Factors Affecting the Recent United States Economic Growth - Research Paper Example

Factors Affecting the Recent U.S. Economic Growth Contents Contents 2 Introduction 3 Hypothesis 5 Literature Review 5 Analysis 14 Conclusion 25 Work Cited 27 Appendix 28 Siyang.li University of laverne Factors Affecting the Recent U.S. Economic Growth Introduction The United States is considered to be the most technically developed country in the world. It is a free market economy, where the private and public sector entities participate in all the important decision making activities. The Federal as well as the State government authorities of the nation tries to achieve higher economic growth with the help of greater commercialization. The country experiences high productivity and its gross domestic products are substantially high relative to most of the nations in the world. The average per person income level of the nation is $ 49800 $49,800 (“The World Fact Book”). Since the degree of industrialization in the country is high, approximately 55% of its imports are crude oil (“The World Fact Book”). The economic prosperity of U.S. had declined to some extent during the oil price boom from 2001 to 2006 (“Recent U.S. Economic Growth”). The soaring prices of energy resources increased the cost of imports as well as industrialization in the nation. Moreover, the real estate sector of the nation was facing certain exuberances since the latter half of 2007 in U.S. (“The World Fact Book”). The real estate’s homes were traded for speculative purposes in the country. Over time, failure of some projects lead to severe crisis in the U.S. money market during 2008. The commercial banks were forced to offer to accept direct implicit bail outs and some of them like Lehman Brothers had collapsed due to severe financial crisis. The recession in 2008, had significantly lowered the economic growth of U.S. since the Great Depression. In order to set everything in the right state, the U.S. government in 2008 has decided to inject $700 billion in its market through the enactment of the Troubled Asset Relief Program (TARP) (“Recent U.S. Economic Growth”). Some of these funds were utilized by the state federal government for purchasing equities of banks and some industrial corporations. In addition to that in 2009, under the guidance of President Barack Obama, the Federal government injected an additional sum of $787 billion in the U.S. economy (“The World Fact Book”). It was claimed that this fund was supposed to be allotted for financing the expansionary fiscal policies of the country from 2010 to 2011. The federal budget deficit measured in terms of percentage change in GDP in U.S. was 9% in 2011 but it decreased to a level of 7.6% in 2012 (“The World Fact Book”). This proves that there are some substantial reasons for which the economic status of U.S. has improved since the last few years. This research paper tries to analyze the primary factors that had caused the growth rate of U.S. economy in the recent years. It is true that the fiscal authorities in the country have introduced numerous regulations and policies to restore the state of the U.S. economy after the recession led by the global financial crisis. One such Act introduced by the government of the country was the Dodd Frank Wall Street Reform and Consumers Protection Act (“The World Fact Book”). With the essence of such measures the macroeconomic determinants of the country have improved. Some of such indicators are its unemployment rate, exchange rates and domestic product. Unemployment rate explains the percentage of employed people in a country from a proportion of its total population. Exchange rate of a country is the price of its currency in terms of the current value of another economy. Gross Domestic product is the value of the final goods and services produced within the domestic territory of a country during a particular point of time. It is highly helpful to analyze the factors that helped to attain growth in the recent years in U.S. This research will help to elaborate the ways by which the public authorities in the contemporary era can restore the state of affairs in a complex economy to stability from a state of uncertainty and crisis. Hypothesis The hypothesis of the paper will elaborate the exact theory that will be proved at the end of the research work. The single hypothesis that will be addressed in the context of this research paper is: H01: There are no significant factors affecting the U.S. economic growth in the recent years. H11: There are many significant factors affecting the U.S. economic growth in the recent years. Literature Review It is claimed by most of the researchers that since 1930, the recession during 2008-2009 was most severe to developed economies in the western world like U.S. recession had lowered the pace of economic activity in U.S. in the first half of 2008, as the value of its national income had fallen during that point of time. However, due to soaring financial crisis, the economy of the country weakened to a greater extent. Finally, towards the end of the recession it was found that the Gross Domestic Product of the country had fallen by 5.1% or $ 680 billion (measured in real terms) (Elwell, “Economic Recovery: Sustaining U.S. Economic Growth in a Post-Crisis Economy”). The output gap of the country was as high as 8.1% during that period of time. The output gap of a country explains the difference between