Health Insurance (Medicare), and SSI (Supplemental Security Income). We will confine ourselves to the Old-Age and Survivors Insurance and Disability Insurance (OASDI) aspect of the Social Security problem. I will refer you to many good sources. Unfortunately, they tend to be very complex, so I will try to keep it simple in this presentation. In recent years, the Social Security taxes have exceeded the pretax Social Security benefits received. This excess is referred to as a surplus. By law, that surplus must be invested only in special issues of U.S. Government securities. This excludes investments in marketable issues of the U.S. Government such as Treasury Bills, Notes and Bonds. It also excludes investment in private sector securities as well as state and local government securities How the Trust Fund Dollars are Invested By law, all income to the trust funds that is not immediately needed to pay expenses is invested, on a daily basis, in securities guaranteed as to both principal and interest by the Federal government. All securities held by the trust funds are "special issues." Such securities are available only to the trust funds. In the past, the Trust Funds have held "public issues" (marketable securities available to the general public). Unlike marketable securities, special issues can be redeemed at any time at face value. Marketable securities are subject to the forces of the open market and may suffer a loss or enjoy a gain if sold before maturity. Investment in special issues gives the trust funds the same flexibility as holding cash. Social Security Online: Trust Fund Data ( The current balance in the OASDI Trust Fund as of May 2005 $1.7 trillion (OASI = $1.5 trillion; DI = $0.2 trillion) Page 2

3 GAO 2002 (Statement of David Walker Comptroller General of the United States) v v v Pay as you go (Paygo) Taxes Transfer Payments At the present time, the Social Security System is on a pay as you go basis and will continue on until around 2017, at which time, taxes will be insufficient and the OASDI Trust Fund will begin to be drawn down. This system works in the following manner: If you are in covered employment, the total social security tax (OASDI) is 15.3%; the cap on earnings subject to the tax will be $90,000 in When you retire and become eligible for OASI payments, they are referred to as a transfer payment. The term transfer payments are neither good nor bad (it s just a technical term): it simply means that at the present time, when you receive these benefits they are not income resulting from a productive resource, such as a supply of labor (during the current period). So in effect, you are receiving a transfer of purchasing power from those who are currently paying social security taxes. Part of the income they earn by producing goods and services is transferred to you, just as for you, when you paid your social security taxes in the past some of your income was transferred beneficiaries. Beginning in 2017, taxes will be insufficient to pay all of the scheduled benefits. To make up the deficit, Social Security Administration will cash in (so to speak) the special issues of government debt that were acquired during the periods when the Administration was running a surplus. That combination of sources to pay your scheduled benefits will reach another critical juncture in 2041 at that time, the fund will be entirely exhausted. Assuming no changes in the meantime, benefits will then have to fall by around 20% to equal the inflows. Demographic Trends Drive Social Security's Long- Term Financing Problem As you all know, Social Security has always been largely a pay-as-you-go system. This means that current workers' taxes pay current retirees' Page 3

4 benefits. As a result, the relative numbers of workers and beneficiaries has a major impact on the program's financial condition. This ratio, however, is changing. In the 1960s, the ratio averaged 4.2:1. Today it is 3.4:1 and it is expected to drop to around 2:1 by The retirement of the baby boom generation is not the only demographic challenge facing the system. People are retiring early and living longer. A falling fertility rate is the other principal factor underlying the growth in the elderly's share of the population. In the 1960s, the fertility rate was an average of 3 children per woman. Today it is a little over 2, and by 2030 it is expected to fall to 1.95-a rate that is below replacement. Taken together, these trends threaten the financial solvency and sustainability of this important program. (See fig. 1.) Figure 1: Social Security Workers per Beneficiary the Background Demographics Age 60+ (born in 1945 and before) Significantly smaller cohort than those that follow The Pre-Baby Boomers (born before 1946) constituted 16.8% of our population in ( million of a population of million) Age (born 1946 through 1964) Page 4

