US Economy Still in a Gridlock

In the third quarter of 2008, United States economy expended 2.5% qoq, indicating that the worst of the recession may be over. Yet, recent data suggests that the recovery is weak and without improvement in the labor market may not be sustainable.

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, after the significant improvement in the third quarter, last two months didn't surprised us on the positive side. For example, although, manufacturing rose for the fourth straight month in November, it was at the slower pace than in previous months. Moreover, looking at Institute for Supply Management data, we can see that the upward trend in the number of manufacturers reporting growing employment levels since April is declining as orders are still weak and factories are running below they capacity.

Looking further, the poor condition of the labor market is likely to start having an impact on expansion. In fact, the economy has lost 7.3 million jobs since the recession began in December 2007 and the unemployment rate reached 10.2% in October. Evidently, without growth in employment, households can’t generate income and create demand which is necessary in elevating production levels.

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 leaving money in the United States and driving down the value of the dollar. Indeed, in the last eight months US dollar has depreciated 16% 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,
12/2/2009 1:39:42 PM