The Current State of the US Economy

The current state of the US economy does not meet the expectation of many citizens. There was a lot of optimism when president Obama came into power in 2009 but there has been no significant change according to various economic indicators. According to the Bureau of Economic Analysis estimates, the current rate of annual growth rate of the real GDP in the year 2011 is estimated to be only 1 percent. This translates to 0.25 percent growth rate as the quarterly growth rate (Gallup, 2011). This rate of economic growth is very insignificant compared to 3.3 percent growth rate that was experience in last quarter of last year. The volatility of economic growth rate has left many people without employment and this is major cause for concern. This paper will discuss the current state of the US economy and at the same time highlight the theoretical perspective of this type of economy.

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In order to highlight the change that has been taking place in the current financial year in a clear perspective, it is important to look at the various economic indicators and other factors that contribute to the growth of the country’s GDP (Tanous, 2011). To begin with, the second quarter of 2011 saw an increase in the number of goods and services by $8.15 billion of what was produced in the first quarter. This is far much less compared to what was expected. This rate of growth is very insignificant even if it is calculated on an annual basis. An increase in the number of goods and services is very important in developing a stable economy because more exports are produced and in the process earning the country some foreign exchange (Gallup, 2011). A growth in production and service industries leads to job creation and therefore solving the problem of unemployment.

Production and service industries have been growing at a low rate which has left many people unemployed. There has been increase in disinvestment over the last two years with an estimated figure of $16.2 per year (Clark, 2011). This is not a good thing for the economy because all the weak spots that were supposed to be strengthened by investments will remain stagnant. The second quarter of 2011 saw a 10 percent drop in inventory investment which signifies a very negative trend. Businesses no longer invest in plant and equipment and this can drive the country to an economic recession like the one experienced in 2009 (Clarke, 2011).

The recovery efforts by the government have resulted in moderate growth rates being experienced across all sectors of the economy. Although there was an end to the output recession from the beginning of 2011, the current rate of unemployment is still a harsh reality that citizens have be contended with in the near future (Census Bureau, 2009). There was a significant increase in consumer purchases in 2009 and 2010. There was also a general increase in consumer spending because there was a notable increase in the amount of disposable income available to consumers. The country was experiencing a smooth growth in the real Gross Domestic Product until the fourth quarter of 2008 when variations started to appear. Components of aggregate demand are clear indicators of a microeconomic challenge. The economy started slowing down in the last quarter of 2008 and in the process affecting the growth of gross domestic investment purchases (Garman, 2009). A decline in investment purchases has been a major macroeconomic problem that has been affecting the US economy up to now.

Private domestic investment has also been on the decline over the last six and a half years. Private domestic investment includes residential construction investment which is a very important economic indicator (Garman, 2009). There has been a significant decline in private domestic investment including investment in residential construction. Although the decline started way back in the year 2005, the current rate of decline has brought devastating effects to the US economy. There was a net sell-off of inventory in the fourth quarter of 2007 that occurred due to the problem of decreasing inventory investment. Residential constructions together with inventory investment are the two major components of private domestic investment that make a significant contribution toward the growth of a country’s GDP. The recession that was experienced in the year 2009 was as a result of low private domestic investment (Swanson, 2011). Investment in plant and equipment was on the decline in 2009 and this caused a lot of damage to the economy. The situation is yet to stabilize and there is a general fear of another recession incase the government does not put in place policies that promote private domestic investment (Tanous, 2011).

The price level and interest rates are the two major factors that affect private domestic investment. The decline in private domestic investment is attributed to high price level together with high interest rates. Investment in plant and equipment has been on the decline because of these two factors. The increase in price levels was an effect of output inflation that was experienced in 2009 (Tanous, 2011). The automobile and construction industries are the major industries that were affected in a great way by the 2009 economic recession. The Obama administration has been trying its level best to revive the automobile industry but it is yet to stabilize. The decline in the value of the US dollar against other major currencies is another reason why the US economy has been performing poorly (Gallup, 2011). A weak dollar affects international trade and the government together with the general public are always concerned about this issue. Economic observers argue that a decrease in the value of the dollar has been the reason why there has been a significant decrease in the trade deficit. Countries such as China have registered significant growth in their GDP due to currency undervaluation. The government sector purchases have also been on the decline since 2009. Both state and local governments have significantly reduced their purchasing and this attributed to a decline in tax revenues collected by both the local and federal governments (Gallup, 2011).