5 Known as the pig in the python, because this cohort is so much larger than those born before The Baby Boomers (born from 1946 through 1964) constituted 26.4% of our population in 2005 (78.1 million of a population of million) Age (born 1965 through 1983) The so-called birth dearther cohort is about the same size as the preceding baby-boomers, but their numbers are much too small to support the boomers (and older group) as the move into their retirement years The birth dearthers (born from 1965 to 1983) constituted 26.2% of our population in 2005 (77.5 million of a population of million) Longevity Good news people are living longer; the challenge comes in financing the lengthening sunset years. Social Security Administration Period Life Table Updated April 22, 2005 Exact Age Number of survivo rs out of 100,000 born alive Period Life Table, 2001 Male Life Expect ancy Number of survivo rs out of 100,000 born alive Female Life Expecta ncy 45 93, , , , , , , , , , , , , , , , Page 5

6 53 90, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Social Security Administration Period Life Table Updated April 22, 2005 Exact Age Number of survivo rs out of 100,000 born alive Period Life Table, 2001 Male Life Expect ancy Number of survivo rs out of 100,000 born alive Female Life Expecta ncy 71 67, , , , , , , , , , , , , , , , , , , , , , , , , , , , Page 6

7 85 26, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Note: The period life expectancy at a given age for 2001 represents the average number of years of life remaining if a group of persons at that age were to experience the mortality rates for 2001 over the course of their remaining life. Administration on Aging Table 1 - Projections of the Population, by Age and Sex: 1995 to 2050 (Numbers in thousands. Minus sign denotes a decrease. Middle series of U.S. Bureau of the Census.) AGE GROUP AND YEAR BOTH SEXES Number Percent Percent of all increase ages from 1995 SEX Male Female Sex Ratio (Men to 100 Women) ALL AGES ,820 x x 128, , ,634 x , , ,716 x , , ,899 x , , ,931 x , , ,138 8 x 10,045 11, , ,433 12, , ,921 18, , ,441 18, Page 7

8 , ,403 21, , x 8,337 10, , ,180 9, , ,753 11, , ,878 19, , ,699 18, , x 4,326 6, , ,938 7, , ,363 7, , ,818 12, , ,342 13, , x 1,015 2, , ,228 3, , ,771 3, , ,021 5, , ,036 11, , x 13,678 19, , ,346 20, , ,887 22, , ,718 37, , ,076 42, Note the relatively small portion of Americans above 65 in 2005 Page 8

9 U.S. Interim Projections by Age, Sex Release Date: May 11, 2004 Source: Population Projections Branch, U.S. Census Bureau 2005 : Total Population = 295,507,134 (Female: 150,393,897; Male: 145,113,237) In 2005: 36,695,904 Americans are 65 years of age or older. This amounts to 12.4% of the total population (3,000,000) (2,000,000) (1,000,000) 0 1,000,000 2,000,000 3,000,000 Age of Population to 100+ Total Resident Population 2005 Female Total Resident Population 2005 Male By 2025, the picture changes significantly Page 9

10 U.S. Interim Projections by Age, Sex Release Date: May 11, 2004 Source: Population Projections Branch, U.S. Census Bureau for 2025 : Total Population = 349,439,199 (Female: 177,716,503; Male: 171,722,696) In 2025: 63,523,732 Americans are projected to be 65 years of age or older. This amounts to 18.2% of the total population (3,000,000) (2,000,000) (1,000,000) 0 1,000,000 2,000,000 3,000,000 Age of Population to 100+ Total Resident Population 2025 Female Total Resident Population 2025 Male Absolute Increases in Real Benefits Income of the Aged Population Size of Income, 1962 and 2002 Median annual income for married couples and nonmarried persons (aged 65 or older) has increased markedly since 1962 (the earliest year for which data are available). Even after adjusting for inflation, median income has risen 90% for married couples and 96% for nonmarried persons. Median income of the aged, by marital status (in 2002 dollars) Page 10

11 Median income of the aged, by marital status (in 2002 dollars) Fast Facts & Figures About Social Security, 2004 (Social Security Online) $35,000 $30,000 $32,460 $25,000 $20,000 $15,000 $17,126 $10,000 $13,190 $5,000 $6,731 $ Married Nonmarried Fast Facts & Figures About Social Security, 2004 (Social Security Online) Page 11

