Status of the US Economy - Case Study Example

Status of the US Economy al Affiliation) Introduction The status of the United s economy has been a question among many people all round the world. Many of these people are potential investors and individuals with business interests in the United States. There have been much anticipation about the status of the economy but many are misleading since they do not have concrete support. It is appropriate to compare the data of economic indicators over the years. This comparison will put one at a good position to study the trend of the economy through the years and therefore be able to predict the status of the economy. In this assessment of the status of the United States economy, data from many economic indicators have been examined in a bid to assess the economic situation in the country. Some of these indicators are Treasury bill rates, exchange rates, and prime loan rates, unemployment rates, fed fund rates, GDP, inflation rates, money supply, industrial production, and stock market indicators. The comparison between the data found from these indicators is not easy since it needs careful interpretation in what they imply. Many of these economic indicators are interrelated and therefore it is appropriate to compare their data and interpretations to come up with a more accurate assessment of the economy. Economic background Before an analysis of the economy is conducted, it highly appropriate to give history of the United States economy. The understanding of the historical economic status will ease the understanding of economic events that occur after those periods and thus be at a good position for determining the trend of the economy. The economy of the United States has been good over the past decades until the last recession that occurred in late 2007. This recession was so great that it left many sectors of the economy crumbling. This recession lasted for approximately 18 months. When the recession ended, the central government had to come up ways of helping kick start the economy. They decided on increasing the money supply on the economy. They did this initiating the buying of the treasury bills through Federal Reserve. They also gave out short term interest rates, which were very low. These encouraged the borrowing of loans by the public and as a result increased the money supply in the economy. The banks had to follow suit by lowering their rates and this encouraged the acquiring of loans buy the public. Despite the intentions of the treasury to want to increase the money supply in the economy to revive it, many big banks did not lower their rates as it was expected of them. Instead of lending money to the public at lower rates, these banks opted to invest the money themselves in other projects. Those financial institutions that took part in lowering their interest rates eased the borrowing of loans by the public. This move propelled the investing of funds in many sectors of the economy and as a result saw the stock market propelling to higher levels. The gap between the high-income earners and the low-income earners has increased during both the Great Recession and the recovery periods. The highest income earners had their earnings increase by more than 30% during the recession while the least income households had their incomes rise not more than 0.4%. The percentage of the increase in income rose to 95% during the recovery period while not significant changes occurred on the low-income households. The widening of the gap between high-income households and the low income households slowed the five-year recovery of the economy from the Great Recession. This fact has led many analysts to revise down their expectations towards the economic growth of United States. Treasury bills Many potential investors know the treasury bills in the United States have no financial risk hence are the safest short-term instrument available in the market. These interests do not have a large interest rate because they just mature in less than 12 months. These form of financial instruments play a major role in the identification of the prevailing economic conditions. This is because they are the most used tools by the Federal Reserve to control the money supply in the economy. The prices and rates of new treasury bills are driven by the forces of demand and supply in the market at each auction. The rates, prices, and yields of existing treasury bills are determined by many factors in the secondary market. These factors affect treasury bills as well as other treasury securities. Apart from demand and supply in the market, the economic conditions influence the rates of these securities. The rates of treasury bills go up during periods of economic recoveries and business expansion. The same rates fall incredibly during recessions. Others factors that also have impact on the changing of treasury bills rates are monetary policy and inflation. The monetary policy actions initiated by the Federal Reserve affect the money supply and in relation to this, it will affect the interest rates of treasury bills and there close substitutes. Inflation and inflation expectations also determine the interest rates for treasury bills. Periods with high inflation experience high rates while those with low levels of inflation will face low interest rates. The interest rates on treasury bills were