U.S. Macroeconomy Forecast GDP 2010/2011

U.S. macroeconomy

Forecast GDP 2010/2011

The United States has experienced the worst economic downturn since the Great Depression, which began with the crash of the stock market in 1929. The causes for today's major economic downturn are various. Some of the reasons are linked to an abundance of stimulus directed toward U.S. housing; not enough financial supervision in financial sectors; illogical lending practices (giving too much money to people who can't pay it back); falling housing prices; the fact that the dollar is become much less valuable; record high debt; a loss of confidence in the banking system because of bad loans; as well as a general loss in the confidence of our government do the right thing. However, it can almost be unequivocally stated that the recession, which is essentially just a decline in the GDP (gross domestic product), was the result of the imploding housing market. With lower house prices and credit circumstances fixed because of the subprime disaster, households found themselves unable to borrow money against capital gains.

The historian Scott Reynolds Nelson posited that in a lot of ways, the crisis we are facing today looks more like the "Long Depression," which lasted, by some people's definition, from 1873 to 1896. "It began as a banking crisis brought on by insolvent mortgages and complex financial instruments, and quickly spread to the real economy, leading to mass unemployment that reached 25% in New York" (Florida 2009).

During the third quarter of 2009, inflation-adjusted GDP increased at a vigorous 2.8% annual rate. The increase was good news in that it showed that there would likely be a conclusion to the recession that began back in December of 2007. By the end of 2009, the United States economy was slowly but surely recovering from the global recession. The job market also appeared to be stabilizing after two years of major damage and record high unemployment. However, at the end of 2009, employment data appeared to be heartening as job losses seemed to be dwindling. By Christmas of 2009, consumers were spending their money once again, showing that they were much more relaxed than the year prior around the same time.

After the financial crisis of 2007-2009, a budding problem of jobless recoveries caused record levels of long-standing unemployment with more than 6 million workers searching for a job for more half of a year as of January 2010 (Zandi 2010). The problem affected older workers more than others (mainly the baby boomers).

In the beginning of 2010, the unemployment rate was sky high at 9.63%. It is predicted to change 3.5% by 2011, dropping to 9.23%. Overall, economic growth, in general, will be moving at a slow rate and that will most likely keep the unemployment rate in the U.S. hovering around 10% throughout the fiscal year 2011. This is discouraging news considering that the worse the labor market is, and the longer that it persists, the harder time consumers will have recovering.

The U.S. economy grew at a 1.6% annual rate in the second quarter of 2010 as organizations scaled back on their inventories and the trade deficit expanded. The trade deficit hit -$49.9 billion in June of 2010, much greater than what was expected (-$42.3 billion). May's deficit was brought down a bit to -$42.0 from the first reported -$42.3. The weakening in the trade balance illustrated a firm $5.9 billion (2%) rise in imports with exports decreasing by -$2.0 billion (-1.3%) (Action Forex 2010).

Profits from current production grew to $72.7 billion in the second quarter of 2010, in comparison to the increase of $148.4 billion in the first quarter of 2010. Corporate income taxes also grew to $39 billion in the second quarter, in comparison with $84.1 billion in the first (Bureau of Economic Analysis).

In mid-August of 2010, the GDP report showed consumer spending, which comprises approximately 70% (over two-thirds) of the economy, grew at a 2% annual rate in the second quarter compared with a previously reported 1.6% rate.

Deficiency in job growth, and a sloping downward in household wealth following collapses in stocks and housing, and the motivation to decrease debt and increase savings are the reasons consumer spending may not get any better.

Wages and salaries improved by a revised $6.5 billion from January until March of 2010, compared with $18.8 billion that was first reported (Zandi 2010). It was predicted that consumer spending was not likely to go up anytime soon thereafter.

The trade gap in 2010's second quarter grew to $445 billion, in comparison with an earlier estimate of $425.9 billion, subtracting 3.37 percentage points from growth, the biggest decrease since record-keeping began in 1947 (Zandi 2010). Imports also grew at a 32.4% rate, the most since 1984 (2010).

Sluggish inventory accretion added 0.63 percentage points to second-quarter growth. The Commerce Department said in its initial report that stockpiles added 1.05 percentage points to growth after adding 2.64 percentage points in the first three months (Zandi 2010).

