The American Economy is something that affects every person in the entire world. That is why it is so important to pay close attention to the details within it. Tracking the economy is difficult without knowing precisely what the economy is. Therefore, the exact definition of the word economy from Oxford Dictionaries is, “The state of a country or region in terms of the production and consumption of goods and services and the supply of money”. This basically means that everything to do with the making and selling of goods and how money is related to them in a community is essentially how you would describe the economy. It is important when looking at the economy of an entire country that it is only considered in the macro aspect to not get caught on minute details. This paper is an analysis of the economy currently in the fall of 2018 and a projection for the economy in the spring of 2019.
Debatably the most important indicator of whether the economy is doing well or failing is gross domestic product (GDP). It is important to have a number indicator of how the economy is doing or else the government would have no way to know the state of the economy. GDP shows the strength and size of an economy. It is the entire sum of all goods and services manufactured throughout a certain time frame. According to the Bureau of economic Analysis, Simon Kuznets created the measurement for economic strength in 1934 for the US government. It can be calculated with by adding together consumer spending, investments made by industries, excess of exports over imports and Government spending with the simple equation of GDP=C+I+E+G. Currently the GDP in America has been increasing consistently at 4.2 percent and is $19390.60 billion.
The steady increase in GDP is great for creating new jobs and growth as a whole country. The growing GDP resulting in a growing economy may cause problems in the near future. Over time, it is common for there to be peaks and valleys in an economy’s GDP. The constant increase over the last 10 years could force a decline in GDP as early as this coming spring of 2019. Our history shows that with so much growth in GDP, a recession is just around the corner. Knowing this, the government could have already thought about and began considering legislation that can make a recession less dramatic and easier on the population.
Another indicator of how an economy is doing is the unemployment rate. The unemployment rate is, simply put, the percent of the workforce that is without a job. This percentage is helpful to understanding the status of the economy because it shows the amount of people who are working and the amount of people who are not. The more people working, the better. The less people working, the worse. It is very easy to see how this number can affect the economy on a macro level and ultimately produce a higher GDP with a greater cash flow throughout the country’s population and government. Unemployment rate is calculated by dividing unemployment by the labor force and multiplying that number by 100. Although the unemployment rate usually looks higher helpful when analyzing the economy, it has a drawback.
The unemployment rate usually looks lower than it actually is because it doesn’t take everything into account. When calculating unemployment rate, the formula only considers those working full time jobs in the labor force, excluding temporary and part time jobs. It also ignores those who cannot work because of a disability or gave up on finding a job. The unemployment rate has, similarly to GDP, gotten increasingly better over the last several years by steadily decreasing. The most recent statistics regarding the unemployment rate come from September of 2018 with a 3.7 percent unemployment rate. This unemployment rate is extremely low and that there is an abundance of jobs available to a lot of Americans willing and able to work.
Coming in the spring of 2019 however, I expect the beginning of a large increase in the unemployment rate. This goes hand-in-hand with GDP. If the GDP is expected to not do as well as it has been the last 10 years, then companies will have less money. The loss of money forces them to reduce salaries or cut jobs which in turn increases the unemployment rate. The steady decrease in the unemployment rate most recently will eventually cause the unemployment rate to sky rocket in order to balance out. The change will not be extremely noticeable by spring next year but the unemployment rate will at least begin to rise.
Inflation can influence the economy in multiple ways. Inflation is the rate in which money losses its value. Some inflation is healthy for the economy for the reason that it can cause society to be more productive, force the economy to have a higher output, and create more jobs. The opposite of inflation is deflation and it causes high interest rates, decreases in wages, and sometimes higher unemployment. The negative counterpart of inflation is hyperinflation. Hyperinflation is inflation at an extremely high rate, and it forces the purchasing power or worth of the dollar to diminish. The current inflation rate is about 3 percent which is a healthy level of inflation that helps the American economy grow.
In the spring of 2019, the inflation rate will drop significantly. This is the case because whenever the GDP falls, it is normal for the inflation rate to drop as well. Since earlier in this analysis of the economy, it is predicted for the GDP to drop, it would affect the inflation rate in a negative fashion. Economic growth is created by the GDP and the inflation rate relies on GDP to grow and fall.
Foreign trade is simply that, trade between countries that are foreign to each other. Imports are trades that consist of products or services being paid for and entering the United States. Exports are the exact opposite, they are products or services leaving the United States into a foreign country. The United States trades most with China, Mexico, and Canada. Total foreign trading from the summer until the latest report available in 2018 is $1,070.4 billion for all countries, imports contribute $652.2 billion and exports $418.2 billion. At the end of the day, foreign trade has a huge impact on the economy because of how large the sheer quantity of money involved within it.
