Current State Of The Us Economy, 2007

The Current State of the United States Economy

Jeremy Keeshin

The economic state of our country is one that varies greatly. We have the social goal of growth and low unemployment and try to achieve that through the means of government manipulation through Monetary and Fiscal Policy. The Bureau of Labor Statistics takes many stats regarding growth through the lens of Price Indices, Gross Output, Personal Income and Unemployment Rate. The Price Indices tell us how prices are now in comparison to a base year and indicate inflation. Real Gross Domestic Product calculates output for a year, Personal Income tracks money that is earned in the circular flow, and the Unemployment Rate tracks the people in the work force who don't have jobs. The data from these statistics suggests that we are in a slight inflationary gap because of the small percentage increase of Real GDP and CPI in addition to slowly increasing Personal Income and a relatively stable but decreasing unemployment rate. The statistics are all signs of growth, which means we are in a healthy economy, and the trend line suggests that things will continue to increase in this way for the next six months. The first stat that demonstrates the slight inflationary period and recovery is that of Real GDP which has been increasing slightly since late 2001. Real GDP is the statistic that measure total output in a country and the formal definition is the market value of final goods and services produced in a country in one year, stated in prices a base year, adjusted for inflation. Currently the GDP of the United States during 2007 in the first quarter was $13,613 billion in current dollars and $11,531.7 billion in 2000 dollars. As a percentage, the Real GDP of the United States is experiencing about 0.8% growth this quarter of Real GDP as shown by graph 1, but the growth rate, although positive, is decreasing. For this reason we are in a slight inflationary and recovery and growth period

with increasing GDP. Trendline A shows a more long term increasing rate of growth, which is most likely not sustainable, because then we would have to increase the amount we are increasing, and as the amount we produce increases, increasing that amount as a percentage would be more difficult. Trendline B shows a more recent decrease in the growth rate of GDP and trendline C shows a steady rate of growth in the middle of these two lines. The best prediction is trendline C, which is a solid average amount of health growth in an economy because a drastic increase could cause the economy to peak out and vice versa. The stats and graphs regarding Real GDP indicate a small inflationary period and suggest future but, decreasing growth, and an eventual return to the health growth rate. The second statistic that lends insight into the health of the economy is the CPI or Consumer Price Index. This is a measure of the prices of a fixed basket of consumer goods, weighted according to each component’s share of average consumer spending, or in other words, an overall measure of the price level with a basket of goods from the consumer perspective. Some important relative CPI statistics to view are that $100 in 2006 is now $102.52 in 2007, and $100 in 2005 is $105.83 in 2007. This means that the CPI has been increasing about 2.5 points per year recently, which is a solid target amount of growth. After the year 2006 had a cumulative CPI percent increase of 3.2%, the first four months of 2007 have had an average increase of 2.5%. Right now, although the country is increasing its output, it is increasing at a lower level than last year. In January CPI went up 0.2% and in February 2007 it went up 0.4%. This is still a sign of growth, but the growth is leveling off, as was demonstrated by the Real GDP graphs. This is a sign that we are in a recovery, but nearing a peak. On graph 2, trenlines A and C show

growth in the percentage increase in CPI, but trendline B is a more stable, long term growth rate of around 2.5%. In the future, we will most likely near this 2.5% increase of CPI, but short term, following trendline C, we are likely to increase CPI to about a 3% increase before it levels off again. This Consumer Price Index tells it from the perspective of the buyers, so it is more delayed than the Producer Price Index (graph 3), which is at 3.2% now. Both the CPI and PPI currently demonstrate growth, and this furthers the position that we are in a recovery period. Additionally, the slow down of the rates and extended periods of positive rates suggest that we may be nearing a peak as marginal increases slow down. Another statistic that contributes to this view of the economy is the statistic that measures the labor force, the unemployment rate. The unemployment rate is the percentage of people in the economy who are willing and able to work but who are not working. As Colander’s text tells us, “When an economy is growing and is an expansion, unemployment is usually falling; when an economy is in a recession, unemployment is usually rising” (498). Currently in our economy, as demonstrated by graph 4, the unemployment rate is falling and has been falling since the middle of 2003. This suggests that we have been in an expansion for the last four years and therefore unemployment is falling. Since the economy is expanding, we are in an inflationary period and are overusing resources and are past Full Employment, which is shown on this model as the trendline at 5% unemployment. The current unemployment rate is 4.5% as the Bureau of Labor Statistics in May2007 reported it. Trendline A on graph 4 suggests that the unemployment rate will continue to decrease in this manner, and it is inferable to predict that it will keep falling until it reaches 4% (the min line) and then increase until it reaches

