Is the US Economic Recovery Losing Steam?

New economic numbers on the employment front seem to have triggered a sense of gloom on the US economic front, with the US Fed officials taking a dim view on it. As per a survey by the payrolls firm ADP, the US economy added only 13,000 nonfarm jobs in the months of June against the expected 61,000. The number of jobs created in the month of May stood at a better 57,000. With this development, the June unemployment rate is likely to edge up to 9.8 percent from 9.7 percent in May. The new unemployment figure seems to be leading to the view that the US economic recovery may not be self sustaining.

US Fed officials have finally acknowledged that the Euro debt crisis may hamper the US economic recovery and have also suggested that the potent mix of the impact of the Euro debt crisis and laggard employment numbers calls for no change in interest rates. Thus, the US Fed is likely to keep interest rate levels at its present and may not consider raising the rate for an extended period. The US Fed also perceives a risk of deflation, which could arise if employment does not pick up.

Increasing employment enhances the purchasing power in the economy and can keep prices stable or put an upward pressure on them. With, employment numbers weakening, purchasing power in the US economy is likely to be curtailed, thus giving rise to the specter of deflation. The US economic growth figures for the first quarter were curtailed to 2.7% on an annualized basis against the expected 3.0%.

Economic recovery in the US, which had received support from the government stimulus package needs to become self reliant. This requires private spending and investment to replace the government stimulus package in order to make the process self sustaining. Government stimulus is based on public borrowings and leads to an increase in the fiscal deficit. Fiscal deficits cannot be increased indefinitely as they can lead to the collapse of economic systems.

The quantum of job losses since the beginning of recession in December 2007, numbering to some eight million is enough to curtail substantial purchasing power in the US economy. This massive loss in employment seems to have taken the steam out of the spending power in the US economy leading to depressed demand and further reduction in production in the US economy. Reduction in production further leads to reduction in employment and a vicious cycle gets established. To break the vicious cycle, governmental intervention via a fiscal stimulus can have positive results. However, eventually, the fiscal stimulus needs to be wound down and the economy needs to get back on to its own growth path.

While, for some time it was felt that the US economy may have managed to reach a self sustaining growth path, doubts are beginning to emerge if this has happened. The Euro debt crisis is an additional drag that seems to be slowing the pace of economic recovery in the US.

Fortunately talks of a double dip recession in the US have not gained much currency as yet. Hopefully, the US economy demonstrates better employment numbers in the next few months so that the chances of any further bad economic news do not arise and the US economy achieves a self sustaining growth path.


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