U.S. Macroeconomy Forecast GDP 2010/2011 Term Paper

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The U.S. economy is currently downshifting. Real GDP appears to be growing nearly 2% annualized -- at most -- in the current quarter. This rate is down from 3% during the first half of 2010 (before impending downward revisions), and 4% during the second half of 2009. Weakening support from the monetary and fiscal stimulus, the fading inventory rotation in manufacturing, and the consequences from Europe's debt crisis are an important aspect of the recovery (Zandi 2010).

Today, the job market is where we see the recovery's weakness. Conceptualizing from the temporary ups and downs of hiring associated to the U.S. census every ten years, job growth slowed down significantly from the spring.

One of the factors related to the slowing is layoffs by state and local governments lacking sufficient resources. There is also a reluctance from private companies to hire. Even though hiring has stabilized somewhat since the recession, it still is much lower than the levels expected in a job market that is functioning in a healthy manner. Right now, the rate of net job creation will not stop the unemployment rate from increasing in the months to come into 2011.

It is the large businesses that seem the most hesitant when it comes to hiring. This seems strange because they have had stronger profits and better balance sheets -- as well as more access to credit. This reluctance can be explained by large businesses' ability to move jobs overseas and their sense of being uncomfortable with the United States' business climate. Because of recent policy debates and legislations concerning health care, immigration policy, and financial regulation, as well as the coming end of Bush's tax cuts, businesses seem to be uncertain about the rules of the game, causing them to put off major decisions about expansion (Zandi 2010).

Then there are the smaller businesses that do not have much in terms of financial resources. They are struggling to get credit, something that they have got to have in order to invest or to hire more people. Zandi (2010) reports that there are outstanding commercial and industrial loans that are still in a two-year decline, and the number of credit cards that are still active, is declining too -- despite the fact that these small businesses need them in order to thrive (2010).

For the larger banks, stricter underwriting doesn't necessarily reflect any kind of lack of capital. The biggest banks in the U.S. have raised phenomenal amounts of money since the financial panic began, and they seem pretty well prepared for bigger losses than they are likely to undergo. Delinquency rates have been sky high among lending -- commercial mortgages are the most infamous exception. Large banks will not be willing to lend (and the people that regulate them won't allow it either) until unemployment's high points and house prices have begun to stabilize a bit (Zandi 2010).

Many of the smaller banks are low on actual funds. Smaller banks find it more difficult to raise funds, and their commercial mortgages losses are huge compared with their existing funds. It is predicted that the FDIC will close a hundreds of financially strapped banks every year for the next few years. Still, we have to acknowledge that banks are important credit providers for small business across the nation and this could have a negative impact on them around the country.

The economic recovery should continue in spite of the weak hiring rate. Zandi (2010) notes that it's not abnormal for the business cycle to relax at this point in time (on its course from recovery to expansion). Zandi (2010) gives the example of the growth spurt followed in early 2002, yet by the end of that year, the recovery appeared to be dead, and there was a lot of worrying about the prospects for a "double-dip recession" (Zandi 2010). It was in the middle of 2003 before growth increased again, and it wasn't' until the finale of that year that "net job creation" resumed in earnest (2010). In the end, the United States was able to prevent a double-dip recession, because of the fact that businesses didn't go ahead with cost-cutting and layoffs. The main reason they didn't was because of their increased profitability (Zandi 2010). Businesses has cut costs during the downturn, and when there were modest improvements in the demand, the profits ended up rebounding.

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The same thing is occurring today. There were many businesses (most businesses) that slashed costs during the recession. "Wider margins combined with somewhat better sales have pushed profits back within striking distance of record high set in mid-2006" (2010).

These better profits have made business balance sheets much stronger. Interest coverage ratios for nonfinancial businesses are fast declining with corporate deleveraging as well as low interest rates. Right now, cash balances are as high as they have ever been relative to short-term liabilities (Zandi 2010).

Recovery still remains tentative, despite all of this. The United States can't allow for anything else to go wrong right now. Policymakers have done what they are going to do, but now the Federal Reserve is arguing about whether to go ahead with quantitative lessening, and Congress is arguing about what to do about Bush's tax cuts, which are about to expire (Zandi 2010). The big thing for the Fed will be the unemployment rate. The increase in unemployment will make the Fed continue expanding its balance sheet by buying more Treasury securities. The idea will be that the already-low long-term interest rates will push more housing activity, automobile purchases and business investment as well.

What is certain is that Congress (as well as Obama) must do something quick so that taxes do not arise in 2011. Everyone can pretty much concur that raising taxes would be bad for the country's economy, but it is difficult to find any agreement thereafter. Obama is all for extending current tax rates for all except the households that make the most money; however, most right wingers want the Bush cuts to be something of permanence (Zandi 2010). What would be practical would be to not hike any taxes in 2011 and to gradually bring in higher rates on households with higher incomes beginning later in 2012. This would give the economy time to find some stability that it doesn't have at the moment. If anything else were to be done right now, it would most likely weaken rather than strengthen the economy (2010).

Real GDP growth is expected to diminish during the second part of 2010, but the slowing seems to have come before its time. Real GDP is thought to grow approximately 2.8% in calendar year 2010. The calendar year 2011 growth estimate is around 3.0%.

The U.S. GDP Price Deflator Index shows that

There are still many risks on the horizon. Talks of a double-dip recession have come up. There is also a good reason for everyone to believe that not everything is going to get better immediately. If anything were to go wrong, the economy is in such a fragile state right now that backtracking in to a recession isn't a ridiculous concept (Zandi 2010).

There is definitely the need for sustained and sustainable economic growth in support of fiscal consolidation across countries. Fiscal consolidation can be designed and put in place to support growth as much as possible. Spending cuts can keep as well as increase the cost-effectiveness of growth-friendly programs, which would include education and innovation. Revenue-raising taxes may be needed, but must be the least damaging to growth, such as consumption taxes, for example.

While Americans are having to focus on paying down their household debt, the one prospect in the United States appears to be business investment, especially in machinery and equipment. Companies are taking advantage of the increase and the expansion of international trade, although real GDP could negatively affect the solid pace of earnings growth.

Foreign trade practices are probably the biggest area where we need to be cautious. We encourage U.S. manufacturers to create, engineer, and produce in markets like Mexico and China and expect that they will hold themselves up to the standards we have here. This is especially true when talking about areas like the environment and labor policy (Heffner 2010). The standards undoubtedly affect the cost it takes to produce. This means that if other countries don't follow the standards, they will have an unfair cost advantage (2010).

The U.S.'s fiscal numbers are very weak right now. These numbers alone probably won't be enough to destroy the U.S.'s power by itself, but what is worrisome is that the numbers may be able to take away the faith that people have for American to get through any crisis. The United States.....

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