US Economy Still in a Gridlock

In the third quarter of 2008, United States economy expended 3.5% qoq, indicating that the worst of the recession may be over. However, for number of Americans struggling to find a job and make ends meet, the only sign of health of the economy would be an improvement in labor market.

Indeed, most of the expansion in consumption and housing market recorded last quarter was coming from the government pumping money in the economy. For example, consumers 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 recent months.

However, the current pace of growth may not be sustainable, as the poor condition of the labor market is likely to start having an impact on expansion. In fact, the economy recorded more job losses in September than in August and unemployment rate reached 9.8%, the highest since 1983. Evidently, without growth in employment, households can’t generate income and create demand which is necessary in elevating production levels.

In addition, the biggest fiscal deficit on record combined with the anticipation of low interest rates for a long time is discouraging investors from leaving money in the United States and driving down the value of the dollar. Indeed, in the last eight months US dollar has depreciated 15% against the Euro. And although a weak dollar has a positive effect on exports, imports prices are also rising bringing the danger of stagflation.

US Economy Still in a Gridlock

Anna Fedec,
11/2/2009 1:30:06 PM