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Friday, March 5, 2010

RSG U.S. Economic Brief - February 2010 by Dr. Douglas O. Walker

The RSG U.S. Economic Brief for February focuses on the state of the recovery from the sharp downturn in production that began in early 2008 and continued through most of 2009. It notes that the economy has recently registered positive quarterly growth and economic conditions in some key sectors of production appear to be improving. But the recovery is uneven, employment continues to fall, the financial sector remains troubled and conditions for sustained growth have yet to be established.

Here are some highlights from the Brief:

  • The U.S. economy started the year with reports that housing prices are stabilizing and that foreclosures declined. Growth in the U.S. industrial and services sectors has also been stronger than expected. On the other hand, the U.S. continued to shed jobs, deepening concerns that relief from the recession will be slow and the state of the overall economy remains precarious.

  • The U.S. economy appears to have moved beyond the trough of its worst recession since the Second World War. Preliminary figures show that positive growth resumed in the fourth quarter of 2009 and forecasts of U.S. economic growth prepared by the University of Pennsylvania for use as an input into assessments of world growth made by international agencies, point to continued growth in overall U.S. economic activity as the country enters 2010. But the pace of the increases in output, measured quarter-on-quarter, are expected to slow. Overall inflation as measured by the GDP price index is expected to be on the order of an annual rate of 2 percent. Unemployment will remain high the entire year.

  • Inflation in the U.S. peaked in mid-2008 and has continued to decline as the recession took hold. In the period before the recession, price increases as measured by the GDP deflator reached an annual rate of 3½ percent but dropped considerably as output growth first slowed and then turned negative. Prices of private consumption goods and services have held steady the past 6 months. Overall, price trends may have stabilized and some rise in the rate of price increase is forecasted.

  • On the policy front, in response to the skyrocketing deficit, President Obama has proposed a partial three-year freeze on discretionary spending. Discretionary spending currently comprises about a sixth of the federal budget, and does not include entitlements such as Social Security and Medicare. President Obama has also said that the freeze will not apply to defense spending. While some support the freeze, others argue that it would be ineffective. The Brief looks at arguments in favor and opposed to the President's proposal and offers some questions to consider when evaluating the merits of the proposal.

World growth remains well below its potential and the global economy has just experienced its first actual contraction since the end of the Second World War. While the international economy has to some extent stabilized, major financial problems remain at the domestic level everywhere. Like the United States, a number of European economies face very difficult adjustments to their public finances and it is by no means clear that adequate external flows to fill their large national budget deficits will be forthcoming. For this reason, no strong impetus to U.S. growth may be expected from the external sector in the near future. Domestic policy, therefore, takes on great importance in shaping the performance of the economy in the months and years ahead.

Students are strongly urged to read through the short section on the controversies surrounding President Obama's proposed spending freeze and consider the questions posed about his proposal and its implications for the economy. Students are encouraged to discuss possible answers to these questions with Mr. Poorbaugh during his office hours on Thursday.

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