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Consumer purchases especially nondurable purchases have been increasing at a steady rate since the 2009 recession. It is important to note that the 2009 recession did not affect public investments and therefore the demand for goods and services was not affected (Clark, 2011). There have been variations in the demand for both durable and nondurable goods and services in the last two years. The expenditure on services has been increasing in the recent past and this has made average income earners to continue struggling. It is very expensive to purchase services compared to durable and nondurable goods. Access to quality medical care has been a major problem to the majority of the citizens due to high medical insurance premiums. The government is sponsoring a bill that will subsidize medical expenses for average citizens. The government is also working towards raising insurance premiums for high income earners and lowering medical insurance for low income earners (Clark, 2011). Although the health bill is still facing a lot of opposition, it implementation will ensure that all citizens to access quality medical care. There is no way an economy can function effectively if the majority of the people can not access quality medical care.

The US economy is still suffering from the effects of the 2009 recession output. Investment demand and consumer demand began declining in the last quarter of the 2008 financial year. The current unemployment rate is not entirely attributed to the output recession (Clark, 2011). When Fannie Mae and Freddie Mac were declared bankrupt in 2008, it was crystal clear that the country was headed for an output recession. This led to the closure of some financial enterprises which brought a lot of panic in the stock market. The future of US economy was definitely going to be affected by the decline in investor confidence. Since 2009, many consumers have become very pessimistic about the future of the US economy. This explains the reason why there has been a decline in consumer purchases until now (Tanous, 2011).

The current US economy is not growing at the expected rate because the majority of business elements are still weak. This can well be explained using a theoretical statement that is related to the current state of the US economy. From the Keynesian school of thought, the current state of the US economy needs direct government intervention to sustain the expect growth. In order to fully recover from the effects of the 2009 recession, it is important for the government to implement policies that will revive spending. The revival of spending will in turn encourage private domestic spending and an increase in purchases of goods and services (Swanson, 2011).

The best way to create employment opportunities for citizens is to revive private spending which will encourage investment in plant and equipment. Demand can only be high if people have enough disposable income. The Obama administration is applying the Keynesian school of thought by coming up with policies that encourage government spending and taxation as a way of overcoming economic recession. The health bill sponsored by White House is meant to subsidize medical insurance premiums for low income earners through government funding (Clark, 2011). Imposing high income tax for high income earners compared to low income earners is a Keynesian way of stabilizing the economy. Before 2009, the US economy largely depended on private spending and that is why the country experienced an economic recession because some individual became bankrupt. According to the Keynesian theory, the government should increase its spending rather than relying on private spending. An increase in private spending can lead to inflation and the government should always be prepared to deal with such scenarios (Clark, 2011). According to the Keynesian theory, decreasing government spending and increasing taxes is recommended in a case where private spending is high. The government should always be on the look out to tame all recession and inflation rates. The Keynesian theory favors low income earners and that is why policies inspired by this theory are always opposed by the rich (Tanous, 2011).

References

  1. Census Bureau. (2009). Statistical abstract of United States economy 2010 (hardcover). New York, NY: Government Printing Press.
  2. Clark, C. (2011). The American economy: a historical encyclopedia. New York, NY: ABC-CLIO.
  3. Gallup, A. (2011). The Gallup poll: Public opinion 2010. New York, NY: Rowman and Littlefield.
  4. Garman, E. (2009). Personal finance. New York, NY: Cengage Learning.
  5. Swanson, P. (2011). An introduction to the US economy. New York, NY: Taylor and Francis.
  6. Tanous, P. (2011). Debt, deficit and the demise of the American economy. New York, NY: John Wiley and Sons.
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