According to the diagram above, there is the indication of how the states of goods and services trade changed thorough 2014 to 2018. For the first and second quarter of 2019, the United States will experience an increase in trade deficit, as the imports increase and exports decrease. This essentially means the value of imports will exceed the value of exports leading to increasing in the trade deficit.
Consumer spending impacts the United States economy because it is the total value of all goods and services purchased by the United states. When there is demand, there is supply. This is what drives the economy and consumer spending. In the third quarter of 2018, the most consumer spending was on restaurants and accommodations. According to the Bureau of Economic Analysis, data implies the U.S. personal spending rose by $46.4 billion, there was a decrease in consumption of durable goods, and unaffected were both nondurable goods and services. Personal income increased by 0.3 percent and personal consumption expenditures also increased by the exact same percent of 0.3. This is normally how personal income and personal consumption expenditures are related.
Consumer spending for this coming spring will begin to decrease. The reason this is the case is because the population will begin to think we are in a recession when the GDP starts to decrease. Since the economy has not seen a decrease in GDP for the last 10 years, once it does happen, everyone will get nervous and begin saving their money to prepare for a recession which will ultimately decrease consumer spending.
Business investments affect the economy as well. A business investment is something like money or assets that are put into a company with the anticipation of getting more out it. This is an important aspect to companies because it will grow them as a whole. When a company grows, it will either cause them to hire more people or raise their current workers’ wages. This increases the amount of money circulating in the economy which will impact it positively. The flip side to this is if a company invests and losses that investment, they are forces to reduce wages or lay off workers. This will be bad for the economy.
Over the last several years, foreign direct investment has increasingly gone up. This is good because investment sparks the economy. Even if the United states goes into a recession during the spring of 2019, that will not be enough to drastically affect the amount of investments that are currently being dealt with. In July of 2018, $47,253 million in investment were put into foreign direct investments. Overall, it may begin to level off, but it will not be enough to affect the investment as a whole.
Another influencer of the economy is government spending. Government spending consists of all the money and resources that the government consumes. It is calculated every year and helps congress to decide what they will spend their money on in the next year. A problem for the United States Government is that almost every year, there is a deficit in government spending which means that there is more money being spent then there is in government revenue. It is easy to see how this could become a problem in the future when the government continuously spends more then they receive year after year. Almost 30 percent of what money is spent by the government is discretionary or optional, meaning that it is not necessary to spend. Cutting down on this portion of government spending would be great for the economy.
In the spring of 2019 there will be a spike in government spending. GDP influence government spending because if GDP goes down and there is a recession, the government will try to help spur the economy by spending more money in the economy. This will not have much of an effect because everyone will just be saving the money out of fear. It will mostly just add more to our increasing debt.
Finally, fiscal policy and monetary policy have a lot in common. They both have the power to influence the economy into growth or calm it down by regulating their separate functions. The difference between them is that fiscal policy is a term that is used to describe when the government manages tax rates or the government spending. Monetary policy pertains mostly to managing interest rates and overall money circulation in a population. These two combined definitely have a large impact on the economy. Fiscal policy spending has soared to above $850 billion in 2018 and monetary policy to just over 2 percent increase according to the National Association of State Budget Officers.
Because of the steady increase, this spring, fiscal and monetary policy statistics will stay relatively similar. Although the expected recession could have somewhat of an impact, it would not be enough to influence these two forms of policy much so quickly as the spring of next year. It is expected that since there will be one more increase in monetary and fiscal policy in the coming year before the two policies take a turn and go in the opposite direction.
Over the course of this paper, it has been presented to the reader that there are many ways different aspects can influence the economy in positive and negative ways and how they can be used to predict the future of how the American economy will be heading in the near future. In the spring of 2019, the economy will go into a little bit of a recession because of the consistent increase of GDP over the last 10 years. Gross domestic product (GDP), unemployment rate, inflation rate, foreign trade (exports & imports), consumer spending, business investment, government spending, fiscal policy, and monetary policy are all of the largest contributors to the United States economy. They all can be used to analyze the economy and predict what might happen in the future.
- “Bureau of Labor Statistics Data.” U.S. Bureau of Labor Statistics, U.S. Bureau of Labor Statistics, data.bls.gov/timeseries/LNS14000000.
