Economy the Current State of the U.S. Essay

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Economy

The current state of the U.S. economy is that the unemployment rate as of April 2012 is 8.1% and the consumer price index was flat for that month (BLS, 2012). The first quarter improvement in the GDP saw an increase of 2.2% (BEA, 2012). The current interest rates are rock bottom, at 0.15% for six months, 0.19% for one year, 0.84% for five years and 1.98% for ten years.

Five years ago, in spring of 2007, the U.S. economy was generally performing better. The housing market was starting to slump but the economy overall was not yet struggling. The yield curve was inverted, however. The six-month rates were 4.99%, the one year rate was 4.94%, the five-year rate was 4.78% and the ten-year rate was 4.86%. In the first quarter of 2007, GDP only grew 0.5%, but this was not the start of the recession as GDP grew in Q2 and Q3 of that year before sliding. Unemployment is usually a lagging indicator, so had not been a major problem that that point, as it was 4.4% in May of 2007. Inflation was 0.4%, slightly higher than current levels but still not very high.

Compared with spring of 2007, the unemployment rate today is much higher. GDP growth is higher, but low in both instances. The inflation rate is lower today than it was five years ago, and interest rates are lower. Thus, unemployment is the biggest problem in the economy today, and the inflation rate is below the Fed's target as well. The economy is underperforming today, whereas five years ago it was starting to show signs that an expansionary period was coming to an end.

One of the problems in the economy is a lack of demand.

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Assuming that getting people to spend more is a useful solution -- it depends on what they are buying and where that was made to determine the multiplier for consumer spending -- there are a few steps the government can take to encourage spending. However, the current personal savings rate is 3.8%, not much higher than where it was during the mid-2000s when Americans were racking up consumer debt (St. Louis Fed, 2012). Americans have typically saved at a much greater rate, so if we want to learn some lessons from the recession we should question whether increasing consumer spending is actually a good idea, since a lot of that spending is just going to put U.S. consumers back into debt. Arguably, the spending needs to come from export markets, which is something the government can encourage by convincing trade partners to lower their trade barriers.

If there is determination to increase consumer spending in the U.S., there are a few ways to encourage this. Easing restrictions on credit of course will do this, if the consequences are ignored. Lowering taxes on the working class will do this -- upper classes tend to either save or invest excess cash so lowering their taxes is not going to help much but the working classes are likely to spend 96.2% (1 -- s) of new money they receive. Savings rates increase during periods of economic uncertainty and decrease during periods of….....

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