Current macroeconomic situation, inflation, and recession in the United States

¶ … Macroeconomic Situation

A discussion given by the Federal Reserve Bank of Chicago, on June 8, 2010, analyzed America's macroeconomic fiscal situation by opining that the economy is recovering from the recession and that national GDP would increase by, at least, a moderate 3.5% that year.

Recovery will be slow given that climbing out takes time and that, given the severity of the recession, a great deal of growth needs to be accomplished for employment and economic situation to return to the level that it was in 2007. The moderate 3.5% expected by Chicago's Federal Reserve Bank a year ago and the very similar climb in percentage expected in the subsequent years following this recession can be compared to the 8% economic growth that followed the deep recession of 1981-1982.

Although GDP's discount rate fell sharply during 2008 and 2009 (approximately 3.7%), it picked up towards the end of 2009 and in 2010 due partially to the government stimulus package (expansionary fiscal policy tools) promoted in 2009 that raised economic activity and that encouraged spending through 2010.

Inventory investment by businesses is also reviving, since induced by the hardships of 2008-2009, businesses cut back their inventory spending in order to avoid excess reserves, and so now manufacturing demand has slightly increased. Open market operations and business spending has also increased on capital equipment, particularly on high-tech production, and consumers have also increased spending.

Housing, however, continues to face difficulties with flux in the open market, but with sales far below historical norms. Foreclosures have added to the overhang of unsold property, but Chicago's Federal Reserve Bank predicts that the improving economy will boost housing market conditions.

As regards the labor market, the Bank notes that patterns of recession often show improvement in economic activity before it indicates improvement in the job market, and the same seems to be the case here: Even as the economy picks up, hiring remains low and job destruction continues. However, with the economy's consistent recovery, hiring levels should return to a more consistent and stable basis. In the meantime, temporary worker employment has increased solidly.

Given previous optimism, however, consumer spending is still low primarily because of the cutback in wages and job opportunities, aside from which there is reduced availability of household credit. This restrains overall GDP growth. In addition, there has been a decline in bank lending to businesses with tighter conditions imposed, and it is, generally, the smaller businesses and start-ups that suffer more predominately here. On the optimistic side, productivity growth has remained strong with unbroken advancement of technology and new products.

What should the U.S. Congress and the Federal Reserve do about it?

The federal government has already provided tax relaxations and other incentives (expansionary fiscal policy tools) to help the flagging housing market and to stimulate businesses to higher levels of employment and buying patterns as well as to increase private consumerism. Many worry that higher inflation will come as a result of Federal accomodatory policies (that will have an additional effect on already enormous national debt), to which the Chicago Federal Bank thinks that inflation will remain relatively stable. This is because most of the funds (that could be used to explode the Federal balance sheet by generating spending pressure) are being retained by banks. Inflationary pressure would however occur if the government retained and intensified their accomodatory polities. With resource gaps and accomodatory policies meeting each other, the Chicago Federal Reserve Bank predicts that inflation will move up less than 2% by 2012.