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Title: Forecast on the future of the US economy over the next year
Introduction
The path to economic recovery has been a disappointing one since the financial crisis ended in mid-2009. The US gross domestic product has grown by only 2% in real terms. This disappointing growth has resulted in an increase in the country’s rate of unemployment. Today, the level of GDP growth is so low that it is not able to lead to a reduction in the number of people who are in long-term unemployment. Owing to this disappointment, the Central Bank has been appearing to downgrade economic growth forecast. Earlier this year, the growth had been projected to level out at between 3.5 and 4.2%, though presently this prediction has been lowered to between 3.3 and 3.7% (Mulpuru 29).
Interest rates
In 2012, interest rates are expected to increase by a small margin. In 2008, when policymakers started appreciating the great magnitude of the economic crisis, they started cutting interest rates aggressively (Nanto 18). They were doing this in the hope that this would reduce the severity of the financial crisis. Such measures were adopted in Europe as the depression started cross continental borders. As the crisis spread to the Middle East and Asia, they realized that cutting interest rates was not the ideal solution to the problem.
A drastic reduction of interest rates in 2012 would be injurious to the housing sector, which is among the most crucial in the US economy. it would greatly influence the amount of money that lenders will repay to banks, and this may create serious problems for banks and other financial institutions. Any problem with banks affects the entire economy. This is the reason why one may not expect policymakers to alter the current interest rates in a big way in 2012.
The main rationale for increasing interest rates is to make the US treasuries attractive. The other viable alternative would be printing more money, though the main disadvantage with the latter option is that it would lead to high inflation rates. Countries that are finding it impossible to find any willing lenders are the ones that are resorting to the option of printing more currency.
Inflation and value of the dollar
One of the considerations regarding inflation in the US is the various ways in which it manifests itself. The annual US inflation rate is considered with regard to the following types of inflation: food, education, apparel, transportation, medical care, energy, housing, and recreation. All these types of inflation are considered in the US inflation rate.
Prices could be rising very rapidly in some inflation categories and falling rapidly in others. Young and healthy people are more likely to spend more on apparel, education, transportation, and recreation, while old people may spend most of their money on medical care. For housing, for instance, it is expected that home values will increase in 2012, meaning, meaning that the cost of housing may increase. Housing is one sector that influences the lives of virtually every American. This rise in value, therefore, is highly likely to contribute to inflation throughout 2012.
With inflation increasing, the dollar is expected to lose its value slightly. Indeed, for nearly 90 years, the dollar has been losing value, it would not be prudent to think that 2012 would be a significantly different year, especially with the inflation rate being expected to keep rising. In combination with factors such as unemployment, increase in home values, and money printing measures, the US dollar is likely to continue being devalued vis-à-vis other currencies, particularly the emerging market currencies.
Unemployment
In August 2011, the non-partisan arm of the Congress forecasted that the unemployment rate, which currently stands at 9%, would decline to 8.5%, which is still a high percentage, by the end of 2012 (Congressional Budget Office 4). The forecast went on to cover the projected economic trends of up to the year 2014, at which time the projected unemployment rate would still be above 8%. In essence, there is likelihood that on Election Day in 2012, unemployment will still be a major issue, which will not have been solved to a satisfactory level. In all likelihood, the unemployment rate will be above the 8% mark.
In 2010, the unemployment rate stood at 9.1% while five years ago, it stood 7.5%. Last year, the economy was still on the recovery phase following the economic recession that started in 2007 (Eder 11). This recovery phase is expected to continue throughout 2011 and 2012. Unemployment rate is one of the key indicators of economic recovery. With the unemployment rate standing at 8.5% in October, there is great hope that this positive trend will continue throughout 2012. It is hoped that this rate will range between 8.6 and 8.0%.
Over the last 12 months, the unemployment rate, by hitting 9.8% has reached the highest level since 1948. With a lot of attention being on any possible improvement, it is highly likely that the US administration will be conscious to put employment-friendly measures in place. It should be borne in mind that 2012 is an electioneering year, and positive indicators in terms of employment will be a hotly pursued goal in the Obama administration. Between September and October, unemployment rates have recorded a short-term fall. If that trend is to continue, this may set a stage for much lower rates at the end of the year and for the better part of 2012.
Foreign direct investment (FDI)
Foreign direct investments are investments by the residents of one country in another country. FDI includes reinvested earnings, equity transactions, and various transactions between companies. In the US, FDI is normally motivated by long-term considerations as opposed to short-term factors. Traditionally, FDI trend for the US has been on an increasing streak. It is interesting that while other aspects of the US economy continued to suffer under the weight of the economic recession, FDI continued to record significant growth. Now that the recession is over, the FDI levels are expected to continue rising as corporate entities focus on longer-term considerations as opposed to short-term securities.
The greatest level of FDI is expected to be channeled towards G-7 countries, namely Germany, France, Japan, Canada, Italy, and United Kingdom (Gloria 28). FDI flows to the euro zone are also expected to be significant, with countries worthy to be mentioned being Norway, The Netherlands, Switzerland, Sweden, and Spain. Corporate entities, however, are likely to rely a lot on economic indicators for each country as one of the criteria for entering into long-term FDI engagements. In terms of value of FDI, a notable focus is also likely to be directed to Middle Eastern and Asian countries, with countries such as China, Saudi Arabia, and Japan being major participants.
Balance of trade, government spending and debt, consumption, and investment
Trade deficits remain a major concern for Congress because of their potential to create trade pressures and consistent friction for the administration to put in place measures that lead to opening up of foreign markets. The current balance of trade indicators paint a grim picture of the US economy. Many US producers are crying foul regarding the Obama administration’s reluctance in protecting them from foreign competitors. Moreover, the administration stands accused of not doing enough to assist US industries to improve productivity at the international level.
Being a reflection of excess spending, the US trade deficits are expected to reduce in 2012 as the Obama administration tightens its fiscal policy through cost-cutting measures while at the same time promoting measures aimed at increasing the amount of savings. As investors become more confident about the growth of the US economy, it is expected that more investments will be directed into the economy. The investors’ confidence is likely to be buoyed even further by capital inflows, which could greatly offset the outflow of US dollars that are used to pay for imports.
The main setback, though, is that consumption levels will remain low throughout 2012. With unemployment rates remaining relatively high, few people are going to secure sufficient disposable income. This is likely to promote a trend of minimum consumption levels. The slight increase in interest rates will discourage households from borrowing money for consumption purposes. To reduce risk, any money borrowed by household may be channeled to investments as a way of creating self-employment as well as reducing default-related risks.
Works Cited
Congressional Budget Office. The Economic Outlook, Washington, D.C: Congressional Budget Office, 2011.
Eder, Gregor. Economic forecast 2011/2012, Washington, D.C. National Bureau of Economic Research, 2011.
Gloria, Diana. 2012 Economic Outlook, New York: City Area Chamber of Commerce, 2010.
Mulpuru, Simeon. US Commerce Forecast: 2008 to 2012, New York: Forrester Research, 2008.
Nanto, Dick. U.S. International Trade: Trends and Forecasts, Washington, D.C: Congressional Research Service, 2011.
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