Future of GDP, Unemployment and Inflation

Economics

economy has recently emerged from recession. During 2009, real GDP declined 2.6%, the largest drop during the study period beginning in 2009. This came following flatlined GDP in 2008. The only similar instance on record was in the early 1980s when GDP declined 0.3% in 1980, rebounded slightly and then declined again in 1982 by 1.9% (BEA, 2011). The most recent recession was, because there was no rebound in the middle and because it was deeper in intensity, the most serious decline in economic output in the last thirty years. Whereas the recovery post-1982 was strong (4.5% growth in ’83 and 7.2% growth in ’84) this has not been the case now (2.9% growth in 2010 and forecasts for 2011 are not much better). The unemployment situation at present roughly mirrors that of the early 1980s recession. During that recession, unemployment moved to 9.7% in 1982 and 9.6% in 1983. During the current recession, unemployment moved to 9.3% in 2009 and 9.6% in 2010. This rate moved down quickly starting in 1984 and has begun to move down today, where it currently sits at 8.8%. It can be argued therefore that the impacts of the current economic slowdown have been at least somewhat stronger than those of the early 1980s recession, and that prospects for recovery are perhaps more challenging.

While the recovery in the mid-1980s was relatively strong, the current recovery seems to be weaker in intensity, especially with respect to the GDP figures. There are significant differences between the two recessions that makes direct comparison only somewhat useful. The early 1980s recession was caused primarily by Federal Reserve policy that raised interest rates sharply in the face of high inflation, the latter being caused in part by skyrocketed oil prices. The high interest rates, therefore, were deemed necessary to cause a recession and bring inflation under control (TCU, no date). The more recent recession has a number of causes including instability in the banking system that led to a credit crunch. Whereas the early 1980s recession was characterized by very high interest rates, the current recession is characterized by interest rates at the zero bound. Thus, the early 1980s recession — the only other major recession in the study period — makes a poor guidepost for predicting future economic indicators.

My predictions for the future of GDP, unemployment and inflation are as follows:

1-year

3 years

10 years

GDP

+3.0%

+4.0%

+2.6%

Unemployment

7.5%

4.8%

5.0%

Inflation

+2.0%

+2.5%

+3.0%

The GDP figure is based on a continued recovery and is the rate of growth expected for 2012. The current fiscal policy from the federal government is in general not going to help much with the recovery. There is little to stimulate either the economy directly via government spending — all indications are that government spending will be reduced in coming years (Bull & Bohan, 2011). There is ample monetary policy stimulus, but that has largely been in place for three years in the form of low interest rates. The , another element of monetary policy stimulus, is only scheduled for the first half of this year. By 2012, the economy will largely be left to its own trend, and that is currently pointing to slow growth. In three years, however, growth is expected to be higher. Previous economic slowdowns have resulted in improved growth prospects three or four years post-recession. Thus, above-average growth is expected in three years. In ten years, the trend will be normal, with growth constrained by cuts to the federal budget to deal with rapidly escalating medical costs and with gas prices pushing down growth prospects, since the U.S. is entirely unprepared to deal with higher gas prices.

Previous instances of high unemployment typically take 3-4 years to resolve (in 1986 unemployment was still at 7.0%). Thus, unemployment will not be fully resolved in a year, although the rate will likely be much better than it is now. Three years from now, unemployment will be at a better level as the “recovery” is around its peak. In ten years, unemployment will be at a fairly normal level.

Inflation is not expected to be significant. Current core inflation is very low, but two factors will push this higher. The first is the “quantitative easing,” which is designed specifically to raise interest rates and pull them off of the zero bound, according to Ben Bernanke (Robb, 2010). This policy is uncommon, but is one of the key good mechanisms available with zero (Bernanke, Reinhart & Sack, 2004). This policy is expect to help raise rates, but not to the point where inflation is a risk. A more likely scenario is that rates will rise to around the Fed’s desired inflation level. This is not expected to cause inflation issues down the road — interest rates will be raised to head of inflation if it begins to show. Higher rates of inflation than the Fed’s target are predicted in 3 and 10 years primarily because commodity prices are on a due to rising demand in the developing world and these prices will be built into the U.S. economy no matter what the Fed does. Thus, a towards increasing inflation is predicted unless significant economic cooling occurs in China, India and other such countries.

Works Cited:

BEA. (2011). Percent change from preceding period in real gross domestic product. Bureau for Economic Analysis. Retrieved April 13, 2011 from http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=1&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=1979&LastYear=2010&3Place=N&Update=Update&JavaBox=no#Mid

Bernanke, B.; Reinhard, V.; Sack, B. (2004). Monetary policy alternatives at the zero bound: An empirical assessment. Brookings Papers on Economic Activity. 2004 (2) 1-100.

BLS. (2011). Employment status of the civilian noninstitutional population. Bureau of Labor Statistics. Retrieved April 13, 2011 from http://www.bls.gov/cps/tables.htm

Bull, A. & Bohan, C. (2011). Obama to lay out deficit plan with focus on tax, spending. Reuters. Retrieved April 13, 2011 from http://www.reuters.com/article/2011/04/13/us-usa-budget-idUSTRE7321P120110413

TCU. (no date). Macroeconomics: Recesssions since 1970. TCU. Retrieved April 13, 2011 www.econ.tcu.edu/harvey/50453/recessions.pdf

Robb, G. (2010). Bernanke: Don’t call it quantitative easing. Marketwatch. Retrieved April 13, 2011 from http://www.marketwatch.com/story/bernanke-dont-call-it-quantitative-easing-2010-11-18