Future Outlook of the US Economy Term Paper

Excerpt from Term Paper :

future evolution of the American economy is closely related not only to the 1990-2000 period, that covered one of the most prolific economic expansion in history, but also the subsequent turn of events brought about by the first Bush administration. I am obviously referring here to the economic recession brought about by the tragic events of September 11 and by the economic cycles following the economic boom of the 90s, to the fiscal policy adopted by the American administration that relied heavily on debt and large fiscal deficits and to the monetary policy involving a reduction to minimum levels (1%) of the interest rate, so as to encourage a rebound of the economic processes.

The beginning of the 90s brought about a new president, Bill Clinton, for whom the campaign slogan "it's the economy, stupid" became an actual concept. President Clinton would become the equivalent of the 90s growth and many of his bills did encourage such a process. One of the numerous examples was the declaration that "era of "big government" was over in America"

. Indeed, many of his measures were directed at improving the market forces and stimulating competition among the players on the market. The local telephone services, for example, were opened to competition and he overall encouraged liberalization and globalization as a successful principle.

On the other hand, the collapse of the Soviet Union in 1991 and the end of the Cold War were equivalent with, joint with the results of the Uruguay GATT Round that saw the founding of the World Trade Organization stimulated free trade through the overall reduction of commercial barriers. For the United States, this meant that the American products now had more potential markets were they could be commercialized.

On the other hand, we shouldn't be ignoring the national causes that made this possible. First of all and most important, the 90s saw a significant increase in U.S. hours and labor productivity. According to many researchers, the growth pace picked up after 1995

. Indeed, while the period from 1973 to 1995 saw the hours productivity increase with an annual rate of 1.44% and the labor productivity with an annual rate of 1.33%, after 1995, these figures increased to 1.99 and 2.07% respectively. There are no signs that these trends are likely to turn the other way, as 2002 saw an increase in non-farm business sector productivity by 4.8%

According to the same researchers, there seem to be three different sources identified as reasons for the labor productivity growth: capital deepening, labor quality growth and total factor productivity growth

. The first relates to capital investments which improve the condition of labor and provides for a better productivity. The second increases the proportion of more productive workers, while the third is defined as output per unit of capital and labor units.

One of the fundamental reasons for the capital deepening was related to the technological boom that determined the economic evolution of the 90s and the strong capital investments made in the IT sector. According to David Pearce

, the Labor Department actually hired a consultancy company (Ernst and Young) to perform audits of companies with consistent productivity figures in the last five years. The result was a "common pattern"

: the companies with consistent productivity and output figures successfully combined innovations in management and technology with employee training and empowerment programs. During the 90s, the accent was on the first two components: innovations management and technology.

For innovations in management, there is no better example than the former CEO at General Electrics, Jack Welch

. The way he succeeded to transform a century old company into something just as competitive and in line with the new achievements as any new name on the market is incredible. According to him, his main realizations were the six sigma concept (a concept emphasizing the importance of quality in a production process), e-business and adapting to the new realities imposed by globalization.

In terms of technology, the Internet became the newest and fastest communications tool which would greatly influence the economic processes. I do not need to mention the Dot Com fever, when every investor chose an Internet-based company. The mania itself drove the Dow Jones Index over the 11,000 point level in late 1999. Technology was booming in the 90s and the advantage was that the United States was the center.

The results are best explained in the Gross Domestic Product growth rate as the leading indicator of economic performances in a country: 3.9% in 1997 and 4.2% in 1998. Additionally, these excellent figures were corroborated with a low inflation (1.6% in 1998, "smallest increase except for one year since 1964"

) and with low unemployment figures (only 4.1% in November 1999, "the lowest rate in nearly 30 years")

. In order to maintain low inflation figures, the interest rates gradually increased as the economic rates did as well, only to reach one of the highest levels recorded, 6.5%.

The new Bush administration saw quite a change in the U.S. economy. First of all, the budgetary surplus that the Clinton administration had left was quickly transformed into a 4% budgetary deficit. The fiscal measures that led to this had everything to do with lower taxes to encourage the revival of the business environment, affected by the economic crisis that had taken over ever since the attacks on the Twin Towers, and with governmental spending. The military spending, in wars such as Afghanistan or Iraq, did not help either.

In terms of monetary policies, the interest rates decreased to some of the lowest levels in history, 1%. The Federal Reserve and President Alan Greenspan took this measure in order to stimulate growth during the height of the economic recession. However, the interest rate has also picked up, simultaneous with the economic growth that has reached 3.8% last year. In this sense, the Federal Reserve has used a 0.25 benchmark and the interest rate currently stands at 2.5%.

In terms of monetary policies, the near-term forecast will most likely show an increasing trend for the interest rate. The objective of the Federal Reserve is quite clear in this sense: stop any inflationary pressures from manifesting. As such, analysts believe that the 0.25 benchmark will be used and will increase the interest rate to 5% or perhaps even somewhat higher.

The fiscal policy will probably show some improvement in the future. The historically large deficits that the administration has managed to bring about is already producing economic problems and there is the risk that the U.S. economy will not be able, at a certain point, to control and support them. Additionally, the budgetary and trade deficits are already worrying the investors, turning them away from American assets and putting a pressure on the dollar.

On the other hand, we need to have a brief look at the situation of the dollar as well. Quoted at an average of 1.2 against the euro in the first months of 2004, the dollar gradually devalued itself due to the same reasons mentioned and had reached a historically low 1.3666 on December 30

. Prospects are that it may go even lower than that on generally worries about the U.S. deficits, but also from signals that large reserves in Japan, South Korea or Russia may turn to other currencies as a hedging measure. However, a weak dollar will likely reduce the trade deficits, as American exporters will become more price-competitive on the international market and will have a cost advantage over the European and Japanese counterparts.

The near-term performances of the American economy are relevant, especially in 2004, with a strong, sustainable and healthy growth, including here reasonable inflation rates and low unemployment rates. The labor productivity ha increased as well. If the non-farming labor productivity figures…

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