12 1962 Source: U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplement 1963 Survey of the Aged Married: ($17,126 total income in 2002 dollars) Other 2,740 16% Social Security $5,309 31% Earnings 4,795 28% Pensions 1,541 9% Asset Income 2,740 16% Page 12

13 2002 Source: U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplement; 1963 Survey of the Aged Married: ($32,460 total income in 2002 dollars) Earnings 8,115 25% Other 974 3% Social Security $12,659 39% Pensions 6,167 19% Asset Income 4,544 14% Social security is the largest and growing piece of the federal tax pie. Page 13

14 2004 Federal Tax Receipts (Billions of dollars) Other 63 3% Social Insurance* $806 42% Personal current taxes % Corporate % Excise taxes Customs % *Old-age, survivors, and disability insurance (OASDI); hospital insurance (HI); unemployment insurance; railroad retirement; government employee retirement; pension benefit guaranty; veterans life insurance; publicly-administered workers compensation; military employee programs (veterans life and military medical insurance); and temporary disability insurance. If there are no changes According to projections by the U.S. Social Security Administration, our annual surplus will move to deficit territory (this means that payments (outlays) will exceed receipts (revenue) In 2041, the OASDI (Old-Age and Survivors Insurance and Disability Insurance) will be exhausted and benefits will be reduced by 20%. OASI = Social Security; DI = Disability Insurance; OASDI = Combined Social Security/Disability; HI = Medicare First year outgo exceeds income KEY DATES FOR THE TRUST FUNDS OASI DI OASDI HI Page 14

15 excluding interest First year outgo exceeds income including interest Year trust fund assets are exhauste d Social Security's Cash Flow Is Expected To Turn Negative in 2017 Today, the Social Security Trust Funds take in more in taxes than they spend. Largely because of the known demographic trends I have described, this situation will change. Under the Trustees' intermediate assumptions, annual cash surpluses begin to shrink in 2006, and combined program outlays begin to exceed dedicated tax receipts in 2017, a year after Medicare's Hospital Insurance Trust Fund (HI) outlays are first expected to exceed program tax revenues. At that time, both programs will become net claimants on the rest of the federal budget. Page 15

16 From 2005 OASDI Trustees Report (March 2005) Social Security and Disability Insurance OASDI Annual Income Excluding Interest, Cost, and Balance in Current Dollars Calendar Years Intermediate Assumptions [In billions] $200 $ ($200) ($400) 2005 $69 billion surplus 2017 $12 billion deficit ($600) ($800) ($1,000) Page 16

17 From 2005 OASDI Trustees Report (March 2005) Medicare HI (Hospital Insurance) Annual Income Excluding Interest, Cost, and Balance in Current Dollars Calendar Years Intermediate Assumptions [In billions] $0 ($100) ($200) 2005 $1 billion deficit ($300) ($400) ($500) ($600) ($700) ($800) ($900) ($1,000) HI Balance Page 17

18 Estimated OASDI Financial Effects Table 1d Change in Long-Range Trust Fund Assets From April 14, 2005 Report (Social Security Administration) Billions of dollars $3,000 $2,000 $1,000 $ ($1,000) ($2,000) ($3,000) ($4,000) From 2005 Annual Social Security and Medicare Trust Fund Reports What is the OASDI (Social Security) Trust Fund and why should we be concerned if there is a deficit starting in 2017 when it is supposed to be funded at current benefit levels until 2041? While it is true that the Social Security System is theoretically held separate from the Federal Budget, after around 2017 the previous surpluses will turn into deficits ((surplus/deficits refers to flows in and out of the trust fund). The shortfall in benefit payments will have to be financed through the federal government, either through raising taxes or issuing more debt (in either case, a burden is Page 18

