Economy and Trade
The United States has the largest and most technologically powerful economy in the world, with its gross domestic product (GDP) estimated at US$14.6 trillion in 2008. This market-based economy has high levels of research and capital investment, funded by both national, and, because of decreasing saving rates, increasingly by foreign investors. The economy has benefited from the US dollar’s status as the global reserve currency.
The country has a two-tier labor market, exacerbated by the development of its technology and services industries. Since 1975, practically all the gains in household income have gone to the top 20% of households.
The war in 2003 between a US-led coalition and Iraq, and the subsequent occupation of Iraq, led to massive increases in funding to the military. Soaring oil prices between 2005 and the first half of 2008 threatened inflation, as higher gasoline prices ate into consumers’ budgets, which, in 2008, accounted for 72% of US economic activity. More recently, the economy has been impacted heavily by the ongoing global recession.
Long-term challenges include a low savings rate, inadequate investment in economic infrastructure, rapidly rising medical and pension costs of an ageing population, sizeable trade and budget deficits, and stagnation of family income in the lower economic groups.
Economic Policy over 12 Months
The past 12 months have seen the United States fighting against the adverse financial conditions that first hit the global economy in 2007. The period has been characterized by aggressive fiscal and monetary easing.
The Federal Funds rate was cut from 3% in March 2008 to a floating rate of 0–0.25% by March 2009. The Federal Reserve also participated in a simultaneous emergency interest-rate cut with the European Central Bank (ECB), the Bank of England, and the central banks of Canada, Sweden, and Switzerland of half a percentage point in October 2008. The Fed has also concentrated on “credit easing” to stimulate specific troubled markets. In November 2008, the Federal Reserve announced an injection of US$800bn into the economy in a further effort to stabilize the financial system, and encourage lending. About US$600bn is to be used to buy up mortgage-backed securities, while US$200bn is being targeted at unfreezing the consumer credit market.
Since May 2008, there have been large tax rebates to provide support to the consumer economy. Several companies have been rescued by the US government over the period, with particular attention paid to the ailing financial and property industries. In September 2008, mortgage lenders Fannie Mae and Freddie Mac—which account for nearly half of the outstanding mortgages in the United States—were taken over by the US government in one of the largest bailouts in US history. In October, lawmakers passed a package allowing the Treasury to spend up to US$700bn buying bad debts from ailing banks under the Troubled Asset Relief Program (TARP), some of which was later spent improving the flow of credit to US consumers. In November, the US government unveiled a US$250bn plan to purchase stakes in a wide variety of banks, in an effort to restore confidence in the sector. The Fed announced the purchase of mortgage-backed securities, beginning in January 2009. The government used some of these funds to purchase equity in US banks, and other industrial corporations.
In a presidential election campaign preoccupied with domestic economic malaise, Barack Obama’s victory in January 2009 owed much to his focus on resuscitating the US economy. Obama has pledged that his economic recovery package will be at the centerpiece of his administration, and has announced an additional US$787 billion fiscal stimulus package—two-thirds on additional spending and one-third on tax cuts—to save or create up to 3.5 million jobs, and to help the economy recover.
Economic Performance over 12 Months
The US economy is going through an exceptionally difficult period after having been hit by converging adverse developments, some in reaction to excesses during the upswing, others created by financial catalysts out of the control of the government. The sharp downturn in the housing market, a financial crisis, and temporarily high commodity prices caused activity to slow sharply during 2008. GDP rose 1.1% over 2008, down from 2.0% in 2007. However, GDP fell at an annualized rate of 6.2% in the final quarter of 2008, highlighting the deepening US recession. This happened at a time when the balance of payments was persistently weak (estimated at −US$569bn for 2008), and the fiscal stance unsustainable in the long-term—making for a difficult challenge to steer policy between competing objectives.
Unemployment has also risen sharply. In February 2009, employment fell by 651,000. By then, total job losses since the recession began in December 2007 numbered almost 4.4 million, and the unemployment rate stood at 8.1%, the highest since December 1983. This, combined with December 2008 US manufacturing figures at a 60-year low (ISM) of 32.9, explain the consumer confidence level of 25 in February 2009, down from 76.4 a year earlier. The merchandise trade deficit reached a record US$847 billion in 2007, but declined to US$810 billion in 2008, as a depreciating exchange rate for the dollar against most major currencies discouraged US imports, and made US exports more competitive abroad. The currency subsequently showed relative strength as other economies across the globe succumbed to recession.
The downturn in the global economy, sparked by the collapse of two Bear Stearns hedge funds in Q3 2007, and the ensuing liquidity crisis, had an impact on the country’s equity, bond, and property markets. The Dow Jones Industrials index fell 33% in 2008, bond spreads widened to levels last seen in the Great Depression, and the Case-Shiller Composite 20 Home Price Index showed an annual fall of 18.6% in 2008.
After posting a decline of 8.5% (annualized rate) in December 2008, the CPI finished the year up only 0.1% on a year-on-year basis, its lowest yearly price appreciation since 1945. This came just half a year after the 12-month growth rate of the CPI was running at a 17-year high of 5.6% (July 2008). Plummeting energy prices caused much of the headline decrease in December. While the decline in prices has reduced fears of rampant inflation, it has led to worries about a Japan-style depression and falling prices, which are partly responsible for the quantitative easing undertaken by the Federal Reserve.
Support for Inward Investment and Imports
Invest in America promotes and supports foreign direct investment in the United States, contributing to US job creation, innovation, and competitiveness. Further details can be found on the website (see More Info).
Following Hurricane Katrina in 2005, the US government instituted a series of tax incentives for companies investing in the GO (Gulf Opportunity) Zone in parts of Louisiana, Mississippi, Alabama, Florida, and Texas. Further details can be found on the US Internal Revenue Service’s website.
GDP growth: 1.1% (2008, BEA)
GDP per capita: US$48,000 (2008, est.)
CPI: 0.1% (2008, US Dept of Labor)
Exchange rate versus dollar: N/A
Unemployment: 8.1% (February 2009, Bureau of Labor Statistics)
FDI: US$237bn (2007, Department of Commerce)
Current account deficit/surplus −US$568.8 billion (2008, est.)
Population: 303,824,640 (July 2008, est.)
Source: CIA Factbook except where stated