The Current State of the United States Economy

Jeremy Keeshin
 The economic state of our country is one that varies greatly. We have the social

goal of growth and low unemployment and try to achieve that through the means of

government manipulation through Monetary and Fiscal Policy. The Bureau of Labor

Statistics takes many stats regarding growth through the lens of Price Indices, Gross

Output, Personal Income and Unemployment Rate. The Price Indices tell us how prices

are now in comparison to a base year and indicate inflation. Real Gross Domestic Product

calculates output for a year, Personal Income tracks money that is earned in the circular

flow, and the Unemployment Rate tracks the people in the work force who don't have

jobs. The data from these statistics suggests that we are in a slight inflationary gap

because of the small percentage increase of Real GDP and CPI in addition to slowly

increasing Personal Income and a relatively stable but decreasing unemployment rate.

The statistics are all signs of growth, which means we are in a healthy economy, and the

trend line suggests that things will continue to increase in this way for the next six

months.

The first stat that demonstrates the slight inflationary period and recovery is that

of Real GDP which has been increasing slightly since late 2001. Real GDP is the statistic

that measure total output in a country and the formal definition is the market value of

final goods and services produced in a country in one year, stated in prices a base year,

adjusted for inflation. Currently the GDP of the United States during 2007 in the first

quarter was $13,613 billion in current dollars and $11,531.7 billion in 2000 dollars. As a

percentage, the Real GDP of the United States is experiencing about 0.8% growth this

quarter of Real GDP as shown by graph 1, but the growth rate, although positive, is

decreasing. For this reason we are in a slight inflationary and recovery and growth period
with increasing GDP. Trendline A shows a more long term increasing rate of growth,

which is most likely not sustainable, because then we would have to increase the amount

we are increasing, and as the amount we produce increases, increasing that amount as a

percentage would be more difficult. Trendline B shows a more recent decrease in the

growth rate of GDP and trendline C shows a steady rate of growth in the middle of these

two lines. The best prediction is trendline C, which is a solid average amount of health

growth in an economy because a drastic increase could cause the economy to peak out

and vice versa. The stats and graphs regarding Real GDP indicate a small inflationary

period and suggest future but, decreasing growth, and an eventual return to the health

growth rate.

The second statistic that lends insight into the health of the economy is the CPI or

Consumer Price Index. This is a measure of the prices of a fixed basket of consumer

goods, weighted according to each component’s share of average consumer spending, or

in other words, an overall measure of the price level with a basket of goods from the

consumer perspective. Some important relative CPI statistics to view are that $100 in

2006 is now $102.52 in 2007, and $100 in 2005 is $105.83 in 2007. This means that the

CPI has been increasing about 2.5 points per year recently, which is a solid target amount

of growth. After the year 2006 had a cumulative CPI percent increase of 3.2%, the first

four months of 2007 have had an average increase of 2.5%. Right now, although the

country is increasing its output, it is increasing at a lower level than last year. In January

CPI went up 0.2% and in February 2007 it went up 0.4%. This is still a sign of growth,

but the growth is leveling off, as was demonstrated by the Real GDP graphs. This is a

sign that we are in a recovery, but nearing a peak. On graph 2, trenlines A and C show
growth in the percentage increase in CPI, but trendline B is a more stable, long term

growth rate of around 2.5%. In the future, we will most likely near this 2.5% increase of

CPI, but short term, following trendline C, we are likely to increase CPI to about a 3%

increase before it levels off again. This Consumer Price Index tells it from the perspective

of the buyers, so it is more delayed than the Producer Price Index (graph 3), which is at

3.2% now. Both the CPI and PPI currently demonstrate growth, and this furthers the

position that we are in a recovery period. Additionally, the slow down of the rates and

extended periods of positive rates suggest that we may be nearing a peak as marginal

increases slow down.

Another statistic that contributes to this view of the economy is the statistic that

measures the labor force, the unemployment rate. The unemployment rate is the

percentage of people in the economy who are willing and able to work but who are not

working. As Colander’s text tells us, “When an economy is growing and is an expansion,

unemployment is usually falling; when an economy is in a recession, unemployment is

usually rising” (498). Currently in our economy, as demonstrated by graph 4, the

unemployment rate is falling and has been falling since the middle of 2003. This suggests

that we have been in an expansion for the last four years and therefore unemployment is

falling. Since the economy is expanding, we are in an inflationary period and are

overusing resources and are past Full Employment, which is shown on this model as the

trendline at 5% unemployment. The current unemployment rate is 4.5% as the Bureau of

Labor Statistics in May2007 reported it. Trendline A on graph 4 suggests that the

unemployment rate will continue to decrease in this manner, and it is inferable to predict

that it will keep falling until it reaches 4% (the min line) and then increase until it reaches
6% (the max line). These natural fluctuations in the unemployment rate occur as the

business cycle oscillates and resources are overused in expansion and underused in

recession. My estimate is that in 6 months the unemployment rate will be at 4.2% as the

expansion we are currently in continues.

