The Current Macroeconomic Situation in the United States | Free Essay Example

The Current Macroeconomic Situation in the United States

Words: 1732
Topic: Business & Economics
Updated:

Introduction

Since the Second World War, the United States has been working hard to overcome the deepest as well as the longest recession it has ever faced (UN, 2011). However, on its way to recovery, the country has experienced a very slow speed. The growth that was experienced in 2010 was 2.6%, and there is an expectation of it to further moderate in 2011 to 2.2%. This is before it makes a slight improvement in the year 2012 to 2.8% (UN, 2011).

The expansion in 2010 resulted from the domestic demand with the less exportation affecting it. An increase in personal consumption was experienced at a percentage of 1.7, while an increase of 15% or more in software and equipment investment was encouraged by strong balance sheets of corporate. Due to the feeble financial positions in both the local and the state levels, there was an increase in government expenditure by one per cent (Trading Economics, 2011). While the central inflation continues to be low, there was stability in the caption inflation until the food and energy prices increased recently. The labor market has continually observed the growth of wage, while reduction in costs and improvement in production has been done by firms.

The Fed has historically kept the federal fund rate low. However, Fed is expected to increase its rate of policy in the beginning of year 2012. In the outlook period, the expenses of the government are expected to be reduced (Trading Economics, 2011). There is a projection that the growth in GDP for the years 2011 and 2012 will be, 2.6% and 2.8% respectively. This is with the unemployment rate reducing to a rate of 8.2% in the year 2012. The speed will have a low impact on the rates of unemployment, and in order to recuperate the jobs that were lost during the predicament, another four years or so is expected to pass (UN, 2011). The risks that are projected to be faced by the United States include upheld increased prices of both oil and commodity, the public finances are expected to deteriorate further, and the financial market and the housing market are expected to prolong failing (McConnell et al, 2011).

Discussion

According to CIER (2011), the United States Bureau of Labor Statistics (BLS) showed the rate of unemployment in the U.S to have reduced, but still on its high levels. According to the Monthly Labor Review of March 2011, at 9.6% in the 2010 fourth quarter, the unemployment rate in the US had fallen slightly from its earlier level of the year. The long term unemployed were recorded to increase (CIER, 2011).

Though in 2010 there was increase in employment, the ratio of the population that did not have jobs changed very slightly. In 2010 also, the civilian labor force size remain unchanged, with a continuation in reduction of participation in the labor force. Events of separations and layoffs reduced in the 2010 4th quarter from the 2009 4th quarter levels. BLS reported that the gross job gains number that include the opening and expansion of establishments of the private sector improved to 6.9 million from March to June of the year 2010. The period recorded 6.2 million of gross job losses that encompassed private sector establishments contracting and opening. Since the cycle kicked off in the September of 1992, there has been a steady decline of job losses, with December 2008 recording 8.5 million, recently (CIER, 2011).

The mass layoff number reduced by 135 in March from February, and the number of initial claims those that are associated reduced by 12,295. These recorded their minimal levels respectively since September of 2007 and May 2007. On the February 2011, last business day, 3.1 million jobs were opened. The 2.3% rate of job openings increased in the course of the month. There were slight changes on the rate of hiring (3.0%) and the rate of total separations (2.9%) in the course of the month (CIER, 2011).

The month of August 2011 marked the rate of inflation of the United States as 3.80%. The average rate of inflation in the U.S remained as 3.38% between the years 1914 to 2010 making a historical record in June 1920 to a high of 23.70%, and in June 1921 a record of -15.80% low. The September 15 report, showed a 3.8% increase on the all items index in the course of the last one year. Some of the indexes that were observed to increase include clothes, gasoline, shelter and food. The energy price was increased to a 1.2% due to the increase in the price of gas. The food index increased with 0.5%, the highest mark since March (Trading Economics, 2011).

Apart from food and energy, the other items index rose with a 0.2% in August, which is similar with the prior month. The main contributors were clothing and shelter. However, household furnishings, cars and trucks that are used, recreation, medical care, personal care, and tobacco indicated increase. After remaining at 3.6% for a period of three months, the change of 12 months of the all items index went up to 3.8%, while that of all items minus that of energy and food reached 2.0% since November 2008, for the first time. Over the last year, the increase in energy index is 18.4%, while that of food has rose to 4.6% (Trading Economics, 2011).

