The Opportunity Cost of Driving Your Car Has Never Been Lower

In August, I posted an item showing how many miles you could drive your car on an hour’s wages. At that time, the average US price for gasoline was $3.60 per hour. Based on an average wage for production and nonsupervisory workers of $20.61 per hour and an average fleet economy of 24.3 miles per gallon, it turned out that an hour’s wages would buy you enough gas to drive 139 miles.

That was a lot better than the “good ol’ days.” Back in the time of the Model T (17 mpg), a production worker earning 50 cents an hour could buy just 2 gallons of gasoline, enough for a pitiful 34 miles. By the depths of the Great Depression, that had crept up to 49 miles, mainly because gas was cheaper. A post-WWII Ford got even worse mileage than a Model T, but wages were up, so miles driven per hour worked had risen to 123. Miles driven per hour worked peaked at 284 in 1998, but after that, rising gasoline prices and stagnant wages sent the cost of driving up again.

Until now. Over the past several months, the price of regular grade gasoline has plummeted to $2.40 per gallon, according to government data for the week ending December 22. That puts the fleet average at 209 miles per gallon and rising. However, the fleet average includes all cars on the road—not just new models. Even if you don’t drive an electric or a hybrid, you can do a lot better than 24.3 miles per gallon if you drive the best of today's technology. Earlier this year I bought a peppy little Ford Fiesta with a high-tech, 3 cylinder, 1 liter, supercharged gasoline engine. The EPA rates it at 36 miles per gallon, although it does quite a bit better than that for me. At $2.40 per gallon, the average wage would buy you enough gas to drive the Fiesta 311 miles, an all-time record.

Here’s a new version of my chart. This time, just for variety, I’ve inverted the vertical axis to show minutes worked per mile driven, rather than miles driven per hour worked. Take a look at that trend line for selected Ford models, and get ready to hit the road. It’s never been cheaper!

Follow this link to view or download a slideshow version of this post suitable for classroom presentation

Behind the Fall of Russia's Ruble: Inflation, Oil Prices, Sanctions, and More

Russia’s economy is in trouble. Growth has come to a halt. A recession looms in 2015. Inflation, interest rates,

and capital flight are up. The government’s budget is under strain. More than any of these, what makes the headlines is the plunge of the ruble, which, at one point in mid-December, had lost half of its value against the dollar in less than a year. What lies behind the weakness of the ruble? Is it harmful in itself, or is it better understood as a symptom of other problems? What options are open to Russian policymakers as they struggle to manage their currency’s descent?

Accounting for inflation

As in many discussions of macroeconomics, we first need to deal with the effects of inflation. Economists use the term nominal to refer to quantities stated in the ordinary way  and  real to quantities that are adjusted to for inflation. Real wages are the most familiar example: We all understand that if our boss raises our nominal wage from $10 per hour to $12 per hour, but at the same time inflation adds 20 percent to the price of everything we buy, our true purchasing power has not changed.

A similar principle applies to exchange rates. Other things being equal, a change in the nominal exchange rate of the ruble would mean change in the competitiveness of goods the country produces for export and those it produces for sale at home in competition with imports. However, inflation also has an impact on competitiveness—one that can either amplify or offset changes in the nominal exchange rate. >>>Read more

Follow this link to view or download a slideshow tutorial with more information on real and nominal exchange rates

US GDP Grows at 5 Percent in Q3 2014, Best of the Recovery

The US economy grew at a 5 percent annual rate in Q3 2014, the fastest rate of the recovery, according to the third estimate released yesterday by the Bureau of Economic Analysis. That is an upward revision from the 3.9 percent of the second estimate. It comes on the heels of a 4.6 percent growth rate in Q2, making it the fastest six-month growth spurt since the 1990s.

Consumer spending led the way, contributing 2.21 percentage points to the quarterly growth. Investment spending contributed 1.18 percentage points to GDP growth. Business fixed investment accounted for most of that. Residential investment was below average in the quarter, and inventories were essentially unchanged. Exports continued to expand and imports fell slightly. A spurt of defense spending raised the contribution of the government sector.

Inflation, as measured by the national accounts, remained moderate. The broadest measure of inflation, the GDP deflator, rose at an annual rate of 1.4 percent in the quarter. The deflator for personal consumption expenditure rose at a 1.2 percent rate. The PCE deflator is especially important because it is the preferred inflation indicator for the Federal Reserve. PCE inflation remains well below the Fed's 2 percent target.

The BEA will release its advance estimate for Q4 GDP at the end of January. Employment indicators for the final quarter have been strong, so it is likely that growth will continue through the end of the year, although most forecasters expect a slightly slower pace than in Q3.

Follow this link to view or download a brief slideshow with detailed charts of the latest GDP numbers.

As Jobs Surge, Term Structure of US Unemployment Remains Distorted

The US economy added 321,000 payroll jobs in November, the best in almost three years. Strong upward revisions to September and October numbers boosted the 12-month gain to 2,756,000, a new high for the recovery.

The official unemployment rate was unchanged at 5.8 percent. The broad unemployment rate, U-6, which takes into account discouraged workers and involuntary part-time workers, fell to a new low of 11.4 percent.

Although these data indicate a return to normal in many respects, distortions remain. One of the most conspicuous is an elevated rate of long-term unemployment. As the chart shows, the term structure of unemployment remains substantially different from the prerecession pattern:

On the one hand, we see that the short-term unemployment rate, made up of people who are out of work for four weeks or less, has not only returned to its pre-recession level, but has actually dropped below it. In 2007, short-term unemployment averaged 1.66 percent of the labor force; now it is 1.61 percent. Most unemployment in this category is voluntary, representing a minimum time needed for job search, interviews, moving, and perhaps a quick vacation between jobs. It includes people who find work soon after entering or reentering the labor force or find a new job quickly after leaving a former one. >>>Read more

Follow this link to view or download a brief slideshow with charts of the latest US employment situation