Many analysts are predicting
that the worst may be over
for the US economy and that it would bottom out soon. And the
stock markets clearly seem to suggest so. People seem to be rejoicing at the
sight of green shoots, like The Institute for Supply Management's closely
monitored index of manufacturing activity (from 40.1 to 42.8 in April), which
incidentally is the highest reading since September last. Meanwhile, the
April consumer spending fell by just 0.1%, after falling 0.3% in March, which
was construed as a turnaround. There was also some small rise in
Nationwide House Price Index. Subsequently, most of the analysts started talking in
bullish tone. In terms of expectation, what takes the cake, however, is the one
by Congressional Budget Office or CBO. They assume a rather robust
recovery in 2010, with real GDP expected to grow by 2.9% (from -3% in 2009)
and then shooting up to as high as 4% in 2011. What is of interest here is
that the projections for both 2010 and 2011 are above the average potential
GDP growth of around 2.75%. More interestingly, as per their projection, the
US will face an unemployment rate of 8.8% for this year (for April the
official unemployment rate was 8.9% and it is on the rise) and this is expected to
rise to 9% next year. Strangely, while they are projecting the economy to
grow above potential, they expect the unemployment level to
rise.
Before we dive deeper into the issues involved, here are some
sobering facts. For starters, we would do well to remember that the genesis of the
current global recession is the bursting of the housing bubble, the genesis
of which, in turn, can be traced to the ultra low interest policy followed by the
US and many other countries. This reminds one of what the noted economist
Milton Friedman wrote. "The Great Depression in the United States…is a
testament to how much harm can be done by mistakes on the part of a few men
when they wield vast power over the monetary system of a country."
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