The Price Point Vol. 116, Issue 1

As Stuyvesant students prepare to enter the world, understanding the economy becomes an essential skill. In today’s society, knowledge of economics provides us with a foundation for navigating financial issues, understanding the effects of public policy on the market, and making informed decisions about our own personal finances.

Shares of Furniture Companies Drop After Suggested Tariffs

Major furniture retailers—including Wayfair and Williams Sonoma, who manufacture overseas or otherwise source their products from foreign manufacturers—saw a decrease in the value of their shares after President Donald Trump suggested on August 22 that the United States would launch a tariff investigation on imported furniture within the next 50 days. The administration would then enact unspecified tariffs on these furniture imports. Trump hopes to return the center of the U.S. furniture industry to domestic instead of foreign manufacturers. Following this, La-Z-Boy and Ethan Allen Interiors experienced a rise in their shares, since both companies manufacture most of their furniture in North America.

Powell Signals Rate Cuts at Jackson Hole

At the Jackson Hole Symposium in Wyoming last weekend, Federal Reserve Chair Jerome Powell implied another interest rate cut for the next FOMC meeting in September. Although further cuts seem counterintuitive, given that inflation is heading towards three percent and away from the Fed’s goal of two percent, the decision to cut rates reflects the growing fragility of the U.S. labor market, despite a low unemployment rate.

U.S. Job Market Poses a Growing Risk to the Economy

Due to the U.S. job market’s increasing risk, labor has become a central issue for the Federal Reserve. Although unemployment has remained at a comfortably low level, many U.S. companies have not been hiring as much as they used to; the share of hires compared to overall employment was 3.3 percent in June—even lower than the 3.9 percent in February 2020 right before the pandemic—meaning potential layoffs will not balance out with new jobs. Although inflation is above the Fed’s target of two percent, Powell has signaled further rate cuts due to weaker job growth, although this would likely increase inflation.

Economics Concept of the Issue

Expected Utility Theory

Expected Utility Theory (EUT) is a foundational framework for understanding decision-making and risk preferences under uncertainty. Daniel Bernoulli (1738) first introduced EUT’s concepts, and they were later formalized by John von Neumann and Oskar Morgenstern in their book Theory of Games and Economic Behavior (1944). The framework states that individuals should always choose the option that will maximize the expected utility, or happiness—which is determined by adding up the products of each outcome’s probability and its utility value, derived from the utility function. In addition, the theory presents several axioms of rational behavior, which are assumptions about how people behave; these axioms assume rational thinking, which later works—including Daniel Kahneman and Amos Tversky’s famous Prospect Theory (1979)—have proven is frequently violated in the real world.