Despite Recent Growth, US Recovery is Still Weak

In the fourth quarter of 2009, the United States economy expanded at an annualized rate of 5.7% giving the impression that the recovery in world’s largest economy has been stronger than expected. Yet, growth was mainly due to inventory rebuilding and the recent economic expansion maybe short lived.

Indeed, on a year over year basis, the US economy grew only 0.1%, which is not very strong having in mind that in the last three months of 2008 US output deteriorated by 1.9%. Moreover, surprising strong expansion in the fourth quarter of 2009 may not last in 2010 as 3.4 percentage points out of 5.7% growth came from inventory rebuilding. In fact, the production is likely to slow down once companies will adjust to demand level.

Looking further, sooner or later, the poor condition of the labor market will start having negative impact on the pace of recovery. In fact, the economy has lost 7.3 million jobs since the recession began in December 2007 and the unemployment rate is the highest in 26 years. Evidently, without growth in employment, households can’t generate income and create demand which is necessary in elevating production levels.

To make things even worst, the biggest fiscal deficit on record combined with the anticipation of low interest rates for a long time is discouraging investors from depositing money in the United States. In fact, the US government deficit is likely to reach 10.6% of GDP in 2010 and the Obama administration is projecting that national debt will rise from 64% of national output to 77% by 2020. More importantly, the US economy may experience a significant slowdown when the Federal Reserve exits from its unconventional policy easing, and is forced to increase rates to fight inflation.

Anna Fedec,
2/2/2010 12:59:10 PM