In this forecast paper I am going to be discussing the future of this country, the current state and the comparison between previous years (2008 specifically) and the current year, 2017 (so far). I will also be covering trends that I have noticed and how these trends affect our AD and AS. Also, I will put our nation through a possible scenario of policy.
So, after reviewing various articles and sites I have uncovered the current state of our country, The United States. We are currently in a average operating state. Actually, in a bit of an acceleration when it comes down to the small percentages of it all. Our real GDP has had a small increase here in the second quarter of the year which it is now sitting at 194.1 billion, which is a 4.2 percent increase from the last quarter (bea.gov). Our inflation rate is about 1.6% currently with an average of 2.2 percent in 2017 so far (data.bls.gov). Our interest rate currently is at about 1.25 (July) currently (focus-economics.com) and our unemployment rate average in 2017 so far is 4.5 percent (data.bls.gov). Now, the time that I am going to be comparing our current state to is 2008. Now, 2008 was a very different time from our now 2017 state of economy. As you know, consistent small growth percentages per year can have a large impact on long term growth, this can be forecasted by the rule of 70. The rule of 70 is when you take any variable and you divide 70 by the yearly percentage it will show you how many years it will take to double that variable. With that being said, our economy has increased dramatically since 2008. Our real GDP in 2008 was about $4,000.1 billion less, this shows a high increase in output and production. This was probably due to the drop in inflation which was about 4.2 percent in ‘08. Our unemployment rate was also about one percent higher. As you can see our economy is in a bit of a better place than it was almost a decade ago. This due to policy changes, advancements in technology, and increased trade.
Now we are going to look at how our nation consumes, where we are putting our money. This is very important because a thriving nation will place its money in investments to gain in the future and because they are in the right financial position to do so.
(bea.gov)
In the photo above the amount of international investments we have placed is shown. As you can see we are steadily rising in the amount of investments we are placing throughout the years, just after 2015 we rebounded from a deceleration in investments and are now on the acceleration. Though this graph only goes to 2016 it gives a good reference as to what kind of direction our economy is heading in. As far as government spending and investment, the nominal federal spending data showed that real federal purchases have been neutral, not high nor low, and state and local spending has been down as payrolls have decreased (businessinsider.com). Net exports have risen just a small amount contributing to the GDP in the beginning of this year but have went on to fall flat as the year went on. (bea.gov)
As you can see from the graph, we had small spike coming into 2017 which went on to fall flat, then to a small decrease moving on to mid 2017.
When it comes to unemployment, like I mentioned before, we are sitting at about 4.5 percent. According to the natural rate of employment the current natural rate of employment is about 5 percent, this is the rate of employment when the economy is operating at a sustainable rate of output (Macroeconomics). So, with that being said, we are below the natural rate of unemployment but not far from it, so that is a good thing. Comparing this to the rate of unemployment in 2008, the average in 2008 was just 0.8 percent higher than the natural rate. Now what does this say about our current position compared to our previous? We can move our attention to the interest rates and how they might affect the rate of unemployment. In 2008, the average interest rate was sitting at about 0.25 percent. This is just about 1 percent lower than our current interest rate. What this means is the rate was a lot lower in investments that businesses could make. Allowing them to have a surplus in revenue, they are given some slack to hire more employees and to raise wages. This increase in hiring and wages, will first; keep people in their current jobs, and second; incentivise people who are unemployed to look harder for a job.
Now our current monetary policy released by the Federal Reserved on July 11th, state that there will be an increase on the reserve balance and in the primary credit rate;
The Federal Funds Rate will increase from 1 percent to 1 ¼ percent.
The interest rate paid on excess reserve balance from 1 percent to 1 ¼ percent.
These changes are effective June 15, 2017 (federalreserve.gov)
These changes are those of a restrictive monetary policy. A restrictive monetary policy is a move towards a policy that reduce aggregate demand and try to decrease the current price level or the level of inflation, which on average is about 0.2 percent higher than the suggested 2 percent operating level. To achieve those reductions, there will be an increase in short-term interest rates on excess reserves, which will attempt to stunt the growth rate of the money supply (Macroeconomics). Another way the Federal Reserve will reduce the money supply is by selling some of its current holdings of government securities. What this will do to our economy in regards to consumption is that it was reduce consumption, reduce long term investments and promote saving in hopes that the interest rate will go down in the future.
Since our economy is undergoing a restrictive monetary policy, let’s look to see what would happen if instead we chose to go with an expansionary policy with state of economy currently. Say that we wanted to stimulate aggregate demand and increase the money supply, the Federal Reserve Bank will move on to open market operations and instead of selling government securities and other assets, it will buy these securities and “inject” new money into our reserves, essentially creating money out of thin air. Also, the Federal Reserve would lower their discount rate. What this means is that it will make it cheaper for banks to borrow money from the Fed and that will in turn push our economy towards a more expansionary impact. Also, the federal funds rate will decrease which will make it more affordable for banks to keep their mandated reserves which will keep more on hand money in the banks for people to access. But, in regards to that effect on our current state of economy, that would cause demand for goods and services to rise because people now want to spend money because there will probably be forecasting for the rate of inflation to go up, with that in mind businesses will have to keep up with the rate of demand and have to hire new employees, increase output and wages, and ultimately increase prices. Now, we can’t really afford an increase in inflation because we are already above the marginal 2 percent, and with more money in the banks for people to access, there will be more consuming and investments made.
John Maynard Keynes was a British economist that is most famous for his analysis of the Great Depression and why it lasted for so long. He argued that if total spending fell then firms would respond by cutting back production (Keynes, The General Theory of Employment, Interest, and Money). So, in the case of our current economy, continuing to stimulate demand, will then stimulate production and output our economy will continue to grow. The problem with the Keynesian view that that Keynes did not acknowledge the rate of inflation and the unemployment rate as a coexisting occurrence. This was banks in the 1930’s but recent plunges in output and employment (2008) have kept Keynes on the radar. Which makes this quote of his quite accurate.
I believe myself to be writing a book on economic theory which will largely revolutionize not, I suppose, at once but in the course of the next ten years the way the world thinks about economic problems. (Macroeconomics)