2011 in Review - The US Economy

2011 for the US economy was a year of slow growth and fears of a double-dip recession, but there were some more positive signs as 2011 came to a close.

Can the world’s biggest economy sustain a more durable upturn in activity during 2012? Keep in mind that this coming year will be dominated by the lead-in to the November Presidential election.

* The debt ceiling crisis: After months of wrangling and fears of government metldown, in August 2011 - President Obama and congressional leaders reached a deal which agreed to raise the debt ceiling by US $400 billion immediately, whilst also cutting government spending by hundreds of billions of dollars over the next decade.

* American Jobs Act - this is an ambitious plan to boost employment in the US economy introduced by President Obama in September 2011.

* Operation Twist - this is a new monetary policy announced by Fed Chairman Ben Bernanke in September 2011 - Operation Twist involves restructuring the Fed’s debt portfolio by selling off short-term T-bills and buying long-term debt. The aim of this stimulus measure is to drive long-term rates down, thereby encouraging more mortgages and business loans to be made. Will it work? Business and consumer confidence remains low and many businesses are already sat on large cash-pils that they seem deeply reluctant to invest until economic conditions improve.

* Goodbye Triple A? - in the summer of 2011, the credit rating agency S&P downgraded US sovereign debt for the first time - Standard & Poors downgraded US treasiry debt from the highest rating of AAA to AA+ although the main reasons for doing so appeared to be political rather than economic namely the debt ceiling impasse in the summer which was eventually resolved.

* Stubbornly high unemployment - As individuals face unemployment in an economic downturn, they lose their skills that are commonly developed on the job. Should they face prolonged unemployment, they eventually become unemployable, thereby raising the structural level of unemployment in the long run.

This is worrying because future capacity could potentially be reduced (particularly the case if it is youths who are facing prolonged unemployment), thus creating a long term supply side problem for the US economy. The next chart is revealing and important - look at how sharply has been the rise in the average duration of unemployment in the US over the last two years.

Key US Macro Figures for 2011
GDP +1.8%
CPI Inflation: 3.2%
Unemployment rate (Oct 2011) 9.0%
Current account balance (% of GDP) -3.1
Budget (fiscal) balance (% of GDP) -9.0%
Interest rates (% on 10-year govt borrowing) 2.01%

Economic structure (% of GDP)
Consumer spending 70.5%
Government 19.5%
Investment 12.6%
Exports 12.7%
Imports 15.9%

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