Macroeconomic Situation the Development Policy

Macroeconomic Situation

The Development Policy and Analysis Division of the United Nations (2012) is forecasting sluggish growth in the U.S. economy in 2012. They have recently issued a report that notes a decelerating pace of growth from 1.7% in the second half of 2011 to 1.5% in 2012. The report cites as reasons for its pessimism "persistent high unemployment, continued balance sheet adjustment by households and the shift to fiscal austerity" as the three key factors underlying its prediction for weak growth.

In order to adequately assess DESA's negative outlook on the macroeconomic situation in the United States, an analysis of the data should be conducted. The most important sets of data are the GDP, the unemployment rate and the inflation rate. The Bureau of Economic Analysis notes that the GDP rose at an annualized rate of 2.8% in the fourth quarter of 2011. The reflects an increase in the pace of economic growth, reversing the trend cited in the DESA report, which only included data up to the third quarter of 2011. The BEA's latest report cites increases in "private inventory investment, personal consumption expenditures, exports, fixed residential investment and government spending" as contributing factors to the increase.

The U.S. Bureau of Labor Statistics noted in its most recent report that non-farm payroll employment rose by 243,000 in January, bringing the unemployment rate to 8.3%. This level is at its lowest level quite some time. Also noted as signs of a positive economy were an increase in durable goods manufacturing jobs of 418,000 in the past two years, and job growth in the construction and mining sectors. While the January figures are a cause for optimism, there remains considerable volatility in employment numbers, such that the gains in January would need to be supported with further gains in the coming months in order to be truly relevant -- they are at present an insignificant sample size.

The BLS also compiles the consumer price index summary, which is used as the main inflation measure. The CPI increased at a rate of 3.0% for 2011. The core CPI, which excludes the volatile food and energy prices, increased 2.2% for the year 2011. These rates of inflation are slightly higher than the Fed's target inflation rate, which is at 2% (Spicer, 2012). If the Fed is more concerned with the core CPI, then rates are unlikely to be raised this year. An increase in rates would slow the economy down. However, if total CPI increases at a faster rate, this could force the Fed to raise rates slightly.

On the whole, however, the data does not support DESA's pessimism about the state of the American economy. The Federal Reserve is currently using expansionary monetary policy to keep the amount of money in the economy at a high level, to spur business investment and real estate markets. In addition, lower rates make it easier for consumers to re-adjust their balance sheets as well. While the data about the U.S. economy is encouraging -- most key measures are trending up, with solid underlying support rather than as the result of short-term trends -- the U.S. economy is not growing so fast that contractionary monetary policy is necessary. The DESA report argued that contractionary fiscal policy is a risk as well, and this may well be the case in an election year, but there is little likelihood that any strong austerity measures would be passed this year either. A continuation of the status quo until after the election is the most likely outcome. Thus, I believe that DESA overstates the downside risk of the U.S. economy. The economy is likely to continue its current path of relatively slow recovery for the coming year.