Three key elements that characterize the growth of an economy

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Three key elements characterize the growth of an economy. They include rate of unemployment, inflation and various figures that define the Gross Domestic Product (GDP). A review of these issues is essential in order to give the reader some good understanding of economic growth. According to the Bureau of Statistics, unemployment rate in the United States seems to rising slightly than expected. The bureau maintains that 8.8% of adult men and 7.9% of their female counterparts fall under the unemployed category. In addition, the rate of inflation as indicated by latest report from the bureau seems to on the rise. This has resulted in the overall increase of consumer price index by up to 1.6% before any form of seasonal adjustment. Finally figures from the Bureau of economic analysis indicate that the GDP for the fourth quarter of 2010 rose by 3.2%. This is mostly attributed to high demand of labor and increases in property prices. This data is essential for household, investors and policy makers towards the growth and development of the economy.

Households

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Inflation is the most pertinent issue that affects many households in the United States. Phil's Stock World (2011) on his comment in the dual mandate quagmire asserts that, according to data from various transcripts, the Federal Reserve is still unconcerned about inflation, in spite of significant evidence to the contrary. In fact, the Fed is so unconcerned about inflation that, it needed to mention "inflation" 49 times in its report. Phil et al (2011) goes on to add that, due to the just passed global economical crisis, households should not expect a quick respite. In fact the Fed expects the jobless rate to remain "elevated" at the end of 2012; even though it claimed a rising real GDP might slowly reduce unemployment.

A survey conducted on 60000 households indicates that inflation does not offer any form of change aimed at reversing the downward trend in unemployment levels. Morgan Stanley is of the view that although employment was reported to have fallen by 622000, this data is still meaningless. No doubt, prices of raw materials have risen. There are some basic reasons for this upward trend. The global growth phenomenon is partly to blame. Increased demand from China, India, and Africa among others will put upward pressure on commodity prices. It is paramount to note that commodity prices are also a function of interest rates. Low interest rates cause a relative increase in the value of low ended products (due to lower discounting), creating less incentive for extraction, and reducing the cost of holding inventories (Phil et al 2011).

Investors

Inflation influences investor's decisions in more elaborate ways as compared to households. With an increase in inflationary pressure, interest rates will be high and hence reduction in investment. Phil et al (2011) notes that, considering the relentless move up in stocks, "Our market targets, breakout two levels, and major breakout levels are providing more bullish fuel to our market thesis." He further points out that, the U.S. bond markets were reacting to inflationary concerns, resulting in Treasury- bond yields rising and bond prices falling. Phil et al further argues that, "It all comes back to inflation. The Fed simply doesn't believe it exists or, if it does, believes it won't last. It can't really lose. The Fed can only be wrong this meeting and then do nothing and wait until next meeting and then 'reevaluate.' Morgan et al 2011, in contrast argues that according to the FOMC minutes, "many participants expect that, with significant slack in resource markets and longer-term inflation expectations stable, measures of core inflation would remain close to current levels in coming quarters". This means that inflation is likely to affect investors' decisions especially in relation to short term investments.

Policy Makers

The policy makers play a major role in the running of the economy. Morgan et al reiterates that with the strong economic rebound, policy-makers are now adopting a slightly anti-cyclical stance. The primary balance (operating revenue less total expenditure) is expected to go from a deficit of 0.3% of GDP in F2010 to a surplus of 0.3% in F2011. Meanwhile, the overall budget balance (which takes into account special transfers, top-ups and net investment returns contribution) is expected to go from a deficit of 0.1% of GDP in F2010 to a surplus of 0.03% in 2011. Specifically, the swing from a slight deficit position to a more or less balanced budget is primarily due to the increase in special transfers being offset by cutbacks in development expenditure. In addition to that in order to boost g.d.p the Fed has a number of tools (such as reverse repose and time deposits for depository institutions) to remove reserves from the banking system when appropriate. However, a sharp tightening in monetary policy is unlikely. The Fed will eventually have to take the foot off the gas pedal (not necessarily "hitting the brakes") as a "normalization" of monetary policy. Removing the conditional commitment to keep short-term interest rates near zero for "an extended period" will depend on a change in the Fed's stated conditions: low rates of resource utilization (equivalently, an elevated unemployment rate); a low underlying trend in inflation; and well-anchored inflation expectations ( Morgan et al 2011 ).

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