on the rise from 1997 until 2007. This implies that the country’s economy was growing and plenty of business expansions were taking place. This trend stopped suddenly in 2007 and the economy experienced a drastic fall of the treasury bills interest rates. This was due to the Great Recession that had hit the United States economy at that time. Towards late 2008, the United States took many initiatives to revive the economy. The Federal Reserve played a major role in this process. Its actions such as buying of the treasury bonds and treasury bills saw the interest rates on treasury bills expanding in the subsequent periods. There was an increasing trend of the T-bills interest rates in 2009 all through 2013. The economy has experienced some fluctuations in the T-bills rate from 2014 all through 2015. Despite the high rates showing that there is economic growth, the fluctuations indicate that the economy is not stable. Exchange Rate Exchange rate changes occur because of the automatic outcome of the floating exchange rate system in majority of the big economies. The exchange rate of a currency against other currencies is influenced by many fundamental and technical factors. The economic performance of a country majorly dictates this rate. Other factors that do so are the relative demand and supply of the two currencies, inflation levels, capital flows, interest rate differentials, resilient levels, and technical support. Despite the fact that the exchange rates are supposed to be determined by the existing economy, it usually occurs inversely as the fluctuations in these rates determine the economy’s fortune. Many consumers do not realize that the effects of exchange rate policy in the United States are far reaching, as they perceive themselves to be doing their business transactions domestically in the country. Many people are deceived that the changes only influence the economy when it imports and exports commodities. This is not the case as its impact is far reaching since for a country to have a strong domestic economy its currency must be strong in comparison with other currencies. The exchange rates in the United States have fluctuated for the past decade due to various global influences. The Asian crisis of 1997 and 1998 was a major factor that strengthened the United States dollar against other currencies in Asia. This was due to the devaluation of the Thai baht. China’s undervaluation of the Yuan also led to the strengthening of the US dollar in 1994. The intention of this undervaluation was to increase China’s exports all round the world. The prominence of Japan is near zero interest policy saw the Japanese yen appreciating by more than 27% over the United States dollar. This weakened the US dollar and as a result, the exchange rates of other currencies against the dollar weakened. This was just after the Great Recession that had knocked down the United States economy. It slowed down the recovery processes of the economy. The European fears of a break up in the European Union made the euro to weaken against the dollar from an exchange rate of 1.51 to 1.19 in 2009. This fact strengthened the United States dollar boosting the economy, which had many problems at the time. A further slump of the euro against the US dollar in 2011 through 2012 strengthened the dollar by a further 19% margin. This fact saw the United States economy growing over the years from that time. Currently the exchange rates of the dollar against other popular currencies such as the pound, euro and Japanese yen has strengthened. This has much impact on the American economy. First, it has improved the merchandise trade. The merchandise trade is a nation’s global trade or its imports and exports. The strengthening of the US dollar against other currencies will increase the trade deficit or reduce the trade surplus. This triggers the reduction of a currency reduction such as the one the economy faces. Reduction of the economy will boost the economy by discouraging the importation of foreign goods and encourage the exportation. This will reduce the trade deficit or increase the trade surplus. The strong and stable exchange rate of the United States dollar against other currencies channels capital flows towards the economy. Foreign capital is flowing towards the United States due to its stable exchange rates. This attraction of investment capital from foreign potential investors works positively to boost the country’s economy. The capital flows experienced in the country are mainly foreign direct investments and foreign portfolio investments. The foreign direct investments are the types of investments in which investors directly take control and interests in existing companies and new companies while the foreign portfolio investments are the types, which the foreign investors enter into joint ventures with domestic companies. Gross Domestic Product The GDP of any economy is a strong determinant of its economic performance. The GDP of the United States has decreased by 0.7% in the first quarter of 2015. This is despite of the previous rise of 2.2%, which it experienced in the last quarter of 2014. The GDP of the United States has been fluctuating since 1947 since it only has an average rise of approximately 3.45%. The economy registered its highest GDP of 16.85% in the second quarter of 1958. It also registered the lowest GDP of 