Economic recovery of the USA

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Introduction

A recession is when GDP growth slows, businesses stop expanding, employment falls, unemployment rises, and housing prices decline. A recession is generally considered less severe than a depression, and if a recession continues long enough it is often then classified as a depression. Using that definition, many experts say the U.S. entered the current recession in 2007. GDP growth must be negative for two consecutive quarters or more. A recession starts when there are several quarters of slowing but still positive growth and the only good thing about it is that it cures inflation. The financial crisis of 2007-present was a crisis triggered by a liquidity shortfall in the United States banking system. It has resulted in the collapse of large financial institutions, the "bail out" of banks by national governments and downturns in stock markets around the world. In many areas, the housing market has also suffered, resulting in numerous evictions, foreclosures and prolonged vacancies. It is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. In our case, we are going to look at the extent of the recession, the policies implemented and how the economy of the USA managed to recover from it.

Discussions

Looking at the US quarterly data that we have collected, we can see that the quarterly US GDP increased at a growth rate of 1.2% into the first quarter of 2007. This basically means that the economy was experiencing growth and even the GDP itself was increasing. An increase in GDP or growth may be because of factors like, improved productivity in the country, increase in exports and even increased consumption. According to the US bureau of economic analysis, the increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, equipment and software, nonresidential structures, and state and local government spending that were partly offset by a negative contribution from residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased. From quarter 1 to quarter 2 of 2007, the US economy experienced a slowing in the growth rate. That is, GDP growth was about 3.2% in the second quarter and the increase in GDP growth was caused by increased residential construction, increased exports, and increased business spending.

In the 3rd quarter the US's GDP experienced growth of 3.6% which was larger than the previous quarter's growth and this meant that the economy was doing good in terms of GDP growth but in the last quarter of 2007, the growth rate slowed down to 2.1% . This was the beginning of the recession period. The US economy entered the year 2008 with a negative growth of 0.7% in the first quarter. This was the first negative growth recorded ever since the Great Depression. A strong dollar coupled with the global recession forced the US economy to cut exports, while the recession in the U.S. caused domestic demand to slump, reducing the demand for goods in the US to drop considerably.

Quarter 2 of 2008, the US recorded a positive growth of 1.5% showing that the economy was still growing even though it recorded a negative growth in the previous quarter and this was a good sign that the economy was recovering from the negative growth it experienced in the previous quarter. The 3rd quarter of 2008 recorded yet another negative growth of 2.7% and this was more extreme than the first one of -0.7%. This was evident that the US was entering a serious recession. The same variables that caused the growth of the US GDP to grow were the same ones that led to the negative growth, that is, reduction in residential construction, slowing in exports, and slowing business spending. This was the slowdown most economists feared. The last quarter of 2008 closed with an even worse negative growth of 5.4% and was even worse in the first quarter of 2009 which was -6.4% GDP growths. Economists say that a large contributor to the decline was a decrease of business inventories meaning that inventories were getting lean and unavailable.

Quarter 2 of 2009 was the beginning of growth; the GDP growth recorded was -0.7% which was an improvement from the previous quarter. This was an incredible and great improvement for the economy. The Bureau of Economic Analysis says that the growth was stimulated by the US government spending which contributed 1.25% to GDP growth. This was called the stimulus program. The $787 billion economic stimulus package was approved by Congress in February, 2009. The plan was to jumpstart economic growth, and save between 900,000 - 2.3 million jobs in the United States of America and the program helped to reduce the harshness of the recession and helped the US economy to start the recovery process which was now beginning. The program also helped to reduce unemployment in the US economy. It was now time to recover from the negative growth of 4 consecutive quarters.

The first positive growth recorded was 2.2% in the 3rd quarter of 2009 and this technically meant that the recession was over. Much of the growth was driven by the Economic Stimulus Program and the Cash for Clunkers incentive. The cash for clunkers incentive is a federal program designed to stimulate U.S. auto sales and help the environment by providing an economic incentive for consumers to replace old, low-mileage vehicles with new, fuel-efficient models that are safer and emit less pollution and fewer greenhouse gases. The concept is, if you trade in a low-mileage vehicle for one that meets a higher mileage threshold set by the Cash for Clunkers program, the government will provide up to $4,500 to help you purchase the new fuel-efficient vehicle. The program is designed to stimulate the sale of new cars manufactured by U.S. companies and this will benefit consumers because they will be getting a government-funded price break that can help them exchange an old car for a new one that is safer, uses less fuel and costs less to operate. This is one of the strategies or policies that were introduced by the US government during the recession to help improve the sale of new cars, thus boosting production of cars domestically. The stimulus program and the cash for clunkers incentive were the most effective policies that helped the US economy to recover from the recession which continued and saw the last quarter of 2009 recording a GDP growth of 5.6%. Everything was now going according to plan, the economy was recovering and at a promising rate.