6% (the max line). These natural fluctuations in the unemployment rate occur as the business cycle oscillates and resources are overused in expansion and underused in recession. My estimate is that in 6 months the unemployment rate will be at 4.2% as the expansion we are currently in continues. A final stat that illuminates and helps relate the state of the economy is the Personal Income, Disposable Personal Income, and Disposable Personal Income Per Capita statistics. Personal Income is National Income plus net transfer payments from government minus amounts attributed but not received. Disposable Personal Income is Personal Income – Persona Taxes, and Disposable Personal Income Per Capita is Disposable Income divided by the population. Graph 5 demonstrates that the steady trendline of Disposable Personal Income has been increasing at about 0.4% per month. Graph 5 also shows on Trendline B that the Real Disposable Persona Income had been increasing during the majority of 2006, but the rate of growth started to decrease around the end of 2006 and going into 2007. Currently, the Real Disposable Income Per Capita is $28,250 in chained 2000 dollars, and this number has been increasing steadily as shown by Trendline A on graph 6. Additionally according to the economic identity that Gross Domestic Product = Personal Income because they are two ways to measure money flow on the circular flow, the GDP graph should mirror the PI graph and it does. As seen on graph 1, the percent increase in Real GDP decreases at the end of 2006 as does PI. This suggests that we will move in the same direction of Real GDP as PI. My prediction for the next six months is that PI, like GDP will continue to increase, but the rate of increase will slowly decrease, and this supports the conclusion that we are in an expansion nearing a peak.

The overall analysis of statistics reveals that we are in a slight inflationary gap, as demonstrated on graph 7. With the Aggregate Demand increase, Real GDP increase, CPI increase, and the unemployment rate decreases as you move past Yfe. The statistics all match this AD/AS short run model. Additionally to place these statistics on the business cycle, we would be at point A on the Business Cycle model. The Real GDP of the economy is increasing, but the rate of increasing is decreasing, and we are nearing a peak. However, we are not too close to the peak, and the economy will not peak out in the next six months. Because of this current inflationary state of the economy the economically correct Monetary and Fiscal policies would be contractionary and tight, but as always politically an administration likes to back an expansionary Fiscal Policy. Bush and his administration have approved tax cuts, which raised tax revenue (as you move up on the Laffer curve as shown by graph 9) and have tried to maintain lower government spending in all of the areas except National Security. Since the national budget is Tax Revenue – Government Spending, an increase of revenue and a decrease of spending will decrease the deficit, but hardly as much as Bush’s lofty plan expects to gain a surplus by 2012. The administration projects a decrease in the deficit from 1.9% to 1.8% of GDP from 2006 to 2007. In the realm of Monetary Policy, the Federal Reserve Bank is conducting a contractionary policy somewhat opposite of Bush’s Fiscal expansion. The Federal Funds rate has been increasing since 2002, and currently it is at 5.25% up from its last change of 5% on May 10, 2006. The reserve requirement has been constant at 10% since 1992 (http://www.federalreserve.gov/monetarypolicy/0693lead.pdf, 589) and the discount rate has been constant at 6.25% for over a year, so the net effect of the Fed’s policies is contractionary as it should be. In regards to world events and national events, the increase

in National Security spending was a response to September 11, and spending to combat terrorism will most likely continue. The introduction of the Euro as legal tender in 2002 had drastic affects on the value of the US dollar and relative interest rates, and since its inception the dollar has depreciated a significant amount as the Euro has appreciated. The international trade for oil and the inelasticity of demand in the United States has had a significant affect on US markets, and the United States and its role as a major importer has set it in a deficit in the current account, but a large surplus in the capital account. This will not be resolved in the short run (in the next six months), but in the long run the foreign possession of US capital assets will have a major impact. For now, the US is in a short run inflationary gap and is in a recovery period of the business cycle, but still has time before it peaks out. The increasing GDP, increasing CPI, increasing PI, and decreasing unemployment rate are all factors that demonstrate that the US is in an inflationary period. Fiscal policy has continued to expand for political reasons, while the Fed is running a more tight money policy. With the new global economy, world events will have an even larger impact on the domestic economy, and they will become quickly intertwined. The economy is experiencing health growth now and will be for the next six months, and it is my prediction based on the data that not for five or more years will the economy peak out. The US economy, as always, is trying to expand, and it is not for a while that the long-term effects of importing goods and services and exporting capital will be realized. The current inflation and growth is healthy, but it must be known that it will not last forever.

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