Term Paper on "Forecast GDP for 2010 and 2011"

Term Paper 12 pages (3172 words) Sources: 10

[EXCERPT] . . . .

U.S. macroeconomy

Forecast GDP 2010/2011

The United States has experienced the worst economic downturn since the Great Depression, which began with the crash of the stock market in 1929. The causes for today's major economic downturn are various. Some of the reasons are linked to an abundance of stimulus directed toward U.S. housing; not enough financial supervision in financial sectors; illogical lending practices (giving too much money to people who can't pay it back); falling housing prices; the fact that the dollar is become much less valuable; record high debt; a loss of confidence in the banking system because of bad loans; as well as a general loss in the confidence of our government do the right thing. However, it can almost be unequivocally stated that the recession, which is essentially just a decline in the GDP (gross domestic product), was the result of the imploding housing market. With lower house prices and credit circumstances fixed because of the subprime disaster, households found themselves unable to borrow money against capital gains.

The historian Scott Reynolds Nelson posited that in a lot of ways, the crisis we are facing today looks more like the "Long Depression," which lasted, by some people's definition, from 1873 to 1896. "It began as a banking crisis brought on by insolvent mortgages and complex financial instruments, and quickly spread to the real economy, leading to mass unemployment that reached 25% in New York" (Florida 2009).

During the third quarter of 2009, inflation-adjusted GDP increased at a vigorous 2.8% annual rate. The increase was good news in that it showed that there would likely be a conclusion to the recession that began back in December of 2007. By the end of 2009, the United States economy was slowly but surely recovering from the global recession. The job market also appeared to be stabilizing after two years of major damage and record high unemployment. However, at the end of 2009, employment data appeared to be heartening as job losses seemed to be dwindling. By Christmas of 2009, consumers were spending their money once again, showing that they were much more relaxed than the year prior around the same time.

After the financial crisis of 2007-2009, a budding problem of jobless recoveries caused record levels of long-standing unemployment with more than 6 million workers searching for a job for more half of a year as of January 2010 (Zandi 2010). The problem affected older workers more than others (mainly the baby boomers).

In the beginning of 2010, the unemployment rate was sky high at 9.63%. It is predicted to change 3.5% by 2011, dropping to 9.23%. Overall, economic growth, in general, will be moving at a slow rate and that will most likely keep the unemployment rate in the U.S. hovering around 10% throughout the fiscal year 2011. This is discouraging news considering that the worse the labor market is, and the longer that it persists, the harder time consumers will have recovering.

The U.S. economy grew at a 1.6% annual rate in the second quarter of 2010 as organizations scaled back on their inventories and the trade deficit expanded. The trade deficit hit -$49.9 billion in June of 2010, much greater than what was expected (-$42.3 billion). May's deficit was brought down a bit to -$42.0 from the first reported -$42.3. The weakening in the trade balance illustrated a firm $5.9 billion (2%) rise in imports with exports decreasing by -$2.0 billion (-1.3%) (Action Forex 2010).

Profits from current production grew to $72.7 billion in the second quarter of 2010, in comparison to the increase of $148.4 billion in the first quarter of 2010. Corporate income taxes also grew to $39 billion in the second quarter, in comparison with $84.1 billion in the first (Bureau of Economic Analysis).

In mid-August of 2010, the GDP report showed consumer spending, which comprises approximately 70% (over two-thirds) of the economy, grew at a 2% annual rate in the second quarter compared with a previously reported 1.6% rate.

Deficiency in job growth, and a sloping downward in household wealth following collapses in stocks and housing, and the motivation to decrease debt and increase savings are the reasons consumer spending may not get any better.

Wages and salaries improved by a revised $6.5 billion from January until March of 2010, compared with $18.8 billion that was first reported (Zandi 2010). It was predicted that consumer spending was not likely to go up anytime soon thereafter.

The trade gap in 2010's second quarter grew to $445 billion, in comparison with an earlier estimate of $425.9 billion, subtracting 3.37 percentage points from growth, the biggest decrease since record-keeping began in 1947 (Zandi 2010). Imports also grew at a 32.4% rate, the most since 1984 (2010).

Sluggish inventory accretion added 0.63 percentage points to second-quarter growth. The Commerce Department said in its initial report that stockpiles added 1.05 percentage points to growth after adding 2.64 percentage points in the first three months (Zandi 2010).

In August 2010, it was reported that gross domestic income (GDI), the money earned by citizens, businesses and government agencies whose purchases go into calculating growth, increased at a 2.3% annual rate between April and June of 2010. In comparison, GDP grew 3.6% from April through June before it adjusted for inflation. GDI, according to Fed, is a better way to measure the economy (Zandi 2010).

Revisions to first-quarter income showed a gain of 4.1%, compared with a 5.6% rate that was first reported. GDP before adjusting for changes in prices rose at a 4.8% rate from January through March.

Corporate profits increased to 4.6% in the second quarter of 2010, the smallest increase since the same three months the year before, after a 10.5% rise in the first three months of the year. Earnings were also up 39% from the same time the year before (Zandi 2010). The increase indicates companies have the ability to improve spending on new equipment as well as add to payroll (2010).

Zandi (2010) notes that business spending on new equipment and software increased at a 24.9% rate in the second quarter of 2010 (the most it has ever since 1983), more than the earlier prediction of 22%. Spending on structures, including both office buildings and factories, increased at a 0.4% rate 2010's second quarter (2010).

In the early months of 2010, the United State's Total Real GDP was at $13.239 trillion and was continuing to increase at a rate of about $3.83 billion every single day. On January 28, 2010, the U.S. debt ceiling was increased to $14.3 trillion dollars (Zandi 2010).

The United States is still facing economic disaster on a very grand scale. We are still persisting with our superpower approach; however, in many ways, our country has become second-class in many different areas. The outlook for 2011 is not expected to be very bright. The administration's budget deficit are predicted to be in excess of $1 trillion and will stay at that very high level for many of the coming years.

The economy stabilized in the middle of 2009 and seems to be expanding at a rather moderate pace. The support to economic activity from stimulus help has helped companies restock their inventories, but as Bernanke (2010) noted in a speech in August 2010, that will diminish over time, but the rising demand from households and companies should help to keep the growth alive.

First of all, we no longer can produce what we need in order to sustain ourselves. We are currently importing much more than we are exporting while at the same time we are selling assets and taking on more debt to sustain a certain standard of living that we simply cannot afford anymore. The financial crisis of 2007-2010 showed us that when you are over-consuming and under-producing, there would be financial problems down the road. However, it is up to debate as to whether this weakening of our superpower status has more the to with other economies rising rather than just American's decline.

Foreign countries are using money earned through our trade deficits to buy many of our most important companies. Since 2000, foreign interests have bought an unparalleled $8 trillion worth of U.S. assets (Heffner 2010). It seems that the plan of most of our international competitors is to leave the United States completely dependent on foreign production, innovation, and financing. "In losing domestic self-sufficiency, national security and leverage in foreign affairs will suffer immensely.

The recovery of the economy will be difficult going into 2011 as momentum is being lost. With nearly a double-digit unemployment rate, this news is rather discouraging. Even scarier, there is no palpable policy response if the recovery does weaken.

Going into 2011, businesses will most likely be doing alright; they are maintaining strong profits as well as very reliable balance sheets. This should be able to increase investment and hiring so that the economy can continue to move ahead.

Households have also made some progress in getting their balance sheets organized;… READ MORE

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