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Macroeconomic Situation in the U.S.
The current data shows that the macroeconomic situation in the USA is improving at a moderate pace, despite the fact that the recovery from the financial crisis and the recession still remains long and complicated (Committee Reports, 2013). Although unemployment rates have declined during the past two months, GDP improved for the last two quarters of 2013, and the U.S. economy has slightly grown in general, the country is still considering which fiscal and monetary policies would be more beneficial for the future of America.
For the second month already, the labor market in the U.S. has been hit with the reluctance of employers to employ new workers notwithstanding the strongest economic growth that is seen these years. In January 2014, U.S. payrolls increased a seasonally adjusted 113,000 new jobs after 75,000 recently added work placements in December 2013 which, according to the Labor Department, marked the weakest two-month process of new jobs development in three years. Still, the unemployment rate declined to 6.6% which is the lowest rate since 2008. A lower unemployment rate in the country resulted in people finding jobs during last month as opposed to previous year when unemployed Americans stopped their job search and quit the work force (Morath et al., 2014).
Another concept concerning the current situation with the U.S. macroeconomic environment is an inflation rate. A growing economy in the U.S. sustains inflation and lifts the outlook for improvement at the beginning of 2014. In December 2013 the inflation rate in the USA was 1.5 percent, which is 0.3 percent higher than in the previous month. The rise in consumer-price index became the largest gain during the past six months. Businesses start gaining pricing power as employment rises, as well as stocks and home values boosts household spending and wealth. David Berson, a chief economist for Nationwide Insurance, claims that the stable, moderate inflation is good for the U.S. economy (Smialek et al., 2014).
Indeed, the records of the recent improved economic situation in the U.S. are present; however, the recovery from a recession that began in 2007 and ended in around two years was slow and difficult. Some of the economic metrics that affect people greater than the performance of the stock market are still below pre-recession standards. According to the Census Bureau, the income of the annual average household decreased from $51,144 in 2010 to $45,018 in 2012. The Federal Reserve reports that the factory output decreased by 20 percent from 2007 to 2009, and by March 2013 recovered around only by three-fourth of previous decrease. Additionally, the Fed claims that the U.S. consumer goods production, which declined in 14 percent during the recession, remains at about half of its pre-recession level. In the beginning of 2013, existing home sales were 10 percent below their peaks on an annualized basis, while new home sales were below 20 percent. International Business Times also reports a slow Gross Domestic Product (GDP) growth in the beginning of 2013, which is the opposite of what was expected in the recovery. During the last three months of 2012, the GDP increased only by 0.1 percent (Obel, 2013).
Nevertheless, Bureau of Economic Analysis reports that the U.S. GDP increased from the second quarter to the third quarter of 2013 at its annual rate of 4.1 percent and of 3.2 percent from the third to the fourth quarter. Growth in the real GDP in the fourth quarter of 2013 originally displayed positive contributions from exports, individual consumption expenditures, private inventory and nonresidential fixed investment, and local government and state expenditures. These positive influences on GDP growth were in part reimbursed by the negative contributions from the expenditures of the federal government as well as residential fixed investments. Imports in the fourth quarter, as part of the GDP calculation, increased by 0.9 percent compared to an increase of 2.4 percent in the third quarter. The gross domestic purchases price index that measures prices paid by the residents of the United States experienced 1.2 percent increase in the fourth quarter. Real exports increased by 11.4 percent in the fourth quarter in comparison to 3.9 percent in the third. The conditions for the U.S. economic growth in terms of the GDP increase has strongly improved for the past two quarters of 2013 (U.S. Economy at a Glance, 2014).
As the U.S. economy is improving, monetary policy is getting an additional attention. Monetary and fiscal policies can be used to change general spending of the economy. The function of the Federal Reserve (the Fed) monetary policy is one of the common demand management of the country. The Federal Open Market Committee or FOMC in turn periodically considers the maintenance or change of the current position of the monetary policy. Currently, for instance, most members of the FOMC reason that at this point of time it would not be appropriate to bring the federal funds target up until 2015 (Labonte, 2014).
One kind of the monetary policy called unconventional policy is used in times of deflation, when interest rate is brought close or equal to 0 percent. Some economists claim that the economy is functioning close to normal, but the risks of unconventional policy are greater than benefits. Thus, they believe that this policy should end. In December 2013, the Federal Reserve started to gradually lower its asset purchases. Little asset purchases can still be viewed as expansionary monetary policy, however, one which adds less economic stimulus than before. If to abandon the future change in course, this step is considered to be the beginning of an eventual end of unconventional monetary policy (Labonte, 2014). On the other hand, some strongly believe that the strategy of the low interest rates now exists for the benefit of the country. Janet Yellen, the Chair of US Federal Reserve, just reassured Wall Street in the necessity to continue with the easy money policy. She believes that this strategy is strong and should be implemented. Yellen argues that the Fed would be able to manage the Federal Funds rate at zero, considering the fact that the unemployment rate has declined below 6-1/2 percent for the past two months (Damon, 2014).
The economy changes rapidly and the monetary policy can be practically much more clever than the fiscal policy. The Fed meets to consider changes in the monetary policy every six weeks while big changes to the fiscal policy occur mostly only once a year. It would be appropriate, however, to use the fiscal policy of lowering government expenditures because it would be expected to bring higher interest rates, which would attract more foreign capital looking for an increased rate of return. Higher inflows of foreign capital would bring higher imports that lower government expenditures on domestic substitutes, and thus lower exports spending (Labonte, 2014).
The situation when unemployment rate would increase and remain high and the inflation would remain low, could intensify a debate about the strategies of the central bank on the easy-money policy at the meeting in March 2014. Meanwhile, the Federal Reserve pullback from the bond-purchasing program which has been used to improve the U.S. economic condition, will not be derailed by the current employment reports (Morath et al., 2014).
The end of 2013 presented an improved macroeconomic situation in the USA. Nevertheless, the pace of recovery from recession is still slow and difficult. Although, there are tools of the fiscal and monetary policies that are appropriate to use, there is still a debate which ones would work the best for the country.