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Economic Analysis and Comparison
The United States as a country has the world’s biggest economy. In 2007, the country’s Gross Domestic Product (GDP) was estimated at USD13.8 trillion. Most economists view the US economy as a hybrid. The majority of the microeconomic decisions are made by the private sector. The government comes into the picture to regulate markets and implement fiscal policies. The US has been consistent in obtaining substantial growth in the GDP. The sustenance of such is important in maintaining the position of the country in the global economy.
There are several aspects that contribute to the figures when the US GDP is computed. Investment within and outside the country has been seen as a vital economic contributor. Government spending has increased rapidly because of the demand for social services and to pump prime segments of the economy. Because of the size of the population, consumer spending has remained consistent. The US also has established economic relationships overseas that boost the import and export activities maintained in the country.
Like any other economy, the US GDP has seen ups and downs through the years. History suggests that the once robust US economy has experienced downturns. The US economy, however, has been resilient and has withstood the challenges in the global economy. Sound fiscal and monetary policies have become the foremost weapon used by the government to maintain the high GDP. The government also has established institutions and statutes to support the current trends in the economy. Overall, the economy remains stable despite concerns about some segments of the economy and problems that can affect GDP growth.
The US dollar is the standard currency used for international transactions. Despite the presence of the Euro, the US dollar remains the most used money in the world. At present, the US dollar is trading below its European counterpart. The decline experienced by the US dollar is pointed at several reasons. The recent increase in inflation can further decrease the value of the US dollar. In addition, the strength gained by foreign currencies makes the US dollar weaker than perceived. Several analysts believe that the dollar will continue at a slow pace of decline. But the recovery of the dollar is being worked by all sectors in the US economy.
The trade surplus of the US economy is viewed as one of its main strengths. The growth in the GDP justifies the increased export and import output recorded by the US economy. Overall, current exports of the country are more focused on fast-moving consumer goods. The established manufacturing industry of the US economy serves as the anchor of this export surge. Most of the imports in the US pertaining to raw materials such as oil and agricultural products. A balance between exports and imports is a goal that the US economy attempts to maintain. At present, the US economy is experiencing a significant surplus in the trade balance.
In terms of investments, the expansion of firms within and outside the US remains an economic contributor. Investments are more focused on the financial market as evidenced by increased public offerings and bond offerings. Increased overseas activities by US companies also contribute to the GDP. Although the US is a highly competitive market, investments coming from foreign sources continue to increase. Aside from the budding markets, there are several opportunities that local and foreign investors view as future economic catalysts.
Comparative Analysis
For purposes of comparison, discussions will be made on the economies of Canada and Mexico. These two countries border the north and south part of the US. Canada is north of the US and is one of the biggest countries in the world. Mexico is south of the US and has a long history with the US. Economically speaking, both countries have been the recipient of the economic resurgence in the US. As close neighbors, Canada and Mexico are exposed to products and services produced within the US. Recent figures suggest that both countries are the top trading partners of the US.
At present, Canada is in the top 10 largest economies in the world. Among the richest countries in the world, Canada is the only nation that depends heavily on the primary sector. The country is also mixed and has an established industrial sector. The GDP per capita is high because Canada is sparsely populated. Mexico is another country that is considered one of the 15 largest in the world. Since 2004, the economy of Mexico has reached more than USD1 trillion. Mexico is an export-oriented economy and thrives primarily in the agricultural sector. In terms of policy, Mexico is a free economy with minimal intervention coming from the government.
The Canadian dollar reached a milestone when it traded over the US dollar. The weak dollar reflected how strong the Canadian dollar has become. The US dollar, however, recovered and the Canadian dollar returned to a lower rate. But the Canadian dollar remains strong and will continue to flourish. The Mexican peso trades much lower than the US dollar. The currency is maintained at lower rates because the economy mostly relies on exports. Controls are made to ensure that the Mexican peso is within levels that exporters can tolerate.
Economic Forecasting
Interests serve as major aspects that affect the US GDP. Interests affect several economic components specifically industries and consumers. In the US, the Federal Reserve System controls interest rates. The monetary policies serve as the guidelines for these interest rates to be set. There are two schools of thought that justify the regulation of interest rates. In periods when rising prices are inevitable, interest rates are increased to limit inflation. High-interest rates are designed to control the supply of money in the market. On the other hand, low-interest rates allow consumers to borrow more and increase their disposable income.
In the short term, the Federal Reserve is expected to maintain the interest rate at 2%. This is expected because of the impending inflation. The housing problems and high energy prices are problems that affect decisions on the interest rate. In the next 2 years, the interest rate will be maintained within the stated percentage. The changes will occur once the new government has settled and started mapping its economic plans. In the long run, interests will be normalized at 4%. This will be maintained for 3 to 4 years or until 2015. The interest rate will have a strong impact on the level of GDP that will be recorded from 2010 until 2020.
Stocks and bonds are also good indicators for economic growth. At present, there are fewer initial public offerings in the US financial markets. But the trend is expected to change as several applications for public offerings are set to be approved by the Securities and Exchange Commission. When it comes to bonds, several companies have also offered these financial instruments. At present, stocks are preferred financial investments while bonds are also highly valued.
