As many economists have already noted, the leading indicator for a recession, or a downturn of the US economy is the growth of Gross Domestic Product (GDP).GDP is the increase in the amount of goods and services produced by an economy over time…
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GDP is the increase in the amount of goods and services produced by an economy over time. According to the Economic Cycle Research Institute (ECRI), more than three years ago, the 2008 financial crisis already triggered studies on longstanding pattern of slowing growth, characterized by higher cyclical volatility and lower trend growth. In layman’s terms, in the short run, we may be having higher upswings of economic growth but at the cost of having equally strong downswings which are hard to anticipate. However, when you try to see patterns as far as from 1970, the long-run trend is down. A part of this trend is shown on the graph below: As one can notice, there was a steep upward change in GDP growth by the end of the 3rd quarter in 2009. The GDP growth figures for 2011 is 2.2% and 1.6% for eth 1st quarter and the 2nd quarter respectively. The graph above may be misleading insofar as it suggests an upward sloping imaginary trend line, but as far as the ECRI is concerned, two implications are possible: First, the fall of GDP will even be steeper than perhaps the -5% in the 2nd quarter of 2009. This means that it’s only a matter of time before GDP growth hits a -5%. If this is the case, since the economy has its own lags and assuming that this debt problem has no clear end, the US economy will be flirting within -5% range or even lower by next year.The second probable case is that though the dip in GDP will only be slight, it will be more frequent resulting in persistent recession perhaps every 2-3 years as the interval of the 2008 crisis with the current crisis. Given that GDP will be fallin short, another index that significantly goes together with this is employment, which can be expected to decrease as well. The index that is commonly used for this is the unemployment rate. The unemployment rate then is defined as the number of unemployed divided by the total labor force while the labor force can be defined as the number of people employed plus the number unemployed and is seeking work. This on the other hand was expounded on by Okun’s law, which verifies that employment, a factor of production, affects output, albeit with a lag. Okun’s law states that a one point increase in the unemployment rate is equated with two percentage poonts of negative growth in real GDP. So if this the case, if GDP falls in the near future, the unemployment rate may be breaching the 10% line. The unemployment rate is pictures below with the graph showing an upward trend from the start of 2006 to the 2nd half of 2011. As one can see, the unemployment rate has been very high, close to 10%, since mid-year of 2009. Alas, this is a signal that the economy is not producing goods and services the best that it could or at full capacity, because of the many jobless citizens. This is the reason why the Fed, with Bernanke at the lead, is using monetary to expand the economy through the use of interest rates. Monetary policy operations include controlling some overnight or short-term interest rates and these rates to lend money to commercial banks influencing mortgage rates and other types of loans. The logic of controlling interest rates is this: lower interest rates means lower costs for companies who wish to borrow money. The lower cost for borrowing is an incentive for more companies to borrow money and invest in capital expansion and businesses. More capital put up would mean not only
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