Andrea Bartges, Neena John, Ji-Won Park, Alex Pehlivanov, Anish Sahasrabudhe Mrs.

Plunkett AP Macro-2nd 5 November 2012

The U.S. economy is currently at the early stages of recovery in the business cycle, displaying slight economic growth and decreases in unemployment. Real GDP increased during the third quarter, from $13,548.5 billion to $13,616.2 billion; this results in a 2.0% increase. As the real GDP increased, the unemployment rate decreased from 8.1% to 7.8%. Although this rate is still historically high, the future shows signs of gradual improvement, such as increased spending and decreased unemployment. Indicators within consumption, investment, government spending, and net exports expounds upon the current state of the recovering economy. To begin, as a whole, personal consumption expenditures have increased. Household spending on durable goods have increased from $1218.5 billion to $1231.9 billion, and the nondurable spending moved from $2541.2 billion to $2581.7 billion. As consumers feel more secure in the economy, consumer confidence has risen 14.7%, from 61.3 to 70.3. Consumers are more willing to spend their money, which is reflected by the increased household spending. Also, they are more likely to borrow money because they feel capable of repaying the loans in a timely manner. Since household consumption makes up the largest portion of real GDP, this increase indicates more growth in the future because increased aggregate demand leads to increased real GDP. The consumer price index exhibits a significantly smaller increase as it moved from 230.244 to 230.580. Disposable income has also increased from $11,953.2 billion to $11,996.2 billion; however, the real disposable income has decreased from $10,303.1 billion to $10,300.8

billion. A cause for this is the impact of inflation on the nominal income. Because the nominal income has increased slower than prices have, the real disposable income has decreased. The decreased income and increased spending can be explained by consumer confidence. Since consumers expect future economic growth, they are inclined to spend and borrow more now, despite the current drop in real disposable income, in order to reap the benefits later on. Overall, by consumption beginning to increase as a whole, it displays prospects for future economic growth and development. Secondly, the US federal government expenditures have shown an increase of 2.3% from $1022.5 billion to $1046.2 billion; this is mainly due to increased spending in multiple sectors. The largest increase in spending is within the military, displaying an increase from $677.3 to $698.4 billion, a rate of 3.1%. The primary reason for the sudden increase in military spending is due to the effect of the threat of the upcoming sequestration, resulting in a decreased military budget for the 2013 year. The government also increased its non-defense based expenditures from $345.3 to $347.8 billion, a 0.7% increase. The reason for this increase in the spending is Social Security, Medicare, Medicaid, and unemployment welfare payments. Government revenues have increased from $2664.9 billion to $2669.1 billion. The comparison between the government expenditures and government savings reveal a higher expenditure value, resulting in a deficit of $1089.4 billion. The deficit is 8.0% of the real GDP; this is the portion that does come from the revenue collected. Overall, due to the increase in government expenditures, including investment within the private sector, current growth in the GDP can be seen and future growth can be expected. Treasury rates for the United States are at historical lows. One-year, five-year, and tenyear treasury rates are at 0.18, 0.73, and 1.75 percent, respectively. Interest rates have fallen

despite huge increases in the sovereign debt of the United States. This has likely happened because pessimism about the economy has driven investors to put their capital in what they believe are safe assets. The policy implications of these low interest rates are that the United States can probably continue deficit spending in order to spur economic growth because investors feel more confident about US debt than other nations. Gross investment within the United States has shown an overall gradual increase, rising to a rate of 0.13% from $1898.4 to $1900.9 billion. Capacity utilization has slightly increased from 78.0% to 78.3%. Although this change is not dramatic, the fact that utilization remains high shows positive steps towards higher production as it nears the utilization cap of 85%. The largest increase in the third quarter belongs to the private residential investment sector, increasing at a rate of 14%, compared to the second quarters rate of 8.5%. This is due to an increase of singlefamily structures within the housing market. Going against this increase is a decrease in the nonresidential investment sector, which decreased by 1.3% compared to an increase of 3.6% in the second quarter. This displays a negative aspect of the economy, as businesses withholding expenditures on capital shows no desire to expand. This type of investment is necessary for a growing economy, as it creates much-needed jobs for the people. Also contributing to an increase in gross investment is non-farm inventory investment, increasing from $53.2 to $62.8 billion. However, this growth is partly negated by a decrease in farm inventory investment, reduced from -$7.9 to -$20.2, due to the recent drought in the Mid-West, resulting in a lower agricultural output. Due to the overall increase in investment, the United States has increased our capital and can expect future economic growth. Net exports make up the final component of the expenditure approach in calculating GDP. The value of exports has decreased from $1842.1 billion to $1834.6 billion, resulting in a

