Macroeconomy of United States

Introduction

This paper aims to present the overview of the economy of United States (US) in a macro perspective, briefly discuss the movements of the economic variables, and present some government policies. The times series data from 2004 to 2007 are from the  World Economic Outlook of the International Monetary Fund, Bureau of Labor Statistics of the US Department of Labor, and Bureau of Economic Analysis of the US Department of Commerce.

Review of US Economy: Prior to 2004

US economy had experienced three episodes of recessions in 1980s, 1990s and 2001—growth in gross domestic product (GDP) dropped significantly, real income sunk, unemployment rates peaked, inflation rates shoot up, and other economic activities fell down. These recessions and other economic issues challenged the government to implement expansionary programs and measures to bring the economy back to its normal track.3.

Gross Domestic Product

Figure 1 presents the four-year trend of US real GDP (the overall indicator of the economic performance) from 2004 to 2007. The economy produced a real GDP of $10.6 trillion in 2004. It increased to $11.

6 trillion in 2007, but at a declining rate.Figure 1. Gross domestic production in constant prices (Real GDP)and real growth rate from 2004 to 2007 (see Appendix Table 1)In 2004, the economy registered a real growth rate of 3.6% as it slowly recovered from the 2001 recession.

However, Hurricane Katrina in the third quarter of 2005 damaged properties, left people homeless and jobless, and generally, disrupted the income flow of the economy. Consequently, real GDP growth dropped to 3.1%. The effects of the hurricane did not stall the economic progress for long as the government implemented a massive recovery program including housing program (US Department of Homeland Security, 2008).

With the largest single housing recovery program in US history, the housing markets peaked in 2005 and moved the economy towards recovery in the first quarter of 2006. But the incremental movement of oil prices beyond $70 per barrel (Associated Press, 2006) in the second quarter caused the economy to slow down, recording an overall 2006 real GDP growth of 2.9%.In the first quarter of 2007, the housing market started to decline, but the strong export performance boosted up the GDP.

In the fourth quarter, real GDP growth decelerated to 0.6% due to a “larger decrease in residential fixed investment, a downturn in private inventory investment, and a deceleration in equipment and software” (Mannering, 2008). Overall 2007 real GDP growth slipped to 2.2%.

 Inflation

Overall (or “headline”) inflation is the rise in the general level of prices for goods and services. Several schools of thought provide various views on the causes of inflation—supply shocks and increased cost of production, increased private and government spending, and expectations.Historically, the overall inflation rate is volatile enough to spike up food and oil prices (Fisher, 2007).

In 2000s, the high levels of overall inflation rate are associated with the increasing oil prices. The devastating effect of the Katrina hurricane on energy supplies (US Department of Homeland Security, 2008) and increased government spending had been reflected in the high inflation rate in the second half of 2005 and first half of 2006. The spiraling of oil prices in 2007 had sharply boosted up the inflation rate.

Overall inflation rate and core inflation rate from 2004 to 2007(see Appendix Table 2)The core inflation, excluding food and energy, is widely used to measure the movement in average consumer prices. Over the past four years, the core inflation has been less than 3%, as shown in Figure 2. Several factors boosted up the core inflation, including increases in shelter cost, and increases in the prices of non-energy goods and services where suppliers passed-through the energy cost increases to final consumers (Bernanke, 2006).Senators Schumer and Maloney (2008) recognized that an increase in energy cost, among others, affects overall inflation—the oil price increase affects the cost of transportation, power generation, chemicals, and other products; and its persistent increases can also translate into core inflation increases.

Unemployment

Figure 3 shows an increasing trend of employment and a declining trend of unemployment. After unemployment peaked at 6% in 2003 (International Monetary Fund, 2007) as a consequence of the 2001 recession, the unemployment rates slowly went down to 4.6% in 2006.

The Bush administration bragged off of this downward trend attributing it to the Jobs and Growth Tax Relief Reconciliation Act of 2003, which aimed at creating millions of jobs by helping “workers to have more take-home pay”, “seniors who rely on dividends”, and “small business owners grow and create more jobs” (Office of the Press Secretary, 2006). In 2007, the unemployment rate rose slightly to 4.7%—although the service sector provided job gains, the goods-producing sector reduced its share to total employment (Council of Economic Advisers, 2008, p.37).

