Development of the US economy over the Past 3 Years Essay Example for Free

Development of the US economy over the Past 3 Years Essay The American government has been successful in running its economy for the years 2005, 2006 and 2007 as shown in continuing productivity growth, the low level of inflation as well low interest rate. This paper therefore attempts to discuss or dramatize the success of the American Government been in running its Economy over the last three years. Since any success will have to be explained on what actions the American government has, this paper will therefore describe and evaluate the main macro economic policies used by the American government, if there is any, over the last three years. How successful is the American government in running its Economy over the last three years? The American government performed well in terms of GDP and other growth measures for the last three years starting from 2005 up to the third quarter of 2007. GPD growth was recorded to have an average of 3 ? % from 2005 up to first quarter of 2006. This slowed down a little starting from second quarter of 2006 (2 ? %) to first and second quarter of 2007 , but the third quarter of 2007 appeared to started showing higher increases at 3. 9%. In describing the state of the US economy, Poole said â€Å"†¦The U. S. economy is highly productive, profit-making opportunities abound, interest rates and inflation are both relatively low and stable. † The economy is however not without any challenges to face. Said challenge is not the business cycle but how the US economy will adjust on many fronts to the baby boom generation retirement but Poole believes that the U. S. laws and institutions will enable the country to face these challenges with a better deal of buoyancy than in some other countries that is facing or will be facing the demographic challenge sooner. Poole expressed an assurance that the U. S. economy is fundamentally sound. He cited the fact that surveys of business economists over the past few years regularly pointed to key sources of strength of US economy and these include â€Å"a dynamic and flexible labour market and a financial system that rewards innovation and risk-taking by channelling capital to its highest rates of return. † He explained that the US market-based economy will allow companies â€Å"the ability and the incentive to innovate and to adapt quickly to changes in relative demands for goods and services. Thus he observes that present managements responding promptly to various shocks that shock the economy and according to him this is a growing dynamism of the U. S. economy which be believes is satisfactorily illustrated by the rise in the economy’s rate of productivity growth that has began as early as 1995 and there is still no sign of let up even at present. One way to check economic performance is the level of inflation. Poole said, that inflation as measured by the all-items CPI called â€Å"headline CPI inflation† slowed from 3. 4 percent in 2005 to 2. percent in 2006, while the inflation rate measured by the PCE (core inflation, which excludes food and energy prices) price index rose slowed from 2. 9 percent to 2. 3 percent over the same period. The decline of inflation in 2006 could only indicate remarkable effect of the monetary policy. Poole explained that the restraint of headline inflation is undeniably an indication of the sharp decline in energy prices over the second half of 2006. He added that most economists believe that core inflation is a better measure of inflation pressures. He also explained that that slight increase in the core PCE price index from 2. percent in 2005 to 2. 2 percent in 2006, and the core CPI index increase more, from 2. 2 to 2. 6 percent was negative indication. However, the core price pressures have been easing out lately which was an indication of a momentum that is headed to a favourable direction. What are the economic policies used by the American Government in managing the economy? The main macro economic policies used by the American government over the last three years include the use of its monetary policies. The use of monetary policy is evident in Federal Reserve Bank having raised its target for the federal funds rate from 1 percent in 2004 to 5? ercent in June of 2006 and is still maintained at present. It was the US monetary policy actions that have kept inflation largely, although not perfectly in check. Monetary policies involved the actions done by the Federal Reserve Bank to control money supply for purposing of managing inflation and necessarily GDP growth. Thus Poole believes that such monetary policy likely had something to do with the timing of slower GDP growth. He emphasized that the timing of slower GDP growth was the inevitable result of falling margin of underutilized resources. He admits however of other factors that is causing the slowdown starting in second quarter of 2006 which he felt as independent of monetary policy. One was the sharp increase energy prices, which showed improvement in the middle of 2006 while the other was considerable weakness in housing markets, which Poole believed may just now be giving off very tentative signal of the need to stop as has reached the bottom . In relation to the use of monetary policy to the US economy, Poole suggested three remarkable facts that deserve attention. He identified the first by saying that the real GDP growth, though sluggish in prior years has become robust starting in 2003, which may now have contributed a present low unemployment rate of 4. 