Macroeconomic Situation in the U.S.

¶ … macroeconomic situation in the U.S. What should the U.S. Congress and the Federal Reserve do about it?

According to the most recent data available from the Bureau of Economic Analysis (BEA) the United States' gross domestic product (GDP) increased at an annual rate of 2.8% in the third quarter of 2009. In the second quarter of 2009, real GDP decreased 0.7%. A recession is usually defined as two consecutive periods of decreased GDP. However, economists also consider other factors, such as production, consumer confidence, and unemployment. The current recession is thought to have begun as early as mid-2007.

Current figures seem to indicate that the U.S. economy is improving. Another important indicator of economic growth is the fact that "domestic profits of financial corporations increased $97.0 billion in the third quarter, compared with an increase of $28.5 billion in the second" (BEA, 2009). Federal government programs such as 'cash for clunkers' contributed to the economic expansion: "Motor vehicle output added 1.45 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change" (BEA, 2009). The housing sector has also shown modest gains. A combination of government rebates for cars and first-time homebuyers and the infusion of stimulus money into the economy encouraged consumers and businesses to spend more money.

However, although the U.S. economy may no longer meet the technical definition of a recession, the Fed remains concerned about the state of the U.S. economy. The Fed continues to keep interest rates low, to encourage consumers to spend more to stimulate the economy. The high unemployment rate and low levels of consumer confidence remain worrisome. The fact that so much of the recent increase in growth was due to government spending and specific 'one off' programs, rather than a slow and steady rebuilding of the economic infrastructure, further underlines the fragility of the economy.

To encourage banks to lend more money to consumers, the Fed is keeping the discount rate, the rate at which it lends to member banks, extremely low and is also keeping reserve requirements low. It continues to buy government securities to infuse more cash into the economy. "The target range for the federal funds rate at 0 to 1/4% and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt" (Fed, 2009).