James Lee
ECON-122
April 18, 2013
http://www.nytimes.com/2013/01/31/business/economy/us-economy-unexpectedly-contracted-in-fourth-quarter.html?_r=0
This article talks about how important the government is to help
the hurt economy by preventing federal spending cuts and allow for the foreign countries to recover. The government has recently been
lowering its government funding towards many sectors of the economy, especially
the military spending dropping 22.5% in the fourth quarter. The vast government
spending is due to the Federal’s Reserve campaign to stimulate growth along
with the stimulus package. With significant federal spending cuts in March 1,
how will the economy and the people react to this?
With
the recession causing firms, households, and foreign trade to decline, the
government stepped in to make up for the slack and go above and beyond. The federal spending is all part of the
aggregate demand equation to stimulate the economy. However, the article states
that the economy is shrinking at an annual rate of 0.1 percent in the last 3
months of 2012. This shrinking would show that the aggregate demand shifts
inwards where the GDP and price has been reduced. This data would point towards
another recession, but the article disagrees.
As the
federal spending decreases, the spending by consumers and business has consistently
been strong. Since the GDP is shrinking, the unemployment should increase, but
it was observed that it decreased possibly due to the consumer and business heavy
spending. The strong business and consumer spending is due to the Federal
Reserve’s campaign by giving out near-zero interest loans. This trend follows
the determinate of investments where lower interest rates cause more demand for
investments. Other developed countries have cut down on spending that caused
weak foreign trade and affecting the shrinking of the economy. Even if other
countries show their economy slowing down, the US private sector has been doing
well.
There has
been 15.3% jump in residential investments, and investment in equipment and
software increased 12.4%. However, the negatives outweighed the positives and
caused this shrink. Also the shrink is partially due to only the big companies
that make up the index like DOW, NASDAQ, and etc. struggling more than most of
the private sector.
The
current aggregate demand affecting the economy is only causing shrinkage by
only a percent, but to make federal spending cuts to an economy slowly
recovering isn’t the wisest decision. The current world economy is very fragile
where the slightest mishap like allowing banks to buy bonds with no committee
to regulate them and when the housing market crashes, the whole world is negatively
affected in some way or another. The federal spending should stay as is and
allow other developed nations to recover and increase US foreign trade to boost
the economy. Then the government can start cutting on spending, while the
economy continually recovers.
It is unfortunate to see that even though the private sector has been able to increase their spending recently, this is being overlooked due to cuts in federal spending. A 22.2% decrease in military spending among other spending cuts, even though the housing market jumped 15.3% and business investment in software, caused the economy to contract at a rate unseen since the last recession. This dynamic reminds me of when we spoke in class about the problems with GDP as an indicator of the health of an economy. The numbers in this article show that consumer and business spending is strong, but due to the sharpest drop in military spending we’ve seen in 40 years, it caused the overall economy to shrink at an annual rate of .1% in the 4th quarter. Due to the nature of how GDP is calculated, a sharp decline of one input can cause the predictions for the near future to look a lot more intimidating than they actually are. The article touches on this point too, “Still, economists said the seemingly bleak gross domestic product report was not a sign that another recession was looming”.
ReplyDeleteIt was also interesting to see that even though the overall GDP decreased, the unemployment rate also decreased, which is the inverse of what usually happens. I would suppose that this phenomena took place because businesses were able to make investments thanks to the low rate of interest the government is offering. A spike in consumer spending is another good sign from this article because it shows that people are comfortable enough with the future of the economy to let the money they could be saving be spent.
The lack of growth that was experienced last year in the GDP of the United States wasn’t completely caused by internal factors. European countries that would traditionally purchase American exports and services have been facing cuts that disallowed them to do so recently. With all of these factors in play, I agree with your assessment that cutting spending on an economy that is just beginning to recover is not the smartest thing to do.
One of the major causes for concern I found in this article was the federal decision to allow social security tax cuts to expire, costing a middle-income worker an extra $1,000 annually. The state of the global economy has been incredibly volatile in recent years, and the United States should definitely make sure that spending cuts are kept at a minimum until external factors can play a role in increasing our GDP.