-->

Monday, February 28, 2011

U.S. Economy 2010 Update

After going over a topsy-turvy path the U.S. economy seems to be stabilizing. Since early last year, the numbers had been discouraging that lead to the downgrade of growth expectations. However, the last quarter 2010 results have registered an impressive comeback, beating all previous forecasts and promising a concrete path to success. On the other hand, there are serious issues to be dealt with before U.S. truly rejoices.
What do the latest numbers say?

The Q4 2010 results released by the Bureau of Economic Analysis indicate GDP growth of 3.2% over 2009. The robust recovery is being driven by increased export volumes, higher automobile sales, nonresidential fixed investments, increased personal outlays (5.8% growth), increased government spending, and extension of fiscal relief. The numbers also indicate more money in the hands of people, which is driving domestic demand. The disposable personal income grew by 3.5%, while saving rates jumped by 5.4%. As per Fed, business spending trends are primarily coming from the equipment and software front and are expected to continue through mush of 2011. Considering that the U.S. economy contracted by 1.7% in 2009, the full year growth of 3.8% in 2010 is quite encouraging. It is interesting to note that these figures breach even the pre-recession GDP growth!


What are the grey areas?

Employment Situation

The unemployment statistics published by the Bureau of Labor Statistics indicate minor improvement from 9.7% in January 2010 to 9.0% in January 2011. The OECD says, “It is becoming increasingly clear that the economy has entered a soft patch, but this is not inconsistent with previous recoveries. We don’t see a risk of a double-dip recession. That said, we don’t see either a recovery that is strong enough to put a significant dent in unemployment.” The still lingering problem of unemployment is responsible for lower demand, reduced production, and overall, lesser-than-required growth. An example is the additional liquidity introduced into the financial during the recession, which failed to have the desired impact due to soft demand.

State Debt

Another cause of worry for the U.S. is the galloping sovereign debt level, which is already touching 100% of the GDP. Unable to contain the situation, the Government is contemplating an increase in the sovereign debt ceiling $14.3 trillion. This will be the second revision in the last two years. Florida Senator Marco Rubio said, “Medicare and Social Security as they currently are structured, is unsustainable. They will bankrupt themselves and ultimately bankrupt our country.” Currently, the Government is blaming it all on the Social Security payouts and pension liabilities. The astronomical pension liabilities are telling on the balance sheets of several states, pushing them on the brink of bankruptcy. This has sparked a fresh row as various states are planning to do away with collective bargaining for public workers. Analysts estimate that it won’t take more than a decade to increase the debt servicing cost three-folds that translates into $840 billion annually!

International Events

The massive oil consumer as U.S. is, the impact of the global political situation cannot be underplayed. The Jasmine Revolution covers a larger part of Arab and North Africa, including important oil producers like Libya and Iran. The rising crude prices can adversely affect the overall recovery process of the country.

As a matter of fact, almost all the economies worldwide are likely to take a beating amidst the explosive political atmosphere. It remains to be seen how the events unfold and whether Saudi Arabia’s commitment to make up for the reduced oil production holds in the future.

No comments:

Post a Comment