The United States economy in 2006: growth deceleration and recovery challenges

Economic Analysis

The United States is the country with the world's largest Gross Domestic Product, which was estimated to be $13.22 trillion dollars in 2006. The United States economy is typical for countries with "market economy"; it's often called "mixed" economy as majority of microeconomic decisions made by big corporations and firms of private economy sector is also regulated by government. Current U.S. economy is considered to be one of the most stable and strong economies due to a high GDP with reasonably high and stable GDP growth, low unemployment rate and high standards of living. Yet, recent geopolitical issues, high oil prices and external debt create some economic concerns. National debt, which includes interests and government deficits in the year of 2006 was nearly equal to $9 trillion (or nearly 64% of GDP).

The current economy of the United Stated can be characterized by recovery from recession of 2001. Yet, there are lots of economic factors which prevent it from faster recovery process: budget deficit, high oil prices and war on terrorism. If we have a look on the dynamics of GDP growth rate we won't see any considerable positive shifts since 2001. Even though that growth results of 2005-2006 (3.64% and 2.24%) are relatively optimistic, general picture shows that recession effects have not been overcome yet and stagnation is obvious in many areas. In the business cycle the current position of the U.S. economy would be little higher than a recovery point, as GDP has been growing since recession of 2001, but the growth decelerated during last 18 months as we can see in Table 1, which means that currently U.S. economy is coming to its peak.

Table 1. Real Historical Growth Rates of GDP Per Capita (Source: ERS International Macroeconomic Data Set)

Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Growth rate 2,98 4,49 4,30 0,77 2,43 1,03 1,95 3,64 2,24 1,85

Graph 1. Business cycle

Unemployment and wage issues

Even though that unemployment situation is the U.S.A. is getting better and the rate of unemployment gradually reduces it's difficult to talk about considerable positive changes as wages remain the same, especially in private sector of economy. The situation in different branches of economy is different, yet it's quite obvious that economic growth of only 1% in the first quarter of 2007 doesn't give any basis for optimistic forecasts, as healthy GDP growth should be about 3%. Such deceleration in growth also expresses in less activity of investment market and consumption market, which lead to smaller demand and which as a result lead to less job demand.

Today American private sector market experiences growth only in education, health, leisure and hospitality sector, yet it only gave the growth of 107,000 jobs. The situation in the productive sector of economy is less optimistic, as "factory sector has contracted for each of the past 12 months, and is down 191,000 over the past year, and 1.8 million over the economic recovery that began in November 2001"(Bernstein, 2007).

Specialists mark that relative progress in employment is observed only in non-productive private sector, "that do not typically respond to underlying weakness in the economy. Wage pressures are subdued, and diminished labor force participation rates, especially for minorities, also suggest cyclical weakness" (Bernstein, 2007).

It means that we can not speak about continuation of recession, but nevertheless, absence of wage acceleration questions achievements of employment growth. In order to make a more accurate evaluation of wages growth we need to compare wage growth rate with current inflation rate. Average inflation rate in 2005-2006 was on the level of 3.24%-3.39%, current inflation rate is approximately equal to 2.54%. So if we compare wage growth to inflation rate, we would see that real income didn't grow at all as real income growth is on the level of approximately 0.7%.

Graph 2

Table 2. Current Inflation Rate (from (http://www.spiritone.com/~moore/inflation.htm)

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Average 2007 2.08% 2.42% 2.78% 2.57% 2.69% 2.69% 2.54% 2006 3.99% 3.60% 3.36% 3.55% 4.17% 4.32% 4.15% 3.82% 2.06% 1.31% 1.97% 2.54% 3.24% 2005 2.97% 3.01% 3.15% 3.51% 2.80% 2.53% 3.17% 3.64% 4.69% 4.35% 3.46% 3.42% 3.39%

The as-AD model of current U.S. economy

In order to build new classical as-AD model of current U.S. economy we should analyze behavior of prices, GDP and inflation. According to the recent data price indices (Po and P1) and GDP (Qo and Q1) have demonstrated growth. Such as-AD model clearly demonstrates that growth of price indices and growth of GDP leads to the growth of inflation.

Consumer price indices for the U.S. (Source: International Financial Statistics, International Monetary Fund)

3,38 2,83 1,59 2,27 2,68 3,38 3,60 2,70

Graph 2. as-AD model of current U.S. economy

Fiscal policies of G. Bush

Current administration of President Bush promotes contractionary monetary and fiscal policies. Bush's administration promoted tax cuts and tried to shorten budget spending in most of areas except military and state security. Tax cuts raised tax revenues and shortened government spending created macroeconomic conditions for deficit decrease. But from the other side, tax cuts which have a positive effect on national economy at a current uneasy situation (war on terrorism spending), such practices had a negative influence on financial situation of people with relatively low income as they received nothing from the tax cuts. Tax cuts widened social gap, making poor people poorer, as currently wage growth can be neglected by high inflation.

Currently it's planed that decrease of deficit will be around 0.1% of GDP (from 1.9% of GDP in 2006 to 1.8% in 2007). Federal Funds rate has been experiencing continuous growth due to a number of political reasons. It experienced growth of 0.25% since May, 2006 and is now 5.25%. Such practices are explained by increase of spending on national security, war on terrorism and growing prices on hydrocarbon energy resources. Also introduction of Euro as EU official currency had a negative impact on dollar value which continues today.

We can conclude that currently U.S. economy is experiencing inflationary period according to its macroeconomic indicators: economy has growing GDP, growing customer price indices, growing producer price indices and growing employment. Fiscal policy in the U.S. was expanded due to objective political reasons which continue to have a deep impact on domestic economic processes. Current data shows that economy of the U.S. will continue to grow till the next of this year and will probably reach its peak the next year.