MONETARY AND FISCAL POLICIES

The role of government in the American economy extends far beyond its activities as a regulator of specific industries. The government also manages the overall pace of economic activity, seeking to maintain high levels of employment and stable prices. It has two main tools for achieving these objectives: fiscal policy, through which it determines the appropriate level of taxes and spending; and monetary policy through which it manages the supply of money. Fed cut money supply growth from 6 % to 2005 3.5 %, after Greenspan 17 raise rates, housing sales and price start peaking out in 2006. However, after Bernanke stop rate hike in 2006, money supply growth up from 4 % to 6.5 % in 2007,excessive liquidity resulted subprime mortgage crisis, If Fed continue adapt tight money policy credit rating through 2007, it will stop many questionable subprime loans.

There are two means by which the government employs fiscal policy to influence the economy - taxing and spending. In a recessionary period like we are experiencing today, with increasing unemployment and slow business growth, government spending is a means of stimulating economic activity. Cutting taxes is another means by which government can put money back into the pocket of the consumer during a recession and thus stimulate economic growth. Conversely, during times of economic expansion, government may increase taxes, taking money out of the consumer's pocket in an effort to moderate economic expansion and quell inflation.

The current fiscal policy in the U.S. is sometimes called a loose or expansionary fiscal policy, one in which government spending is higher than revenue. The reverse is known as a tight fiscal policy, a fiscal contraction, during which revenue outweighs spending. During a fiscal expansion, such as the one we're in now, the desired effect of spending is to restore the output of goods and services, the gross domestic product, and put employees back to work. This, in turn increases the demand for goods and services and the overall health of the economy.

Disadvantages

  • The fiscal policy of spending more than the revenue earned does not take into account the population confidence and emotional condition.
  • The problem with the administration "printing more money" to create large stimulus packages to get businesses to start growth projects and expansion which in turn creates jobs and lowers unemployment, is that if the confidence of the business owners and executives is so low that they are remaining reluctant to begin growth and are continuing to add layoffs instead of hiring. This quickly becomes the vicious cycle, as the layoffs continue and consumer spending decreases, businesses decrease in production, causing more layoffs and less tax revenue is generated.
  • Less revenue being generated and an increased need for stimulus, the administration is tempted to provide more stimuli at the expense of deficit growth.

MONETARY POLICY

Federal Reserve Chairman Alan Greenspan used monetary policy to regulate interest rates, with the situation we are in now monetary policy adjustments have little or no impact on our current economy. One must take into account a large reason of why the economy was easily regulated by monetary policy was the fact that the technology and real estate booms were experiencing out of control record expansion, consumer and business confidence was at an all time high, Wall Street and the stock market were experiencing record growth and profits and the unemployment rate was at an all time low.

The drastic change started in 2006 when the "perfect storm" hit Wall Street and the Capital had a drastic change in administration and congress control. With the combination of the technology crash in 2001, the Wall Street crash from September 11th 2001, the real estate bubble burst in 2007, bringing down Wall Street's biggest banks and insurance companies, and the drastic change in fiscal policy with an administration change in 2008 the economic situation was ripe for a dramatic change of direction and the recession was inevitable.

RESPONSES BY THE GOVERNMENT TO IMPROVE MONETARY POLICIES

  • To support housing markets and economic activity more broadly, and to improve mortgage market functioning, the Federal Reserve has begun to purchase large amounts of agency debt and agency mortgage-backed securities. Since the announcement of this program last November, the conforming fixed mortgage rate has fallen nearly 1 percentage point.
  • The Federal Reserve also established new lending facilities and expanded existing facilities to enhance the flow of credit to businesses and households.
  • In response to heightened stress in bank funding markets, we increased the size of the Term Auction Facility to help ensure that banks could obtain the funds they need to provide credit to their customers, and they expanded their network of swap lines with foreign central banks to ease conditions in interconnected dollar funding markets at home and abroad.
  • They also established new lending facilities to support the functioning of the commercial paper market and to ease pressures on money market mutual funds.
  • In an effort to restart securitization markets to support the extension of credit to consumers and small businesses, we joined with the Treasury to announce the Term Asset-Backed Securities Loan Facility (TALF). The TALF is expected to begin extending loans soon.

EVIDENCE OF ECONOMIC RECOVERY

  • Oil Prices are stabilizing - historically, oil prices were very volatile. During an economic downturn, they only go in one direction - down. But as the demand increases (companies still need to replenish their stocks), the price of oil may not necessarily go up, but it is likely to stabilize. On the other hand, if there's no recovery, oil prices will fall further.
  • Initial Public Offering (IPO) Market is Recovering - the two main reasons why companies go public include: generating capital for expansion and owners who want to cash out. Companies typically go public when they can get a good valuation. When businesses start to take risk by sacrificing a larger stake in the company by issuing more shares, it is a sign that economic recovery is underway.
  • Customer Confidence - the better-than-expected earnings from large retailers including Macy's Inc, Home Depot, and Nordstrom provides a ray of hope that confidence and spending is stabilizing. Although the year-on-year basis for retailers still leaves much to be desired, improvements still remain as a good sign for retailers and the whole economy in general.

