Discontent over the economy played a major role in the midterm elections last fall, in which dissatisfied voters installed a new Republican majority in the House of Representatives.
And the economy is certain to be one of the biggest issues in the 2012 presidential election. Indeed, it may determine whether President Obama wins a second term in the White House. (The phrase "It's the economy, stupid" became the mantra of Bill Clinton's successful 1992 presidential campaign, and it rings just as true today.)
To follow the discussion, here's a list of 19 key terms that politicians and the media use when talking about the economy.
Wall Street This is probably the first phrase that comes to mind when you think about the world of money and finance. It's literally a street in lower Manhattan where the New York Stock Exchange and other key financial institutions are located, but the term has become shorthand for the U.S. financial industry. And yes, there was once a wall on the street, built by the Dutch in the 1600s to protect the settlement from the Indians.
Stock A share of a business that an investor can buy. Companies usually decide to sell stock to the public when they need money to expand. Each stockholder actually owns a tiny piece of the company.
Stock Market An exchange where shares of stock are bought and sold by investors. The New York Stock Exchange is the biggie, with about 2,800 companiesboth American and foreigncollectively worth about $18 trillion. You'll also hear about the Nasdaq, a newer stock exchange that's in New York too and lists a lot of technology stocks, like Apple and Microsoft.
The Dow Shorthand for the Dow Jones Industrial Average, it's actually an index of the stock prices of 30 major American corporations. It's widely viewed as an indicator of how the overall stock market is performing, which is why you hear people say, "The Dow is up" or "The Dow is down." Charles Dow, who had cofounded Dow Jones & Company with Edward Jones, came up with the idea for the index in 1896.
Bear Market A period in which stock prices are generally heading down, usually as a result of investors feeling pessimistic about the prospects for business and the economy. A recession with high unemployment or a period of high inflation are typical causes of a bear market.
Bull Market When stock prices are rising, and investors feel "bullish," or optimistic, about the market and the economy. The origin of the terms is unclear, but it may be because bulls drive their horns up to attack and bears swipe their paws down.
MONEY & JOBS
Unemployment Rate The percentage of people who are looking for work and have not found jobs. (It doesn't take into account those who are unemployed but not actively looking for work.) The unemployment rate, which currently is almost 9 percent, is a key indicator of how the economy is doing overall. Five years ago, when the economy was booming, the unemployment rate was less than 5 percent.
Recession A decline in overall business activity. During a recession, businesses produce less, hire fewer workers, or lay off workers. People spend less, either because they're unemployed or fear they might lose their jobs. Recessions occur periodically and are considered part of the regular economic cycle.
Depression A period of severe and sustained economic decline in which unemployment rises sharply and overall economic activity shrinks substantially. During the Great Depression of the 1930s, which followed the stock market crash in October 1929, unemployment in the U.S. reached 25 percent.
Inflation A steady increase in the prices of goods and services. When prices go up, money loses value because you need more of it to buy a pair of jeans than you did a month ago. However, a little bit of inflation is good, since it's a natural consequence of a growing economy.
Deflation A decrease in the price of goods and services, usually due to a weak economy. That may sound like a good thingwho wouldn't want to pay less for a car or a pair of shoes than they would have a year ago? But as prices fall, so does the overall level of spending in the economy: People and businesses start putting off purchases because they expect things to cost less a month or a year from now. That lack of spending hurts the economy, and companies may need to cut wages or lay people off as their business slows down. Deflation intensified the Great Depression in the U.S., and is a primary cause of Japan's 20-year economic slump.
Cost of Living What it costs day-to-day to live in a particular place varies: The cost of living is a lot higher in Los Angeles, for example, than in South Dakota. It includes the price of basic necessities like rent, food, transportation, and the T-shirts you buy at the mall.
Outsourcing Companies outsource something they've been doing themselves because they think it would make more sense to have someone else do it for them, usually to save money. For example, an Internet company might outsource its cafeteria to a company that specializes in food preparation. Today, the type of outsourcing that gets the most attention is when companies outsource things they were doing in the U.S. to another country, like India or China, where costs, especially labor, are a lot lower than they are here.
Mortgage A loan for the purchase of a home. It works like this: If a house costs $200,000, a buyer makes a down payment of 20 percent, or $40,000, and takes out a mortgage from a bank for $160,000. With an interest rate of 5 percent, the buyer would have a monthly payment of about $1,070 for the next 30 years. When it's all paid off, including interest, the buyer, not the bank, owns the house free and clear.
Foreclosure A legal process in which banks take possession of homes when borrowers are unable to keep making their mortgage payments. The banks then sell the homes to new owners. Since 2008 when the economic crisis began, banks have foreclosed on almost 7 million homes in the U.S., with California, Florida, and Arizona the hardest hit states.
Underwater A term for homeowners who owe more on their mortgages than their homes are currently worth. Say your parents bought your house for $300,000 before the financial crisis began in 2008, when real-estate prices were much higher. Maybe they now owe $250,000 on their mortgage, but if they tried to sell your house, they'd be able to get only $175,000 for it. So if one of your parents gets a new job and you need to move, they can't sell the house without losing a substantial amount of moneyabout $75,000 in this example.
Deficit If the federal government were to spend, say, $100 in a year and took in only $80 in taxes, fees, and other revenue, it would run a budget deficit of $20. It would then have to borrow the rest of what it needs by selling bonds. Since 2001, when the federal government had a budget surplus, Washington has run a deficit every year. Each year's federal deficit is added to the national debt, which is currently about $14 trillion. State governments generally aren't allowed to run deficits; they have to balance their budgets each year, which can mean cutting spending or raising taxes.
Stimulus Major spending by the federal government designed to jump-start a sagging economy. In 2009, the "stimulus bill" pumped $787 billion of government spending into the economy to offset the effects of the recession. Maybe you've driven past a highway project with a sign that says "Paid for by the American Recovery and Reinvestment Act." That's the formal name of the stimulus legislation.
Federal Reserve The Fed, as it's commonly known, was created in 1913 by Congress. It functions as the central bank of the U.S., meaning it regulates the banks that you and your parents do business with. Through its power over what is known as monetary policy, the Fed controls the flow of money into the economy. It does that by its ability to influence interest rates. If the economy is doing poorly, as it is now, the Fed will follow a "loose" monetary policythat is, lower interest ratesso that people and businesses will borrow more, spend more, and get the economy moving. If the economy is booming and inflation becomes a problem, the Fed tightens its monetary policy by raising interest rates, which discourages borrowing and slows the economy down. The chairman of the Fed, who is appointed by the President, is Ben Bernanke.
Online Extra: For Upfront's Guide to the Stock Market, click here.
(The New York Times Upfront, Vol. 143, April 18, 2011)