10.85% in the first quarter of 1958. The United States is a much diversified and technologically advanced economy. Finance, real estate, insurance, rental, health care, leasing, social assistance, business, professional and educational services are responsible for approximately 45% of the country’s GDP. Government services contribute about 17% of the GDP. Mining, manufacturing, and construction comprise of about 13%. Transportation and warehousing, utilities, and information constitute 10% of the GDP. Agriculture is the least contributor to the GDP since it counts only 1.5% of the nation’s GDP. The decline of the GDP from in first quarter of 2015 from the fourth quarter of 2014 indicates a deceleration in trade surplus, state and local government spending, nonresidential fixed investment, private inventory investment, and exports. There was a decrease of 1.6% in the price index for gross domestic purchases during the first quarter. This index determines the prices paid by US citizens. This index had only decreased by 0.1% in the fourth quarter of 2014. In the fourth quarter, the price index of the gross domestic purchases increased by 0.2% with the exclusion of the food and energy prices. There was an increase of 1.7% percent of real personal consumption expenditures in the first quarter. This was in comparison with the 4.6% increase that was experienced in the fourth quarter. Durable goods had an increase of 1.1% in comparison with the 6.15% increase in 2014. Nondurable goods had an increase of 0.2% in comparison with previous increase of 4.1%. Services had an increase of 2.2% in comparison to the previous increase of 4.3%. There was a decrease of the real nonresidential fixed investment by 2.8% in the first quarter of 2015. This was a significant decrease in comparison with the 4.8% increase in the fourth quarter of 2014. There was a decrease in nonresidential investment structures by 21% in comparison with the previous increase of 6%. There was an increase of equipment investment by 2.7% in comparison with the previous increase of 0.7%. There was also an increase of the intellectual property investments by 3.5% in comparison with the previous increase of 10.2%. Lastly, there was an increase in the investment of very residential by 5.5% in comparison with the previous increase of 10.2%. The real exports of products and services had a decrease of approximately 7.5% in the first quarter of 2015. This was in comparison with 4.6% increase it experienced in the fourth quarter. The real imports of products and services on the other hand had an increase of 5.5% in comparison with the previous 10.3% increase. The consumption expenditures and investments of the federal government increased by 0.1% in comparison with the 7% decrease it had in the previous quarter. This was caused by the decrease in expenditure of 0.1% by the National defense in comparison with its previous decrease of 12.2%. The nondefense expenditure increased by 2% in comparison with previous increase of 1.4%. There was a decrease of 1.5% in consumption expenditures by the real state and local government consumption in comparison with previous increase of 1.7%. All the above factors affected the change of the GDP from the fourth quarter in 2014 to the first quarter in 2015. Unemployment Rate The unemployment rate of the United States has decreased to 5.40% in comparison with the 5.55%, which it experienced in 2014. A reduction of the unemployment rate is an indication that country’s economy is growing. The US economy is has managed to maintain an average unemployment rate of 5.9% from 1948 through the years to 2015. This is despite the various economic recessions, recoveries and booms experienced in the country. This rate was highest in 1982 at 10.75% and lowest in March 1955 at 2.50 percent. The number of unemployed persons for less than six weeks increased by 250,000 to 2.8 million in 2015. Over the past 18months, the number of unemployed has decreased by 878,000. The participation in the civilian labor force has changed since the previous year. The percentage of the participation rose to 63% from the previous 59.2%. The population of part time workers decreased by 878,000 to 6.6 million, implying that more people are getting permanent jobs which is more productive for the economy. Many people who are working on part-time basis do so since there job hours have been cut down or they find difficulties in getting full time employment. By March 2015, 2.2 million American residents were able to find employment in the United States. Majority of these people had looked for jobs for the previous twelve months but were unlucky to acquire one. The employment of this population is a boost to the economic growth of the country. Other factors that indicate economic performance such as the stock markets may be doing well but without underlying fundamentals such as the unemployment rate, they do not hold value. Despite the fact that the unemployment rate may have gone down, the number might be misleading in many aspects. First the gauges of this rate has many challenges that reflect weaknesses in its estimation of the number of unemployed people such as the inclusion of the jobless people within six months, the millions of workers at part time jobs but are in need of full time employment. The reduction of the unemployment rate is not solely the determinant of