Tag Archives: U.S. economy recovery

The U.S. Economy and Job Market Far From Healthy

Ever since the financial crisis a couple years ago, the U.S. has always been working on economy recovery. How close is the U.S. economy to healthy condition? According to Wall Street Journal, Janet Yellen, Federal Reserve Chairwomen, the U.S. economy and job market are still far from healthy, and still require plenty of support from the central bank’s low-interest-rate policy.

Regarding the U.S. economy, it is still considerably short of the two goals assigned to the Federal Reserve by the Congress – low and stable inflation and maximum sustainable employment. In order to deal with the U.S. economy, the central bank has implemented the low-interest-rate policies which include the actions such as reducing the level of short-term interest rates to near zero, and reducing longer-term interest rates and thus provide further support for the U.S. economy. The Federal Reserve has purchased large quantities of longer-term Treasury securities and longer-term securities issued or guaranteed by government-sponsored agencies such as Fannie Mae or Freddie Mac. Low interest rates help households and businesses finance new spending and help support the prices of many other assets, such as stocks and houses. The Fed has kept official interest rates at effectively zero since December 2008, and has vowed to keep them there for a considerable while longer. The recent decisions by the Fed are to reduce the amount of bonds it buys a month. In this sense, I believe that we can expect the long-term rates to go down.

How is the current employment situation in the U.S.? First of all, statistics on job turnover pointed to considerable slack in the labor market.  Firms are still reluctant to increase the pace of hiring although it is now laying off fewer existing workers. On the employees’ side, they are less likely to quite their job voluntarily because they believe it hard to find another. Secondly, the wages are not increasing as the decline in unemployment. In my understandings, if the wages remain almost unchanged, the increase in price level will make it harder for people to make a living and thus decrease the domestic purchasing power as well as the domestic demand. Lastly, the labor force participation rate falls in a slack of job market when people who want a job give up trying to find a new one. If this continues, I am afraid that the lower participation could mean that current unemployment stated (6.7%) is overstating the progress in the labor market.

China Slowdown — Biggest Threat to U.S. Recovery

Many indicators these years showed that U.S. economy is recovering, which gives people a lot of confidence. However, when asked what overseas force has the greatest potential to slow down U.S. growth, 27 out of 49 economists cited China’s weakening economy as the answer, according to Wall Street Journal.

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Why did the majority of economists believe that the risk is from China’s economy? Because the slowdown is already under way. As we can see from the above figure, the lasted data suggest China’s economy slowed down across the board in the first two months of 2014. On Thursday, China reported weakness in January-February as the world’s second biggest economy, China has an outsized impact on trade flows,emerging-market currencies and the overall global financial system.

What would be affected if China slow down its economy growth? General speaking, it’s the reduced demand for the U.S. economy that would be hurt. To be more specific, the reduced demand for American exports, financial-market volatility and higher unemployment rate will threat the U.S. economy recovery.

As regard the reduced demand for American exports, the slowdown growth will make China demand less of the American goods. The weaken economy has cut the purchasing power of Chinese citizens since people now have less money to spend. Therefore, the aggregate demand as well as the demand for foreign goods will be influenced – so as for American exports.

The slow down in China’s economy will cause the volatility in financial market. The economy impacts corporate earnings in terms of revenue and costs. Stock prices generally reflect investor expectations for future corporate earnings and consequently for future economic growth. As a result, sound economic forecasts should help investors make equity market decisions. If, for example, an economic slowdown is predicted — preferably with some degree of reliability — then this could signal an appropriate time for not investing in stocks.

The U.S. unemployment rate would also be affected. Since China has a lower demand for American exports, some of the companies specializing in international trade would be less profitable and therefore may cut their employment rate. Also, the shrink of China’s market may hurt some of the sectors of U.S. businesses, for example, automobile exporting to China may decrease sharply which will affect the employment rate in this industry.

To sum up, the recovery of U.S. economy depend on many internal and external factors. Some slight changes in any of the factors may bring positive or negative influences to the U.S. recovery. Considering from the above three aspects, the reduced demand for American exports, the financial-market volatility and increased unemployment rate would be the biggest threat caused by the slowdown of China’s economy.