0.4% drop from last quarter. This decrease can be attributed to the recession in Europe that has had a global impact. The value of exports to Europe has seen significant decreases. Imports have also decreased from $2249.6 billion to $2248.3 billion. The 1.3% drop can also be connected to the recession in Europe; due to their decreased production, our imports from Europe have decreased. As the value of imports is higher than exports, there is a negative net exports value of -$413.7 billion. This difference is higher than its previous value of -$407.4 billion. Inflation rates have shown fluctuations within the past three quarters, falling from 2.9% to as low as 1.4%, and rising back up towards the current inflation rate of 2.0%. This increase in inflation has caused a negative change within price stability. The unemployment rate is currently 7.8%. Although it has decreased slightly from 8.1%, it still remains historically high, due to the combination of a scarcity of work opportunities and the extended length of unemployment collection. Also, this rate appears high because the labor force is smaller due to people giving up the search for a job. However, the unemployment rate is gradually decreasing, striving towards the full employment rate of 4.5%. In the current presidential election, the major party representatives carry highly differentiating views on the correct economic policies and government actions necessary to remedy the current economic dangers. Governor Mitt Romney believes that the best path for the economic sector is to cut taxes within numerous private sectors, including a cut of 20% for individuals and moving the tax rate for cooperation to 25%. This follows the classical economic approach, using reduced tax rates to increase the disposable income of consumers, resulting in higher consumption. President Obama, on the other hand, has plans to decrease taxes for smaller business and increase government spending to directly inject money into the economy. With the effect of the multiplier effect, this primary injection could begin a chain reaction; increasing

capital, creating employment, and an achieving an overall increase in consumption. His method follows the views of Keynes, who stated that a direct injection by the government would result in more rapid change compared to a tax cut. We agree with President Obamas approach to the problem. Our reasoning for this is that if tax cuts become the main solution, the average American will save a portion of their increased income and less money will be spent in the economy. Our recommendation then would be to increase government spending rather than cut taxes across all tax brackets. Current events can easily affect the economy, and history has a tendency to repeat itself. One such example is the recent hurricane in the Northeast, Hurricane Sandy. Although its effects may be less devastating compared to the monstrosity known as Hurricane Katrina, the drawbacks, such as decreased consumption and the temporary shut-down of both businesses within the city and various oil refineries along the coast, are expected to be of the same nature. Following the effects of Katrina, the economy saw a sudden spike up in real GDP, due to the countrys efforts to replace the numerous damaged aspects of southern Louisiana. The chance that real GDP will spike up again is high, but depends dominantly on the degree of damage done by Sandy. Another connection to the history of the US economy is the effect of international affairs. Compared to the 20th century, the U.S. is more rapidly affected by international changes, such as the recent commotion that hit Europe. Had this commotion hit Europe between the Vietnam War and the breakup of the Soviet Union, the United States economy would have been less affected by the sudden economic breakdown. Also, Europe is currently trying to use monetary policies that the U.S. used 4 years ago to lead it to a weaker dollar. A weaker dollar creates a higher demand for their goods and services because it causes them to become comparatively cheaper

A current event that can have a large impact on the future economy is sequestration. If Congress does not act before the new year, tax rates would rise as government spending would be cut. This will create implications for future economic growth because of less disposable income and decreased government spending to be injected into the economy. The U.S. economy shows both strengths and weaknesses in its current stage. A major component that is supporting the economy is an increase in government spending. This increase in government expenditures has indirectly caused an expansion in aggregate demand, encouraging the growth of the real GDP. Also strengthening the economy is a slight increase in personal consumption and investment. Although this change is not as significant compared to government spending, the increase still promotes economic growth and shows positive outlook for the future of the economy. Hindering the growth, however, is an increase in net imports. With decreasing net exports, the real GDP is lowered as people are buying more foreign goods and services as they become cheaper in comparison to domestic products. This situation is worsened as foreign countries are not finding the initiative to purchase American-made goods. In comparison, this scenario is reversed within the competing countries, as the foreigners are buying less American goods. The effects of international trade, although it is an important factor, does not completely offset the continual growth of the economy, which is currently upheld by the consumption, investment, and government sectors, continuing the enduring betterment of the economy of the United States of America.