The current state of the economy in the United States has been slow in recent months. While the economy is not currently in a recession, we may eventually fall victim to the first recession we’ve had in nearly ten years. The economy in general is showing growth, just not much. It will be difficult to predict what exactly will happen to the US economy in the future. Many economists do not agree on what will become of the economy. Some feel that we will begin a recession over the next year, and some feel that there is significant policy implementation that will allow us to dodge a recession and regain our economic strength.
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There are many factors that make up the US economy. The means in which I will discuss the overall growth and current status of the economy is by analyzing the Gross Domestic Product, and discuss the factors that cause it to rise and fall. The GDP is the total aggregate income of the United States. It is comprised of consumption, investment, government spending, and net exports. The GDP in the fourth quarter of 2000 grew at a 1. 1% annual rate, the lowest since a 0. 8% increase in the second quarter of 1995. The below par performance in GDP is due to those factors that comprise the GDP.
The most important of which is consumption. Consumption in the United States has been less than expected mainly due to low consumer confidence. Consumer confidence has hit a 10 year low with an index of 106. 8 as reported by Alan Greenspan. In the past 2 months the index number has plummeted nearly 22 points, the biggest decrease since the 1990-1991 recession. The reason for this recent drop in consumer confidence is due to several key factors. One factor is the poor performance of the stock market. The Dow Jones is down from its peak that was hit last year, but has now rebounded slightly.
The Nasdaq took a dive with the decrease in the prices of tech stocks. The Nasdaq has fallen nearly 56% from its peak in March of 2000. The Wilshire 5000, which is a broader market, is also down by about 22%. Also a factor in dropping consumer confidence is the fear of more layoffs by major employers. The media has paid a lot of attention to large layoffs of companies, yet the labor markets still remain fairly tight.
The natural rate of unemployment in the US is approximately 5%, which is higher than the actual rate of unemployment, which is estimated to be 4. . Another reason for the depletion of consumer confidence is the rise in inflation. The inflation rate was 3. 5 percent last year as calculated by the consumer price index. Raising prices mean that consumers are less likely to purchase goods and services, and it also causes concern amongst them. A main reason for the increase in the inflation rate is the increase in energy costs. The increase in costs of energy is due primarily to a decrease in the supply of energy and an increase in the demand.
Also playing a role in the lack of consumption is the purchasing power of net assets, or net wealth. In recent years when the stock market had been performing well, consumers were experiencing large increases in net wealth. Now that the market has been falling, net wealth is down and people have less purchasing power. Investment is another part of the economy that contributes to the GDP. Categories of investment include physical capital, residential construction, and inventories, all of which are owned by firms. Manufacturing activity has decreased so far this year in most parts of the US.
Falling output among makers of high tech equipment and motor vehicles and parts was reported in the “Beige Book” in Atlanta, Chicago, St. Louis, and Dallas. Also noted was declining production of electronics and telecommunications, as well as production of industrial equipment and building materials. However there were improvements in production of pharmaceuticals and biotechnology. Most of the firms who reported declines in production also had increases in inventories. They reported that their inventories were higher than they had anticipated, and due to that have cut capital spending.
It is hardly a wonder why investment has declined with the effect that consumer confidence has had on consumption. Government spending is also a very important part of the GDP. Government spending makes up about 16 percent of the economy’s aggregate expenditures. The government purchases many things with the taxes it generates. Some such things that the government spends their money on are defense, education, Medicare, and other government programs. Currently, and in recent years the government has been spending less than they could have.
With the tax money generated, the government has actually been running surpluses. This means that the tax dollars generated by the taxpayers have been stockpiled and have not gone to purchase goods and services. This is good because for the first time in many years we have not been running a deficit. It is also bad because the government could be spending more and it would increase the real GDP. In the future President Bush plans to increase government spending as well as cut taxes. The final component of the GDP is net exports. Net exports are composed of total exports minus total imports.
