The economic growth rate of a country is not constant over time, but it exhibits phases of expansion, stagnation, and decline. Fluctuation of an economy in these phases creates a business cycle that elucidates trends and offers projections of economic growth. For the last ten years since the great recession of 2008/2009, the United States has been on the expansionary phase of the business cycle. Given that the United State is experiencing one of the most extended periods of expansion, projections indicate that it would enter into stagnation and recession as the next phases of the business cycle. In this view, this essay examines trends of the economic growth of the United States with the objective of explaining how policymakers would manage an impending recession.
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Economic Growth of Last Year
In 2017, the economy of the United States exhibited growth because the real gross domestic product (GDP) increased significantly. According to the World Bank Data, the real GDP increased from $18.624 trillion in 2016 to $19.391 trillion in 2017. This increase in the real GDP reflects the percent growth to 2.27% in 2017 from 1.49% in 2017. However, the inflation rate increased from 1.26% in 2016 to 2.23% in 2017. The unemployment rate depicted a downward trend because it declined from 4.87% to 4.36% in 2016 and 2017, respectively. Therefore, trends of the real GDP, inflation rate, and the unemployment rate shows that the United States economy is still in the expansionary phase.
Economic Growth of the Current Year
The examination of the economic indicators reveals that the United States continues to exhibit expansionary growth in 2018. The real GDP was $20.04, $20.41, and $20.66 trillion in the first, second, and third quarters of 2018 (US Bureau of Economic Analysis par. 1). In essence, the real GDP increased by $620 million within the first nine months of 2018. Comparatively, the quarterly growth rate of the real GDP was about $170 million in 2017 and approximately $206 million in 2018. Moreover, the quarterly comparison shows that the percent changes in the real GDP were 3.9%, 4.2%, 4.8%, and 5.1% in corresponding quarters of 2017.
In contrast, the percent changes in real GDP were 4.3%, 7.6%, and 5.0% in the first three quarters of 2018 respectively. Hence, these comparisons show that the economy of the United States grew faster in the first three quarters of 2018 than in the previous year.
The Real GDP Forecast for 2019
Based on the expansionary trends, economic experts project a positive change in the real GDP forecast for 2019. The Organization for Economic Co-operation and Development projects that the percent change in the real GDP would attain a peak of 2.89% in 2019 before reaching a declining phase of the business cycle (OECD Data). The percent increase of 2.89% would make the real GDP increased from the current projection of $20 trillion to $21 trillion in 2019. Therefore, a forest of real GDP indicates that the economy of the United States would continue to grow in 2019.
Projection of Economic Growth in 2019
The projection shows that economic growth would decrease in 2019 due to various fiscal factors. Goldman Sachs and J. P. Morgan project that the United States economy would grow by 2.5% in 2019 from 2.9% in 2018 due to waning stimulus and stringent financial conditions (Hatzius et al. 1; Kelly par. 1). Waning economic stimulus owing to massive tax cuts would contribute to reduced economic growth in 2019. Stringent financial conditions occasioned by enhanced demand for money, decreased lending, and increased savings rate have reduced the supply of money in the markets. A consistent inflation rate of 2% and the creation of job opportunities would reduce unemployment to 3.4% or less, which is the lowest in the history of the United States.
Probability of Recession
Goldman assigns 75% as the probability of the economic recession to occur in the next 1-3 years. The analysis of economic trends reveals that the economy of the United States operates in a low volatility period where the business cycle is at the peak of the expansionary phase, awaiting a declining phase. According to Goldman Sachs, interest rates of about 2%, unemployment of approximately 3%, and labor growth of 2% are characteristics of a ‘low volatility regime,’ which signals the occurrence of the economic recession (Hatzius, Jan, et al. 9). Thus, based on historical trends, the peak of the expansionary phase of the business circle does not last for more than two years.
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Fiscal Policy Levers
When the economy enters the period of the economic recession, policymakers have to adopt the expansionary fiscal policy. Seidman states that public spending and tax regime are two fiscal policy levers that policymakers adjust to strengthen the economic growth (176). Public spending constitutes the government’s expenditure on development projects, such as infrastructure, health, education, security, and administration. Tax regime entails the structure, composition, and the degree of taxation that a government employs in raising revenues. As a fiscal policy lever, increasing public spending boosts the supply of money in the market and reduces interest rates. Consequently, an adequate supply of money in the market allows businesses to expand their production and enables consumers to purchase extra goods and services.
The adjustment of the tax regime to reduce taxes would strengthen the economy in recession. Essentially, tax reduction stimulates economic growth since it augments the disposable income of consumers, which subsequently generates demand for products, encourages production, and creates employment opportunities.
Decreasing Aggregate Expenditure
If the aggregate expenditure decreases during a recession, it is not possible for recovery to occur. When the aggregate expenditure falls, it causes the supply of products to increase in the market, leading to decreased prices due to the law of supply and demand. Subsequently, decreased prices discourage production, increases unemployment, and shrink the growth of GDP. Recovery requires the stimulation of the production system by increasing the supply of money in the market for businesses and consumers to access and use them in the production or consumption of goods and services, respectively. Therefore, recovery cannot because decreased expenditure suppresses production, which is a critical economic factor during the recession.
The analysis of the business cycle of the United States provides critical economic insights of trends and projections. Trends of economic growth indicate that the United States has a positive economic growth as demonstrated by the real GDP, unemployment rate, and inflation rate. In the business cycle, the economy of the United States is at the expansionary phase where volatility is very low, and the recession is imminent. Goldman Sachs predicts that the recession would happen within 1-3 years with the probability of 75%. Therefore, policymakers need to employ the expansionary fiscal policy of increasing public spending and reducing taxes to stimulate local production and strengthen the economy during the recession.
Hatzius, Jan, et al. “2019 Outlook: The Home Stretch.” Goldman Sachs. 2018. Web.
Kelly, David. “Economic Update” JP Morgan. 2018. Web.
OECD Data: Real GDP Forecast. Organization for Economic Co-operation and Development, 2018. Web.
Seidman, Laurence S. How to Combat Recession: Stimulus Without Debt. Oxford University Press, 2018.
US Bureau of Economic Analysis. “The Gross Domestic Product (GDP).” Federal Reserve Bank of St. Louis, 2018. Web.
World Bank Data: The United States. World Bank, 2018. Web.