Economic Forecasts

By: Jack Wendy May. 26,2020
U.S. Economic Outlook

Social distancing to contain the Covid-19 pandemic caused the economy to contract at the sharpest rate since the end of 2008 in the first quarter. Consumer spending and business investment plunged, while exports also shrank at a rapid clip amid disrupted global trade. Q1?€?s dismal result, however, will pale in comparison to the unprecedented contraction expected in Q2. Initial jobless claims topped 30 million in the six weeks ending 25 April. In tandem, consumer confidence plummeted in April on elevated uncertainty over the economic situation and the frail labor market. As the true impact of the Great Lockdown continued to take shape, Congress passed its fourth economic relief package of USD 484 billion in late April which replenished the Paycheck Protection Program?€”a small business fund which dried up in mid-April?€”and provided additional funds for hospitals and testing.




Economic Overview of the United States

Despite facing challenges at the domestic level along with a rapidly transforming global landscape, the U.S. economy is still the largest and most important in the world. The U.S. economy represents about 20% of total global output, and is still larger than that of China. Moreover, according to the IMF, the U.S. has the sixth highest per capita GDP (PPP). The U.S. economy features a highly-developed and technologically-advanced services sector, which accounts for about 80% of its output. The U.S. economy is dominated by services-oriented companies in areas such as technology, financial services, healthcare and retail. Large U.S. corporations also play a major role on the global stage, with more than a fifth of companies on the Fortune Global 500 coming from the United States.


Even though the services sector is the main engine of the economy, the U.S. also has an important manufacturing base, which represents roughly 15% of output. The U.S. is the second largest manufacturer in the world and a leader in higher-value industries such as automobiles, aerospace, machinery, telecommunications and chemicals. Meanwhile, agriculture represents less than 2% of output. However, large amounts of arable land, advanced farming technology and generous government subsidies make the U.S. a net exporter of food and the largest agricultural exporting country in the world.

The U.S. economy maintains its powerhouse status through a combination of characteristics. The country has access to abundant natural resources and a sophisticated physical infrastructure. It also has a large, well-educated and productive workforce. Moreover, the physical and human capital is fully leveraged in a free-market and business-oriented environment. The government and the people of the United States both contribute to this unique economic environment. The government provides political stability, a functional legal system, and a regulatory structure that allow the economy to flourish. The general population, including a diversity of immigrants, brings a solid work ethic, as well as a sense of entrepreneurship and risk taking to the mix. Economic growth in the United States is constantly being driven forward by ongoing innovation, research and development as well as capital investment.

The U.S. economy is currently emerging from a period of considerable turmoil. A mix of factors, including low interest rates, widespread mortgage lending, excessive risk taking in the financial sector, high consumer indebtedness and lax government regulation, led to a major recession that began in 2008. The housing market and several major banks collapsed and the U.S. economy proceeded to contract until the third quarter of 2009 in what was the deepest and longest downturn since the Great Depression. The U.S. government intervened by using USD 700 billion to purchase troubled mortgage-related assets and propping up large floundering corporations in order to stabilize the financial system. It also introduced a stimulus package worth USD 831 billion to be spent across the following 10 years to boost the economy.

The economy has been recovering slowly yet unevenly since the depths of the recession in 2009. The economy has received further support through expansionary monetary policies. This includes not only holding interest rates at the lower bound, but also the unconventional practice of the government buying large amounts of financial assets to increase the money supply and hold down long term interest rates?€”a practice known as ?€?quantitative easing?€?.

While the labor market has recovered significantly and employment has returned to pre-crisis levels, there is still widespread debate regarding the health of the U.S. economy. In addition, even though the worst effects of the recession are now fading, the economy still faces a variety of significant challenges going forward. Deteriorating infrastructure, wage stagnation, rising income inequality, elevated pension and medical costs, as well as large current account and government budget deficits, are all issues facing the US economy.


United States?€? Monetary Policy

The U.S. Congress has established that the monetary policy objectives of the Federal Reserve are to promote maximum employment and price stability in what is known as the ?€?dual mandate?€?. The Federal Open Market Committee (FOMC) is the Fed's monetary policymaking body. The FOMC meets about eight times a year to discuss developments and the outlook for the U.S. economy and to debate different policy options, including the level of interest rates. The federal funds rate, the main interest rate managed by the Fed, is the rate which deposit banks charge each other to trade funds overnight in order to maintain reserve balance requirements. The federal funds rate is one of the most important in the U.S. economy because it influences all other short term interest rates.

During the years since the recession hit, the Fed has been very active.. Interest rates were initially supposed to be kept low only until the unemployment rate dropped to 6.5% or inflation surpassed 2.5%. However, this specific forward guidance was revamped in March 2014 when the Fed announced that any future decisions to hike interest rates no longer depended on previously-established quantitative thresholds, but rather on the assessment of a broad range of more qualitative information. In an additional response to counter the effects of the recession, in December 2012, the Fed announced an unconventional policy known as ?€?quantitative easing?€?. This policy involves the purchase of vast sums of financial assets in an attempt to increase the money supply and hold down long-term interest rates.

United States?€? Exchange Rate Policy

The U.S. dollar is often referred to as the world?€?s currency because it is by far the most used currency in international transactions and also the most widely held reserve currency. Almost two thirds of currency reserves held throughout the world are in U.S. dollars.

Although the Treasury Department has the primary authority to oversee international financial issues, the Treasury?€?s decisions regarding foreign exchange are made in consultation with the Federal Reserve. However, U.S. intervention in the foreign exchange market has become increasingly less frequent. U.S. authorities typically let the open foreign exchange market and domestic monetary policies determine rates.

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