CONCLUSION ON MONETARY AND FISCAL POLICIES

The government of U.S adopted these two regulatory policies to help them during a recession time. These policies showed significant improvements in output as well the standards of people were also improving. The government used fiscal policy to increase government spending and lowering tax paid in goods as to put money back to the nation. Monetary policy tools used by U.S government included;

  • Reserve ratio: minimum amount that the bank must hold against deposits
  • Discount rate: interest on loans that the central bank makes on banks
  • Open market operation: when it buys or sells government bonds.
  • By 2009 q4 the GDP growth rate had increased by 3.4%, the first time it had been positive since the recession started in 2007.
  • Technically the USA was out of the recession; but, most of the GDP growth was driven by the American Recovery and Reinvestment Act of 2009(stimulus package), and the Cash for Clunkers (is a federal program designed to stimulate U.S. auto sales and help the environment by providing an economic incentive for consumers to replace old, low-mileage vehicles with new, fuel-efficient models that are safer and emit less pollution and fewer greenhouse gases.) Government spending contributed 2.3% to GDP growth, while motor vehicle sales contributed 1.66%. Without the spending, GDP would have still been negative.
  • The ARRA had saved close to 640,000 jobs of the intended 900,000 it set out to save by October 2009.
  • The ARRA was aimed at
  • Clean, Efficient, American Energy
  • Transforming our Economy with Science and Technology
  • Modernizing Roads, Bridges, Transit and Waterways
  • Education for the 21st Century
  • Tax Cuts to Make Work Pay and Create Jobs
  • Lowering Healthcare Costs
  • Helping Workers Hurt by the Economy
  • Saving Public Sector Jobs and Protecting Vital Services
  • The two-year American Recovery and Reinvestment Act, which Obama said would create or save more than 3 million jobs, was originally estimated to cost the federal government $787 billion, but a year later;
  • Thus far, $179 billion in the plan has been spent and $93 billion in tax cuts have been issued. Another $154 billion is in the process of being sent out, and $247 billion is left to spend. The remainder comes in tax cuts yet to be granted.
  • Cost estimate for the recovery act up to $862 billion from $787 billion.
  • More than $8 billion from the plan has been spent on increased food stamps, as the assistance program for the hungry recently reached a record enrolment of 38 million people.
  • By the end of December last year, the Department of Transportation approved 10,000 highway projects. Of the $34.1 billion the department has made available to states, it has only paid out $8.63 billion.
  • The plan increased unemployment benefit payments and extended extra payments for those who could not find work when their regular benefits were exhausted through the end of 2009. Recently, Congress pushed the expiration date of both programs to February 28.
  • Nearly $280 billion of the spending will be directed through state governments, including a $48 billion stabilization fund to help states balance their budgets.
  • According to figures provided by those who received grants and loans from the plan, 595,263 jobs were created or saved by the plan in the final three months of 2009. A previous report, which had used a different method of calculation, said it had saved 640,239 jobs in the prior quarter.
  • The White House Council of Economic Advisers estimated there would have been 1.5 million to 2 million fewer jobs in 2009 if not for the stimulus funds.
  • In January, the U.S. employment rate stood at 9.7 percent. A year earlier, when Congress was negotiating the stimulus plan, it had just reached 7.7 percent.
  • In the fourth quarter of 2009 U.S. gross domestic product grew 5.7 percent, with two quarters of growth bringing hope that the economy was pulling out of recession.

USA 2010 and on ward to the future

  • Our forecast estimates show that by Q1 2010 the GDP GROWTH RATE will be at 4%, a decline of 1.6% from the previous quarter of which the actual results will be released 31th of April 2010.
  • The forecasted March growth rate of 4% is expected to slow to 2.2% in July and August. The slower growth is expected as the inventory boost slows and the government's monetary and fiscal stimulus programs end.

References

  • http://environment.about.com/od/cashforclunkers/f/cash-for-clunkers-benefits.htm
  • http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=USD
  • http://useconomy.about.com/od/economicindicators/a/GDP-statistics.htm
  • http://useconomy.about.com/od/economicindicators/a/GDP-statistics.htm
  • http://www.bea.gov/newsreleases/national/gdp/2006/gdp306f.htm
  • http://www.bea.gov/national/index.htm#gdp
  • http://libertarianpapers.org/articles/2009/lp-1-31.pdf
  • http://www.aspousa.org/index.php/2009/09/the-aftermath-of-the-great-recession-part-ii/
  • http://www.onlineforextrading.com/blog/us-recession-nearing-end
  • http://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932010

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