Balance of Payments

The US economy had been experiencing rapid export growth in the past four years. Nominal exports increased from $1. 2 trillion in 2004 to $1.6 trillion in 2007. Figure 4 shows that the share of nominal exports to nominal GDP increased from 9.9% in 2004 to 11.

8% in 2007. This implies that the growth of nominal exports surpassed that of nominal GDP.The Council of Economic Advisers in its Economic Report of the President (2008, p.83) claimed that four factors have contributed to the impressive export performance.

These are the trading partners’ income growth boosting their demand for US products, increased US productive capacity in meeting foreign demand, changes in exchange rates making export goods cheaper, and the longer-run decline in trade-related costs. Figure 4. Nominal Exports and its percentage share to nominal GDPfrom 2004 to 2007 (see Appendix Table 3)In 2004, the trade deficit totaled $612 billion and increased to $709 billion in 2007. The current account deficit was $640 billion and increased to $784 billion in 2007, as shown in Figure 5.

Trade deficit accounted for an average of 94% of the total current account deficit for the four-year period.Figure 5. Trade deficit and current account deficit from 2004 to 2007(see Appendix Table 3)Although the strong export performance relatively narrowed the trade deficit and current account deficit in absolute terms and relative to GDP, the overall trade deficit has been adversely affected by increasing oil prices.Cavallo (2006, p.1) noted that from “August 2004 to July 2006, the overall trade deficit grew from $54 billion to $68 billion and the petroleum-related trade deficit rose from $14 billion to $26 billion, indicating that the deterioration in the petroleum-related trade deficit accounts for 80% of the worsening in the overall trade deficit”.7.         Business CycleEncyclopedia Britannica Online Dictionary defines business cycle as the “fluctuations in the general rate of economic activity, as measured by the levels of employment, prices, and production”. In terms of business cycle, the period 2004–2007 shows a relatively healthy economy.

Yellen (2006, p.1) said that the “US economy has been enjoying an era that many economists call the ‘Great Moderation’… this means that recessions have been less frequent with less severe swings, inflation stood at quite moderate levels, and productivity trends have been very favorable”. The last recession occurred in 2001, which were caused by shocks to investment by businesses and households, and unexpected declines in real net exports in 2000 (Kliesen, 2003, p. 36).

Monetary and Fiscal Policies

Monetary policy refers to the actions undertaken by the Federal Reserve System (Fed) to achieve national economic goals and maintain stable prices. To influence the appropriate economic variables, the Fed either raise or lower federal fund rate, raise or lower the amount of bank reserves, or tighten or relax the supply of money in the market (Board of Governors of the Federal Reserve System, 2008).To wit are examples of how the Fed influences economic variables: (a) the Fed raised its federal fund rate from 1% in 2004 to 5.25% in 2006, in response to the increasing inflation almost reaching 3%; the Fed retained the rate in 2007 (Rocheteau & Tinlin, 2007); and (b) the Fed increased M1 money supply from 2001 to 2005, in response to the 2001 recession—eventually causing an increase in real estate loans resulting to a real estate bubble (Rozeff, 2008).

Fiscal policy refers to the actions undertaken by the President, Congress and the Budget Office by which levels of spending are adjusted to provide public goods and services, and by how the government finances its spending. Examples of fiscal policies include (a) the Energy Policy Act of 2005 that includes tax credits for consumers, home builders, and appliance manufacturers; and tax deductions for commercial buildings (Public Law 109–58, 2005); (b) the massive Hurricane Katrina recovery program that included housing construction, repair of infrastructure, restoration of the environment and parts, rebuilding of communities, provision of health care and other social services (US Department of Homeland Security, 2008); and (c) Home Mortgage Debt Forgiveness Debt Relief Cut of 2007 that helped “homeowners who are facing foreclosure or who sell their homes in a short sale” (Public Law Fact Sheet, 2007).

Conclusion

Over the past 4 years, US economy has been slowly growing, with discernible signs of improvements.

Export growth surpassed the GDP and import growth, core inflation remained below 3% but showed a rising trend, overall inflation stayed sensitive to oil price increase, jobs created grew, unemployment remained low, housing market continued to decline. Government policies were geared towards keeping the economy on track. It is, however, debatable as to whether or not they are the appropriate policies and measures.

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