Economics Paper on The U.S. Economy in the Next Three Years

The Great Recession led the country in a financial crisis, which has taken longer to recover. The U.S. gross domestic product (GDP) has grown at a slower rate, with only 2.1% annually. The economy has been characterized by tight credit conditions, substantial budget cuts, and high risk aversion, which have dragged the economy by preventing consumers and businesses from investing. Due to lower inflation rates, the Federal Reserve System offers bonds at relatively lower interest rates. Besides, it is only recently that there have been signs of rebounds in home prices and construction, which are recovery factors evident in the past economic recoveries. However, based on historical data, the U.S. GDP growth in the next three years is likely to be slower compared to the past three years.

In the second quarter of 2018, the U.S. GDP growth recorded 4.1%, which is the fastest speed since 2014. The growth increased from 2.2% in the first quarter (Fox). Consumer spending increased by 4% and non-residential investments went up by 7.3%. The increase in consumer spending, which contributes to 70% of the economy, is due to purchases on autos, housing and utilities, healthcare, accommodations, and food services (Fox). Furthermore, the consumers’ purchasing power improved in lower taxes, which led to low unemployment rates, lower borrowing costs, improved finances, and controlled inflation. While analysts acknowledge that the economy is performing well, they, however, hold that maintaining the same performance challenging (Fox).

In 2015, stronger consumer spending and construction increased the U.S. GDP at a rate of 2.2%. Consumers’ purchasing power recorded a growth rate of 4.4% while construction spending grew by 4.1% (Fox). The following year, the US economy slowed down in the last quarter, recording an annual growth rate of 1.6%. This was the lowest mark the economy hit since 2011. In 2017, the numbers again climbed to 2.3%. The rise was attributed to the Trump administration’s tax law, which, according to experts, will boost the economy but in the short term (Fox). During these three years, the country experienced long-term unemployment, which has negative effects on the economy. Similarly, limited investments experienced drag the economy. The failure of people and businesses to develop new technologies, grow capital stocks, or finance new enterprises prevented businesses from growing too.

Following an economic recession, average growth is often anticipated as the economy struggles to recover. Therefore, growth in the next three years will be slower than the past three years. According to reports released by the Congressional Budget Office, the economy is expected to rise significantly this year and reduce the pace in the next few years (Kowalewski). This year, CBO predicts that employment rates will improve this year and drop substantially the following year. Correspondingly, the inflation and interest rates will rise. Later, the GDP growth is expected to increase again to reach the level of potential output. In the coming years, the demand for production will be more than the supply of output, which will in turn increase inflation and interest rates. High interest rates will slow output growth, lowering demand (Kowalewski). This economic prediction is based on the changes made to federal tax policies, referred to as the 2017 Tax Act. According to CBO, the 2017 tax act and legislation will influence discretionary spending by increasing growth in household and business spending, which will in turn increase demand. The reports suggested that the gap between real GDP and real potential GDP will hit the highest mark since 2000 (Kowalewski).Also, as the baby-boom generation exits the labor force, a drop in the economic growth is expected. Similarly, federal budget cuts will undermine economic growth through capping of projects expenditure, which would have created more jobs. Although the economy will slow down, the growth in population will create housing demand, which will cause investments in construction.

The diagrams below illustrate the trends of the U.S. economic growth from the recent years and the projections for the coming years. As illustrated, numbers are expected to climb in 2018 then drop significantly in the following years.

Chart 1: U.S. economic growth trends

Source: (Kowalewski)

Chart 2: Growth of real GDP and real potential GDP

Source: (Kowalewski)

The U.S. GDP growth will slow down in the coming three years compared to the last three years. In the second quarter of this year, the U.S. GDP recorded the most significant growth since 2014. The past three years experienced slight improvements, which were majorly attributed to consumers’ expenditure and construction. The financial crisis experienced reflects the effects of the Great Recession, which have made a lasting mark on the U.S. economy. After an economic recession, slow growth is expected as the economy struggles to recover. Also, the 2017 tax act is expected to increase discretional spending that will slow down the economy. Other factors that will reduce the pace of GDP growth are the exit of baby-boomers from the labor market and federal budget cuts.

 

 

Works Cited

Fox, Justin. Excited About GDP Number? Wait for the Revisions. Bloomberg Opinion. Economics. 27 July, 2018. https://www.bloomberg.com/view/articles/2018-07-27/revisions-in-2015-gdp-change-the-bigger-picture

Kowalewski, Kim. CBO’s Economic Forecast for the 2018-2028 Period. Congressional Budget Office. 16 April, 2018. https://www.cbo.gov/publication/53764