In order to understand US economics, one must understand what economics is. Economics is defined as the social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity. (McConnell,R 2015). There are several factors involved when looking at the US economy. These factors are the nominal and real GDP, CPI, inflation rate, unemployment rate, what part of the business cycle the economy is in, and the current fiscal and monetary policy. All of these factors play a pivotal role in how society and the government will make current and future choices in an effort to keep the economy in a stable state of mind or bring it out of a recession or depression. All of these will be defined throughout the paper along with showing what the current market is showing. Through out US history the economy has seen its fair share of expansion and contractions. Over the past ten years the current economic state of the US has fluctuated. During this time the country has been through two different administrations starting the President G.W Bush and ending with President Barrack Obama. Both of these administrations had differing views of the US economy and the policies that should be in place. Currently the country has just switched administrations and is now under the lead of President Donald Trump. With each new administration coming into office they must take these factors into watch when implementing new policies that could affect the state of the US economy.
What are GDP, RGDP, and NGDP? GDP is known as gross domestic product and such is defined as the total market value of all final goods and for the additions of inventories. (McConnell,R 2015). RGDP is known as real gross domestic product and this is the measurement of the value of final goods and services produced within the US. In order to determine the RGDP, the government must determine the NGDP. NGDP is known as the nominal gross domestic product and this is the measurement of the total dollar value of all goods and services produced within the US. However, the total dollar value is determined by using the current prices at the time of production. The GDP is calculated by adding together personal consumption (C), GPD investment (Ig), government purchases (G), and net exports (Xn). (McConnell,R 2015). In 2006, the US GDP was 13855.59 trillions dollars. (GDP, 2017). Over the course of the ten years the GDP has grown. In 2007, the GDP increased by just under a trillion dollars and again in 2008 there was a minimal increase. In 2008, there was a slight decrease in the GDP before rebounding in 2010. The slight increases from 2006 to 2009 with the slight decrease can be attributed to the Great Recession of those years. At the time in order to protect the economy, the US government implemented loose economic strategies. This is the opposite of what happened during the recession of 1928. At the time of the recession during 1928, the government was operating with tight economic polices. The tight economic policies coupled with other factors led the Great Depression of 1929 until 1941 when the US entered World War II. Had the government continued to operate in a strict economic policy, there is a possibility we could’ve seen another depression. Each year since the end of the Great Recession of 07-09, the GDP has increased slightly and upwards of a trillion dollars. The average growth rate of the GDP has been anywhere from 1.5% to 3% in growth. The last time the growth rate saw a deficit was in the first quarter of 2014. The current numbers show a trending that the economy will continue to grow an average of 1% to 3% a year. (GDP Growth, 2017). This is a good number because it is showing the economy is stabilizing. Growth in excess of 3% will cause the economy to reach its threshold causing a business cycle change. Along with the business cycle change, inflation will increase and product prices will rise.
What is CPI? What is inflation? CPI is known as the Consumer Price Index (CPI) and is defined as an index that measures the prices of a fixed market basket of some goods and services bought by a typical consumer. (McConnell, R 2015). It is also known as the main tool to measure inflation. The rate of inflation (ROI) is the percentage of growth of the CPI. Inflation is defined as the rise in the general prices of products. (McConnell, R 2015). Whenever the rate of inflation is reported as a negative this is described as deflation. From 2006 through 2016 the CPI was steadily increasing with a slight period of deflation from September 2008 through April 2009. Since April 2009, the CPI has been increasing until present day. During this period of 2006 through 2016, the ROI has fluctuated reaching a high peak of 5.6% (July 2008). One year later the ROI reached its’ low at -2.1% (July 2009). The highest point of inflation was six months after the recession started and reached its lowest point at the tail end of the recession after the government bailout. Since the recession, the highest the ROI was 3.9% (September 201) and the lowest was -.2% (April 2015). In 2008, during the midst of the recession, the Federal Reserve (Fed) stepped in. The Fed’s dual fiscal and monetary policies have done a good job of controlling inflation while avoiding deflation. However, if they fail to raise rates in an appropriate amount of time this could lead the current economy back to the recovering economy that existed in 2001. The all-time low interest rates caused the economy to become overheated, a factor contributing to the housing bubble crash in 2007.