its domestic demand and production. This means that the country was producing less than what it could actually manufacture. Since, the aggregate productivity of the country had fallen, the average amount of employment opportunities generated within its economy also became low (Elwell, “Economic Recovery: Sustaining U.S. Economic Growth in a Post-Crisis Economy”). The rate of unemployment in the country in 2007 was 4.6% while the same increased to a level of 10.1% in the latter half of 2009. According to some of the estimates, almost 7 million individuals in U.S. were rendered jobless during the recession and almost 8.1 million individuals in the country were underemployed. Figure 1; U.S. Post War Recessions (Source: (Elwell, “Economic Recovery: Sustaining U.S. Economic Growth in a Post-Crisis Economy”) The blue line in the above graph shows the actual GDP trend of U.S. and the red line shows the forecasted trend. The above line graph shows the impact of U.S. post war recession. The figure is the graphical representation of a report generated by the U.S. Department of Commerce Bureau of Economic Analysis. It clearly states that the actual trend of GDP in the country was less than the forecasted trend since 2008 (Nicholson and Snyder 666). However, it is claimed that the recession in 2008 did not turn into a market depression in U.S. like that of 1929. The U.S. government had adopted several stabilization policies, after the recession in 2009. It is stated that the U.S. public governing authorities had adopted several monetary and fiscal policy measures to eradicate the declining state of the economy. All these stabilization policies had helped to stimulate the economic activities in the country since 2012. The aggregate supply of money in the economy of U.S. had significantly fallen during the recession of 2009; this is the reason for which the GDP of the country had fallen. The Federal Reserve increased the aggregate supply of money in the economy of U.S. after the recession. The organization reduced the federal funds rate to zero and elaborated its role of being the lender of the last resort. It also introduced several new lending operations, through which it channelized liquidity in certain segments of the economy which were facing severe financial crunches. Special policies were also adopted by the Federal Reserve that helped to enhance the confidence of all the lenders in the market. Thus, all the actions undertaken by the Federal Reserve were types of expansionary monetary policies. With the help of such policies, the monetary authorities of U.S. injected $2 trillion in its economy, instead of just providing the usual fund of $1 million in 2008. In 2009, it was found that cost of borrowing in the market of U.S. had significantly fallen due to the benefits generated by the expansionary monetary policies of the Federal Reserve. However, it was found that the entire economy of U.S. was still under severe recession. Thus, at the end of 2009, the Federal Reserve decided to stimulate the economy of U.S. with greater financial resources. In 2009, 18th of March, Federal Reserve announced to buy $300 billion of Treasury securities in U.S. It also claimed to buy $200 billion of Agency Debt and $ 1.25 trillion of Agency mortgaged-backed securities (Snowdon and Vane 76). Apart from the traditional monetary policy actions, there were also some fiscal measures that helped U.S. economy recover from the state of recession in 2009. The fiscal authorities of the country in 2009 that was headed by the Congress and Bush administration had introduced the Economic Stimulus Act in 2008. It was estimated that the cost of incorporating this Act is $120 billion in U.S. The policy aimed to provide special rebates on taxes to the households of the nation. It also helped to accelerate the depreciation rules of the corporate firms in U.S. In 2008, the Congress authorities headed by Bush administration also introduced the Emergency Economic Stabilization Act. This Act created the Troubled Asset Relief Program (TARP). The TARP helped to provide bail outs to some of the commercial banks in the country. The program helped to restore the capital adequacies of these banks and helped them remove the various types of troubled assets from their balance sheets. Later on in 2009, the Recovery and Reinvestment Act was introduced in U.S. by their new fiscal authority that was headed by Congress and Obama administration. The aggregate cost of the Act was $787 billion, out of which $286 billion was invested for introducing special tax cuts in the country and $501 billion was used for implementing other types of expansionary fiscal policies in U.S. It was noted that the real gross domestic product (GDP) of the country was increased from the latter half of 2010 in U.S. This growth rate that the country experienced after the recession in 2008 was primary feasible due to the expansionary fiscal and monetary policies adopted by the fiscal and monetary authorities of the country. Though the growth is not high at it was before recession but it has improved over time from its lowest during the recession. All the fiscal measures that were undertaken by the government of the country were primarily incurred for increasing the employment opportunities in the nation, enhancing the return of normal output level of the country, lowering the long term debt burden of the governmentdelete this, the US debt increased, as the national