Despite Recent Growth, US Recovery is Still Weak

In the fourth quarter of 2009, the United States economy expanded at an annualized rate of 5.9% giving the impression that the recovery in world’s largest economy has been stronger than expected. Yet, growth was mainly due to inventory rebuilding and the recent economic expansion maybe short lived.

Indeed, on a year over year basis, the US economy grew only 0.1%, which is not very strong having in mind that in the last three months of 2008 US output deteriorated by 1.9%. Moreover, surprising strong expansion in the fourth quarter of 2009 may not last in 2010 as 3.9 percentage points out of 5.9% growth came from inventory rebuilding. And once companies will adjust to demand level, the production is likely to slow down. In fact, in January durable goods orders, excluding transportation, slipped 0.6% and business spending dropped 2.9%.

Looking further, households demand is necessary to elevate production levels and the poor condition of the labor market is having a negative impact on the recovery pace. Indeed, the US economy has lost 7.3 million jobs since the recession began in December 2007. And the job creation promise made by many  politicians is not working because the unemployment rate is the highest in 26 years. In fact, consumer sentiment was weaker in February as more Americans became impatient with the government's effort to stimulate jobs.

To make things even worst, the biggest fiscal deficit on record combined with the anticipation of low interest rates for a long time is discouraging investors from depositing money in the United States. In fact, the US government deficit is likely to reach 10.6% of GDP in 2010 and the Obama administration is projecting that national debt will rise from 64% of national output to 77% by 2020. More importantly, the US economy may experience a significant slowdown when the Federal Reserve exits from its unconventional policy easing, and is forced to increase rates to fight inflation.

Despite Recent Growth, US Recovery is Still Weak

Anna Fedec,
2/26/2010 3:16:38 PM