What is the business cycle? The business cycle is the four cycles the economy cycles through. It
is defined as recurring increases and decreases in the level of economic activity over periods of years; consists of peak, recession, trough, and expansion phases. (McConnell, R 2015). The expansion phase is when the employment and GDP rates both rise. Typically a healthy increase for the GDP or economy is 2% to 3%. The stock market will enter what is called the bull market. The bull market is a market in which share prices are rising and buying is encouraged. If the economy grows more than 3%, which is considered an unhealthy growth, the economy enters the peak phase. This is when the market has reached is maximum potential and a recession will soon begin. The employment rate will reach its highest rate and output of the GDP is close to capacity. During a peak phase of the cycle the inflation rate will increase sending prices upward. This could be seen in 2006 when the housing market peaked early. Once the economy reaches it peak it will move into what is called the recession phase of the cycle. The recession is when there is a period of time where the GDP declines, lower incomes, and unemployment rates rise. The typical recession lasts six months or more. The economy’s market sees a contraction but it doesn’t always become negative. The markets enter what is called a bear market. A bear market is when prices are contracting and selling is encouraged. The country entered the its most recent recession in December of 2007 until 2009, lasting about 18 months. The unemployment rate was 4.6% in 2007 and continued to rise through 2009 reaching 9.3%. (Unemployment, 2017). Once the great recession ended the unemployment rate continued increase to 9.6% in 2010 before declining. (Unemployment, 2017). After the recession or contraction phase the economy shifted into a trough period. The trough is when the economy has reached its temporary minimum. It is at this period that the recession period is considered to have ended. The characteristics of the trough are substantial unemployment rates with a less than potential output for the GDP. The Great Recession of 07-09 is said to have ended when the US government provided a 700 billion dollar buyout. The unemployment rate in 2010 was still substantial peaking at 9.6%, the highest it reached during the period of 2006-2016. (Unemployment, 2017). In 2016, the current GDP is 18.46 trillion dollars. (GDP, 2017). The current GDP growth rate is 2.6%. (GDP Growth Rate, 2017). The unemployment rate for 2016 was 4.9%. The current unemployment rate for May 2017 is 4.3 %, this is the lowest the rate since 2010. (Unemployment, 2017). Based on these current figures, the current phase the US economy is experiencing is the expansion phase. The low unemployment rate and the increase in employment and GDP rates characterize this.
What is the unemployment rate? The unemployment rate is defined as the percentage of the labor force unemployed at any time. The formula for the unemployment rate is unemployed divided by labor force multiplied by 100. (McConnell,R 2015). From 2006 through 2016, the unemployment rate ranged from 4.6% to 9.6%. The lowest rate was during the peak phase of the business cycle during the 2006-year. The rate began to rise during the recession to 9.3%, reaching its’ peak in 2010 during the trough cycle reaching 9.6%. During the trough cycle the unemployment rate continued to decrease until reaching the current low of 4.3% (May 2017). This is the lowest unemployment rate since 2001 and indicative of the economic state of expansion.
Beginning with the recession in 2007-2009, the US government began to operate on less strict economic polices. This could be seen as great thing because it has stimulated the economy out of the recession and through the trough. The fiscal and monetary polices were lowered in December of 2008 by the Fed. The rates at that time were dropped between 0% to 0.25%, this is which economists refer to as the zero lower bound. (Labonte, M. 2017). Zero lower bound is defined as the constraint placed on the federal reserve to stimulate the economy through lower interest rates but can’t be driven lower than 0%. (McConnell, R 2017). The rates can’t be lowered than zero because if they were in the negative than people wouldn’t want to deposit their money in the bank because they would eventually lose money due to the negative rates. Since 2015 the Fed has started increasing the rate. Just recently the rate was increased again and is currently between .75% and 1.00%. The Fed is expected to meet again this year with another rate hike expected. It is expected the rate will between 1.00% and 1.25%. Most people will notice the rate hike with their savings accounts and debt. This is because the Fed controls how banks are charged to borrow money. The increase will be seen on credit cards, auto loans, and mortgage loans. The auto and mortgage loans will see an increase of about 1% on their rates. Most households with large credit card debts, those over $10,000, will see the most strain. The Fed believes that the current rates are less stimulative than the zero lower bound, however since rates are still below the neutral rate it will still stimulate the economy. (Labonte, M. 2017). There are downsides to the current policy though. If the Fed raises the rates to slowly than the economy could over stimulate. This could cause high inflation rates and instability. (Labonte,M 2017). Most economists believe that the risks outweigh any benefit because it could cause the same economic situation that caused the housing bubble, which led to the Great Recession. (Labonte,M 2017) With economy currently in the expansion phase of the business cycle, I do believe that the current policies are appropriate for the current economic state.
What is the current forecast for today’s economy? Well economists believe that we are in one of the most stable economies that has been seen in a while. This is based off of the GDP, CPI, unemployment rate, current business cycle phase, and the current policies in place. It is forecasted that the GDP is grow 2.2% during 2017. (Amadeo, K 2017). The Fed is expected to raise the rates to 1.25% in June of 2017 and could see 1.5% by the end of the year. (Amadeo, K 2017). The current unemployment rate is 4.3% as of May and is expected to decrease by .1% in the following year. These rates are better than what was seen prior to the recession and the year of 2006 leading up to the recession. The current administration could change these numbers based on new policies or laws they implement. During the campaign for presidency, Donald Trump was stating he was going to raise the economy by 4% a year. This would be detrimental for the economy because it exceeds the health growth of 2-3% a year. These numbers could also change based on the policies that could also create more new jobs within in the US. This could reach the point of the highest employment rate. However, only time will tell what will happen under this current administration and the state of our economy.