Essay on What has happened in the American economy in the last two years?
Introduction
The beginning of this century in the United States economy was marked by the formation of a new technological order. It is characterized by computerization of all spheres of economic activity, the use of innovative information technology, dynamic software updating, faster growth of services. An important role belongs to scientific and technological progress promoting the growth of total effectiveness of production factors, the emergence of new societal needs for goods and services, implementation of large-scale structural changes in the economic sector.
A characteristic feature of structural change in the U.S. is the changing balance between the main areas of social production – material and immaterial ones. Increasing role of non-material production is a quite natural phenomenon, since it reflects the growth of social productivity and allows meeting the rapidly changing needs of society. Technological progress, expanding the scope of division of labor within the material production, simultaneously increases the role of intangible conditions of social life. They, in turn, form the service sector which increases the efficiency of the entire economy; final social product and the consumption fund are increasing, and the quality of life grows.
2007-2009 economic crisis adversely affected the dynamics of investment in housing, automotive industry, aviation industry, and it cannot but impact the prospects of the U.S. economic development. During the Bush Jr. administration, the American state, people and business were obviously living beyond their means, inflating the debt bubble and attracting cheap money throughout the global economy. The influx of cheap money was observed mainly in the services sector, in which traditionally real estate selling held a dominant position. Many U.S. citizens experienced credit euphoria, buying houses and apartments that were growing in price.
However, any crisis is good for the financial community, since it leads to a reduction of purely speculative operations and backward productions and increases the interest to new sources of economic growth. The crisis reveals uncompetitive industries in terms of financial instability, as well as the most promising sectors of the economy. The decrease in sales volumes in the construction industry, agriculture and basic industries, despite the recession, is accompanied by increased supply of most types of services, rapid development of high-tech industries, and increased share of science driven products and service products in U.S. exports. Major structural changes occurring today in the U.S. economy will largely define the face of the global economy of the 21st century.
American Economy 2009-2011
It is considered that the current downturn in the U.S. began in the third quarter of 2008, when the decline of real GDP was recorded for the first time during a long period of time. Meanwhile, the study of the statistics the U.S. Bureau of Economic Analysis (BEA) shows that the fall in production of goods in the private sector of the U.S. economy by 0.7% was recorded already at the end of 2007 (“GDP and the Economy 2008”), and only due to the dynamic growth of production services during this period the country maintained the illusion of economic growth.
According to the official forecasts prepared by a group of economic advisers of the president, in 2009 the real U.S. GDP should have grown by 0.6%, while the number of unemployed people should have increased to 7.7% (“Economic Report of the President 2009” 54). As it was noted in the Economic Report of the President, an active monetary policy and the infusion of treasury assets in financial institutions could ease the financial strain and lead to the restoration of interest rate sensitive sectors of the economy in the second half of 2009 (“Economic Report of the President 2009” 33).
In practice, in late 2008 – early 2009, the U.S. economy experienced another cyclical downturn. According to estimates, in the first quarter of 2009, the U.S. GDP declined by 6.1% in comparison with the fourth quarter of 2008. The indicators of gross domestic product fell up to negative values. The world’s largest investment bank Lehman Brothers became bankrupt; the assets of leading corporations were significantly depreciated. Even on the day of the inauguration of President Barack Obama, on the background of national euphoria, the key stock indexes decreased by 5%, reaching the lowest levels in decades (“GDP and the Economy 2009”).
Apparently, the basic direction of overcoming the existing problems was the effective macroeconomic policies, implemented through management mechanisms formed in a long-term practice of the economy: monetary, credit, tax, and budgetary policy. However, it was obvious that the normal cash flow could be restored only if there were new growth points in the economy, new products and technologies that would be in demand.
Stabilization of energy prices also helped stimulate economic growth in the U.S. In general, the political settlement of Iraqi issue, the development of alternative energy sources and energy-saving technologies in the U.S. could create favorable conditions for greater stability in oil prices, which is beneficial for the economic sector of the country.
We can assume that after overcoming the crisis, the development of world market investment has accelerated again as a result of strengthening the financial systems of industrial and developing countries under the influence of improved information technology and communications, as well as increased competition among financial institutions for the use of temporarily free money resources. The dynamic development of the global financial market has provided additional foreign investment to the U.S. economy that helped the country overcome the current recession.
