Essay About Government Spending And Current State Of The Economy

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The current state of the economy in the United States has been slow in recent months. While the economy is not currently in a recession, we may eventually fall victim to the first recession weve had in nearly ten years. The economy in general is showing growth, just not much. It will be difficult to predict what exactly will happen to the US economy in the future. Many economists do not agree on what will become of the economy. Some feel that we will begin a recession over the next year, and some feel that there is significant policy implementation that will allow us to dodge a recession and regain our economic strength. There are many factors that make up the US economy. The means in which I will discuss the overall growth and current status of the economy is by analyzing the Gross Domestic Product, and discuss the factors that cause it to rise and fall. The GDP is the total aggregate income of the United States. It is comprised of consumption, investment, government spending, and net exports. The GDP in the fourth quarter of 2000 grew at a 1.1% annual rate, the lowest since a 0.8% increase in the second quarter of 1995. The below par performance in GDP is due to those factors that comprise the GDP. The most important of which is consumption. Consumption in the United States has been less than expected mainly due to low consumer confidence. Consumer confidence has hit a 10 year low with an index of 106.8 as reported by Alan Greenspan. In the past 2 months the index number has plummeted nearly 22 points, the biggest decrease since the 1990-1991 recession. The reason for this recent drop in consumer confidence is due to several key factors. One factor is the poor performance of the stock market. The Dow Jones is down from its peak that was hit last year, but has now rebounded slightly. The Nasdaq took a dive with the decrease in the prices of tech stocks. The Nasdaq has fallen nearly 56% from its peak in March of 2000. The Wilshire 5000, which is a broader market, is also down by about 22%. Also a factor in dropping consumer confidence is the fear of more layoffs by major employers. The media has paid a lot of attention to large layoffs of companies, yet the labor markets still remain fairly tight. The natural rate of unemployment in the US is approximately 5%, which is higher than the actual rate of unemployment, which is estimated to be 4.2%. Another reason for the depletion of consumer confidence is the rise in inflation. The inflation rate was 3.5 percent last year as calculated by the consumer price index. Raising prices mean that consumers are less likely to purchase goods and services, and it also causes concern amongst them. A main reason for the increase in the inflation rate is the increase in energy costs. The increase in costs of energy is due primarily to a decrease in the supply of energy and an increase in the demand. Also playing a role in the lack of consumption is the purchasing power of net assets, or net wealth. In recent years when the stock market had been performing well, consumers were experiencing large increases in net wealth. Now that the market has been falling, net wealth is down and people have less purchasing power. Investment is another part of the economy that contributes to the GDP. Categories of investment include physical capital, residential construction, and inventories, all of which are owned by firms. Manufacturing activity has decreased so far this year in most parts of the US. Falling output among makers of high tech equipment and motor vehicles and parts was reported in the “Beige Book” in Atlanta, Chicago, St. Louis, and Dallas. Also noted was declining production of electronics and telecommunications, as well as production of industrial equipment and building materials. However there were improvements in production of pharmaceuticals and biotechnology. Most of the firms who reported declines in production also had increases in inventories. They reported that their inventories were higher than they had anticipated, and due to that have cut capital spending. It is hardly a wonder why investment has declined with the effect that consumer confidence has had on consumption. Government spending is also a very important part of the GDP. Government spending makes up about 16 percent of the economys aggregate expenditures. The government purchases many things with the taxes it generates. Some such things that the government spends their money on are defense, education, Medicare, and other government programs. Currently, and in recent years the government has been spending less than they could have. With the tax money generated, the government has actually been running surpluses. This means that the tax dollars generated by the taxpayers have been stockpiled and have not gone to purchase goods and services. This is good because for the first time in many years we have not been running a deficit. It is also bad because the government could be spending more and it would increase the real GDP. In the future President Bush plans to increase government spending as well as cut taxes. The final component of the GDP is net exports. Net exports are composed of total exports minus total imports. This number is usually a negative number because we are running a trade deficit. The US imports more goods and services than it exports. In the fourth quarter of last year, net exports were down 14.6 percent and net imports were up 0.6 percent. This means that there is an even greater trade deficit. The reason for the increase in the trade deficit is due to the strength of the US dollar. The US dollar has remained strong in the foreign exchange, while some countries such as Australia have struggled to maintain high exchange rates on their currency. Based on the sub par numbers the economy has been producing recently there has been a lot of concern about a recession. Some feel it is inevitable, while others believe that the economy will bounce back. The government has realized that the economy is showing signs that are primary for a recession. But before the country goes into a recession, it has to have negative economic growth for at least 2 quarters or six months. The government fearing that we may slump into a recession has already implemented monetary policy changes and plans on implementing fiscal policy changes. The changes in government policy will increase the growth of the economy and stabilize the slide downward. The first action that has