6 percent. Another is that fact long-term inflation expectations were hardly shifted, while the third is the fact of quarterly average yield on 10-year nominal Treasury securities that was actually slightly lower than it was in mid 2002. Thus Poole is justifying that, â€Å"the economy has performed well despite a near tripling of crude oil prices since December 2001. He also pointed about the issue of present energy price increase. The first one is of course attributing, the increase in price â€Å"a consequence of a booming world economy, which raised energy demand rather than a supply shock; while the second one is attributing to monetary policies in the US and in most other countries have their jobs well of securing inflation expectations. † Despite a decline in growth in 2006 as compared to 2005, Poole found still further proof to the latest data on stable performance of the US economy. Poole, said, â€Å"†¦Particularly noteworthy was the larger-than-expected increase in real GDP during the fourth quarter of 2006. Following relatively anaemic rates of growth in the second and third quarters of 2006, growth of real GDP during the fourth quarter picked up nicely, rising to a 3. 5 percent annual rate. † Will the decline in the some of the measurable variable prove a failure of the monetary policy of the company? Poole cited two other aspects of the GDP report which were less favourable than the overall report. First, there was recorded slight decline in the business fixed investment during the fourth quarter of 2006. He interpreted that that the decline was nothing more than normal variation, as may be perhaps a consequence on the part of firms that were waiting for release of the new Vista operating system from Microsoft. To support his position, he explained that over the four quarters of 2006, a 6. 8 percent in non-residential fixed investment rose was recorded and one could readily appreciate that a healthy and expected increase given that the economy has continued to absorb excess capacity. This he even believe on the positive figures forecast for the economy that will â€Å"perhaps produce better than expected results. He however warned that â€Å"the extension of the fourth quarter weakness in business capital outlays going forward certainly would be a cause for concern. † The second noticeable aspect of the GDP report that was the nearly twenty percent rate of decline in residential fixed investment. He narrated that the decline began in the second quarter and was followed by a greater decline in each of the subsequent quarter. Thus he explained that as a normal result, the sharp decline in private housing starts and sales must have cause a significant pull on real GDP growth in 2006. Thus the second half of 2006, showed the contribution to real GDP growth from real residential fixed investment to have averaged about negative percentage points. This would prompt then the explanation for the slowing down in 2006 on why monetary policy was not applied to address the problem. Poole, explained that the Year 2006 was a hard situation for homebuilders as compared to 2005. He explained that following a record-setting rate of 1. 7 million units that have started in 2005, he noted that single-family started to fall to 1. 5 million units in 2006. He explained that the this average showed a comparatively large number of starts during the first half of the year which was followed by a much lower level of starts during the second half of 2006. This he noted December 2006- single-family starts which were approximately 16. 5 percent below annual average. In comparison, Poole cited the consensus of the Blue Chip forecasters made in December 2005 that real residential fixed investment would decrease by only about 1. 4 percent in 2006, using annual average data, but the actual the decline was about 4 ¼ percent. The rate fourth quarter as of 2006 is therefore obviously steeper, than the fourth quarter of 2005 to the fourth quarter of 2006. It may thus be observed that the slowing down of growth starting in the second quarter of 2006 may be attributed to the continued fall on sale of housing although presently there are already signs of recovery. But since the third quarter of 2007 has even exceeded even the average of growth rate prior to slight decline in second quarter of 2006, it may be argued that the problem of housing has eased out already. It may be concluded that the American government has been successful in running its Economy over the last three years in terms of GDP and controlled level of inflation and the lower interest rate. The main macro economic policies used by the American government over the last three years include mainly the use of its monetary policies through the Federal Reserve Bank of the US by raising interest rate a little in order to control inflation. Since it was able to do its part in controlling prices via inflationary measures the US Government through the Federal Reserve has done well it function of managing the economy.