19 placed on the tax payer, immediately in the case of a tax hike, or deferred in the case of issuing more government debt). Keep in mind that we are not talking about reducing benefits not until 2041, that is By the year 2041, the Social Security Administration projects that the OASDI (Social Security) Trust Fund will be exhausted entirely. At that time, funding will revert to pay as you go and the benefits will be immediately reduced by 20%. Why the growing apprehension by the Baby Boomers and younger? Regardless of any political chatter, future Social Security recipients will realize significantly lower rates of return on their investment. Returns on Investment Private Investment (Stocks and Bonds) vs. Government Securities (Bonds) vs. Social Security Selected Realized Returns, Average Standard Return Deviation Small-company stocks 17.3% 33.2% Large-company stocks L-T corporate bonds L-T government bonds U.S. Treasury bills Source: Based on Stocks, Bonds, Bills, and Inflation: (Valuation Edition) 2002 Yearbook (Chicago: Ibbotson Associates, 2002), 28. Page 19

20 (OMB) Given the reality of a system that promises shrinking returns (likely negative) and ever increasing costs, it is no wonder that younger people have a very strong desire to self-direct at least a portion of their Social Security retirement dollars. They understand that their tax burden will rise in the future (beginning in 2017) and once the trust fund dries up in 2041, their benefits will drop by 20%. In addition, their retirement age will probably rise to age 70 (or more). Page 20

21 Another caveat concerning pushing the increasing burden on to higher income earners The percentage of people living below the poverty line does not give a complete picture of the economic situation of older Americans. Examining the income distribution of the population age 65 and over and their median income provides additional insights into their economic well-being. Since 1974, the proportion of older people living in poverty and in the low-income group has generally declined so that, by 2002, 10 percent of the older population lived in poverty and 28 percent of the older population were in the low-income group. In 2002, people in the middle income group made up the largest share of older people by income category (35 percent). The Page 21

22 proportion with a high income has increased over time. The proportion of the older population having a high income rose from 18 percent in 1974 to 26 percent in The trend in median household income of the older population has also been positive. In 1974, the median household income for older people was $16,882 when expressed in 2002 dollars. By 2002, the median household income had increased to $23,152. From U.S. Census Bureau : Table IE-4 Household Income Limits by Percentile Income Limits by Percentile (e.g., if two earners in a household earn $75,500 each, then that household is within the top 5% of income earners). Year th (Lowest Income) 20th 50th 80th 90th 95th (Highest Income) $ $ 10,686 17,970 42,100 83, , ,499 The first thing that jumps out at the reader (or should) is the fact that the overwhelming burden of (Federal Personal Income) taxes are borne by only half of the taxpayers 96% in Page 22

23 Who Pays the Taxes In 1999 Percentiles* Total Share of AGI % of Federal Personal Income Tax Income Earners Income Earned Taxes Paid Top 1% 20% 36% Top 5% 34% 56% Top 10% 45% 67% Top 25% 67% 84% Top 50% 87% 96% Bottom 50% 13% 4% Source: IRS *Ranked by adjusted gross income (AGI Net Worth Net worth (the value of real estate, stocks, bonds, and other assets minus outstanding debts) is an important indicator of economic security and well-being. Greater net worth allows a family to maintain its standard of living when income falls because of job loss, health problems, or family changes such as divorce or widowhood. Page 23

24 Between 1984 and 2001 the median net worth of households headed by white people age 65 and over increased 81 percent from $113,400 to $205,000. The median net worth of households headed by black people age 65 and over increased 60 percent from $25,600 to $41,000. Although the rate of growth of wealth between 1984 and 2001 has been substantial for both older black households and older white households, large differences continue to exist, with the median net worth of older white households ($205,000) ve times larger than older black households ($41,000). In 2001, the median net worth of households headed by married people age 65 and over ($291,000) was more than twice that of households headed by unmarried people ($100,800) in the same age group. Page 24