The US economy is the world’s largest economy (Trading Economics, 2011). The Bureau of Economic Analysis, in the 2nd quarter of 2011, showed the United States Gross Domestic Product (GDP) to have increased by 1.3% as compared to the prior quarter which increased with 0.4%. As per the record, the average quarterly GDP growth of the United States was 3.28% between the years 1947 and 2011, with a high of 17.20% in March 1950 and a low of -10.40% in March 1958.

With the economy being market oriented, most of the decisions are made by business firms and private individuals (Trading Economics, 2011). The private market place forms a predominant market for the buying of required goods and services by the federal and state governments. The GDP increase in the 2nd quarter resulted from positive contributions from the exports, personal consumption expenditure, non-residential fixed investment, and federal government spending (Trading Economics, 2011). There was an increase in GDP growth that was evident in the 2nd quarter. This is in contrast with a 9.4% decrease in the 1st quarter. The current production corporate profits of the US increased in the 2nd quarter by 61.2 billion dollars as compared to a 19 billion dollar increase in the 1st (Trading Economics, 2011).

In order to deal with the problems of unemployment, inflation, and recession, fiscal and monetary policies should be employed. Expansionary fiscal policy is one of the tool aimed taking the economy to greater heights, as well as minimizing the discrepancies resulting from recession (AmosWeb, 2011). Fiscal policy form tends to correct the business cycle contraction problems through increasing transfer payments, decreasing taxes, and increasing government purchases. While the government buys from the gross domestic product, the total production is encouraged. In addition, income is enhanced and more employment is noted (Rittenberg & Tregarthen, 2005).

While the taxes are reduced, the household sector is left with some more income. This income enables them to spend more, thus increasing production and income due to employment. This applies to the transfer payments too (AmosWeb, 2011).

Federal Open Market Committee (FOMC) is a monetary policy that controls the supply of money (Amadeo, 2011). It does not do this directly, but by determining the interest rates through discount rates changes or by affecting the rate of federal funds through buying and selling of the securities of the government. When it increases the interest rates, the amount of money in the economy is reduced and vice versa (Amadeo, 2011). FOMC tends to control the rate of inflation while, at the same time, avoiding recession. Since the changes do not occur instant, but take about six months, the monetary policy is applicable in the US government (Amadeo, 2011).

Another policy that should be observed is the monetary policy. It tends to use a monetary authority or the central bank to take charge of interest rates or money supply (McConnell et al, 2011). This is in order to reduce inflation and unemployment, make stable the business cycles, and promote the growth of the economy (AmosWeb, 2011). The Fed takes charge of the monetary policy in the US. Therefore, it can influence the supply of money. This is through controlling discount rates, allowing open market operations, as well as reserve requirements. However, open market operations are the main operational tool (AmosWeb, 2011).

Conclusion

With the United States being the largest economy in the world, it tends to affect most other economies, especially in the developing countries. Though it is currently trying to fight unemployment, recession and inflation, the rate is very slow. The rate of employment has been observed as one of the key determinants of the condition of the economy. It is, therefore, important for the government to ensure that most, or if possible, all its citizens are employed.

Employed people tend to give back to the economy by spending on food or other items, thus increasing income through creating employment. The government should also ensure that money meant for children, the poor, the unemployed, and the old reaches them since the transfer payments also enhance employment through spending. The government should also ensure that the rates of income tax are reduced in order for the households to spend more. FOMC and monetary policy should also be observed in order to ensure that there is sufficient supply of money in the economy, but not create inflation or recession.

References

Amadeo, K. (2011). Federal Open Market Committee. Web.

AmosWeb. (2011). Expansionary Fiscal Policy: Monetary Policy. Web.

CIER (China Institute for Employment Research). (2011). BLS: Summary of BLS (2010-2011). Web.

McConnell, C., Brue, S., & Flynn, S. (2011). Alternate Edition for Economics. New York, NY: McGraw- Hill Companies, Inc. Web.

Rittenberg, L., & Tregarthen, T. (2005). Principles of macroeconomics. Irvington, NY: Flat world Knowledge Inc. Web.

Trading Economics. (2011). United States GDP Growth Rate at 1.30%Web.

Trading Economics. (2011). United States Inflation Rate at 3.80%. Web.

United Nations (UN). (2011). World Economic Situation and Prospects 2011. Web.