Economic Catalysts
There are several aspects of the economy that needs to be discussed to ensure precise GDP forecasting. One important consideration pertains to the money supply and monetary policy. As stated previously, monetary policies are important in ensuring equilibrium in the market. Policies on money supply go beyond producing paper bills and coins. Monetary policies on loans and mortgages are the primary concern. The US monetary board is expected to provide the necessary regulations to balance the money in the market through sound decision-making.
Fiscal policies are also important in fueling the economy. At present, the US federal government has enjoyed a high budget surplus. This means that enough funds can be allocated to specific sectors. The government uses funds to provide quality social services. In doing so the government helps the private sector. Aside from these services, the government continues to forge contract private firms to perform some basic services. Since the government is expected to change, the fiscal policy will focus on the goals drafted by the incoming leaders. But the focus on spending to pump the economy will remain as the focal point by the new government.
The activities in the international markets can provide the needed boost that the US economy requires. For instance, the emergence of the European Union can serve as a major partner for trade. Another important development pertains to the growth of the Asian markets. US firms have recognized the trend and are slowly expanding to the region. The growth in the rural US is can serve as a complement to established metropolitans. Real estate projects will continue to expand in states that are known for agriculture. This is expected in the next 5 to 10 years.
Component Forecast
In computing for the GDP, investment from the private sector is a prominent component. At present, investment in the US has been considered normal. This means that growth is slow in some areas such as manufacturing and communications. There are some industries that have decided to outsource. Hence the growth in the rural US has been substantial in the last 5 years. High energy prices and operational costs have limited the capacity of factories. The service industry, however, has compensated for the loss. Technology has also provided a major boost in the slow growth exhibited by the US economy in the last 2 years.
In terms of government spending, 2008, has been as busy as expected. The subsidies provided by the government to limit inflation effects have increased spending. Projects in the health and military sectors are also priorities for the government. The trend is expected to change when the new government assumes office. As forecasted, spending will shift to focus on economic activities. In addition, the worsening sub-prime problem will keep the government in the picture. The government is expected to increase spending by an average of 15% in the next 5 years.
The consumer spending figures have been down on the last half of 2008. This trend is expected to continue in the next 2 years. Because of the credit problems, consumers have become tentative to spend. Moreover, inflation in the US is at an all-time high, and spending is expected to be controlled. To boost spending, the government has been providing subsidies. These are used to increase the disposable income of households. In the next five years, consumer spending is expected to reach 25% of the total GDP of the US.
Exports and imports are also primary components of the GDP. When it comes to exports, the US will continue to lead the world in providing top-notch finished products. The focus of US firms in outsourcing activities in emerging markets also improves exports. The presence of US companies in Asia and Eastern Europe provides opportunities for growth and development. Imports will remain to be a barometer for growth and development. Energy will be an issue as oil prices in the world market have remained high. But recent explorations in the US are expected to ease the burden of the US market when oil prices continue to rise.
In the short run, the US GDP is expected to rise by 2-3%. The slow growth reflects the current problems experienced by the economy. The housing woes and sub-prime meltdown will have an impact in the next 2 years. Overall, the growth will be fueled by the increased market accessibility and opportunity to invest in emerging economies. Aside from economic fundamentals, the political arena in the US will affect next 2 years. The new administration will undergo a massive overhaul and will take the first 2 years as a period of adjustment. Increasing the growth to what was predicted will be a major achievement for the US economy.
The long-term prediction for the US is similar to what was forecasted in the next 2 years. In 2012, the US will reach USD15 trillion in GDP. This means that after 2009, the GDP growth needs to be above 7%. This is a high percentage as compared to the figures provided by analysts. Given the unpredictable markets, the US is well-positioned to make the right decisions in the future. In addition, the investment made by the economy in emerging industries will start to provide dividends. By 2020, the US will have approximately USD20 trillion in GDP.
Conclusion
As stated in previous discussions, there are several key drivers that can improve the GDP growth of the US. The most important at present are the investments made by companies in the local and foreign markets. The next driver pertains to the manner in which the government supports the economy. The budget needs to be increased annually to support the private sector. In addition, the balance between exports and imports will be critical in the growth of the GDP. As expected, the spending of the consumers provides the boost that is necessary to sustain the US economy.
There are some important aspects that can alter the forecasts made on the US economy. The most important consideration is the current economic problems in the US. The main culprit for the US slowdown in the housing and financial sectors. Foreclosures have remained high and house prices are low. The sub-prime problem also poses a threat to the economic plans of the US. On the positive side, the US economy is known to rise above adversities. The GDP can exceed expectations with timely policies and improvements in other aspects of the economy.
Investors consider economic analysis as vital in making decisions. In fact, the world’s richest man Warren Buffet is a known fundamental analyst. For investors, the economy is a major indicator for the best kind of investment. When the economy is doing well, investments are also expected to improve. On the other hand, a slowdown in the economy makes investors cautious in making decisions. Aside from being an indicator, the economic analysis provides the big picture in which the economy is currently operating. The accurate figures obtained from the economic analysis can be used to make sound and successful decisions.
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