US Economy: Back on Track?

 

Despite challenges, the good news is that the world’s largest economy has picked up steam since the end of 2010 and is now seeing renewed growth trajectory. 

The world's largest economy is regaining the growth momentum  boosted by strongest household spending in more than four years, buoyant exports, activity in the business sector. The growth engine of the world grew at an annualized rate of 3.2% between October and December faster than the third quarter's 2.6% rate, raised optimism that a sustainable recovery is under way, which will facilitate businesses to start hiring again. These positive developments revels that some of the stimulus package of the government has really trickled down to households.

According to the statement issued by the Federal Open Market Committee, “the economic recovery is continuing, though at a rate insufficient to bring about a significant improvement in labor market conditions.”  Consumer confidence, a widely-watched indicator hit a three year high as Americans are more positive about the economy and their income prospects. The Conference Board Consumer Confidence Index rose to 70.4% in February 2011 from a revised level of 64.8% the month before marking the highest level since February 2008, despite persistent pessimism about the grim but slowly improving US jobs market. 

Challenges Remain

However, analysts are of the view that the present growth was closely linked to ongoing efforts to stimulate its economy, rather than to tackle its growing deficit. Millions of Americas are still out of labor market and the unemployment rate has been stuck above 9% since April 2009. To overcome these challenges, the economy needs to grow by no less than 3% over several quarters against growth estimates at 2.5% to 2.7%, which not strong enough to generate sufficient jobs to reduce unemployment. House prices in 11 biggest cities have fallen to their lowest point since the subprime crisis and in Las Vegas, the fall is even worse. The trade deficit between the US and China  has grown to record $270bn and the budget deficit headed for $1.5 trillion. The trade deficit with China is the largest that the US has had with any country as 23% increase in imports from China exceed rise in exports.

Moreover, ongoing turmoil in the Middle East is adding oil prices a further push, which can become a drag on the economic recovery. However, economists are of the view that the impact of Middle East turmoil to drag down the US recovery is limited as long as Saudi Arabia remains unaffected. Although increasing oil prices are emerged as a serious risk for the global economic recovery, especially in OECD countries.

Outlook

Despite challenges, the good news is that the world’s largest economy has picked up steam since the end of 2010 and is now seeing renewed growth trajectory. But how far the growth tempo can reduce unemployment rate remain to be seen. The economy needs a credible strategy for dealing the burgeoning deficit. Despite, unemployment rate still at 9%, economists are optimistic about the improved sentiment which is seen as a sign of likely spending and investment and could be sustained. Timothy F. Geithner, Treasury Secretary is very confident about the growth sustainability.  He says “It is not a boom or an expansion but it is going to offer a rapid decline in unemployment.”

 Jany, Chief Economist