25 Overall, between 1984 and 2001 the median net worth of households headed by people age 65 and over increased by 82 percent (from $98,900 to $179,800). Participation in the Labor Force The labor force participation rate is the percentage of a group that is in the labor force that is, either working (employed) or actively looking for work (unemployed). Some older Americans work out of economic necessity. Others may be attracted by the social contact, intellectual challenges, or sense of value that work often provides. Between 1963 and 2003, labor force participation rates declined from 90 percent to 75 percent among men age Over this period, participation rates declined from 76 percent to 50 percent for men age and from 21 percent to 12 percent for men age 70 and over. For all of these groups, most of these declines occurred prior to Page 25

26 The decline in labor force participation among older men before the 1980s has been attributed to several factors. The youngest age of eligibility for Social Security bene ts was reduced from 65 to 62 in the early 1960s. Greater wealth also allowed older Americans to retire earlier. The more recent stability of participation rates has been partially explained by the elimination of mandatory retirement laws, liberalization of the Social Security earnings test (the reduction of Social Security bene ts as earnings exceed speci ed amounts), and gradual increases in the delayed retirement credit for Social Security bene ciaries. While men age also have experienced an overall decline in labor force participation over the past 4 decades, this group has gradually increased its participation rate in more recent years. Men age experienced declines in labor force participation similar to the other older age groups prior to the early 1980s, then saw their participation level off between 1983 and 1993 with rates in the 24 percent to 26 percent range. Since then, their participation rate has increased to nearly 33 percent in While contributions to the system have risen over the years, benefits have outstripped them, with earlier recipients deriving more than those coming later. There is little doubt that contributions (taxes) will rise in the future and benefits will fall. Page 26

27 Table 2.A3 Annual maximum taxable earnings and contribution rates, Annual maximum taxable earnings Contribution rate (percent) Year (dollars) Employer and employee, Self-employed person Total, Total, OASDI HI OASDI OASI DI HI OASDI OASI DI HI and HI and HI $ 3, , , , , , , , , , ,600 6, ,600 6, ,800 7, ,800 7, ,800 7, ,800 7, ,000 9, ,800 10, ,200 13, ,100 a 14,100 a ,300 a 15,300 a ,500 a 16,500 a ,700 a 17,700 a ,900 22, ,900 25, ,700 29, ,400 a 32,400 a ,700 a 35,700 a ,800 a 37,800 a 7.0 b b Page 27

28 Table 2.A3 Annual maximum taxable earnings and contribution rates, Annual maximum taxable earnings Contribution rate (percent) Year (dollars) Employer and employee, Self-employed person Total, Total, OASDI HI OASDI OASI DI HI OASDI OASI DI HI and HI and HI ,600 a 39,600 a b ,000 a 42,000 a b ,800 a 43,800 a b ,000 a 45,000 a b ,000 a 48,000 a b ,300 c 51,300 c ,400 c 125,000 d ,500 c 130, ,600 a 135,000 a ,600 a e ,200 a e ,700 a e ,400 a e ,400 a e ,600 a e ,200 a e ,400 a e ,900 a e ,000 a e ,900 a e Last word The Cost of Delay Each year, Social Security's trustees provide an estimate of the financial status of the program for the next 75 years. In changing from the valuation period of one year's Trustees Report to the next, Page 28

29 an additional year with a large imbalance between taxes and benefits is added to the projection. As a result, the estimated cost of meeting Social Security's financial shortfall tends to go up every year. Social Security's unfunded obligation on January 1 of each year In the following table, we will see a rise in the cost of covered employees in OASDI: % % 26.8% higher % % 41.5% higher Page 29

30 Calendar year Intermediate: Income rate OASDI Cost rate Table VI.F2. Estimated OASDI and HI Annual Income Rates, and Balances, Calendar Years [As a percentage of taxable payroll 1 ] HI Income Balance rate Current Statistics ( ) The Employment Picture Unemployment Rate ({5.2% Apr} {5.1% May}) {5.0% Jun} Nonfarm employment increased by 146,000 in June, and the unemployment rate continued to trend down, reaching 5.0 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Over the month, payroll employment continued to grow in several industries, notably professional and business services and health care. Industry Payroll Employment (Establishment Survey Data) Total nonfarm employment rose by 146,000 in June to million, seasonally adjusted. This followed job gains of 292,000 in April and 104,000 in May (as revised). Over the month, professional and business services and Page 30

