Current State of American Economy in Terms of Business Cycles - Case Study Example

Running Head: Current State of American Economy in Terms of Business Cycles Your name Course name Professors’ name Date Introduction This paper seeks to assess the state of US economy by looking at business cycle. A business cycle simply comprise of period of expansion, and contraction. The change from contraction to expansion is termed as a trough while the move from expansion to contraction is called a peak. Changes in business cycle usually take place in the long-run period by tracking full-employment capabilities. Long-run trend shows the amount that an economy can produce when all resources are employed. The divergence of actual real GDP from long run trend of potential real GDP is the basis of business cycle. Business cycle is further understood by examining aggregate expenditure model through analysis of current GDP, unemployment, consumption, and investment data. Peak, Contraction, and Trough Natioanl Bureau of Economic Research of 2001 determinedMarch 2001 as a peak period in US business cycle. This marked the end of expansion that began in March 1991 to its peak in March 2001. This period also signifies the beginning of contraction or rather recession.Concisely, recession is a period of declining economic activity and is indicated by a decreasing real GDP.Contraction often last for about a year. However, some will last for six months or eighteen months. It is vital to realise that one of the longest contractions was during the Great Depression, which lasted close to four years. The committee within the National Bureau of Economic Research, NBER, is vested with the responsibility to study business cycles in United States thus determines when the economy is undergoing recession orexpansion. NBER defines recession as a recurring period of decline in economic activity i.e. total output, income, employment, and trade, which last for more than six months. This decline in economic activity is accompanied by contraction in various sectors of the economy. According to NBER,recession in the United States started in December 2007 and ended in June 2009. To arrive at this decision, the committee reviewed the National Income and Product Accounts that were released in 2010. These accounts revealed vital information regarding economic activity, real Gross Domestic Product, and real Gross Domestic Income. While carrying out its investigation on the accounts, the committee concluded that real GDP and real GDI of 2010 was 3.1% above its low of 2009. Murray (np) asserts thatthe 2007-2009 recession resulted into a 7.3 million job loss, 4.1% reduction in economic output, and reduced the value of Americans by 21%. Murray alludes to a statement made by NBER Business Cycle committee that the recession took 18 months, beginning from December 2007 when the economy took a downturn to June 2009. This was the second longest slump after the ones of 1970’s and 1980’s. Verick and Iyanatul (pp.3) shades light on the 2007-2009 recessions by directing attention to turbulence in the sub-prime segment of the housing market, which culminated into a full recession by December 2007. Determination of business cycle is usually delayed. This is true given the context of NBER which delayed for nine months to announce that recession had begun. According to NBER, the end of recession is indicated by a trough. NBER conclusively stated that June 2009 was the end of recession thus is termed as a trough. This was also the beginning of expansion phase. To arrive at a decision that the month of June 2009 was a trough, NBER committee on business cycle did not make certain that economic conditions were favourable or that the economy was back to normalcy. Instead, the committee only clarified that recovery began in that month signalling the end of recession. Various economic indicators are deployed when deducing a trough. Owing to the fact that real GDP and GDI are issued on quarterly basis whilst the economic indicators are subject to change following revisions and measurement errors, NBER resorted to various monthly indicators in order to determine months of peaks and troughs. Specifically, NBER committee on business cycle emphasized measures covering total economy as opposed to particular sectors. These variables include monthly measures of GDP and GDI developed by Macroeconomic advisors, the payroll, household measure of total employment, aggregate hours of work in the whole economy, and real personal incomes in exclusion of transfers (NBER, 2010, Np). After considering all these variables, the committee concluded that trough occurred in June 2009. Real GDP was at its minimum level during the second quarter of 2009. At the same time, the value of GDI was similar in the second and third quarter of 2009. NBER further recaps on the average real GDP and Real GDI, which reached its minimum in the second quarter of 2009. Strong rise in real GDP and real GDI in the fourth quarter out rightly points out that a trough occurred in the third quarter of 2009. Even though recession ended in 2009, Lisack (Np)reflects on the Bureau of Labour Statisticsof 2012 that reported 1,434 mass layoff actions in the month of January 2012. Expansion Homan and Ilan (2011)produced an article with details on current US economy whose value of goods and services exceeded pre-recession period.According to this article, the GDP rate of expansion fromJuly through to August2011 was 2.5%. In the same article, expanding economy is also lauded by Neal Soss, chief economist with Credit Suisse. Neal affirms that the slow pace of growth is not capable of containingUS jobs and budgets. The period of economic expansion after the 2007-2009 recession discerniblewith consumers who have reduced savings to boost their purchases. In the same way, companies have improved investment in equipment and software. Statistics from the Labour Department illustrate that the number of employed people in September 2011 was 6.7 million less as compared to when recession began in 2007.Other variable indicating growth and expansion is the surging stocks as