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Us Macroeconomy Essay

1429 words - 6 pages

As the U.S. economy ventured into 2006, GDP growth was high mostly due to high consumption spending. Aggregate demand was high and employment was high. These high employment levels and oil prices left the Federal Reserve worried about inflation as it appeared that increased price levels were beginning to take hold. However, they restrained themselves from any interest rate hike as the housing market began to cool off and oil prices began declining. Meanwhile, the hurricanes temporarily hurt both businesses and consumers in the third quart, but production recovered as reconstruction and domestic energy output began to pick up near the end of the year. Residential construction was still ...view middle of the document...

However, a reversing trend began to take hold as the economy began to slow, the dollar began to decline, and foreign economies began to pick up. The export driven GDP growth was notable moving into 2007 as the housing market collapses and the credit crisis took hold. This, however, would not be enough to hold the United States out of recession.
As the economy moved into 2007 production activity peaked in December marking the officially declared beginning of the recession. While this fact was not known at the time, the there were many concerns as major changes were occurring in the economy such as decreases in home prices and consumer wealth, decreased consumer and business confidence, a credit crisis in the financial markets, slower rate of growth in federal government spending, a continuous increase in the money supply to keep interest rates low, a decrease in the value of the dollar, and growth in foreign economies. Businesses and consumers were hit with the deflation of value of their real and financial assets, as well as high debt levels and a surplus of real assets. Near the end of 2007 the housing slump had become to weigh heavily on the economy the affect of delinquencies of subprime mortgages is now coming into full swing. The decrease in available credit has dampened investment spending exacerbating this issue for consumers are higher oil prices and increased food and energy prices lowering their disposable income and ultimately decreasing consumption spending. In addition, consumers were grappling with high debt levels as the average level grew to 129% of disposable income. Both the growth of foreign companies compounded by the decrease in the value of the dollar spurred foreign investment in the U.S. shrinking the deficit and reducing GDP. The decreased dollar has make imports more expensive for U.S. consumers, but has helped exports as the U.S. becomes more competitive in the world marketplace. The drop in oil prices during this time along with the decreased dollar value also helped exports. The Federal Reserve seeing a decelerating economy started to aggressively cut the interest rate in an effort to start banks lending again and revitalize the economy. The housing market continues to decline and consumer confidence is at its lowest level in two years. This can also be seen in the fall of durable goods orders as consumers and businesses are putting off their purchases. However, the financial markets are near an all time high, exports are rising, and thanks to interest cuts business investment is holding up. Inventories of existing homes are continuing to rise and prices continue to fall. Mortgage companies are reducing the availability of credit. Unemployment has held relatively steady in the wake of the housing and credit turmoil. While the housing market has created a negative wealth effect on consumers, the continuing rising income and the health of the financial market has given then drive to spend. Productivity...

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