This paper aims to provide information concerning the economy and explain in detail some of the economic concepts that are vital to understanding how a country’s economy functions.
For starters, economic indicators inform economists and investors about the economy’s progress, specifically whether an economy is expanding or contracting. Essentially, economic indicators use data from previous months or years and compare it to real-time data to gauge whether the economy is growing or shrinking. Economic indicators include inflation, Gross Domestic Product, employment rate, consumer spending, manufacturing demand, construction spending, home building and home sales. Data from economic indicators is vital to informing economists to gauge future movements of macroeconomic data. It is essential to understand that economic indicators measure numerous aspects of the economy, including unemployment, price changes and overall economic growth. Additionally, investors and markets rely on information from these indicators to plan their movements.
Business cycles refer to economic changes through different stages identified as expansion and contraction. Various economic indicators –such as GDP, consumer spending, and unemployment rates, are vital in determining an economy’s current cycle. Understanding business cycles is essential as it provides investors and businesses with information on when to make profitable investments and transactions since it directly impacts numerous economic aspects such as corporate earnings and stocks and bonds investments. Four cycles affect all businesses; Expansion, peak, contraction and troughs.
- Expansion: The expansion stage is the most profitable cycle of the economy. During this stage, companies and businesses experience positive growth, and the stock markets reap desirable profits. Additionally, unemployment rates are low, and business witness steady gains. There is also increased buying and investing, leading to gradual price increases.
- Peak: Peak is the second stage in the business cycle. In this stage, the economy begins to spin out of control due to unhealthy changes in numbers. Several factors can lead to this harmful growth. For instance, investors may display overconfidence in acquiring many assets, causing their prices to spiral abnormally, leading to asset bubbles. Moreover, companies may be expanding without checks. The peak stage often marks the end of the expansion stage discussed above and the beginning of a downward trend.
- Contraction: The contraction stage describes the period through which an economy transitions from the peak stage to the last step (trough). During this stage, unemployment rates shoot up, stocks experience losses, and the Growth Development Product decreases. All these scenarios reflect that business activity is slowing down.
- Trough: The trough stage is the lowest point of economic decline. Troughs occur when the contraction stage has reached its lowest and is beginning to transition to the expansion stage. However, the trough stage cannot immediately transition into the expansion stage and takes considerably longer.
Judging from estimates, it is fair to say that the United States economy is in a trough (“US business cycle expansions and contractions,” 2021). The global COVID-19 pandemic affected the economy greatly, with the United States entering a trough. Accordingly, the economy has been in the contraction phase from April 2020 till date. Since then, business activity has been low until recently, when the economy appears to take shape to enter the expansion stage. However, it is difficult to ascertain when the economy will fully recover despite some indicators, such as the employment rate improving. Nevertheless, decreased company earnings and rising interest rates indicate that the economy is yet to recover, and it may take considerably longer before the economy gets back to normal.
Gross Domestic Product
The Gross Domestic Product, commonly referred to as GDP, determines the monetary value of products and services. In other words, it measures all output of a particular country’s economy. This financial indicator is vital to economists since it provides information concerning the overall performance of an economy. When the Gross Domestic Product is increasing, economists deduce that the economy is performing well. Conversely, when it decreases, economists interpret this change as the economy deteriorating. A shrinking GDP often translates to negative trends, such as increasing unemployment rates. According to the United States Bureau of Economic Analysis (2022), the Gross Domestic Product of the United States is estimated to be $25.5 trillion. The Growth Domestic Product has grown by 8.1% from the previous year. However, in the second quarter of 2022, the GDP decreased by 0.6% (Bureau of Economic Analysis). Since the United States economy has bounced back from the COVID-19 pandemic quickly, economists should be expected that the Gross Domestic Product will continue increasing. However, this growth is expected to be slow owing to persisting inflation coupled with the continued tightening of monetary policies by the Federal Reserve.
Inflation refers to the rate of change in product and service prices. In a regular market, there are instances when prices increase (inflation) and instances when prices decrease (deflation). Economists use the Consumer Price Index to measure inflation (Alvarez et al. 2020). This indicator gauges price percentage changes of household goods and services. It is essential to understand that the Consumer Price Index may be volatile through different months. However, establishing a trend over several months makes it easy to determine inflation rates.
Additionally, economists measure inflation by comparing Consumer Price Indexes of months from different years. According to the United States Bureau of Labor Statistics (2022), the Consumer Price Index increased by 0.4% in September and 8.2% in the last year. The increase in inflation can be attributed to monetary and fiscal policies initiated in response to the global COVID-19 pandemic, energy shortages and the Russian-Ukraine war.
