Monday, December 7, 2009

US Economy in 2010

After the deepest recession since the Great Depression, there is understandably considerable relief at the first signs of growth in the US. Recent job figures also suggest the economy has turned. However, some commentators worry that these first greenshoots could lead to a complacent feeling and that the US economy still faces many weakness in 2010.

Economic Growth and Spare Capacity


This graphs shows the extent of the decline in economic output. The recession of 2009 easily dwarves the modest decline of 2001. The red line indicates the potential rate of economic growth. This shows how much spare capacity will exist in the US economy in 2010, this will make it difficult to tackle the unemployment problem.

Unemployment in US

The sharp rise in unemployment is perhaps the biggest problem facing the US economy. Like the UK, the rise in unemployment has been muted by a fall in working hours and increase in temporary employment. The bad news is that the forecast for unemployment in 2010 and 2011 is for a continued period of high unemployment.

Forecast for US Unemployment

Unemployment rates in 2010 and 2011 - source: P.Krugman

The Problem with US Banking Sector

As we mentioned in a recent post - Worries over future home foreclosures - the US banking sector still faces more potential losses from home repossessions. This graph shows how much banks have been affected by the housing market crash and credit crunch. It will take a long time for banks to recover balance sheets and ability to lend like before the crash.

Assets of US Banks

Budget Deficit

The US budget deficit continues its remorseless rise. Now over $12 trillion, it continues to rise as a % of GDP. It has also become an important political issue. With more voters apparantely concerned about the deficit than unemployment. The debt is a long term problem, but, efforts to reduce it in the short term could dampen the economic recovery and push the economy back into recession.

The Dollar in 2010

Many people might be a little surprise at how much the dollar rallied from the summer of 2008. But, this year, the dollar has regained its downward momentum, and it is hard to see a reversal in the dollar fortunes given state of economy.

Inflation and Interest Rates

There are some who apparently worry about inflation prospects in the US. But, I still feel the US has more to fear from inflation than deflation. Inflation is likely to remain low during 2010 because of the spare capacity and lack of wage pressures. As a consequence, interest rates are likely to remain low throughout 2010.


Image Sources: St Louis Fed

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