Monday, November 7, 2011

US Economy Shows Signs of Recovery

Finally some good news vis-à-vis the US economy!

The economy registered modest but encouraging growth last quarter. According to the calculations of the Commerce Department, the nation's Gross Domestic Product grew by an annual rate of 2.5% in the July-September quarter, which is almost twice as much as it grew in the previous April-June quarter. This economic growth is a significant improvement over the very feeble 0.9% growth that we saw in the first half of the year. The GDP growth also sends a good signal about the prospects of the US economy and should be reassuring as some economists had warned that the US economy was heading towards another recession.

What caused this rise in GDP growth? First and chiefly, an increase in consumer spending, and second, an increase in business spending on software and equipment. During the summer, consumers spent on everything from clothes to cars at an annual rate of 2.4 %, which is thrice what they did in the previous Spring quarter. What is more, households stepped up their spending on services by 3%, which is the highest increase in spending on services in more than 5 years. However, the increase was mostly due to rising health care costs as well as a very hot summer which necessitated higher than usual expenditure on cooling. Businesses also contributed slightly to the increase in GDP growth by increasing their investment on equipment and software, which increased 17.4% that is thrice what it did in spring.

Despite this encouraging growth however, the GDP growth is still much below what is required to generate many jobs and to drive down employment rate. Economists caution that consumer spending, which accounts for 70%  of all economic activity in the US, will not pick up until incomes start growing, which unfortunately does not seem imminent. At the moment consumers are increasing their spending by eating away their savings but that obviously cannot continue forever.

There is thus a “half full” kind of situation for workers vis-à-vis the economy. The cause of concern is that the GDP increase is not so high that it could motivate companies to hire more and the increase in consumer spending was mostly accompanied by consumers’ dipping into their savings. Such a trend is not sustainable, not least because savings tend to run out! Thus the vicious cycle of low consumer spending leading to low economic growth and thus fewer jobs and fewer jobs leading to low consumer spending and low economic growth is likely to continue. Which is not heartening.

What is encouraging, however, is that the economy picked up in the last quarter and another meltdown--which seemed to be in the offing after recent political wranglings over debt ceiling precipitated a temporary stock market crash and partly led to the downgrading of the US credit rating--does not seem imminent. As recently as in August another massive recession seemed to be hovering over the horizon so it is reassuring that an appreciable increase in GDP growth suggests that we will not see another recession soon. That is important because another economic downturn will further lead to large-scale layoffs, increasing unemployment, which is already a very high 9% at the moment.