Major Economic Statistics and the US Economy - Essay Example

Major Economic Statistics and the US Economy The economic development of the country depends upon many factors including the manufacturing and agricultural data, labour forces and unemployment, input and output etc. The level of their development and potential growth can be assessed on the basis of statistical data represented the main tendencies of the industry’s growth (or decline). US Labour statistics figures show the tendency to improve the current situation on the Labour market: the level of unemployment is lower in comparison with the previous year results: from 5.4% (Dec 2004) to 5.1% (May 2005). The level of average hourly earning rose from 15.85 to 16.03%. During the previous half a year the consumer price index has rose from 0.0 to 0.5 (in April), but failed in May to –0.1 point. This decline can be explained by seasonal changes, and does not play an important role in economic estimations. Economic employment index failed in 0.1 point in comparison with the Dec 2004 (0.8). The US import price index shows the substantial growth (from -1.4 in Dec 2004 to 2.2 in Mar 2005, but failed in May to –1.3. The productivity function (percent change from previous quarter at annual rate) shows increase from 2.3 to 2.9%. If a productivity function exhibits increasing returns to scale then higher growth rate should generate rising real living standards for the community as a whole. In June, payroll employment fell to a new low since its peak in February 2001, representing a total loss of over two and a half million jobs since then. Factory capacity usage rates also remained very low (US Department of Labour, 2005). Economic theory tells that short-term increases in the quantity of labour, with other factors held constant, will result in diminishing returns to labour. According statistical data in the first quarter of 2005, real GDP and real nonresidential fixed investment increased 3.5%. Real residential investment increased 8.8 % (White House Statistics, 2005). To analyse the economic statistical data objectively the demographic situation of the country should also be considered. Demography statistics shows population growth between 2000 –2005 years (White House Statistics, 2005). Rapid population growth raises total factor inputs by increasing the supply of labour. Hence, it would be expected to result in a rise in the Gross Domestic Product (GDP). However, when considering the impact on the standard of living the economists have to look at the movement of GDP on a per capita basis. Taking into account the economic factors mentioned above and population growth it is possible to say that the rate of production does not coincide with the rate of population growth. Even if figures show that production activity of the country increases it does not satisfy the increased consumption need (because of population growth). This fact is proved by the poverty statistical data shows the rise in poverty rate from 11.7 % in 2001 to 12.1 % in 2002. The number of poor increased also, by 1.7 million, to 34.6 million poor in 2001. It is possibleto predict that in a competitive US market, reductions in the marginal product of labour will tend to lower the rewards to labour. In other words rapid growth in population leads to a cut in wage rates (Economic Forecast for the United States. 2005). According to the statistical data the U.S. current-account deficit increased $6.7 billion to $195.1 billion in the first quarter of 2005. In the economic system there is a link between the country balance payment and its rate of economic growth. The notion of trade balance can be defined as “the difference between the value of the goods and services that a country exports and the value of the goods and services that it imports” (White House Statistics, 2005). The strong growth of demand has led to a large increase in the trade deficit in goods and services. So, if the US government wants to reduce the trade deficit, then it has to accept that consumer must grow at a slower rate in order to reduce the imbalance between exports and imports. The USA balance of payments deficit expanded to $144.9 billion in the 2004 and a differs from the deficit of $127 billion in the last quarter of 2003. Generally, the deficit rose from 4.6 % to 5.1 %. In such circumstances, USA needs to attract more than $1.5 billion per day in foreign investment to cover the payments shortfall. Reducing savings means directing more resources to current consumption, a process that lowers investment and future living standards. The logic of this reasoning leads to the conclusion that what the US economy needed was an increase in savings and not consumption. Instead, the country tried to invest more than it saved while simultaneously increasing consumption. According to statistical data in April 2005, real personal consumption expenditures increased 0.2 %, and personal saving as a percentage of disposable personal income increased to 0.9 %. Privately owned housing starts in May were at a seasonally adjusted annual rate of 2,009,000 up 0.2% from the revised April 2005 figure of 2,005,000. The nonmanufacturing business activity index suggests that the service sector is expanding at a faster rate. And, nationally, home building remains quite strong (White House Statistics, 2005). Satatistical data on industrial production have shown that manufacturing output has not grown for two months. It declined by 0.3% in March from February 2005, and held steady in April. Economists say that the last time “two consecutive months of no growth were March and April 2003” (The White House Statistics, 2005). Unlike two years ago, however, when materials and machinery slowed output down, the culprit this time is light vehicles. This