The State of the US

The State of the US Economy

The United States has the largest and most technologically powerful economy in the world, with a per capita gross domestic product (GDP) of $40,100 (Index Mundi, 2005). It is best classified as a market-oriented economy, with private individuals and business firms making the majority of economic decisions, and the federal and state governments purchasing necessary goods and services mainly in the private marketplace.

American companies have more enjoy flexibility than Western Europe and Japanese businesses in decisions to expand capital plant, reduce labor, and develop new products (Index Mundi, 2005). However, they are faced with more barriers to entry in their rivals' home markets than the barriers to entry of foreign firms in American markets.

The United States is at the forefront in technological advances, particularly in the fields of medicine, computers, aerospace, and military equipment (Index Mundi, 2005). With a major increase in technology and related fields, the U.S economy has seen a gradual development of a "two-tier labor market" in which those at the bottom do not have the education and skills of those at the top. As a result, they increasingly fail to obtain comparable pay raises, health insurance coverage, and other benefits. Since 1975, the majority of gains in household income have gone to the top 20 percent of households.

According to the Index Mundi (2005): "The response to the terrorist attacks of 11 September 2001 showed the remarkable resilience of the economy. The war in MarchApril 2003 between a US-led coalition and Iraq, and the subsequent occupation of Iraq, required major shifts in national resources to the military. The rise in GDP in 2004 was undergirded by substantial gains in labor productivity. The economy suffered from a sharp increase in energy prices in the second half of 2004. Long-term problems include inadequate investment in economic infrastructure, rapidly rising medical and pension costs of an aging population, sizable trade and budget deficits, and stagnation of family income in the lower economic groups."

The United States has entered a period of recovery and has been steadily climbing for the past few years (Kohn, 2005). Most measures of economic recovery support the perception that the U.S. economy is doing well overall. Real gross domestic product growth shows a significant rebound from the 2001 recession, and improvements in both the labor and product markets are seen across the nature.

For a lengthy period after the 2001 recession began, there was little or no increase in employment (Kohn, 2005). In the early part of 2005, it was reported that payroll gains increased to an average of 160,000 per month steadily, and the unemployment rate has fallen to about five percent, almost one percentage point below where it was in 2003. Consumer spending on goods and services and housing has remained strong throughout this growth, and, more recently, business investment in capital equipment dramatically increased.

This increase in output goes hand-in-hand with large improvements in labor productivity that, since 2002, have been in excess of even the accelerated pace of the mid-to-late1990s (Kohn, 2005). However, a recent and drastic rise in energy prices seems to have negatively affected consumer confidence and spending recently. However, with financial conditions still healthy, profits and cash flow still strong, and incomes continuing to increase, most forecasters expect growth to be steady.

According to Kohn (2005): "Excluding food and energy, the rate of inflation has fluctuated around 1-12 percent over the past few years, measured by the chain-weighted price index for personal consumption expenditures. Core inflation has been running somewhat faster more recently, in part because of the increases in the prices of energy, commodities, and imports that began last year. Nevertheless, barring further sizable increases in the prices of oil and natural gas, both core and headline inflation rates should moderate later this year. Buttressing this view, long-run inflation expectations have been, on balance, fairly stable in the face of these price gyrations."

The consumer market is critical to the state of the economy. In 2004, household spending on homes and cars increased (Minehan, 2005). Throughout most of 2004, households continued to spend on homes and automobiles, buoyed by increasing house prices, low interest rates, and a stronger stock market. Consumers were eager to purchase homes and stocks because it fuelled their nest eggs. This steady increase in confidence and spending was helpful in sustaining general demand and production in 2004.

Consumer confidence also increased an unemployment declined. Between 2001 and 2004, job growth was slow (Minehan, 2005). In post-war history, it had never taken as long to regain the jobs lost during a recession, not to mention to begin creating jobs as necessary for an expanding labor force. During the last half of 2004, job growth increased and in the past six months, employment growth has averaged about 180,000 per month.

It seems that the U.S. economy is growing faster than any other major industrialized nation. Small businesses are doing well. Workers are earning more money and have more opportunities. These are all signs of a strong economy.

Productivity is another important aspect that affects the state of the U.S. economy. After an approximately five percent pace of growth in early 2004, the rate of productivity growth slightly declined, but only to a more than healthy three percent for the year in general. According to Minehan (2005): "the major surge in underlying structural productivity that we have seen in the U.S. economy over the last 10 years or so can have a remarkable impact in raising standards of living over time. And in the very near term, productivity growth has been key to the economy's good track record on inflation."

The future of the United States economy seems positive. Economists predict a continuation of the recent acceleration in job creation as the economy continues to grow (Minehan, 2005). In addition, inflation, which has caused concern because of its elevation over its pace from 2004, seems likely to be stable on the whole. However, this is dependent on a series of positive factors.

