Economic Situation What "Current Macroeconomic Situation" U.S.

¶ … Economic Situation What "current macroeconomic situation" U.S. (e.g. U.S. economy concerned unemployment, inflation, recession,)? What fiscal policies monetary policies time? Key concepts include paper -- data trends unemployment, inflation, GDP growth, expansionary fiscal policy tools, FOMC, easy money policy tools terms class. What is the current macroeconomic situation in the U.S. The United States is no longer mired in a full-blown recession as it was in 2008, but the process of economic recovery has been long, slow, and onerous. At present, unemployment is hovering around 7.9%.

This reflects a slight increase from the last quarter. The U.S. seems to be in a precarious position, neither in full-blown recessionary mode but not entirely recovered. Of particular concern is the fact that "the increase [in unemployment] was much sharper for millennials, up from 11.5% the month before and 10.9% in November 2012" (Kingkade 2013). Young people were particularly hard-hit by the recession. Many new college graduates have failed to find jobs to enable them to pay off their student loans and gain a more secure foothold in the middle class.

This new job data suggests that the next generation of workers is continuing to struggle. The relatively high unemployment rate indicates that the U.S. economy is contracting, and this is supported by the nation's low inflation rate. "The inflation rate in the United States was recorded at 1.70% in December of 2012…Historically, from 1914 until 2012, the United States Inflation Rate averaged 3.36% reaching an all-time high of 23.70" (United States inflation rate, 2012, Trading Economies).

When employment is scarce, people spend less money, and therefore the prices of goods and services tend to be more stable or even go down. While too high an inflation rate is worrisome, given that it means people can buy less for the same amount of money, deflation is not a positive economic sign, either. The uncertain state of the U.S. recovery is confirmed by the most recent release of GDP (Gross Domestic Product) data.

"Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 0.1% in the fourth quarter of 2012 " (GDP, 2012, BEA). This decrease was generated by a decline in "private inventory investment, in federal government spending, in exports, and in state and local government spending that were partly offset by an upturn in nonresidential fixed investment, a larger decrease in imports, and an acceleration in PCE [personal consumption expenditure]" (GDP, 2012, BEA).

In general, when faced with a contracting economy, the Federal Reserve pursues an expansionary monetary policy. It buys up rather than sells government securities, to increase the free flow of liquid capital in the economy. It reduces the interest rate to encourage people to borrow more and save less. During the most recent recession, interest rates plummeted to historic lows. The Fed also reduces the reserve requirements for member banks during recessions, so the banks have more money to lend to consumers.

It reduces the discount rate so banks can borrow money from the Fed to lend to consumers at a reduced rate. Low interest rates also ease the pressure on consumers with adjustable-rate mortgages. The Fed has stated that despite the lengthy period of time it has kept interest rates at rock-bottom levels, it will continue to keep them the "short-term rate near zero until the 7.7% unemployment rate is 6.5% or lower" (Davidson 2012).

The Fed will continue to buy back mortgage-backed securities in an effort to lower long-term interest rates for assets such as mortgages and corporate bonds and hopefully 'nudge' consumers to buy stocks, further stimulating the economy (Davidson 2012). However, as well as an expansionary monetary policy, an expansionary fiscal policy also seems warranted in the current economic situation. This would require the federal government to reduce taxes, increase government spending, and effectively 'pump' money into the economy to increase overall consumer and business spending, production, and demand.

According to classical Keynesian theory, the government should operate at a deficit during economic slowdowns and at a surplus or at a break-even point during times of prosperity. However, the nation's high debt is very controversial in Washington D.C.'s political environment, and despite the weak economy, there are pressures upon the current administration to reduce government spending, in contrast to Keynesian wisdom.

The Obama Administration has pursued a moderate Keynesian course, introducing a stimulus package to lift the economy out of the worst of the recession, and intervening in the economy to 'bail out' troubled automotive manufacturers GM and Chrysler to prevent massive job losses. This is a typical pattern: not only of Roosevelt's New Deal, but even of Ronald Reagan's presidency in the 1980s and George Bush's in the early 2000s.

All three presidents cut taxes and expanded government spending during recessions (albeit defense spending in the case of conservatives Reagan and Bush), still keeping with Keynesian dictates (Cassidy 2012). Obama's stimulus was relatively modest and is unlikely to be.