U.S. Current Macroeconomic Situation:
Similar to the rest of the world, the macroeconomic conditions in the United States are currently fragile. This is mainly because the rate of unemployment is high though is slowly declining, the currency valuation is fluctuating up and down, and the European financial unrest has continued to have significant impacts on the nation’s economy. These conditions are coupled by a slow increase in manufacturing and upward trend of the stock markets. As a result of these macroeconomic conditions, there are huge speculations that the United States Federal Reserve will enforce more stimulus plans in attempts to boost the stalled recovery of the economy.
Macroeconomic Outlook for 2012:
The backbone of America’s economic recovery since the end of recent recession has been private consumption. The U.S. economy accelerated in the fourth quarter of 2011 and continued its slow recovery in the first quarter of this year after overcoming the negative effects from Japan’s natural disasters and the debt fiasco that occurred in early 2011. There are various indicators that show that the recovery continues to gain momentum such as the inching down of unemployment insurance claims and the increase in the average weekly hours in manufacturing. The other indicator of the gradual recovery of the economy is the fact that car sales are currently at pre-recession levels (“U.S. Quarterly Macroeconomic Review,” 2012).
However, the U.S. economic recovery is expected to remain volatile because of a combination of various domestic and external factors. In this case, the domestic factors are the three main sources of weakness i.e. financial contraction, lethargic demand for non-durables and services, and slow rise in construction of residential housing. On the contrary the external factors include the slowdown in emerging markets and the economic crisis in the euro zone.
While the unemployment rate remains high, it has declined or fell to 8.5% during this period of slow economic recovery. Consequently, the employment-population ratio has become stable, which is an indication of a possible turnaround in the employment outlook. Even though the initial unemployment insurance claims have continues to struggle to be below 400,000, the ongoing claims have declined below 4 million. However, this rate is still beyond the pre-recession levels of unemployment insurance claims.
While there are talks of another recession, the major concern is inflation, which is largely associated with printing more money. The inflation concerns are also fueled by the fact that quantitative easing, which is printing more money and buying bad debts by the Federal Reserve, has been used as a means of correcting some major issues like unemployment, the stock market, and the housing market. As a result, there is need for the government to outweigh cost and determine the necessary and acceptable level of inflation. Notably, core inflation remains low but volatility in major consumer inflation is an indicator of the huge shifts in the prices of food and energy. Consequently, the consumer prices are increasingly drawing closer to the inflation target, an indication of low inflationary expectations.
The United States economic recovery is largely affected by the housing market crisis and other loans that are going into default. Moreover, in addition to these loans, spending has largely decreased because of the high rates of unemployment. The downward spiral of demand has in turn contributed to a slight decline in the gross domestic product. As there are huge concerns about inflation due to quantitative easing, there have also been some concerns and talks about another recession. Quantitative easing could be an effective solution to fix the housing market crisis, the stock market crisis, and the high unemployment rates but it won’t fix inflation concerns that are likely to emerge.
Appropriate Fiscal and Monetary Policies:
With regards to the appropriate monetary and fiscal policies, there is need for close evaluation of the policy because it will be accommodating the current climate of the economy. While extending the accommodation of inflation can have significant negative effects, pulling away from it immediately can also have damaging impacts on the economy (Morris, 2010). As the current macroeconomic condition in the United States is troublesome to many Americans, the government should adopt an expansionary fiscal policy in which money is used to enhance the liquidity in the system.
Currently, the Federal Open Market Committee that makes decision for the Federal Reserve is attempting to stimulate the economy through quantitative easing. However, these attempts have been accompanied by increase in debt, which necessitates the need to do something about debt ceiling. The measures adopted by the FOMC are easy money policy tools that do little to ease unemployment and stimulate the flow of credit again. One of the most appropriate monetary and fiscal policies at this time includes tax breaks for the wealthy and big businesses that provide incentives to create jobs. Such policies would stimulate small business growth that could be helpful in getting the U.S. economy moving again. Secondly, the U.S. Federal Reserve should stop taking drastic actions like printing more money as the Congress is evaluating foreign trade.
The current macroeconomic situation in America is volatile given the high unemployment rate and high inflationary rate. The appropriate monetary policy at this time is expansionary fiscal policy, which can be used to divert market crash, lessen the rate of unemployment, and increase the gross domestic product to enhance economic growth.
Morris, K. (2010, October 7). Current Macroeconomic Situation. Retrieved October 18, 2012,
“U.S. Quarterly Macroeconomic Review — Q1 2012.” (2012, April 19). Macroeconomic
Quarterly. Retrieved October 18, 2012, from http://cebviews.com/uploads/2012/05/U.S.-Quarterly-Report-Q2_2012-FINAL.pdf
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