- “Economy | Definition of Economy in English by Oxford Dictionaries.” Oxford Dictionaries | English, Oxford Dictionaries, en.oxforddictionaries.com/definition/economy.
- “Featured Content from InflationData.com.” Historical Oil Prices: InflationData.com, inflationdata.com/articles.
- “United States GDP 1960-2018 | Data | Chart | Calendar | Forecast | News.” Kenya Government Debt to GDP | 1998-2018 | Data | Chart | Calendar, TRADING ECONOMICS, tradingeconomics.com/united-states/gdp.
- Amadeo, K. (2006, December 7). How the Stock Market Affects You, Even If You Don’t Invest. Retrieved from https://www.thebalance.com/how-do-stocks-and-stock-investing-affect-the-u-s-economy-3306179
- Amadeo, K. (2009, December 27). What You Buy Every Day Drives U.S. Economic Growth. Retrieved from https://www.thebalance.com/consumer-spending-definition-and-determinants-3305917
- Anna | [email protected] (2018, October 5). United States Balance of Trade | 1950-2018 | Data | Chart | Calendar. Retrieved from https://tradingeconomics.com/united-states/balance-of-trade
- BEA | Joana Ferreira | [email protected] (2018, September 28). United States Personal Spending | 1959-2018 | Data | Chart | Calendar. Retrieved from https://tradingeconomics.com/united-states/personal-spending
- BEA: Data Tools, apps.bea.gov/scb/account_articles/general/0100od/maintext.htm.
- CNBC. (2018, July 30). Consumer spending rose solidly in June as households spent more on restaurants and accommodation. Retrieved from https://www.cnbc.com/2018/07/31/us-personal-income-june-2018.html
- Cox, J. (2018, July 27). Second-quarter GDP jumps 4.1% for best pace in nearly four years. Retrieved from https://www.cnbc.com/2018/07/27/us-gdp-q2-2018.html
- Joseph E. Kafchinski. (n.d.). Foreign Trade: U.S. Top Trading Partners. Retrieved from https://www.census.gov/foreign-trade/statistics/highlights/top/index.html#2018
- Joseph E. Kafchinski. (n.d.). U.S. International Trade Data – Foreign Trade – US Census Bureau. Retrieved from https://www.census.gov/foreign-trade/data/index.html
- Joseph E. Kafchinski. (n.d.). U.S. International Trade in Goods and Services (FT900). Retrieved from https://www.census.gov/foreign-trade/Press-Release/2018pr/06/index.html
- Kramer, Leslie. “What Is GDP and Why Is It So Important To Investors?” Investopedia, Investopedia, 5 Feb. 2018, www.investopedia.com/ask/answers/what-is-gdp-why-its-important-to-economists-investors/.
- Seth, Shobhit. “Inflation Definition.” Investopedia, Investopedia, 31 Oct. 2018, www.investopedia.com/terms/i/inflation.asp.
- Staff, Investopedia. “Unemployment Rate.” Investopedia, Investopedia, 22 Oct. 2018, www.investopedia.com/terms/u/unemploymentrate.asp.
- Stock Market – Forecast – 2018/2020. (n.d.). Retrieved from https://tradingeconomics.com/forecast/stock-market
- Telford, T. (2018, October 15). Retrieved from https://www.washingtonpost.com/business/2018/10/15/drop-bar-restaurant-spending-dampened-us-retail-sales-september/?utm_term=.27678cdac477
- U.S. companies seen investing more in business this year after tax… (2018, May 18). Retrieved from https://www.reuters.com/article/us-usa-stocks-capex/u-s-companies-seen-investing-more-in-business-this-yr-after-tax-cuts-idUSKCN1II2WO
- U.S. consumer spending rises; wage growth slows in second-quarter. (2018, July 31). Retrieved from https://www.reuters.com/article/us-usa-economy-spending/u-s-consumer-spending-increases-solidly-in-june-idUSKBN1KL1SR
- United States Balance of Trade – Forecast. (n.d.). Retrieved from https://tradingeconomics.com/united-states/balance-of-trade/forecast
- United States Consumer Spending – Forecast. (n.d.). Retrieved from https://tradingeconomics.com/united-states/consumer-spending/forecast
- United States Exports – Forecast. (n.d.). Retrieved from https://tradingeconomics.com/united-states/exports/forecast
- United States Imports – Forecast. (n.d.). Retrieved from https://tradingeconomics.com/united-states/imports/forecast