State of the economy: macroeconomic analysis

Macroeconomic Analysis

The state of the United States economy is slowly improving. Over the past eighteen months, key indicators have been at levels that would be considered poor historically, but there have been signs of improvement of late. However, some of those improvements are relatively minor, in particular those associated with unemployment. As a result, cautious optimism is the best one can hope for with respect to the current macroeconomic climate.

According to the Bureau of Economic Analysis (BEA) the real GDP growth rate slumped badly in late 2008 and early 2009. Economic growth turned positive in Q3 of 2009 and this growth has continued for the subsequent two quarters. The pace of growth in Q1 of 2010 was 3.0% (second estimate), which was slower than it was for Q4 of 2009, which saw 6.1% growth.

Inflation figures are compiled by the Bureau of Labor Statistics. The inflation rate can be viewed two ways. The first is total CPI (consumer price index) and the second is core CPI, which is the total CPI less food and energy. In the past two years, the inflation rate dropped significantly, turning negative during the key recessionary period from autumn 2008 to autumn 2009. Since then, inflation figures increased sharply but have now leveled off to a more stable increase. Core CPI, however, is often considered a better measure of inflation because of the high degree of volatility in food and energy prices. Indeed, the sharp decrease in CPI in the second half of 2008 corresponds to a period in which gasoline prices decreased substantially. The core CPI has decreased steadily over the course of the past two years. The BLS also tabulates unemployment statistics. These have held steady for the past year. In May 2009 the unemployment rate was 9.4% and for May 2010 this is 9.7%. The rate has been rangebound for that entire time.

The implications for the economy are interesting. The GDP figures indicate that the economy is beginning to pull out of recession. However, the recovery has not, as some might expect, included improvements to the unemployment figures or an increase in inflation. The unemployment figures can be explained partially in that unemployment is considered to be a lagging indicator. Inflation, however, is not a lagging indicator. As such, it would be expected to increase if the economy was increasing strongly, given that interest rates are very low. Not only is inflation not increasing, but it is decreasing, and long-term interest rates do not indicate that that the U.S. needs to be concerned with inflationary pressure either.