Monday, April 2, 2012

Research Paper on Economics

Research Paper on Economics

Economic Situation in USA
In accordance with astonishing official statistics of the United States of America, the country is almost facing the new economic recession in 2008. The level of unemployment rises, prices for food and energy increase, and industries and financial markets are facing hard times.

Currently the U.S. economy is in the very dangerous state, and government should be very careful, as even small shock can be crucial to pushing the economy over the safe edge. According to the Blue Chip consensus, the probability of the recession in the country is about 40%, which is very high. There are about seven main threats to the economy of the country that touch credit markets, capital spending, oil prices, exports, housing, consumer spending and taxes. Speaking about credit markets, it is necessary to pay attention to Libor rate and interest rate spreads. The spread between the Libor rate and the 3-month Treasury bill is about 75 basis points, when usually this spread is not greater then 10. The crisis can be only overcome if the spread returns to its normal state. The other big problem in the sector is short-term credits, on which big businesses rely very much.

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Capital spending are facing problems in the sectors of investments in core equipment and profits. If many companies are unable to borrow money from banks for their immediate funding needs, they have to turn to their own internal funds, and as profits significantly slowed down for many companies in 2008, they experience lack of current assets and thus unable to increase their profits. Managers are not willing to start new projects and to invest a lot, when the economy of the USA and global economies are slowing down.

Oil prices are very much interconnected with core inflation rates. What is good for the economy of the United States is that core inflation is moderate so far. But there is still the threat that inflation can push prices even at higher levels. And even though global economy was able to adjust the price for barrel oil at level of $ 80, it is still the question whether the global economy is able to develop and thrive with slow down of American economy.

A good sign for American economy is exports, which are growing due to dollar weakening. U.S. producers are taking larger market share at the global market and U.S. economy is slowing transforming from being nation-oriented and building many homes for its citizens to the country that produces tradable goods. This kind of transformation is expected to diminish the huge current account deficit. But still growth of export depends on two other variables: dollar value and growth rates in America’s trading partners.

United States situation with housing is very harsh, and even though building companies are trying to decrease their inventory of unsold homes, they are not successful enough, as sales are constantly falling along with new construction. Even official inventory statistics do not reflect real situation on the market, as it doesn’t take into consideration canceled sales.
Consumer spending is connected with employment growth, which keeps high wages. But the problem is that the job growth has decreased significantly for the last three years and the same tendency is keeping in 2008. Blue Chip consensus predicts that in 2008 the consumer spending can be the lowest for the last 17 years.

It is important to mention that federal government is very much concerned with the prospect of recession and thus has cut rates of fed funds by a full percentage point, but it might be meaningless, as people already have taken so many debts that they will not take on more.

Speaking about unemployment rate in the United States, it is important to mention that as to the March and April 2008 the level is 5.1, while in January it was 4.9 and in February, 4.8. The productivity level was 1.9 as to the December, 2007. Inflation level as the April, 18 2008 is 4.0, with the 4.1 overall forecast for the whole month. The inflation is expected to decrease up to 3.4 % in September, 2008. GDP growth (April, 18 2008) is at the level of 0.58 %.

American people are facing many taxes on the day-to-day basis. The most apparent taxes are payroll and income taxes. There are also sales and excise taxes, property and many others.

Government is trying to cope with the difficult economic situation in the country. The Economic Stimulus Act of 2008 was signed by the President Bush. The tax deduction of $600 per person was made to stimulate the country out of the current economic crisis. And even though President Bush is not willing to accept publicly that the United Stated are facing the recession, he will spend about $150 billion dollars (or 1% of the GDP) to struggle with the stagflation on inflation to prevent the recession. But most economists, politicians and analysts believe that Economic Stimulus Act of 2008 will not be successful enough in stimulating economy of the United States for several reasons. First, they suppose that most people will immediately spend obtained tax deductions. And the problem is that most people (according to statistical data) prefer to buy goods and merchandise that are manufactured in other countries, and thus stimulate foreign economies. The other reason is that annual budget of the United States have already borrowed a lot of money from other countries, especially from China. And therefore the propose stimulus package implies the purchase of more Chinese goods by American people. The best way to cope with the recession is the creation of new working places, and it becomes obvious that tax rebate will not create many in the country, as it is too little to encourage the start of new businesses. It could be more efficient to make the larger tax cut for new businesses or small companies for the creation of new jobs. The economy needs stimulation also because of the mortgage crunch. As tax rebate has no influence upon the monthly wages of the employees, they will continue to make their mortgage payments on the monthly basis. From one side, tax rebate is a good aid to people to pay off their rising debts, but from the other side, it is still not enough and some additional programs or financial aids will be very valuable.

As inflation, or cost of living, is rising quicker then salaries do, economy needs a great stimulation. To be more precise, salaries and jobs are decreasing. The price of gas and oil are the primary concern. And tax rebate has nothing to so with creating new jobs, as I have already mentioned in the previous paragraph, as well as with increasing salaries. It will be most likely just spent on expensive gas, instead of improving the state of U.S. economy.

And finally referring to the most important reason of the difficult economic situation of the country- it is war in Iraq. As tax rebates are planned to be made, it ill only increase country’s borrowings and hurt the economy further. It has nothing to do with the problems of war financing at all.

To my opinion to cope with crisis, the government should directly address main reasons for it and try to solve existing problems directly. The tax percentage decrease for the first time will be very efficient, as when taxes are decreasing- economy starts to rise immediately, along with rising salaries and creating new jobs.
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