The Cycling Economy Essay

1461 words - 6 pages

The article that I have chosen to analyze is entitled “Political Pressure Wouldn’t Halt More Fed Easing” written by Scott Lanman and published last October 5, 2011 in Bloomberg. Federal Reserve Chairman indicated that he would continue to use monetary policies to stimulate economic activity, which is primarily reflected upon interest rates. This is amidst the probable recession for the US due to its debt debacle and credit downgrading which triggered a panic-stricken market.
As many economists have already noted, the leading indicator for a recession, or a downturn of the US economy is the growth of Gross Domestic Product (GDP). GDP is the increase in the amount of goods and services produced by an economy over time. According to the Economic Cycle Research Institute (ECRI), more than three years ago, the 2008 financial crisis already triggered studies on longstanding pattern of slowing growth, characterized by higher cyclical volatility and lower trend growth. In layman’s terms, in the short run, we may be having higher upswings of economic growth but at the cost of having equally strong downswings which are hard to anticipate. However, when you try to see patterns as far as from 1970, the long-run trend is down. A part of this trend is shown on the graph below:


As one can notice, there was a steep upward change in GDP growth by the end of the 3rd quarter in 2009. The GDP growth figures for 2011 is 2.2% and 1.6% for eth 1st quarter and the 2nd quarter respectively. The graph above may be misleading insofar as it suggests an upward sloping imaginary trend line, but as far as the ECRI is concerned, two implications are possible: First, the fall of GDP will even be steeper than perhaps the -5% in the 2nd quarter of 2009. This means that it’s only a matter of time before GDP growth hits a -5%. If this is the case, since the economy has its own lags and assuming that this debt problem has no clear end, the US economy will be flirting within -5% range or even lower by next year. The second probable case is that though the dip in GDP will only be slight, it will be more frequent resulting in persistent recession perhaps every 2-3 years as the interval of the 2008 crisis with the current crisis.
Given that GDP will be fallin short, another index that significantly goes together with this is employment, which can be expected to decrease as well. The index that is commonly used for this is the unemployment rate. The unemployment rate then is defined as the number of unemployed divided by the total labor force while the labor force can be defined as the number of people employed plus the number unemployed and is seeking work. This on the other hand was expounded on by Okun’s law, which verifies that employment, a factor of production, affects output, albeit with a lag. Okun’s law states that a one point increase in the unemployment rate is equated with two percentage poonts of negative growth in real GDP. So if this the case, if GDP falls in the...

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