31 health care added jobs, and manufacturing employment declined. Unemployment (Household Survey Data) In June, total employment (141.6 million) and the civilian labor force (149.1 million) were essentially unchanged. The employment-population ratio held at 62.7 percent, and the labor force participation rate was little changed over the month at 66.0 percent. News Release - Jobless Claims (4-wk rolling average: 321,250 July-9, to 318,500 July-16, to 318,250 Julu-23) In the week ending July 23, the advance figure for seasonally adjusted initial claims was 310,000, an increase of 5,000 from the previous week s revised figure of 305,000. The 4-week moving average was 318,250, a decrease of 250 from the previous week s revised average of 318,500. For 2001, the average weekly initial jobless claims were running around 405,000; thus far, in 2005, the average has been in the 325,000 range. News Release - GDP (2 nd Quarter 2005 Real GDP: 3.4%) Preliminary Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.4 percent in the second quarter of 2005, according to advance estimates released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.8 percent. v 2 nd Quarter 2005 is the fifteenth consecutive quarter of economic expansion The major contributors to the increase in real GDP in the second quarter were: Page 31

32 from Table 2.--Contributions to Percent Change in Real Gross Domestic Product Personal Consumption Expenditures (PCE) 2.3% (Durable Goods 0.68% (Motor Vehicles and parts 0.35%); Nondurable Goods 0.66%; Services 0.96% change from 4th Quarter) Gross private domestic investment: -0.84% (Fixed Investment 1.48%; Change in Private Inventories -2.32%) Net Exports (Exports Imports): 1.57% An increase in Exports contributed 1.25% while a decrease in Imports added to the total by 0.33% Government Spending (Government consumption expenditures and gross investment): 0.38% Federal increasing 0.09% and State and Local increasing by 0.28% News Release - What Recession? The ongoing debate as to when/if there indeed was a recession at all (Webster s Dictionary) RECESSION : A period during which economic activity, as measured by gross domestic product, declines for at least two quarters in a row in a specific country. If the decline is severe and long, such as greater than ten percent, it Bureau of Economic Analysis (BEA) Table Percent Change From Preceding Period in Real Gross Domestic Product [Percent] Seasonally adjusted at annual rates Today is: 5/27/05 Last Revised on July 29, 2005 Next Release Date August 31, 2005 Gross Domestic Product : (Revised Real GDP) I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II (0.5) 2.1 (0.5) 1.2 (1.4) Gross Domestic Product: (Revised Real GDP) (1.0) (2.0) I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II Gross Domestic Product: (Revised Real GDP) Page 32

33 Leading Indicators According to figures released by the Conference Board on Thursday, July 21, 2005, seven of the ten indicators that make up the leading index increased in June. The Conference Board announced that the U.S. leading index increased 0.9 percent, the coincident index increased 0.2 percent and the lagging index increased 0.3 percent in June. The leading index now stands at (1996=100). Based on revised data, this index remained unchanged in May and increased 0.2 percent in April. During the six-month span through June, the leading index increased 0.6 percent, with five out of ten components advancing (diffusion index, six-month span equals fifty-five percent). Next release Thursday, August 18 at 10:00 AM ET News Release - Construction (put in place) (June 0.3% below May) The U.S. Census Bureau of the Department of Commerce announced today that construction spending during June 2005 was estimated at a seasonally adjusted annual rate of $1,093.0 billion, 0.3 percent (±1.6%)* below the revised May estimate of $1,096.0 billion. The June figure is 7.9 percent (±2.2%) above the June 2004 estimate of $1,013.2 billion. During the first 6 months of this year, construction spending amounted to $514.8 billion, 9.3 percent (±1.9%) above the $471.0 billion for the same period in Next release July 2005 data will be released on September 1, 2005 at 10:00 A.M. EDT. News Release - Page 33