debt set records for being high and generating macroeconomic stability in the country (Tucker 165). If measured in terms of real GDP, it can be stated that the U.S. economy had started to recover since mid of 2009. However, it was claimed that the growth rate of real GDP was very uneven and slow in the nation. The average growth rate of real GDP of the country was only 2.5%. Some researchers claimed that the recovery growth rate of U.S. after the Great Depression was higher that the growth experienced by the nation since 2009 (OECD 108). In addition, to this the researchers stated that, unlike the growth after 1930, the economic growth of U.S. after 2009 was sustainable for the long run (Elwell, “Economic Recovery: Sustaining U.S. Economic Growth in a Post-Crisis Economy”). The sustainable growth of U.S. in the recent years (after the global financial crisis) was primarily due to the consistent business and household demand in its economy. However, there still exists some output gap in the nation and hence it claims that the country is producing less than what it can manufacture at the full employment level. Figure 2: Output Gap in U.S. Recent Economic Growth (Source: (Elwell, “Economic Recovery: Sustaining U.S. Economic Growth in a Post-Crisis Economy”) The above graph shows the output gap experienced by U.S., since its recent economic growth. It was claimed in the reports of U.S. Department of Commerce that the rise in investment spending of the commercial firms in U.S. after the recession was higher than the rise of its domestic consumption demand. Moreover, it is also claimed that during 2011 to 2012, the effects of fiscal stimulus has slightly faded in U.S. because of poor trading relationships shared by U.S. and Europe during this point of time. During the slow and sustainable stage of economic recovery, the credit conditions in U.S. had improved. The corporate as well as household consumers of the nation received easier access to credit during this period of time. Hence, as the credit appraisal norms of the financial authorities were lowered during this point of time and this helped to increase the aggregate demand for industrial as well as commercial loans in the market. The aggregate investment level of the country had increased with the essence of higher loans offered to the domestic investors in the nation and this helped to augment the overall productivity of the country. The stock market of the country was also rebounded and the interest spreads on the corporate bonds of the country had narrowed. The overall manufacturing productivity of the country had increased by almost 78.3% in the early stage of 2013. As, the overall production level of the economy increased, the amount of employment opportunities in the country had also improved (Porter 123). Figure 3: Employment Opportunities in U.S. (Source: (Elwell, “Economic Recovery: Sustaining U.S. Economic Growth in a Post-Crisis Economy”) From the above graph it can be stated that after recession, the employment opportunities in U.S. had increased. This proves that the economy’s productivity had also increased after recession. Figure 4: House Prices in U.S. (Source: (Elwell, “Economic Recovery: Sustaining U.S. Economic Growth in a Post-Crisis Economy”) The above figure clearly shows the results of the U.S. Department of Commerce. It states that after recession, the house prices of U.S. had increased. This is because the demand for houses in that period of time had also increased (marked by the housing starts in the above Y axis). According to the views of some authors, there were certain factors that helped in stimulating the growth of U.S. economy after the recession in 2008 (Baily, “Restoring Economic Growth”). The government of the country incorporated several polices with the help of which the workers income level in the nation could increase. The feasibility of investments made in the real estate sector was checked by the monetary authorities of the nation. The states were provided with continuous financial aids and such assistance helped to increase its level of economic development. The government authorities of the country also tried to control the trade deficit of the nation. It was claimed that U.S. shared a good trading relationship with many European nations. The recession in 2008 was generated in Europe primarily due to its real estate sector’s price bubble. U.S. goods were demanded by many European countries in the international market. The exports to U.S. in the European nations had fallen during the recession and this negatively affected the trade balance of U.S. This is because the overall production capacity of the country had declined. Thus, U.S government had taken active steps to lower the recessionary status of many European nations, for improving its external trade balance account. The states were encouraged to attract more private domestic and foreign investments. Such investments were primarily made in the infrastructure segment of the nation. The governing authorities of the country also encouraged educational technology in U.S. This is because with its help the quality of education in the nation was improved and the more productive human capital was created. Thus, from the above review it can be stated that the U.S. government authorities adopted several policies to improve the economic status of the country after recession. It not only adopted expansionary fiscal policies but also tried