In August 2010, it was reported that gross domestic income (GDI), the money earned by citizens, businesses and government agencies whose purchases go into calculating growth, increased at a 2.3% annual rate between April and June of 2010. In comparison, GDP grew 3.6% from April through June before it adjusted for inflation. GDI, according to Fed, is a better way to measure the economy (Zandi 2010).

Revisions to first-quarter income showed a gain of 4.1%, compared with a 5.6% rate that was first reported. GDP before adjusting for changes in prices rose at a 4.8% rate from January through March.

Corporate profits increased to 4.6% in the second quarter of 2010, the smallest increase since the same three months the year before, after a 10.5% rise in the first three months of the year. Earnings were also up 39% from the same time the year before (Zandi 2010). The increase indicates companies have the ability to improve spending on new equipment as well as add to payroll (2010).

Zandi (2010) notes that business spending on new equipment and software increased at a 24.9% rate in the second quarter of 2010 (the most it has ever since 1983), more than the earlier prediction of 22%. Spending on structures, including both office buildings and factories, increased at a 0.4% rate 2010's second quarter (2010).

In the early months of 2010, the United State's Total Real GDP was at $13.239 trillion and was continuing to increase at a rate of about $3.83 billion every single day. On January 28, 2010, the U.S. debt ceiling was increased to $14.3 trillion dollars (Zandi 2010).

The United States is still facing economic disaster on a very grand scale. We are still persisting with our superpower approach; however, in many ways, our country has become second-class in many different areas. The outlook for 2011 is not expected to be very bright. The administration's budget deficit are predicted to be in excess of $1 trillion and will stay at that very high level for many of the coming years.

The economy stabilized in the middle of 2009 and seems to be expanding at a rather moderate pace. The support to economic activity from stimulus help has helped companies restock their inventories, but as Bernanke (2010) noted in a speech in August 2010, that will diminish over time, but the rising demand from households and companies should help to keep the growth alive.

First of all, we no longer can produce what we need in order to sustain ourselves. We are currently importing much more than we are exporting while at the same time we are selling assets and taking on more debt to sustain a certain standard of living that we simply cannot afford anymore. The financial crisis of 2007-2010 showed us that when you are over-consuming and under-producing, there would be financial problems down the road. However, it is up to debate as to whether this weakening of our superpower status has more the to with other economies rising rather than just American's decline.

Foreign countries are using money earned through our trade deficits to buy many of our most important companies. Since 2000, foreign interests have bought an unparalleled $8 trillion worth of U.S. assets (Heffner 2010). It seems that the plan of most of our international competitors is to leave the United States completely dependent on foreign production, innovation, and financing. "In losing domestic self-sufficiency, national security and leverage in foreign affairs will suffer immensely.

The recovery of the economy will be difficult going into 2011 as momentum is being lost. With nearly a double-digit unemployment rate, this news is rather discouraging. Even scarier, there is no palpable policy response if the recovery does weaken.

Going into 2011, businesses will most likely be doing alright; they are maintaining strong profits as well as very reliable balance sheets. This should be able to increase investment and hiring so that the economy can continue to move ahead.

Households have also made some progress in getting their balance sheets organized; debt service burdens appear to be at a decade low, and saving rates higher than they have been in twenty years.

The U.S. economy is currently downshifting. Real GDP appears to be growing nearly 2% annualized -- at most -- in the current quarter. This rate is down from 3% during the first half of 2010 (before impending downward revisions), and 4% during the second half of 2009. Weakening support from the monetary and fiscal stimulus, the fading inventory rotation in manufacturing, and the consequences from Europe's debt crisis are an important aspect of the recovery (Zandi 2010).

Today, the job market is where we see the recovery's weakness. Conceptualizing from the temporary ups and downs of hiring associated to the U.S. census every ten years, job growth slowed down significantly from the spring.

One of the factors related to the slowing is layoffs by state and local governments lacking sufficient resources. There is also a reluctance from private companies to hire. Even though hiring has stabilized somewhat since the recession, it still is much lower than the levels expected in a job market that is functioning in a healthy manner. Right now, the rate of net job creation will not stop the unemployment rate from increasing in the months to come into 2011.