When unemployment rates in a country are low, families and the whole country lose. Furthermore, workers lose their purchasing power, causing other workers to lose employment. Economists rely on the unemployment rate to best understand labour market conditions. Economists use unemployment rates to measure unemployment. It is essential to understand that unemployment rates are vital in gauging the general performance of the economy. The United States Bureau of Labor Statistics (2022) shows that the unemployment rate in the United States declined to 3.5% in September 2022. This decline in the unemployment rate may be attributed to increasing inflation which means that more workers are available to supply short-term labour in return for higher wages.
Monetary policy refers to the central bank’s tools to regulate the money supply and improve economic growth through measures such as controlling interest rates. The Federal Reserve Bank is responsible for initiating and performing monetary policies concerning the economy of the United States. Specifically, The Federal Open Market Committee (FOMC) oversees all economic policies in the United States intending to control inflation. According to a recent press release, the Federal Reserve increased interest rates by 0.75%, indicating that the rates may increase above this level (Federal Reserve System, 2022). Moreover, the Federal Open Market Committee (FOMC) argued that despite current indicators of production and spending, inflation is still high due to high energy and food prices and far stretching effects of the COVID-19 pandemic on the economy. Nevertheless, the Federal reserve still recognizes that hiking rates will cause adverse effects on consumer instruments such as credit cards and home equity loans (Federal Reserve System, 2022).
Fiscal policies describe the application of government spending and tax practices to affect economic conditions. For example, when tackling inflation, the government may choose to cut spending or increase interest rates to regulate the economy. The United States economy is currently following an expansionary fiscal policy that is meant to reduce spending. According to (xxx), the Federal budget policy for 2022 was determined to be $1.4 trillion, with revenues increasing by 21% while outlays decreased by 8% compared to 2021 (Congressional Budget Office, 2022). A project that could impact the budget is quantitative easing. This refers to the government’s purchase of treasury and mortgage securities to help it to meet its monetary policy goals. The government often utilizes quantitative easing when the interest rates are close to zero and need additional economic stimulus. Since interest rates are high, the United States government stopped utilizing quantitative easing. However, the quantitative easing in response to the 2020 recession caused by the COVID-19 pandemic has led to federal budget deficits. Consequently, this causes uncertainty in future budgetary effects (Congressional Budget Office, 2022).
International trade plays a huge role in advancing the economic status of the United States, one of the leading nations in trade. According to the Observatory of Economic Complexity, the top five imports of the United States are cars, motor vehicle accessories, computers, medicaments and broadcasting equipment. On the other hand, the top five exports by the United States are refined petroleum, gas, gas turbines, aircraft parts and medical instruments. The United States’ biggest trading partners are Canada, Mexico, China, Japan, Germany and South Korea (“United States (USA) exports, imports, and trade partners,” n.d.). The United States practices free trade, which unfortunately has been under attack from people who argue this form of trade introduces more competition for United States goods ad products. Nevertheless, free trade is the best option for the United States since it allows its citizens to specialize in producing products and services more efficiently than other nations and then trade them with high-quality goods at a lower cost.
In conclusion, the United States economy has bounced back stronger after suffering a downfall during the COVID-19 pandemic. Government policy responses have played a vital part in this rebound. However, strong and persisting inflation appears to slow down economic growth. The dampened growth calls for the United States government to improve efficiency in public spending, widen the tax, improve labour market policies and address other policy challenges that inhibit growth.
Alvarez, S.E., Lein, S.M. Tracking inflation on a daily basis. Swiss J Economics Statistics 156, 18 (2020). https://doi.org/10.1186/s41937-020-00062-w
Bureau of Labor Statistics. (2022, October 7). Employment situation summary. US Bureau of Labor Statistics. Retrieved October 24, 2022, from https://www.bls.gov/news.release/empsit.nr0.htm
Congressional Budget Office. (2022, October). Monthly budget review: September 2022. https://www.cbo.gov/publication/58493
The Federal Reserve System, [“Decisions Regarding Monetary Policy Implementation,”] press release (September 2022), URL. https://www.federalreserve.gov/newsevents.htm
US Bureau of Economic Analysis, [“Gross Domestic Product (Third Estimate), GDP by Industry, and Corporate Profits (Revised), 2nd Quarter 2022 and Annual Update,”] news release (September 2022), URL. www.bea.gov
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United States (USA) exports, imports, and trade partners. (n.d.). OEC – The Observatory of Economic Complexity. Retrieved October 24, 2022, from https://oec.world/en/profile/country/usa
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