US Economic Recovery Will Be Challenged in the Months Ahead

On June 25, the United States GDP growth for the first quarter of 2010 was revised down to 2.7%, showing that the recovery in the biggest economy in the world may not be as strong as many have expected.

Indeed, even though the revision was not significant, it came from consumer consumption and business spending which are required components for growth to be called sustainable. In fact, consumer spending, which is vital in elevating production levels is weak mostly due to high unemployment rate. And although we can see some improvement in the labor market it may take a few years to revive 8.5 million jobs lost since the recession began in December 2007.
Looking further, the biggest fiscal deficit on record may sooner or later discourage investors from investing in US Treasuries. In fact, in 2010 the deficit is likely to reach 10.6% of GDP and the Obama administration is projecting that national debt will rise from 64% of national output to 77% by 2020. In addition, we can't forget that higher fiscal deficit also means higher taxes. While this and last year, tax payments were lowered to stimulate the economy, next year the brakes may be allowed to expire.
There is also another danger by the corner. The US Federal Reserve is slowly moving away from its unconventional policy easing, and may be forced to increase rates to fight inflation. Higher cost of money connected with falling home prices may hamper the recovery in housing market, depress residential investments and drag the growth further down. So far, the US has been able to sell its bonds at a very low yield mostly because of Europe's financial trouble. However, the future will present some big challenges for the US economy.

Anna Fedec,
5/29/2010 4:53:37 PM