economic growth since many workers have stagnant wages and many more are making fewer funds than they would wish to make due to the Great Recession that knocked down the American economy. Inflation rate The inflation rate in the United States has gone down by 0.2% in 2015. The country has managed to maintain an average inflation rate of 3.32% from 1915 all through the years to 2015. The country experienced the highest rate in 1921 at 23.70% and the lowest in 1924 at – 15.80%. The current fall of the inflation ratio implies that the consumer prices of commodities and services have gone down. This is a wider implication of economic growth. This fall was stimulated by the fall in energy cost by 0.1%. This decline was propelled by the energy index, which dropped by 19.5% over the previous 12 months. The decline of energy index made all the major components of energy to fall apart from electricity. The food index increased by 2.1% and this resulted to the increase of all the index of all the items in exclusion of energy food to rise by 1.75%. On a monthly basis, key consumer prices increased by 0.15% in April and March 2015 from the previous increase of 0.21% in the previous months. The index of all the items in the market with exclusion of energy and food rose by 0.32%. This led to the slight increase of all the items seasonally. In general, the price index of shelter, medical care, used cars and trucks, household furnishing and operations, and new vehicles all rose. In April 2015, the energy index fell while the food index remains unchanged. The decline in energy index was caused by a decline in the gasoline index, fuel oil index, and natural oil index and an unchanged electricity index. The decrease of the inflation rate indicates good economic performance and if maintained it shows that the economy will grow and be more stable. Stock market indicators The United States had tremendous performance in the stock markets during the year 2014. Majority of the sectors in the economy made big profits at that time and the economic growth was significant. The United States seems to have failed to sustain this growth in the stock market since there has been a decline in 2015, just three months after the boom. Currently the stock market index has hit an all-time high level of 18313.23. The United has an average of 2599.54 index pints in the stock market from 1912 to 2015. The increase of the stock market indexes in the current month shows the revival of the collapsing economic trend, which was experienced at the beginning of 2015. The stock market indexes in the United States have been increasing over the years with the exception of the economic recessions. The recessions are the major cause of the fluctuations of the trend. The increase of the stock market indexes over the years has seen the country encouraging domestic investment as well as promoting foreign investments in the country. These two factors are responsible for the economic growth that has been achieved over the years. The stock market indexes should be managed at high levels to continue to stimulate the economy of the country. Money Supply The money supply in the United States is currently at 4056783 USD Million, a rise from the previous 4036567 USD Million it experienced three months ago. This figure has restored back the quantity of money available in the market that had decreased significantly from the fourth quarter of 2014 to the first quarter of 2015. The country has managed to have an average money supply rate of 5716648 USD Million from 1959 until 2015. The country experienced an all-time money supply of 4076896 USD Million in August 2014 and the lowest record of 4837865 USD Million in 1963. The Federal Reserve carries out the monitoring and control of the money supply in the US economy. The increase of the money supply shows an increase of the economic growth though this should not be at the expense of the Federal Reserve releasing all of its money from the reserves since it can lead to an increase of the inflation rate. The money supply in the economy reduced significantly during 2007 and 2008 due to the Great Recession that saw many sectors of the economy crumble. In a move to revive the economy in the recovery period, which started from late 2008, the Federal Reserve had to increase the money supply in the economy by purchasing its treasury bills and other government securities. This led to significant increase in the money supply from 2009 through to 2014. The recent decline in the money supply at the beginning of the year was a fluctuation from the economic boom that the economy faced in the previous period (www.economist.com). Conclusion From the discussion of the economic indicators above it is evident that the United States economy was on the increase until the Great Recession that occurred in 2007. The recession lasted for about 18 months and heavily influenced many sectors of the economy. The economy was revived from the beginning of January 2009, which marked the economic recovery period. The economy is currently at a stable condition though not as good as it experienced in the previous year, 2014. Much has to be done to see an improvement the economy in United States. Reference The Economist,. (2015). U.S. Economy | Economist - World News, Politics, Economics, Business & Finance. 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