to improve the quality of education system of the country. This is because by enhancing the knowledge base and skills of the workforce of the nation, the country could experience higher productivity across all the formal segments. It was claimed by some researchers that after globalization itself, the international competitiveness of U.S. was falling due to the extensive rise in the competitive powers of some emerging nations of the world. This was responsible for lowering U.S. exports and increasing its imports from the international market. However, by incorporating certain export promotion and import substitution policies the government authorities of the nation actually augmented the market competency of U.S. In fact almost all the economies in the contemporary world face upswings and downswings in its business cycle. Thus, recessionary outcomes in an economy are very common economic phenomenon. After every recovery state, when the actual output level of the economy matches with the potential or full employment level, then the economy automatically falls in the pre-recession stage and such changes in the economy automatically increases the rate of unemployed workforce in the nation. Thus, the fiscal and monetary stimulating policies of U.S. must ensure that the actual output remains below the potential level of output. This is because; otherwise the economy would again fall back into the track of another pre-recession stage. Thus, it would be most desirable outcome for U.S. to experience a low sustainable economic growth with a natural rate of unemployment (Mankiw and Taylor 177). Analysis This context of the research paper will empirically analyze quantitative data as well as qualitative information to confirm the estimates and research implications of the literature review. However, it should be noted that all the information and data that would be utilized stated in this context would be analyzed with special interpretive skills of the researcher. All the data and information collected for preparing the context of the analysis were accumulated from secondary authentic sources (Thomas 222). Figure 5: GNI Growth of U.S. (Source: “Data Bank”) The above graph shows that the gross national income (GNI) growth rate of U.S. had significantly fallen during the recession in 2008. Gross national income or product is the value of the final goods and services produced by the nationals of a country in a particular point of time, either within or outside of its domestic territory. However, with the help of the monetary and fiscal stimulating policies, the GNI growth rate of the country has increased at a fast rate from 2010 onwards. In addition to that it must be noted that the GNI growth rate of the country has fallen slightly from 2011 onwards, as stated in the literature review. This has primarily occurred due to the slower economic progress of some of the European trading partners of U.S. It is should be noted that GNI is the most appropriate indicator of a country’s economic progress. This is because, according to the theory of economics: GNI = GDP + Net Factor Income Accrued by a Nation form the Rest of the World (NFA) Rise in GDP often does not ensure long run economic growth of a nation because if the trade balance of the concerned country is poor, then it might experience a negative NFA and hence its GNI can fall (Melvin and Norrbin 132). Thus, if the GNI growth rate of a country increases, then it surely means that the country is performing well both in terms of its internal as well as external markets. Thus, from the above graph it is clearly proved that U.S. has experienced significant economic growth in the recent years, since its recession during 2009. Figure 6: Money Supply in U.S. (Source: “Data Bank”) The context of the literature review had claimed that the level of money supply was increased in U.S. after the recession in 2009. It was believed that higher supply of money in the country would stimulate and recover its economy from the recessionary stage. The above graph states that the liquid as well as quasi-money supply in U.S. had fallen during the recession in 2008. However, with the help of expansionary monetary policies, the aggregate supply of money was increased by the Federal Reserve since 2008. This is the reason for which it is observed in the above graph that the monetary as well as the quasi money supply of U.S. has increased from 2010 onwards due to the enactment of the expansionary monetary policies. Quasi-money supply in an economy is also considered to be one of the important aspects of money adequacy of an economy because it resembles the liquid assets in the market that can be easily converted into fluid money. Thus, rise in supply of money was an important factor that has generated the recent economic growth in U.S. Figure 7: Unemployment Rate (Source: “Data Bank”) As the supply of money in the economy of U.S. has increased, the aggregate level of investment expenditure in the country of U.S. has also improved. This has helped to enhance the domestic productivity of the country, measured in terms of average number of manufactured goods and services. Since, the aggregate production level of the country has increased, the demand for employment opportunities in the country has also enhanced. The above graph shows that from 2010 onwards, the rate of unemployment in U.S. has significantly fallen. This implies a rise in the employment opportunities of