It is the large businesses that seem the most hesitant when it comes to hiring. This seems strange because they have had stronger profits and better balance sheets -- as well as more access to credit. This reluctance can be explained by large businesses' ability to move jobs overseas and their sense of being uncomfortable with the United States' business climate. Because of recent policy debates and legislations concerning health care, immigration policy, and financial regulation, as well as the coming end of Bush's tax cuts, businesses seem to be uncertain about the rules of the game, causing them to put off major decisions about expansion (Zandi 2010).

Then there are the smaller businesses that do not have much in terms of financial resources. They are struggling to get credit, something that they have got to have in order to invest or to hire more people. Zandi (2010) reports that there are outstanding commercial and industrial loans that are still in a two-year decline, and the number of credit cards that are still active, is declining too -- despite the fact that these small businesses need them in order to thrive (2010).

For the larger banks, stricter underwriting doesn't necessarily reflect any kind of lack of capital. The biggest banks in the U.S. have raised phenomenal amounts of money since the financial panic began, and they seem pretty well prepared for bigger losses than they are likely to undergo. Delinquency rates have been sky high among lending -- commercial mortgages are the most infamous exception. Large banks will not be willing to lend (and the people that regulate them won't allow it either) until unemployment's high points and house prices have begun to stabilize a bit (Zandi 2010).

Many of the smaller banks are low on actual funds. Smaller banks find it more difficult to raise funds, and their commercial mortgages losses are huge compared with their existing funds. It is predicted that the FDIC will close a hundreds of financially strapped banks every year for the next few years. Still, we have to acknowledge that banks are important credit providers for small business across the nation and this could have a negative impact on them around the country.

The economic recovery should continue in spite of the weak hiring rate. Zandi (2010) notes that it's not abnormal for the business cycle to relax at this point in time (on its course from recovery to expansion). Zandi (2010) gives the example of the growth spurt followed in early 2002, yet by the end of that year, the recovery appeared to be dead, and there was a lot of worrying about the prospects for a "double-dip recession" (Zandi 2010). It was in the middle of 2003 before growth increased again, and it wasn't' until the finale of that year that "net job creation" resumed in earnest (2010). In the end, the United States was able to prevent a double-dip recession, because of the fact that businesses didn't go ahead with cost-cutting and layoffs. The main reason they didn't was because of their increased profitability (Zandi 2010). Businesses has cut costs during the downturn, and when there were modest improvements in the demand, the profits ended up rebounding. The same thing is occurring today. There were many businesses (most businesses) that slashed costs during the recession. "Wider margins combined with somewhat better sales have pushed profits back within striking distance of record high set in mid-2006" (2010).

These better profits have made business balance sheets much stronger. Interest coverage ratios for nonfinancial businesses are fast declining with corporate deleveraging as well as low interest rates. Right now, cash balances are as high as they have ever been relative to short-term liabilities (Zandi 2010).

Recovery still remains tentative, despite all of this. The United States can't allow for anything else to go wrong right now. Policymakers have done what they are going to do, but now the Federal Reserve is arguing about whether to go ahead with quantitative lessening, and Congress is arguing about what to do about Bush's tax cuts, which are about to expire (Zandi 2010). The big thing for the Fed will be the unemployment rate. The increase in unemployment will make the Fed continue expanding its balance sheet by buying more Treasury securities. The idea will be that the already-low long-term interest rates will push more housing activity, automobile purchases and business investment as well.

What is certain is that Congress (as well as Obama) must do something quick so that taxes do not arise in 2011. Everyone can pretty much concur that raising taxes would be bad for the country's economy, but it is difficult to find any agreement thereafter. Obama is all for extending current tax rates for all except the households that make the most money; however, most right wingers want the Bush cuts to be something of permanence (Zandi 2010). What would be practical would be to not hike any taxes in 2011 and to gradually bring in higher rates on households with higher incomes beginning later in 2012. This would give the economy time to find some stability that it doesn't have at the moment. If anything else were to be done right now, it would most likely weaken rather than strengthen the economy (2010).