34 New Housing Starts (June 2.4% above May) Privately-owned housing units authorized by building permits in June were at a seasonally adjusted annual rate of 2,111,000. This is 2.4 percent (±0.8%) above the revised May rate of 2,062,000 and is 4.8 percent (±1.0%) above the June 2004 estimate of 2,014,000. Single-family authorizations in June were at a rate of 1,649,000; this is 1.3 percent (±0.9%) above the May figure of 1,628,000. Authorizations of units in buildings with five units or more were at a rate of 374,000 in June. Next release (for July) August 16, 2005 at 8:30 A.M. EDT News Release - New Residential Sales (June 4.0% above May) Sales of new one-family houses in June 2005 were at a seasonally adjusted annual rate of 1,374,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 4.0 percent (±11.6%)* above the revised May rate of 1,321,000 and is 14.0 percent (±17.4%)* above the June 2004 estimate of 1,205,000. The median sales price of new houses sold in June 2005 was $214,800; the average sales price was $267,400. The seasonally adjusted estimate of new houses for sale at the end of June was 454,000. This represents a supply of 4.0 months at the current sales rate. Next release (for July) August 24, 2005 at 10:00 A.M. EDT. News Release - Page 34

35 Durable Goods Summary New orders for manufactured goods in June increased $3.9 billion or 1.0 percent to $400.5 billion, the U.S. Census Bureau reported today. This was at the highest level since the series was first stated on a NAICS basis in 1992 and followed a 3.6 percent May increase. Shipments, down following three consecutive monthly increases, decreased $0.4 billion or 0.1 percent to $391.8 billion. This followed a 0.3 percent May increase. Unfilled orders, up for the second consecutive month, increased $15.8 billion or 2.8 percent to $580.7 billion. This was at the highest level since the series began and followed a 2.1 percent May increase. Inventories, down for the third consecutive month, decreased $0.1 billion to $483.4 billion. This followed a 0.2 percent May decrease. New orders for manufactured durable goods in June, up three consecutive months, increased $4.2 billion or 2.0 percent to $216.7 billion, revised from the previously published 1.4 percent increase. New orders for manufactured nondurable goods decreased $0.3 billion or 0.2 percent to $183.9 billion. Shipments of manufactured durable goods in June, down following three consecutive monthly increases, decreased $0.1 billion to $208.0 billion, revised from the previously published 0.1 percent decrease. Shipments of manufactured nondurable goods decreased $0.3 billion or 0.2 percent to $183.9 billion, due to basic chemicals, which decreased $0.5 billion or 1.0 percent to $43.9 billion. Unfilled orders for manufactured durable goods in June, up for the second consecutive month, increased $15.8 billion or 2.8 percent to $580.7 billion, revised from the previously published 2.6 percent increase. Meanwhile, Inventories of manufactured durable goods in June, down two of the last three months, decreased $1.0 billion or 0.3 percent to $290.9 billion, unchanged from the previously published 0.3 percent decrease. Inventories of manufactured nondurable goods, up following two consecutive monthly decreases, increased $0.9 billion or 0.4 percent to $192.6 billion. Next release (for July) August 24, 2005 at 8:30 A.M. EDT. News Release - Page 35

36 Capital Goods Industries (April): Nondefense new orders for capital goods in May increased $10.2 billion or 14.5 percent to $80.7 billion. Shipments decreased $0.5 billion or 0.7 percent to $68.6 billion. Unfilled orders increased $12.2 billion or 4.8 percent to $263.7 billion. Inventories increased $0.7 billion or 0.6 percent to $113.6 billion. Defense new orders for capital goods in May increased $0.9 billion or 13.8 percent to $7.4 billion. Shipments increased $0.2 billion or 2.5 percent to $8.4 billion. Unfilled orders decreased $1.1 billion or 0.7 percent to $142.6 billion. Inventories increased 0.1 percent to $19.5 billion. Next release (for June) July 27, 2005 at 8:30 A.M. EDT. News Release - 5adv.pdf Current Account Balance (Trade Balance) The Current Account Balance consists of the Trade Balance (Net Exports (Exports less Imports) of Goods and Services), the Income Balance (Income Receipts and Income Payments), and net Unilateral Current Transfers. The Department of Commerce publishes the Current Account Balance data on quarterly basis. The U.S. Current Account Balance 2003 $530.7 billion The U.S. Current Account Balance 2004 $665.9 billion The U.S. Trade Balance 2003 $496.5 billion The U.S. Trade Balance 2004 $617.1 billion The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total May exports of $106.9 billion and imports of $162.2 billion resulted in a goods and services deficit of $55.3 billion, $1.6 billion less than the $56.9 billion in April, revised. May exports were $0.2 billion more than April exports of $106.7 billion. May imports were $1.4 billion less than April imports of $163.6 billion. Page 36