could be a special concern because consumer spending is the foundation behind economic growth (The White House Statistics, 2005). It was reported that purchasing managers' index for manufacturing was 51.4% in May 2005. In comparison with situation in April this is down 1.9 points from 6.2 points six months earlier, and more than 11.0 points from May 2004. According to economic analysis this is currently the 24th consecutive month above that threshold (Economic Review and Forecast 2005). April's new orders for durable goods, excluding transportation declined 0.2% in April. This indicates a waning in the consistent manufacturing uptrend experienced a year ago (The White House Statistics, 2005). Economists point to the potential impact of even relatively small interest rate increases in US indebtedness (Holbrook, 2005). In addition to the attractiveness of its large and growing market, the United States is seen by foreign direct investors as attractive because of its flexible labour markets, its strength as the centre of technological innovation, its dynamic service sector, as well as the quality of management to be found in the country.  Market researchers were bothered because “utilized capacity was only at 80 % even though unemployment had fallen to 4.3 % and expansion had continued unabated” (Lewis-Beck, Tien, 2005). Taking pension funds into consideration, it was clear that personal savings had declined. This was answered with the so-called ‘wealth effect’, which held that as Americans became wealthier they would spend more and more and this would keep recession at bay. The credit expansion fuelled the boom and thus consumer spending by raising nominal incomes and funding the disturbing rise in household debt. It is explained that a global downturn had subdued American capacity despite rising employment. Consumer spending as an engine of economic growth is the great economic “fallacy of the age” (Barrett, 2004). “To expose this fallacy was to paint a different and somewhat grim picture of the US economy even as others rambled on ecstatically about the “new era economy” (Barrett, 2004). It is possible to summarize that in the current economic environment output is rising, but it does not feel like an expanding economy for many people because of the stagnant job market. Solid productivity trends, fiscal stimulus, and low interest rates have laid the groundwork for stronger growth. But corporate governance issues and international political situation complicate the economic situation. The degree to which activity picks up depends largely on how organizations work through these issues. It is supposed that in half a year market dynamics should stimulate activity (CBO’s Current economic projections, 2005). Strong productivity gains have kept real personal incomes rising throughout this time of sluggishness and should continue to be a key foundation for growth into the future. Despite recent increases, the value of the dollar is down 4-1/2 % since the start of the year, which should help promote export growth (CBO’s Current economic projections, 2005). And, financial conditions have improved, with major equity indexes rising well above their recent lows. The federal budget deficit is expected to decline over the next few years. This perspective is based on the assumption sustained economic growth will yield greater tax revenue (Holbrook, 2005). It is predicted that company profits have undergone consistent growth in the past two years due to policy influence the average operational profit growth rates of 500 kinds of industrial shares reached 23%, but in 2006, profit growth rate will fail to reach half of this figure (to stand at 9-10%) (CBO’s Current economic projections, 2005). Under the current circumstances, the main task of the government is to reduce current account deficit of the country. To improve the monetary policy situation the Federal Reserve should continue to develop an accommodative monetary policy. This can help to reduced financing costs and keep liquidity flowing into the economy. At the same time forecasting a pickup in activity, economists expect inflationary pressures to remain subdued (Economic Review and Forecast 2005). The possibility of low inflation rate for 2006 can be explained by two main factors: the high productivity growth rate marked the economy in recent years, which allows output to increase more rapidly with minimal upward pressure on prices; and the inactive capital and labor resources currently available in the economy. In general, it is possible to say that government need to introduce new reforms (Political, Economic, Social security) to support the economic growth which is closely connected and reflects the general situation of the society. New economic model should be adapted to restore an economic climate that encourages long-term public and private investment. References 1. Barrett, Craig. “The Next Economy”. Foreign PolicyMagazine. September/October 2004 Ed. 2. CBO’s Current economic projections, 2005 Available at: www.cbo.gov/showdoc.cfm?index=1824&sequence=0 3. Economic Forecast for the United States. 2005 Available at: http://www.csus.edu/indiv/j/jensena/sfp/us/ 4. Economic Review and Forecast 2005. Available at: http://www.comerica.com/cma/cda/main/0,1555,1_A_1183,00.html 5. Holbrook, T. M. "A Post-Mortem Update of the Economic News and Personal Finances Forecasting Model," P.S. Political Science and Politics, XXXVIII, 2005, 1, pp. 35-36. 6. Lewis-Beck, M. S., Tien, Ch. "The Jobs Model Forecast: Well Done in 2004," P.S. Political Science and Politics, XXXVIII, 2005, 1, pp. 27-29. 7. The White House. Economic Statistics 2005. Available at: www.whitehouse.gov/fsbr/esbr.html 8. U.S Department of Labour. Bureau of Statistics. 2005. Available at: www.bls.gov Read More