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Why do we keep hearing about the U.S. economy?

The United States and Korea are intertwined economically, so what happens in America can quickly ripple to Seoul.
July 02,2009
Articles about business and economics aren’t exactly the most entertaining stories in the daily newspaper.

They’re often filled with unbelievably large numbers, complex acronyms and strange terms. At first glance, they might seem much less interesting than the latest gossip about “Jon & Kate Plus 8” or the dire news coming from North Korea.

But upon closer examination, you’ll find that these articles broach subjects that can impact your life in big ways, from the likelihood that you’ll find a summer job to the buying power of the money you’ve been saving for college.

These days, you might have come across numerous articles highlighting certain barometers of the U.S. economy, such as the unemployment rate, the manufacturing index and the volume of housing sales.

It might seem strange at first that newspapers and TV stations in Korea are dedicating so much time to what’s happening in the United States, rather than focusing on the situation here.

But there’s a simple explanation. The economies of the two countries are becoming increasingly intertwined, so developments in the U.S. can quickly ripple to Korea as well.

Here’s an example: If the jobless rate in the United States rises to, say, its highest point in a year, spooked investors might sell shares of publicly traded companies to safeguard their money, and the country’s stock market might tumble as a result. Such a decline in the U.S. markets likely would lead to a similar plunge in Korea, possibly within hours.

Such economic data from the U.S. is more significant in times of economic turmoil, like today. Many countries are looking to the see if the United States ? the epicenter of the latest global economic crisis ? has bottomed out and is moving into recovery mode. That would bode well for other countries trying to work their way out of the economic morass as well. If the U.S. continues to struggle, though, there could be more pain ahead for the entire world.

And that’s why market observers around the world hold their collective breath every time officials in the United States release economic data measuring job levels, manufacturing output and consumer and business sentiment.

Now it’s time to get down to the nitty-gritty and drill into the main U.S. economic indicators that Koreans pay attention to ? and why they do.

Perhaps the most widely watched measure is the initial jobless claims figure released by the U.S. Labor Department every Thursday. The report, which tracks how many people filed for unemployment benefits the previous week, is considered one of the best gauges of the U.S. job market. People filing for unemployment benefits are, obviously, out of work, likely because they were recently laid off by their employers. The higher the number, the worse the overall economic picture. If companies are shedding more positions, that means they’re struggling financially.

And the more jobs they cut, the more people out there who scale back on spending, creating a vicious cycle. A decline in jobless claims, on the other hand, signals that the overall business climate is improving, which bodes well for the overall economy and financial markets ? both in the U.S. and in Korea.

So let’s take a look a some recent real-world data.

Jobless claims in the United States reached a 25-year high in January and have bobbed around that level for much of the year. The number of new applications for unemployment benefits hovered around 350,000 each week late last year. But it surged to more than 500,000 in early January and rocketed past 600,000 by month’s end.

Claims hit an all-time high of 674,000 in the final week of March before declining a bit to 605,000. They have hovered around 620,000 since then. What can we draw from that data? The situation has improved in recent months, but claims remain at historically high levels, meaning the economy is still on shaky ground.

Next in line is the ISM manufacturing index. As you can probably guess, the index provides a glimpse into the vitality of the nation’s manufacturing activity. Why the heck is that important? Because it’s yet another measure of how companies are actually doing. If the manufacturing index rises, companies are producing more TVs, laptops, potato chips and cars to meet higher demand. If the index sags, companies are reducing output because consumers are reining in spending.

The index, on a scale of 0 to 100, is released by the Arizona-based Institute of Supply Management. A reading below 50 means that the country’s manufacturing activities have dropped considerably, while a reading above 50 indicates that the nation’s overall industrial activities are growing.

Stock market and financial bigwigs monitor this index closely, as it is one of the primary gauges of the nation’s economy. The ISM index fell below 50 in February 2008. It dipped below 40 last October and stayed there through March. In April, it rose to 40.1 ? indicating that companies still have a long way to go to recover.

Another important barometer is new home sales, released by the U.S. Census Bureau every month. The bureau lumps new homes ? from pre-construction to final sales ? into seven price categories from $150,000 to $750,000 and then tallies sales in each category. The data also show how many properties in each category are planned for construction, how many are currently under construction and how many have been sold or left unsold.

According to the data, which is announced about two months after the actual transactions, 33,000 new homes were sold in April, a 33 percent decrease from a year earlier.

Meanwhile, 414,000 existing homes were sold during the same month, down only some 20,000 units ? or about 5 percent ? from a year earlier. The latest data for April, announced on June 24, also revealed that newly built houses sold on average about 10 months after construction. In comparison, the average for 2007 was six months.

Another measure to look at is the CBOE volatility index ? often called the “fear index” ? which attempts to estimate how volatile stock markets will be over the next 30 days. The bigger the number, the more volatile stock markets tend to be. The Chicago Board Options Exchange releases the index every day.

“An index number between 30 and 40 means that the stock markets tend to be quite stable, while a number above 50 means greater volatility,” said Na Jong-hyuck, an analyst at Daishin Securities.

A higher number could mean a dramatic market swing one way or the other, and that can be an especially bad thing in tough economic times when fear and uncertainty rule. However, a lower number means there might be little upward momentum on the horizon to heat up the market.

The index recently returned to the level seen before the global economic collapse last fall, which is seen as a positive sign.

Another common U.S. economic measure you will read about in Korean newspapers is the consumer confidence index, released by the business-backed Conference Board on the last Thursday of every month. The private think tank conducts monthly surveys of 5,000 households across the country to gauge consumer feelings about the economy. Changes of 5 percent or more indicate the potential for a major shift in the direction of the economy, while changes of less than 5 percent are considered negligible. The index level in May was 54.9, the second consecutive month it rose.

The Conference Board said in a statement that the recent rise indicates that a growing number of consumers now believe that the worst has passed. But it also said the results indicate that the nation’s economy would continue to struggle in the second quarter of the year.

By Kwon Hyuck-joo, Jung Ha-won [hawon@joongang.co.kr]