Thus, in the 3rd quarter of 2010 U.S. GDP grew by 2.6%; growth rates of the U.S. economy in the 4th quarter of 2010 were revised upward from 2.8% to 3.1% in recalculation for the year. In December 2010 the negative U.S. trade balance, according to the revised data, made $ 40.26 billion dollars; previously it had been reported that the deficit amounted to $ 40.6 billion (“GDP and the Economy 2010”).
The American economy over the two last months of 2010 was growing at a moderate pace as reported in a published summary of comments on the current economic situation in the districts of the Federal Reserve System (Beige Book).
Data from 12 districts for the period from November to December show that the economy in this period grew moderately. Economic activity in the districts of Boston, New York, Philadelphia and Richmond increased. Economic activity in Cleveland, Atlanta, Chicago, St. Louis, Kansas City and Dallas changed from insignificant to moderate indicator. The economy in the district of Minneapolis continues its recovery, while San Francisco shows a strong growth by the data of the end of the year. The FRS noted the recovery of the industrial sector in all districts, but the most significant growth was recorded in Chicago and Richmond. Retail sales in the holiday season were larger than expected and exceeded the 2009 rates in several districts (“Current Economic Conditions, December 2010”).
Non-financial sector also showed growth in the last months of the year in Boston, New York, Philadelphia, Richmond, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco (“Current Economic Conditions, December 2010”).
The state of the financial sector in all districts was mixed, the number of requests for lending increased slightly in Philadelphia and Richmond, but declined in St. Louis and Dallas. Energy sector demonstrated an activity increase in Atlanta, Minneapolis, Kansas City, Dallas and San Francisco (“Current Economic Conditions, December 2010”).
The FRS again noted the relative weakness of the real estate market in all districts, despite the continued modest growth in the rental market of commercial real estate.
In general, the recession would have been much more serious without the substantial assistance from the FRS in the form of low interest rates and special loan programs for financial institutions. GDP growth in real terms in the 4th quarter of the last year was also conditioned by the dynamics of the index of personal consumer spending which shows the change in prices for consumer goods and services, as well as by good export data. It should be noted that in the 4th quarter of 2010 imports of goods and services declined sharply. Thus, exports of goods and services in real terms in the reported quarter grew by 8.6%, while imports decreased by 12.6%, as stated by the U.S. Ministry of Commerce. GDP by the results of the last year in real terms increased by 2,9%, while in 2009 this figure dropped to 2,6%. The growth rate in 2010 was conditioned by the growth of exports and positive dynamics of the PCE index (“Current Economic Conditions, December 2010”; “GDP and the Economy 2010”).
The volume of industrial production in the U.S. in February 2011 fell by 0.1% compared to January, but this decrease was caused by the reduction of heat production at thermal power plants due to improved weather according to the Federal Reserve System. Production in processing industry rose in February by 0.4% compared to January and by 6.9% compared to February of the last year. The U.S. industrial capacity was used in February on 76.3% (it was planned 76.5%) (“Current Economic Conditions, March 2011”).
The negative U.S. trade balance in January 2011 increased at once by $ 6 billion compared to the previous month reaching $ 46.3 billion. The index given by the Ministry of Trade significantly exceeded the expectations of the experts: before the publication of the data the consensus forecast amounted only $ 41.4 billion. In January 2011 the volume of U.S. imports reached $ 214.08 billion (+5.2%), which was the biggest increase in this index since March 1993. At the same time, the volume of exports rose by only 2.7% reaching $ 167.74 billion. In annualized recounting, the U.S. imports in January 2011 increased by 19,3%, while exports rose by 15,9% (“Current Economic Conditions, March 2011”).
A number of experts express some concern about the increase of imports of goods: compared with the previous reporting month, it rose by more than $ 10 billion. Import increase has a restraining influence on the growth of U.S. GDP, but nevertheless some experts tend to interpret this figure as optimistic. In a study by Reuters most of the specialists consider the rapid increase in imports as a sign of strengthening domestic demand, and believe that it will mostly stay in warehouses and will thus be neutralized.
U.S. inflation according to February data was 0.5% as reported by the U.S. Department of Labor. Experts interviewed by Bloomberg predicted the increase in consumer prices by 0,4%. Core CPI (excluding unstable food and energy prices) in February increased by 0.2% in a monthly recalculation showing maximum growth since October 2009. A month earlier, U.S. inflation was 0,4% (“Current Economic Conditions, March 2011”).
