This paper analyzes key U.S. macroeconomic indicators — civil unemployment, real GDP, and the Consumer Price Index — in the wake of the 2008 recession and assesses their trajectory through 2011. Drawing on Federal Reserve Economic Data (FRED) and Financial Forecast Center projections, the paper identifies troubling trends pointing toward a potential return to recession in 2012. It then evaluates the fiscal policy debate surrounding expansionary government spending versus deficit reduction, as well as the Federal Reserve's easy money monetary policy and its limited effectiveness in the post-financial-crisis environment. The paper concludes that swift, consensus-driven policy action was urgently needed.
The major recession that began in the United States in 2007 drastically changed the landscape of the American economy, both in the present and for the future. Several major indices can be analyzed to determine the nature of this change, and there are many policy avenues through which the government can act to control its future course. By examining current macroeconomic trends in the U.S., we can determine the likely economic scenario the country faces going forward, and by understanding the fiscal and monetary policy tools at the government's disposal, we can assess the best methods for manipulating those trends toward a better outcome.
One macroeconomic trend that has been particularly troubling for economists and politicians during this recession is the civil unemployment rate. According to the Federal Reserve Bank of St. Louis Economic Data (FRED), the unemployment rate in the United States doubled between early 2008 and late 2009, rising from 4.5% to 10.1%. While the early 1980s did see a higher overall unemployment rate, at no point since the end of the Great Depression has unemployment risen as drastically or as quickly as it did from 2008 to 2009.
Since its high of 10.1% in October 2009, the civil unemployment rate trended downward very slowly, reaching a low of 8.8% in March 2011 before rising slightly again over the summer of 2011 (FRED).
The data trend of the Real Gross Domestic Product — the GDP adjusted for inflation — is also troubling. After maintaining largely steady or modest growth over the previous 60 years, the real GDP took its steepest plunge since the 1930s, losing three-quarters of a percent between April 2008 and April 2009 (FRED). While GDP rose steadily during the following two years, forecasts by the independent Financial Forecast Center predicted another decline beginning in January 2012.
Both of these indicators point to a possible return to recession in 2012, and this forecast is strengthened by data trends involving inflation. The Consumer Price Index (CPI) fell considerably from 2008 to 2009 before beginning to rise again over the subsequent two years. However, the CPI began trending toward deflation in July 2011, and the Financial Forecast Center predicted this deflation would steepen in the coming year.
"Debate over expansionary spending versus deficit reduction"
"Fed's easy money policy and its limited effectiveness"
While expansionary fiscal policy and easy money monetary policy had been successful tools for stimulating the economy in past recessions, the political climate at the time and the particular nature of the financial crisis underlying this recession undermined their effectiveness, leaving leaders and economists struggling to determine the best course of action for restoring growth while avoiding further economic harm. With data trends suggesting another recession on the horizon, it was essential that the government reach a strong consensus on the best path forward and implement it quickly and consistently.
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