European leaders move in to cut region’s sovereign debt. In the first quarter of 2011, U.S economy rate of expansion deterioratedto 0.4%. This was attributed to reduced consumer and government spending. However, this phenomenon changed with an increasing GDP annual rate of 1.3% and 2.0% in the second and third quarter of 2011 (Elwell, Np). The motivating factor behind the increasing rate was stronger business investment spending and contribution realised from net export. Overtime, credit conditions in US economy have improved consequently improving the ease of obtaining loans for investment and other purposes. A survey conducted by Federal Reserve indicates that bank lending standards and terms have progressively eased in the first half of 2011. Because of this, commercial and industrial loans have been increasing overtime. Bureau of Labour Statistics clarifies that unemployment rate which had clocked 10.1% in October 2009 reduced to 9.0% in October 2011. Elwell (par 21)attributes this improvement to the year 2010. Elwell goes further to state that economic growth of 2011 only played a role of curbing growth in unemployment. The high rate of unemployment, even after several years of economic recovery, sparks a sense of concern. In the housing sector, Elwell insists that it has remained depressed notwithstanding several months after recession. In relation to this fact, the researcher states that mortgage loan foreclosures continue to obey the upward trend whilst prices of house deteriorate.Besides affecting negatively US economic activities, the weakening housing market as well is creating unfavourable conditions in household and bank balance sheet.This then kills the recovery of aggregate spending. Recommendations to Obama administration and FED The National Bureau of Economic Research is very clear in its study of the 2007 to 2009 recession. From this research, there is need to develop a robust economy wherecompanies expand to create more jobs for the population. Now, Americans are not spending simply because many of them are not in employment. At the same time, the working category spends less owing to fear of losing their job security. This trend is not good since a reduced spending by Americans decreases company profits leading to company stagnation and even more layoffs as indicated by Bureau of Labour Statistics of 2012(np). The first policy recommendation is to stimulate businesses and offload tax on citizens, which then creates jobs and wealth of American people. In its stimulus package, Obama proposed a huge sum of money that automatically creates deficit in budgets. The effect of this large sum of stimulus package is to put pressure on taxpayer. Equally, there cannot be economic growth where taxpayer is over ladenwith federal deficits.A budget deficit also means that the government will print more money leading to devaluation of US dollar. Considering these factors, the government should consider cutting down taxes that weigh on American people. The effect is that people will have more money at their disposal to spend in investment or consumption given that general economic demand has been raised. The other sector that Obama administration shouldconcentrate on is the financial sector. By injecting capital into this service industry, banks and other lending institution will be able to avail funds to borrowers. The Federal Reserve can further consider the need to make financial market more responsive to market forces instead of interfering with its operation. Specifically, Obama administration is obliged to look at possibility of leaving the market to respond to forces of demand and supply as opposed to influencing its operation. The case of sub-prime lending where the government deregulated banking industry is a good example of adverse effect of government interference. Specific recommendation to reduce unemployment rate The roadmap to reducing unemployment rate is focusing more energy on industries and business, which employ American population. Industries that are operating below their optimum levels must be examined to deduce areas which needs government’s aid. Those, which were largely affected by global financial crisis, ought to be rescued by being funded. In the end, they will achieve their optimality and end up absorbing more people. This eventually reduces unemployment rate from 8.3. Conclusion This paper is a study of current state of US economy with specific reference to business circle. It is obvious from the writing that US went through economic recession from 2007 to 2009 after emerging from a 10 year expansion since 1991.National Bureau of Economic Research further confirmed existence of trough in mid-2009. This was the start of economic recovery, which, although it has been under slow growth, US is steadily regaining. The essay further gave recommendations on improving economic growth in US and specific recommendation to reduce level of unemployment rate from 8.3% to the “full employment unemployment rate.” Works Cited Board of Governors of the Federal Reserve System. Senior Loan Officers Survey on Bank Lending Practices. Federalreserve, 30 Jan. 2012. Web. 26 Feb 2012. Bureau of Labour Statistics. Labour Force Statistics from the Current Population Survey. Bls. 23 Fen 2012. Web. 26 Feb 2012. Bureau of Labour Statistics. Mass Layoffs Summarybls, Feb 23 2012. Web. 26 Feb 2012. Elwell, Craig K. Economic Recovery: Sustaining U.S. Economic Growth in a Post- Crisis Economy. Washington, DC: Congressional Research Service, 2011. Homan, Timothy. R, and Ilan, Kolet.Economy in U.S. Surpasses Pre-Recession Level After 15 Quarters. bloomberg , 28Oct. 2011. Web. 26 Feb 2012. Lisack, Thomas. History of Economic Recession in America.financialsense, 17 July. 2011. Web. 26 Feb. 2012. Murray,Sara . Slump Over, Pain Persists.Economy, 21 Sept. 2010. Web. 26 Feb. 2012. National Bureau of Economic Research. The Business-Cycle Peak of March 2001. nber. 26 Nov 2001. Web. 26 Feb 2012. Verick, Sher, andIyanatul, Islam. The Great Recession of 2008-2009: Causes, Consequences, and Policy Responses. Discussion Paper No. 4934 May 2010. Read More