One of the main indicators of economic growth throughout history has been the U.S. consumer. Thus, it is important that household spending continue to support GDP growth at its current pace. Because the momentum from 2003 tax is dying down and 2005's fiscal policy is not enabling much new stimulus, growth in household disposable income-a major factor that influences consumption-now depends more heavily on growth in employment (Minehan, 2005). Fortunately, recent hiring data is positive in this respect, indicating that job creation will provide the income growth necessary to support future consumer spending.

It is important to note that there are some risks to the future of the U.S. economy. First and foremost, higher oil prices could have a negative impact on consumption. In addition, after a period of more spending and less saving, consumers could decide to change their strategies of investing and increase their savings (Minehan, 2005). This would effectively slow growth. For this reason, the stimulus from the housing market is uncertain. The high rate of increase in house prices of the past couple of years is not guaranteed to continue. If house prices stabilize, this source of wealth creation would not support consumer spending at the same rate.

This is related to the important issue of inflation in 2005. According to Minehan (2005): "So far inflation in this recovery while on the uptick has been well behaved at least by historic standards. The year over year rate of core inflation reached a low of about 1 percent in late 2003, a rate not seen since the early 1960s. In 2004, however, inflation as measured by the core CPI accelerated to a 2.3 percent annual pace and it has ticked up again so far in 2005 as well. In large part, this reflected the pass through of the rising cost of energy and other imported goods into core goods and services prices."

There are a series of potential risks relating to inflation. Because there is no way to determine whether the economy will continue to grow, this poses a risk. In addition, various cost pressures, including energy prices to benefits costs, pose a risk, as well (Minehan, 2005). Finally, uncertainty about the pace of GDP growth in 2005 raises uncertainty in regard to whether remaining slack in the economy will be reduced.

In general, the outlook for 2005 is positive. Economists are positive that we will enjoy strong growth, continued job creation, solid business investment, and reasonably low inflation.

Employment in Pennsylvania is above its pre-recession peak. The state's strong performance is also reflected in the unemployment figures. In June, the unemployment rate in Pennsylvania was five percent, on par with the national figure of five percent. Given the positive outlook described for the nation, it seems likely that 2005 will be a reasonably good year for Pennsylvania as well.

Labor and Industry Secretary Stephen M. Schmerin recently released the latest 2005 statewide workforce report, showing that Pennsylvania's statewide job count increased by 6,500 in June to 5,703,600 (Powers, 2005). "This is the first time since March 2001 that Pennsylvania's job count climbed above 5.7 million," Schmerin announced. "Our economy has added 60,000 jobs in the last year and I expect that trend will continue. Pennsylvania's economy added jobs in nine of the past 10 months."

The tables below show the current state of the U.S. economy and the Pennsylvania labor-related economy.

Table 1: United States Economy at a Glance

Footnotes: (1) In percent, seasonally adjusted. Annual averages are available for Not Seasonally Adjusted data. (2) Number of jobs, in thousands, seasonally adjusted (3) For production and nonsupervisory workers on private nonfarm payrolls, seasonally adjusted (4) All items, U.S. city average, all urban consumers, 1982-84=100, 1-month percent change, seasonally adjusted (5) Finished goods, 1982=100, 1-month percent change, seasonally adjusted (6) All imports, 1-month percent change, not seasonally adjusted (7) Compensation, all civilian workers, quarterly data, 3-month percent change, seasonally adjusted (8) Output per hour, nonfarm business, quarterly data, percent change from previous quarter at annual rate, seasonally adjusted Source: U. S. Bureau of Labor Statistics. (2005). Retrieved from the Internet at: http:www.bls.goveagFnote4.

Table 2: Pennsylvania Economy at a Glance Footnotes: (1) Number of persons, in thousands, seasonally adjusted (2) In percent, seasonally adjusted (3) Number of jobs, in thousands, seasonally adjusted Source: U. S. Bureau of Labor Statistics. (2005). Retrieved from the Internet at: http:www.bls.goveagFnote4.

The wars in Iraq and Afghanistan have had an impact on the current state of the U.S. economy (Sterngold, 2005). July 2005 reports put U.S. spending at $314 billion, and, at the time, the Congressional Budget Office expected additional expenses of perhaps $450 billion over the next 10 years. This makes the combined war efforts the most expensive military effort in the last 60 years.

Many critics argue that the war is not making the United States safer; rather, it is negatively impacting U.S. taxpayers by building a major debt burden, since the war is financed with deficit spending. As the government has to pay more interest on its debt, it has less for health care, education and other programs. Sen. Chuck Hagel of Nebraska believes that the costs of the war are pushing the U.S. fiscal priorities out of balance (Sterngold, 2005).

Just one year ago, in mid-2004, employment growth was faltering; oil price increases were sharply reducing consumption, and business investment growth was a shaky topic (Minehan, 2005). At that time, the economy was supported by highly accommodative monetary policy and the impact of the fiscal momentum of the 2003 tax cuts. In 2005, the monetary policy is less accommodative, and the last of the recent tax changes-the partial expensing tax credit-is a thing of the past as well. The economy is now in many ways self-sustaining, with annual gross domestic product (GDP) growth for the last half of 2004 better than four percent.