Sunday, October 10, 2010

US economy update

Early this week, the chief economist of Goldman Sachs, Jan Hatzius, forecast two scenarios for the US economy over the next 6-9 months - either a "fairly bad one" (economy grows at a 1.5-2% rate through the middle of next year and the unemployment rate rises moderately to 10%) or a "very bad one" (tipping into outright recession). Later in the week, reinforcing the gloom and the reality that the recession is far from over, came the September jobs report. The Center on Budget and Policy Priorities has a series of excellent graphics that nicely captures the US economic situation.

The economic growth rate looks set to taper off, potentially tipping the economy back into negative growth territory, especially with the stimulus spending now becoming history.

The unemployment rate remained close to historic highs at 9.6%, with the economy losing 95000 jobs in September.

Taking into account people who want to work but are discouraged from looking and people working part time because they can’t find full-time jobs, the most comprehensive measure of unemployment recorded its highest ever reading at 17.1% in September.

The private sector job creation machine looks comatose and shows no signs of any revival, leaving government with the responsibility of stabilizing the labor market. In fact, after rising by 93000 in August, the increase in private sector payrolls slowed down to just 64,000 in September.

On a historic sweep, the extent of job losses has been the worst since the seventies. Since the downturn began in December 2007, the economy has shed, on net, about 5.6% of its non-farm payroll jobs, and this without accounting for the fact that the working-age population has continued to grow.

On its way up the recession slope the unemployment rate had shot up, whereas it remains sticky on its way down.

And, as the CBO estimates show, the fiscal stimulus spending through the ARRA appears to have saved the economy from a complete disaster. It estimates that the GDP in the second quarter of 2010 is between 1.7-4.5% larger than it would have been without the Recovery Act.

The CBO also estimates that without the Recovery Act, the unemployment rate in 2010 would have been 0.7-1.8 percentage points higher than it actually will be and payroll employment will be between 1.3-3.3 million jobs greater than it would have been.

And, the gap between actual and full-employment GDP would have been much larger without TARP and the Recovery Act.

Update 1 (13/10/2010)

Sobering stats from the Times about the recovery from recession in the US. At the current rate of job creation, the nation would need nine more years to recapture the jobs lost during the recession. And that doesn’t even account for five million or six million jobs needed in that time to keep pace with an expanding population. Given that median house prices have dropped 20% since 2005, assuming an inflation rate of about 2%, it would take 13 years for housing prices to climb back to their peak.


sai prasad said...

sad for a great country. With all the Nobel prize winning economists coming from the same USA, further worrysome that they have no solution. In fact, they are not even able to stem the rot. And where is all this debate leading to ? And how do we know that we stand a chance of shaping things ?

Would love to see such figures for India's situation. Any ideas?

Parag said...

A huge factor behind the economic crisis is the increasing gap between incomes and cost of living over the past 30 years. In trying to maintain their standard of living, Americans have placed themselves ever deeper in debt. Perhaps because this has happened over a long period of time, it goes largely unnoticed.

World economy update