37 In May, the goods deficit decreased $1.6 billion from April to $60.8 billion, and the services surplus was virtually unchanged at $5.4 billion. Exports of goods decreased $0.1 billion to $74.5 billion, and imports of goods decreased $1.6 billion to $135.3 billion. Exports of services increased $0.2 billion to $32.4 billion, and imports of services increased $0.2 billion to $27.0 billion. In May, the goods and services deficit was up $6.6 billion from May Exports were up $10.5 billion, or 10.9 percent, and imports were up $17.1 billion, or 11.8 percent. Next release (for June) August 12, 2005 at 8:30 A.M. EDT News Release - The Good (Exports June May 2005) Extracted from Department of Commerce July (April revised) 108, , , ,000 Millions of Dollars 100,000 98,000 96,000 94,000 92,000 90,000 88,000 86,000 June July August September October November December January February March April (R) May Page 37

38 The Bad (Imports June July 2005) Extracted from Department of Commerce July (April revised) 165, ,000 Millions of Dollars 155, , , , ,000 June July August September October November December January February March April (R) May The Ugly (Trade Balance Jun May 2005) Extracted from Department of Commerce July (April revised) (40,000) (45,000) June July August September October November December January February March April (R) May Millions of Dollars (50,000) (55,000) (60,000) (65,000) Page 38

39 CPI 0.1% (June) / PPI 0.0% (June) (Seasonally adjusted) CPI The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in June, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The June level of ( =100) was 2.5 percent higher than in June Energy costs declined for the second consecutive month--down 0.5 percent in June. Within energy, the index for petroleum-based energy decreased 0.8 percent and the index for energy services decreased 0.2 percent. The index for all items less food and energy increased 0.1 percent in June, the same as in May. Next release (for July) August 16, 2005, at 8:30 A.M. (EDT) News Release - PPI The Producer Price Index for Finished Goods showed no change in June, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported on July 15, This index had fallen 0.6 percent in May and risen 0.6 percent in April. Among finished goods, the index for energy goods increased 2.0 percent in June, following a 3.5-percent drop in the previous month. By contrast, prices for finished consumer foods fell 1.1 percent, compared with a 0.3-percent decline in May, and the index for finished goods other than foods and energy decreased 0.1 percent in June, following a 0.1- percent rise a month earlier. Next release (for July) August 17, 2005 at 8:30 A.M. EDT News Release - Productivity, Unit Labor Cost and Compensation (Seasonally Adjusted) The Bureau of Labor Statistics of the U.S. Department of Labor reported preliminary productivity data on June 2, as measured by output per Page 39

40 hour of all persons--for the first quarter of The seasonally adjusted annual rates of productivity change in the first quarter were: 2.1 percent in the business sector and 2.6 percent in the nonfarm business sector Productivity in the business sector grew more slowly than in the fourth quarter of 2004, when it increased 3.7 percent. In the nonfarm business sector, however, productivity increased more in the first quarter than it had in the previous quarter. Next Release (for 2 nd Quarter) August 9, 2005 at 8:30 A.M. EDT News Release year U.S. Government Bond Rate While the 10-year Maturity U.S. Government Security has risen of late, it continues to remain trading at a relatively low rate. 10-Year Treasury Constant Maturity Rate Not Seasonally Adjusted Monthly Numbers Board of Governor s federal Reserve System 5 Percentage Yield % Aug 3, Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Page 40