U.S. Economy Update from 2013

The world is impressed and the market watchers back home jubilant over the much-talked-about turnaround in the U.S. economy. It was not very far back in the past when organizations, like OECD had slashed their growth forecasts for 2010 and 2011 on the concerns of historical unemployment rate and uncontrolled national debt. In the latest results, U.S. has beaten all forecasts by a decent margin.

What’s the big news?

In a recent interview, Chief Economist Bob Baur, from Principal Global Investors, said, “I would say the US recovery is over... we're into an expansion. Real GDP is now above its December 2007 highs. So we've reached a new peak.” However, he was quick to point out that the excess liquidity pumped into the financial system by the Government as a part of the stimulus program could not make much difference due to weak demand for funds. One reason for such buoyant enthusiasm is the Q4 2010 numbers that indicate a recovery and a GDP growth of 3.2% y-o-y in that quarter. Chief contributories to the GDP were the automobile sales, exports, personal outlay (5.8% increase in Q4), nonresidential fixed investment, continuation of fiscal relief in the form of tax-cuts, and federal government spending. Fed says that business spending on equipment and software is rising well into the current year. The disposable personal income (3.5% growth in fourth quarter) and saving rates (5.4% in Q4 against 5.9% in Q3) indicated modestly positive trends (Bureau of Economic Analysis). These figures are particularly encouraging in view of the negative GDP growth of 1.7% registered in FY 2009. According to BEA, GDP grew by 3.8% for the full-year 2010. This is higher than the growth in pre-recession times!


Where are the pitfalls?

Unemployment

Analysts and institutions, like Bank of Japan are adopting a more cautious view on the matter. The concerns over inflation rates, unemployment, and tight sovereign debt situation are sufficient to rationalize much of the prevailing optimism. The latest economic releases of the Bureau of Labor Statistics showed improvement in the unemployment rates from 9.7% in January 2010 to 9.0% in January 2011, yet they remain too high to be comfortable. The policymakers are also beginning to admit that the pre-recession employment levels are not achievable in the immediate term. In OECD’s opinion, “It is becoming increasingly clear that the economy has entered a soft patch, but this is not inconsistent with previous recoveries. We don’t see a risk of a double-dip recession. That said, we don’t see either a recovery that is strong enough to put a significant dent in unemployment. ” Unemployment has a ripple effect on virtually all the segments of the economy in the form of reduced demand and consequently, reduced production.

Sovereign Debt

At over $14 trillion, the U.S. sovereign debt is more than 95% of the GDP – an unreasonably high figure by any standards. Though there is no clarity or overt admission by the Treasury, the spiraling debt is going more or less uncontrollable. Perhaps, it is this realization that the Government plans to upwardly revise the Sovereign Debt ceiling for the second time in last two years. The first one was the February 2010 amendment, where the limit was set to $14.3 trillion. Speaking from the Florida House, Senator Marco Rubio said, “Medicare and Social Security as they currently are structured, is unsustainable. They will bankrupt themselves and ultimately bankrupt our country.” Post World War II, there was a sudden rise in number of births in the country and the phenomenon continued till around late 1950s. The babies born during that period began attaining retirement age in last couple of years, which has put greater pressure of the Social Security payouts. The unprecedented unemployment rates have only added to the burden. The mounting pension liabilities alone have pushed many U.S. states on the verge of bankruptcy. The only reason they remain solvent is that currently, the states cannot declare bankruptcy under the statute. According to an estimate, at this rate, the debt servicing costs may treble over the coming decade and that means over $840 billion annually!

International Political Events

No matter how brilliantly U.S. Government try to underplay the current political situation in the oil-producing countries, the markets and key indices are already reacting negatively to the crisis. Almost 40% of the total U.S. oil import comes from the OPEC countries and the impact of the agitation cannot be underrated. Right now, the oil production as well as the transportation is in the line of fire. This is especially true in the light of the fact that the Jasmine Revolution covers Tunisia, China, Gabon, Libya, Bahrain, Algeria, Egypt, Morocco, Iran, and some other nations.

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Comments 2 comments

CHRIS57 profile image

CHRIS57 5 years ago from Northern Germany

You stick your fingers into the right topics. Good Hub.

Another pitfall: Low industrialization. Maybe my thinking is very conservative, but how can any sustained economic growth be created with such little producing industry that is left in the US?

If the producing sector resembles some 10% of the US economy, how is it possible to achieve a GNP growths of over 3%. Let me assume there is a 10% growths in producing industry. That leads to 1% contribution to the GNP. In this example everything above 1% is what you call thin air into the bubble. It has to be borrowed.

When i look into economic figures, i always look at what producing industry does, first. Then i compare with the GNP development and get a direct idea of bubble inflation or sound growth.

Keeping this in mind - US economy is in a mess and stays this way. But i have no economic education. I can only look bewildered at media news that praize consumer credit increase to be good news.

Again, great hub, i am fully in line with you.


EurionConst profile image

EurionConst 5 years ago from Delhi, India Author

Thanks a lot Chris! I'm glad you found this useful.

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