US Economy May Be in Gridlock For Longer Than Expected

During the last few months, both bad and good news have been coming for the US economy. During some days it seems that the worst recession of the last 75 years is over. However, in other days, bad data is released destroying investors’ confidence.

For instance, recently the Office of Management and Budget predicted a surge in unemployment rate to 10%, a significant widening of budget deficit and a 2.8% contraction of the economy in 2009. On the other hand, U.S. consumer confidence climbed more than forecast because consumers are becoming less concerned about the outlook for jobs.

Indeed, the worst of recession may be over but the U.S. economy is far from a sustainable recovery. In fact, most of the improvement in consumption and housing market has been coming from the government pumping money in the economy. For example, consumers this quarter have benefited from the cash-for-clunkers” plan and extended jobless benefits aimed at stimulating spending, which accounts for 70 percent of the economy. Also, government stimulus efforts and low interest rates have made homes more affordable to first-time buyers, spurring increases in sales in July.

But will the US economic recovery be sustainable when the effect of stimulus package fades? Probably not. After all, we can’t forget the fiscal stimulus comes with a massive fiscal deficit. So the government needs to find money to finance the gap and it may need to sell more government bonds to pay for interest of bonds sold in the past to bailout major financial instructions which are now making billions of dollars in profits. Moreover, the Obama administration may need to increase taxes or not extend previous administration tax cuts engendering available income and consumer spending.

Anna Fedec,
8/27/2009 5:30:37 PM