Road to economic recovery of the USA

Road to Economic Recovery of the USA

Introduction

A recession is when GDP growth slows, businesses stop expanding, employment falls, unemployment rises, and housing prices decline. A recession is generally considered less severe than a depression, and if a recession continues long enough it is often then classified as a depression. Using that definition, many experts say the U.S. entered the current recession in 2007. GDP growth must be negative for two consecutive quarters or more. A recession starts when there are several quarters of slowing but still positive growth and the only good thing about it is that it cures inflation. The financial crisis of 2007-present was a crisis triggered by a liquidity shortfall in the United States banking system. It has resulted in the collapse of large financial institutions, the "bail out" of banks by national governments and downturns in stock markets around the world. In many areas, the housing market has also suffered, resulting in numerous evictions, foreclosures and prolonged vacancies. It is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. In our case, we are going to look at the extent of the recession, the policies implemented and how the economy of the USA managed to recover from it.

Discussions

Looking at the US quarterly data that we have collected, we can see that the quarterly US GDP increased at a growth rate of 1.2% into the first quarter of 2007. This basically means that the economy was experiencing growth and even the GDP itself was increasing. An increase in GDP or growth may be because of factors like, improved productivity in the country, increase in exports and even increased consumption. According to the US bureau of economic analysis, the increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, equipment and software, nonresidential structures, and state and local government spending that were partly offset by a negative contribution from residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased. From quarter 1 to quarter 2 of 2007, the US economy experienced a slowing in the growth rate. That is, GDP growth was about 3.2% in the second quarter and the increase in GDP growth was caused by increased residential construction, increased exports, and increased business spending.

In the 3rd quarter the US's GDP experienced growth of 3.6% which was larger than the previous quarter's growth and this meant that the economy was doing good in terms of GDP growth but in the last quarter of 2007, the growth rate slowed down to 2.1% . This was the beginning of the recession period. The US economy entered the year 2008 with a negative growth of 0.7% in the first quarter. This was the first negative growth recorded ever since the Great Depression. A strong dollar coupled with the global recession forced the US economy to cut exports, while the recession in the U.S. caused domestic demand to slump, reducing the demand for goods in the US to drop considerably.

Quarter 2 of 2008, the US recorded a positive growth of 1.5% showing that the economy was still growing even though it recorded a negative growth in the previous quarter and this was a good sign that the economy was recovering from the negative growth it experienced in the previous quarter. The 3rd quarter of 2008 recorded yet another negative growth of 2.7% and this was more extreme than the first one of -0.7%. This was evident that the US was entering a serious recession. The same variables that caused the growth of the US GDP to grow were the same ones that led to the negative growth, that is, reduction in residential construction, slowing in exports, and slowing business spending. This was the slowdown most economists feared. The last quarter of 2008 closed with an even worse negative growth of 5.4% and was even worse in the first quarter of 2009 which was -6.4% GDP growths. Economists say that a large contributor to the decline was a decrease of business inventories meaning that inventories were getting lean and unavailable.

Quarter 2 of 2009 was the beginning of growth; the GDP growth recorded was -0.7% which was an improvement from the previous quarter. This was an incredible and great improvement for the economy. The Bureau of Economic Analysis says that the growth was stimulated by the US government spending which contributed 1.25% to GDP growth. This was called the stimulus program. The $787 billion economic stimulus package was approved by Congress in February, 2009. The plan was to jumpstart economic growth, and save between 900,000 - 2.3 million jobs in the United States of America and the program helped to reduce the harshness of the recession and helped the US economy to start the recovery process which was now beginning. The program also helped to reduce unemployment in the US economy. It was now time to recover from the negative growth of 4 consecutive quarters.

The first positive growth recorded was 2.2% in the 3rd quarter of 2009 and this technically meant that the recession was over. Much of the growth was driven by the Economic Stimulus Program and the Cash for Clunkers incentive. The cash for clunkers incentive is a federal program designed to stimulate U.S. auto sales and help the environment by providing an economic incentive for consumers to replace old, low-mileage vehicles with new, fuel-efficient models that are safer and emit less pollution and fewer greenhouse gases. The concept is, if you trade in a low-mileage vehicle for one that meets a higher mileage threshold set by the Cash for Clunkers program, the government will provide up to $4,500 to help you purchase the new fuel-efficient vehicle. The program is designed to stimulate the sale of new cars manufactured by U.S. companies and this will benefit consumers because they will be getting a government-funded price break that can help them exchange an old car for a new one that is safer, uses less fuel and costs less to operate. This is one of the strategies or policies that were introduced by the US government during the recession to help improve the sale of new cars, thus boosting production of cars domestically. The stimulus program and the cash for clunkers incentive were the most effective policies that helped the US economy to recover from the recession which continued and saw the last quarter of 2009 recording a GDP growth of 5.6%. Everything was now going according to plan, the economy was recovering and at a promising rate.

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