Regarding the U.S. labor market, job growth remains slow. Concerning the unemployment reduction from 9,8% to 9,4% recorded in December 2010 it should be noted that, although any reduction is good news, December decline in unemployment was not a sign of rapid recovery of the labor market (“Current Economic Conditions, March 2011”; “Current Economic Conditions, December 2010”).
The U.S. unemployment rate dropped by 0.1% in March, making 8.8%. This indicator has become minimal over the past two years. At the same time the number of new jobs increased by 216 thousand in nonagricultural sectors according to the report of the Labor Department. Particularly pleasant for the market participants was the increase of new jobs in the private sector: according to the Department this figure rose by 230 thousand in March after rising by 240 thousand in February (“Current Economic Conditions, March 2011”). The number of new jobs in the public sector at the same time decreased by 14 thousand, according to the report.
According to experts, the unemployment rate will remain above 9% throughout 2011 and above 8% till the end of 2012 (“Current Economic Conditions, March 2011”). However, there is evidence that many of those who have been left out of the labor market will return to it in conditions of improvement in the economy this year.
According to Bill Cheney, a leading economist John Hancock Financial Services, everything tells that the U.S. labor market is gradually recovering. Reuters’ experts add that a strong labor market will help the U.S. economy to survive the growth of world oil prices, but can hardly contribute to easing of monetary policy the FRS.
According to the estimations, world’s largest economy needs to create around 250-300 thousand new jobs each month to make 13.5 million unemployed Americans feel the difference. Starting from February of the last year, the total number of new jobs in nonagricultural sectors of the country grew by 1.5 million. Unemployment rate for the same period fell by nearly 1% (“Current Economic Conditions, March 2011”).
U.S. Federal Reserve System decided to keep key interest rate in the range of 0-0.25% per annum according to the FRS report issued on the results of the Federal Open Market Committee (FOMC) session. This decision was predicted by most analysts. The Fed continues to keep to the intention to follow the program of “quantitative easing”, which provides buying-out government bonds for $ 600 billion, as stated in the records of the Office. The Fed notes that this program will strengthen the economy during the developing “nuclear crisis” in Japan. The decision to leave the program unchanged was unanimous.
The report notes that the U.S. economy has become more stable, and the labor market situation is gradually improving. At the same time, it states that the housing market is still in a difficult situation. Regarding the growth of inflation, the FRS analysts do not exclude the price increase, but predict it to be gradual.
Concerning the inflation, the Fed experts report on certain increase of it due to the jump in world commodity prices because of the deteriorating situation in the Middle East and Africa. At the same time, in their opinion this jump is temporary, and U.S. inflation will stay within the range of 1.25-1.75% the current year. According to analysts, there is little evidence that low interest rates warm up inflation.
In spite of this, the head of the Federal Reserve System expects economic growth in 2011 compared with the last year. According to the Fed forecasts, his year U.S. GDP will grow by 3.5-4%, which is higher than 2.8% by which GDP, as they suggest, grew from the 4th quarter of 2009 to the 4th quarter of 2010 (“Current Economic Conditions, March 2011”).
Conclusion
Despite the existing conditions towards improvement, the economy of the USA faces two major obstacles that continue to restrain it from development: reduction of the net asset value of households, due to which consumer spending has become more restrained, and bank lending.
Many households continue to try to recover the value of their assets in response to past and possible future price declines in the residential land. Meanwhile, banks have still problems with asset quality, which limits the growth of assets and loans. It is expected that in the conditions of improvement in the economy, the demand for loans will rise, but banks with poor asset quality will continue to focus on preserving capital, not on increasing lending.
Taking into account the slowdown of inflation and high unemployment rates, the Federal Reserve System probably would want to further reduce the target rate of interest, although the resulting rate would be negative. Instead, from December 2008 to March 2010 and then again starting from November 2010, the Federal Reserve System implemented large-scale purchases of long-term treasury bonds. This operation is designed to lower real long-term interest rates and to level the influence of consumer spending reduction on the economy. However, most solvent financial institutions would crash during the panic in financial markets, if the FRS didn’t implement its special loan programs during the credit crunch.
In general, in 2011, the U.S. economy moves from recovery stage after the recession to the full growth. Though the labor market and real estate will continue to pull growth back, there are some strong positive factors: the financial position of companies gets stronger; quantitative easing will continue until the middle of the next year; the program of tax cuts is extended; there are also positive prospects for the stock market, especially in the first half of the year. The greatest opportunities are seen in the sectors of industry, information technology, as well as the financial sector.