A final stat that illuminates and helps relate the state of the economy is the

Personal Income, Disposable Personal Income, and Disposable Personal Income Per

Capita statistics. Personal Income is National Income plus net transfer payments from

government minus amounts attributed but not received. Disposable Personal Income is

Personal Income – Persona Taxes, and Disposable Personal Income Per Capita is

Disposable Income divided by the population. Graph 5 demonstrates that the steady

trendline of Disposable Personal Income has been increasing at about 0.4% per month.

Graph 5 also shows on Trendline B that the Real Disposable Persona Income had been

increasing during the majority of 2006, but the rate of growth started to decrease around

the end of 2006 and going into 2007. Currently, the Real Disposable Income Per Capita is

$28,250 in chained 2000 dollars, and this number has been increasing steadily as shown

by Trendline A on graph 6. Additionally according to the economic identity that Gross

Domestic Product = Personal Income because they are two ways to measure money flow

on the circular flow, the GDP graph should mirror the PI graph and it does. As seen on

graph 1, the percent increase in Real GDP decreases at the end of 2006 as does PI. This

suggests that we will move in the same direction of Real GDP as PI. My prediction for

the next six months is that PI, like GDP will continue to increase, but the rate of increase

will slowly decrease, and this supports the conclusion that we are in an expansion nearing

a peak.
 The overall analysis of statistics reveals that we are in a slight inflationary gap, as

demonstrated on graph 7. With the Aggregate Demand increase, Real GDP increase, CPI

increase, and the unemployment rate decreases as you move past Yfe. The statistics all

match this AD/AS short run model. Additionally to place these statistics on the business

cycle, we would be at point A on the Business Cycle model. The Real GDP of the

economy is increasing, but the rate of increasing is decreasing, and we are nearing a peak.

However, we are not too close to the peak, and the economy will not peak out in the next

six months. Because of this current inflationary state of the economy the economically

correct Monetary and Fiscal policies would be contractionary and tight, but as always

politically an administration likes to back an expansionary Fiscal Policy. Bush and his

administration have approved tax cuts, which raised tax revenue (as you move up on the

Laffer curve as shown by graph 9) and have tried to maintain lower government spending

in all of the areas except National Security. Since the national budget is Tax Revenue –

Government Spending, an increase of revenue and a decrease of spending will decrease

the deficit, but hardly as much as Bush’s lofty plan expects to gain a surplus by 2012. The

administration projects a decrease in the deficit from 1.9% to 1.8% of GDP from 2006 to

2007. In the realm of Monetary Policy, the Federal Reserve Bank is conducting a

contractionary policy somewhat opposite of Bush’s Fiscal expansion. The Federal Funds

rate has been increasing since 2002, and currently it is at 5.25% up from its last change of

5% on May 10, 2006. The reserve requirement has been constant at 10% since 1992

(http://www.federalreserve.gov/monetarypolicy/0693lead.pdf, 589) and the discount rate

has been constant at 6.25% for over a year, so the net effect of the Fed’s policies is

contractionary as it should be. In regards to world events and national events, the increase
in National Security spending was a response to September 11, and spending to combat

terrorism will most likely continue. The introduction of the Euro as legal tender in 2002

had drastic affects on the value of the US dollar and relative interest rates, and since its

inception the dollar has depreciated a significant amount as the Euro has appreciated. The

international trade for oil and the inelasticity of demand in the United States has had a

significant affect on US markets, and the United States and its role as a major importer

has set it in a deficit in the current account, but a large surplus in the capital account. This

will not be resolved in the short run (in the next six months), but in the long run the

foreign possession of US capital assets will have a major impact.

For now, the US is in a short run inflationary gap and is in a recovery period of

the business cycle, but still has time before it peaks out. The increasing GDP, increasing

CPI, increasing PI, and decreasing unemployment rate are all factors that demonstrate

that the US is in an inflationary period. Fiscal policy has continued to expand for political

reasons, while the Fed is running a more tight money policy. With the new global

economy, world events will have an even larger impact on the domestic economy, and

they will become quickly intertwined. The economy is experiencing health growth now

and will be for the next six months, and it is my prediction based on the data that not for

five or more years will the economy peak out. The US economy, as always, is trying to

expand, and it is not for a while that the long-term effects of importing goods and

services and exporting capital will be realized. The current inflation and growth is

healthy, but it must be known that it will not last forever.

GRAPH 1

GRAPH 2
GRAPH 3

GRAPH 4
GRAPH 5

GRAPH 6
GRAPH 7

GRAPH 8
GRAPH 9