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US consumer spending up again, Commerce Department says

Updated on October 18, 2012

Commentary

This commentary is based on the article that can be found at: http://www.bbc.co.uk/news/business-12068280

Topic of this article is about US recovery from recession which happened in recent years. There are many factors in this article, which may represent recovery phase. Because of those factors, many believe that US actually is in the recovery phase, but not all factors are appearing (such as decrease of unemployment level).

As it’s already mentioned, US, as same as most (if not whole) world, was in recession (Definition: A recession is a state of an economy when business activity starts to decline and eventually hits its lowest point1) in recent years. By many beliefs, US is currently in recovery phase (Definition: An early expansionary phase of the business cycle shortly after a contraction has ended, but before a full-blown expansion begins2). In this article, there are many factors which are indicators of recovery phase. First, spending rose for 0.4% since last month. Besides spending, income rose too. That is very positive fact (that spending and income rose) because consumer spending accounts for 70% of US economy’s total economic output. In this month (December) home sales also increased, for 5 %, but in general, sales are down for one fifth in differ from last year. All this tells us that US GDP (Definition: Gross Domestic Product is the value of total production of goods and services in a country over a specified period, typically a year. How much GDP grows from one period to the next is an indication of a country's economic health3) is rising, which is positive thing since all countries aim to have GDP as high as possible. Also, when recession happens, GDP decreases, so when it starts to increase again that means that country may be in recovery phase. From fact that home sales have increased, we can say that income of people (buyers) is increased and is stable (during recession unemployment rapidly rises, and income is not stable due that) because, buying of property (homes in this case) is not a small thing, and people don’t buy homes when have small incomes and/or not stable jobs. Only thing that decreased is demand for so-called durable manufactured goods by 1.3% in November.

Graph 1
Graph 1

On graph 1, we can see how recession affects the unemployment level and the income. As recession happens, demand for labor shifts leftwards, and by that decreases. That increases unemployment level, which is bad for the country and for general GDP. Also, real wage level (income) decreases as well. As same as everything in economics, unemployment is connected to many other things. When unemployment increases (and currently, unemployment rate in US is still 9.8 which is very high, despite recovery-like phase through which US is passing) that means more people are without a job and probably without income too. Besides that, real wage level is decreased too, so people who have jobs, have less money to spend on goods which are not essential. That leads to decrease in demand for majority of goods in market. When decrease in demand occurs, supply has to be reduced too, or new (higher) price has to be put, to set new equilibrium. Not to cause another decrease in demand, price is not changed, but supply is decreased. When supply is decreased, there are workers which are no longer needed in companies, so unemployment increases once again. And that’s how recession affects almost every aspect of country’s economy and GDP. Even though US economy rose by 2.6%, some experts still believe that the recovery is not strong enough, and not fast enough to bring down the country’s high level of unemployment.

Currently, when recession is over, and country enters the recovery phase, the biggest issue that country has to deal with is high level of unemployment. To solve the problem, Government of the US put $600 billion in to economy flow, to help increase in GDP and decrease unemployment level. Besides that, government extended tax cuts, which have expired. By money input country aims to help companies to hire more workers, and still have income and also to encourage new-created companies to develop and increase country’s GDP. By cutting taxes, country wants to help consumers, to spend more money on goods and less on taxes. If more money is spent on goods, companies operate more efficiently and gain higher income. All this is connected to unemployment level, which will be decreased in some period of time.

Resources

  1. Ain. "Glossary of Economic Terms." Promotional Codes | Discount Codes | Voucher Codes. Web. 25 Dec. 2010. <http://www.promotionalcodes.org.uk/info/glossary-of-economic-terms/>.
  2. "Definition of Recovery, Definition at Economic Glossary." Economic Glossary - Advanced & Basic Economic Terms Definitions. Web. 25 Dec. 2010. <http://glossary.econguru.com/economic-term/recovery>.
  3. "TD Waterhouse - Private Investment Counsel - Glossary." TD Waterhouse - Wealth of Experience. Web. 25 Dec. 2010. <http://www.tdwaterhouse.ca/pcs/pic/glossary.jsp#G>

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