the country. The rise in employment level in U.S. implies rise in per person national income level. A rise in per person income level has helped to generate higher amount of GNI in the country. Thus, from the above analysis, it can be clearly stated rise in aggregate employment opportunities has also become an important factor determining the recent economic growth of U.S. Figure 8: GDP per capita (Source: “Data Bank”) As, employment opportunities has increased, the per person domestic income level of country has increased since the implementation of the stimulating monetary and fiscal policies. The above graph shows that from 2010 onwards the GDP per capita of U.S. has increased. Rise in per capita GDP in U.S. simply implies rise in the level of the country’s total GDP. In addition to this it is also obvious that rise in GDP would enhance the value of GNI (or gross national product) in U.S. This proves that rise in GDP per capita has also helped to enhance the economic growth of U.S. in the recent years, measured in terms of GNI. Figure 9: Trade Deficit in U.S. (Source: “Data Bank”) The above graph explains the trade deficit of U.S. since 2003. From the above figure, it can be clearly stated that US exports have been lower that its imports since the recession in 2008. However, the amount of its trade deficit has fallen over time. This is evident from the above graph that shows the trade deficit line falling after 2009. Figure 10: Imports in U.S. (Source: “Data Bank”) The above graph shows that the aggregate amount of imports in U.S, has improved since 2010. Over time it is found that the competitiveness of the developed countries in the world, like U.S. are falling in the international markets. Some of the emerging developing nations like India, China and South Africa are becoming more productive over the years. These countries offer a productive labor force at cheap costs and purposely lower their exchange rates in the international market. Such aspects in these makes the multinational companies extend their business internationalization scales in these nations. The level of foreign direct investment and economic productivity in these developing nations of the world are much higher than that of the developed nations like U.S. Thus, the aggregate exports of these developing nations made to U.S. has increased in the recent years. Moreover, the average consumption propensities of the U.S. customers are much higher than that of many developing nations of the world. Such reasons have increased the imports of U.S. and hence have lowered its trade balance in the market in recent years. Rise in imports (at a given level of exports) have lowered the trade balance income of U.S. and have thus negatively affected its recent economic growth. It is true because, in the recent years U.S. is highly dependent on China for trading numerous goods and services. As, the currency value of China is purposely devaluated in the market relative to that of U.S., from most of the trading deals China acquires higher economic surplus than U.S. Figure 11: Exports in U.S. (Source: “Data Bank”) The above graph shows that the aggregate exports of U.S. have increased since 2010. A rise in exports implies greater foreign exchange earnings and hence higher income for the country. Figure 12: Trade Trends in U.S. (Source: “Data Bank”) However, form the above graph it is clearly visible that imports in U.S. over time is much more than its exports. The trend lines are upward sloping for both the indicators. This proves that the overall scale and scope of international trade in U.S. has improved over time, despite of the two consecutive recessions experienced by the nation in 1930 and 2008. However, the difference in imports and exports in the country signifies its falling trade balance. It was claimed in the literature review that since the recession of 2008, the government of the country had tried to improve the level of educational quality and technological state in U.S. Such factors have perhaps helped to enhance the global competency of the country and this can be claimed after observing the above figure. The figure clearly states that the gap between U.S. imports and exports has fallen since 2010, is shows improvement in the international competitiveness of the country. Figure 13: Trade Balance in U.S. (Source: “Data Bank”) The above graph clearly proves the discussion stated above. It shows that trade balance in U.S. has significantly fallen since 2010. This proves that the exports of U.S. are falling relative to its imports. Thus, falling trade balance has negatively influenced the recent U.S. economic growth. The above analysis explains the positive and negative factors affecting the recent growth rate of U.S. on the basis of descriptive statistical analysis. In order to statistically show the most significant factors affecting the recent growth rate of U.S., the researcher has conducted a multiple regression, as a tool of inferential statistical analysis. In the model the researcher has regressed GNI growth rate on variables like money supply, unemployment rate, GDP per capita, trade (% of GDP), foreign direct investment and government expenditure. It should be noted that all the variables were based on U.S. and were time series in nature (2004-2012) annually. The adjusted R Square value of the model was .95; hence it was a good fit model. The p value of the adjusted R square in the model was .03( Read More