Economics: The State of the U.S. Economy
Cousin Edgar, a global investor, is seeking to capitalize on the thriving gasoline industry and the rising world demand for oil by purchasing several gas stations in the U.S. market. Inspiring his interest is the high price of gasoline, which he reckons will rise even higher in the near future, thanks to the urbanization and industrialization currently being witnessed in the developing economies of Asia. Furthermore, the turmoil facing some of the world's largest oil- producers has spurred fears of supply disruptions, and, consequently, opened up growth avenues for smaller producers such as the U.S.
Cousin Edgar reckons that he will need financial reinforcement, which will most likely not be much of a problem, given that the ongoing recovery efforts have managed to stimulate loan growth to reasonable levels that are essentially near the pre-recession index. However, economic weakness still remains evident, and there are concerns that the economy may never fully recover from the effects of the 2008 depression, or that it may do so at a pace that is slower than would be expected. These macroeconomic concerns have led experts to question the suitability of the U.S. economy as a business environment, at least for now. To this end, one may wonder - is cousin Edgar's timing really right? This report provides answers to this question by examining the trends in eight crucial macroeconomic indicators; GDP growth, demographics, international trade, interest rates, monetary policy, unemployment level, fiscal policy, and business cycle.
2 Relevant Economic Principles: Determinants of Demand and Supply
2.1 Summary
The 2008 recession has been termed "the most severe economic contraction since the 1930s" (Elwell, 2013, p. 1). Economic activity, as Elwell (2013) points out, was moderate over the first two quarters of 2008, but the financial crisis came in, overtook the already weakening economy, and accelerated the decline. Recovery efforts kicked off in mid-2009. Since then, there has been moderate increase in employment, with the stock market showing signs of recovery, and real GDP rising, although at an uneven pace.
On the other hand, the Federal Reserve, in the wake of the recovery efforts, unveiled three quantitative easing efforts that collectively increased money supply, causing inflation and shrinking the dollar's buying power - in an overturn of events that has seen it lose significant ground against the world's majors. Subsequently, international trade has been affected as imports have become more expensive. The national debt has shot up, from $9.2 trillion in 2008 to $14.5 trillion in 2013. Experts expect the national debt to reach $20 trillion, almost 140% of current GDP, by the year 2020.
2.2 Real GDP Growth Rate
On average, the economy grew by 5.6% over the last decade of the twentieth century. The economic slowdown was, however, quite evident even before the 2008 bursting of the housing bubble. The GDP growth rate fell from 6.52% to 5.12% between 2005 and 2006, and dropped even further to 4.42% in the last quarter of 2007 (Multpl.com, 2014a). As depicted in figure 1, the decline of economic activity bottomed in the last quarter of 2008, hitting an all-time low of -0.98%, with real GDP contracting by approximately $680 billion or 5.4% (Elwell, 2013). The output gap at this point widened to a significant 8.1%, the largest measure since World War II.
The launch of the Economic stimulus Program in March 2009 marked the beginning of economic recovery. Its effect had, however, hardly been felt by the end of the year, and the GDP recorded an anemic growth of 0.12% (Multpl.com, 2014a). Since then, GDP has been on an upward trend, with a small drop in 2011 that was occasioned by the high foreclosures that had kept the housing market from recovering fully (Elwell, 2013). The growth rate averaged a healthy 4% between December 2010 and March 2014. Furthermore, the output gap has reduced significantly since 2009, and was reported at 4.6% in the first quarter of 2014 (Multpl.com, 2014a).
Table 1: GDP Growth Rate from December 2005 to March 2014
Year
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014'
% GDP Growth
6.52
5.12
4.42
-0.98
0.12
4.58
3.85
3.80
4.08
3.72
(Source: Multpl.com, 2014a)
Figure 1: Percentage GDP Growth Rate (2005 -2014)
2.3 Fiscal Policy Actions
In 2008, Congress passed the Economic Stimulus Act, "a $120 billion package that provided tax rebates to households and accelerated depreciation rules for business" (Elwell, 2013, p. 3). Later on in 2009, the Obama administration adopted the American Recovery and Reinstatement Act, which incorporated a $787 billion bouquet with $501 billion of spending increases (26.2% rise from government spending in 2008), and $286 billion of tax cuts (Elwell, 2013). These fiscal actions are reported to...
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