This number is usually a negative number because we are running a trade deficit. The US imports more goods and services than it exports. In the fourth quarter of last year, net exports were down 14. 6 percent and net imports were up 0. 6 percent. This means that there is an even greater trade deficit. The reason for the increase in the trade deficit is due to the strength of the US dollar. The US dollar has remained strong in the foreign exchange, while some countries such as Australia have struggled to maintain high exchange rates on their currency.
Based on the sub par numbers the economy has been producing recently there has been a lot of concern about a recession. Some feel it is inevitable, while others believe that the economy will bounce back. The government has realized that the economy is showing signs that are primary for a recession. But before the country goes into a recession, it has to have negative economic growth for at least 2 quarters or six months. The government fearing that we may slump into a recession has already implemented monetary policy changes and plans on implementing fiscal policy changes.
The changes in government policy will increase the growth of the economy and stabilize the slide downward. The first action that has been taken was by the Fed. The Fed had realized that the economy seemed to be taking a turn for the worse in recent months and were forced to react to the threat of recession. The Federal Open Market Committee decided to cut back interest rates by half a percentage twice in January. First at the regularly scheduled meeting in January, the FOMC agreed to cut interest rates by one half of a percent.
Then later in the month, FOMC chairman Alan Greenspan announced at a surprise to most people that he would cut the short term interest rates by another half percentage at an unscheduled meeting, which is a rare event and usually signals economic unrest. There has also been concern that the Fed may cut interest rates again before the next scheduled meeting of the FOMC. Amid these rumors, in an appearance before congress FOMC chairman Alan Greenspan announce that the Fed would not be moving again outside of their regularly scheduled meeting.
However Greenspan is expected to announce at the meeting between the FOMC that the Fed will once again be reducing the short-term interest rate by half a percent. This will adjust the interest rate to a mere 5 percent. The effect that the lowering of interest rates has on the economy is due to the theory that if interest rates decrease then the supply of loanable funds will increase. Therefore the consumers will have access to more loanable funds and will be able to consume more goods. Also people will be more inclined to borrow money because they won’t have to pay such high interest rates.
Many economists believe that simply reducing the interest rates will stimulate the economy into periods of more rapid growth. Two economists William McDonough the President of the New York Fed, and the President of the Chicago Fed Michael Moskow are cautiously optimistic about the future of the economy. They think that after one or two quarters of sluggish economic progress, the economy will then regain its strength. They are reluctant to say that there will be no recession at all, however they feel that the growth of the economy in the first quarter of this year will be weak, but they think it will still remain positive.
They also noted that the biggest problem would not be increasing inflation, but weakness of market due to low consumer expectations. President Bush has also proposed a series of fiscal policy changes that will help to bring the economy back to its splendor. President Bush has proposed a tax cut bill that will reduce the rate of income tax payable of all US taxpayers. His bill will eliminate the fifth tax bracket and reduce the income tax rates in all brackets. Over the next 10 years, the bill will reduce taxes by about 1. rillion dollars.
While cutting taxes, President Bush also plans to increase government spending, but with controls and limitations on congressional spending. He plans on raising funds in defense, education, as well as other areas. By doing so, President Bush is attempting to effectively use supply-side economics tactics. President Reagan also attempted supply-side economics in the 1980’s, but he was unable to keep the deficit from skyrocketing because the spending restraints on congress never materialized.
If the rate of domestic spending had risen at the same rate as inflation, at the end of his presidency, the government would have had a surplus of almost 250 billion dollars. The way that supply-side economics works is by increasing the disposable income of the taxpayer, which will inevitably increase consumption. The theory is that if people get to retain more of the money that they earn they will work better and longer thus increasing productivity as well as the quality of goods. President Bush’s tax cut plan if done correctly will help greatly to get the US economy to increase its growth.
So is the United States in a recession? The answer is no it isn’t. The US has had a period of sluggish growth, but still it has been positive. The economy will have to grow at a negative rate over the next two quarters in order for the US to be in a recession. But is there cause for concern that a recession may occur? Yes there is, but the government’s interventions should keep the US from falling victim to recession. I believe that the economy will eventually pick itself back up and avoid a recession. The GDP will once again grow at a quick pace.