Thursday, August 18, 2011

IS AMERICAN ECONOMY SLIPPING IN THE RECESSION?


                  The recession was already the deepest since the Great Depression and, while it still pales in comparison, the data help explains why it is taking so long to shake off its legacy. Americans by a large majority believe the United States is on the wrong track and nearly half think the worst is yet to come in the economy, a Reuters/Ipsos poll said on Wednesday. The economic slowdown has become more visible over the last three weeks," said analyst Grace Lau of PacWest Financial Management in Phoenix. The Dow, which stood near 12,900 three months ago, closed down roughly 635 points at just under 10,810. The government's debt total is the accumulation of annual budget deficits the United States has compiled, almost uninterrupted, for more than a half-century. Uncle Sam routinely plugs the annual funding shortfalls by selling Treasury bonds — it borrows the money, and then pays interest on the bonds. Social Security, Medicare and Medicaid and military programs account for a rising proportion of government outlays. The federal debt has nearly tripled over the past 15 years.

                         
The United States public debt is the money borrowed by the federal government of the United States at any one time through the issue of securities by the Treasury and other federal government agencies.

 The gross public debt comprises two components:
    First,  Debt held by government accounts, also known as intergovernmental holdings, that is, Treasury securities held in accounts that are administered by the federal government, such as the Social Security Trust Fund.
Second,  Debt held by government accounts, also known as intergovernmental holdings, that is, Treasury securities held in accounts that are administered by the federal government, such as the Social Security Trust Fund.

                         The net public debt increases or decreases as a result of the annual unified budget deficit or surplus. The federal government budget deficit or surplus is the cash difference between government receipts and spending, ignoring intra-governmental transfers. However, there is certain spending (supplemental appropriations) that add to the gross debt but are excluded from the deficit. The deficit is presented on cash rather than an accruals basis, although the accrual deficit provides more information on the longer-term implications of the government's annual operations.

                         
Gross debt has increased by over $500 billion each year since fiscal year (FY) 2003, with increases of $1 trillion in FY2008, $1.9 trillion in FY2009, and $1.7 trillion in FY2010.[3] As of August 3, 2011, the gross debt was $14.34 trillion dollars, of which $9.78 trillion was held by the public and $4.56 trillion was intergovernmental holdings. The annual gross domestic product (GDP) to the end of June 2011 was $15.003 trillion (July 29, 2011 estimate), with gross debt at a ratio of 96% of GDP, and debt held by the public at 65% of GDP.

                          Together with the budget deficit, the political climate was one of the reasons given by Standard & Poor's to revise the outlook on the US  sovereign credit rating down to negative on April 18, 2011.Standard and Poor's downgraded the credit rating by one notch from AAA to AA+ on August 5, 2011, for the first time ever. The long-term outlook is negative and it could lower the rating further to AA within the next 2 years. OVER the past few days a spirited debate over the status of the American government, and in particular its ability to borrow, has rumbled around Washington. This debate was obviously triggered by S&P's announcement Monday morning that it was cutting its outlook on American government debt to "negative", signaling that there is a one in three chance of a downgrade in America's credit rating by 2013.


                         
The “Great Recession” was even greater than previously thought, and the U.S. economy has skated uncomfortably close to a new one this year. New data showed the 2007-2009 U.S. recession was much more severe than prior measures had found, with economic output declining a cumulative of 5.1% instead of 4.1%. The report also showed the current slowdown began earlier and has been deeper than previously thought, with growth in the first quarter advancing at only a 0.4% annual pace. The data indicated the economy began slowing in the fourth quarter of last year before high gasoline prices and supply chain disruptions from Japan’s earthquake had hit, suggesting the weakness is more fundamental and less temporary than economists had believed

                         
An issue in particular is a slowdown in consumer spending. One major source of weakness is consumer spending, which accounts for about 70 percent of the economy. Household purchases adjusted for inflation dropped in June for the third consecutive month -- the first such occurrence outside of a recession since 1959, Consumers are dealing with a labor market that’s gotten weaker, a hit to their wealth through declines in the stock market and just a lot of bad news and uncertainty. Gross domestic product shrank 5.1% from the fourth quarter of 2007 to the second quarter of 2009, compared with the previously reported 4.1% drop, the Commerce Department said last week. The second-worst contraction in the post-World War II era was a 3.7% decline in 1957-58.
                     
                         Growth in the second quarter slowed to a pace that has typically been followed by a contraction within a year. Household spending fell in June for the third straight month; never in the past five decades “Downside risks to the economic outlook have increased,” according to the Federal Open Market Committee statement after the Aug. 9 meeting. Consumer spending has “flattened out,” the labor market has deteriorated and the expansion is “considerably slower” than expected. Gross domestic product, adjusted for inflation, cooled to a 1.6 percent rate in the second quarter from a year earlier. About 70 percent of the time when the pace has fallen below 2 percent, a slump has followed within a year, according to data since World War II. “When growth slows to less than 2 percent on a year-to-year basis, the economy is simply unable to withstand a major shock or policy mistake." 

                         
On the economic front, productivity dropped 0.3% in the second quarter, according to the Labor Department, following a decline of 0.6% in the previous quarter. After the Feb announcement, the US stock markets slipped into red indicating that Fed is running out of ideas. However, at the end of the trading session, Dow saw a surge of 400 points. This was on account of buying stocks at lower levels. Gold prices hit a record US$1,779 an ounce in its biggest three-day rally since the depths of the financial crisis in late 2008. Though the stable rates may bring some relief to the investors, there are signs of the weakness in the US economy. In its announcement, Fed indicated that the economy has grown inconsiderably slower than the Fed had expected.  Economists believe that another round of quantitative easing was not done mainly due to higher inflation and marginal dip in unemployment rate. The Fed is in a predicament. It does not want to take any action that is not going to have a clear impact on the economy or financial markets. It does not have any monetary policy initiative to address the slowdown, thus raising concerns of a return to recession.

                         
The Outstanding Public Debt as of 15 Aug 2011 at 01:46:50 PM GMT is $ 14,602,354,507,213.91 and is the sum of all outstanding debt owed by the Federal Government. Nearly two-thirds is the public debt, which is owed to the people, businesses and foreign governments who bought Treasury bills, notes and bonds. The rest is owed by the government to itself, and is held as Government Account securities.  The estimated population of the United States is 311,124,035. So each citizen's share of this debt is $46,934.19. The National Debt has continued to increase an average of $3.95 billion per day since September 28, 2007.

                          
                        The American debt is the largest in the world. For foreign investors like China and Japan, the United States is such a large customer it is allowed to run a huge tab so it will keep buying exports.  The debt level is the debt as a percent of the total country's production, or GDP, which was $14.7 trillion in 2010. The debt nearly 100% of GDP. The U.S. also has a debt ceiling, which attempts to limit the debt. However, Congress usually raises the ceiling to prevent the negative consequences of a debt default.  The budget deficit is when the government spends more than it receives in revenue. In FY 2011 the deficit is projected to be $1.26 trillion, the difference between $3.83 trillion in spending and $2.57 trillion in revenue. Although this deficit huge, it is less than the $1.6 trillion deficit in FY 2010, and the $1.4 trillion deficit in FY 2009


The U.S., however, has been the beneficiary of two unusual factors.
--> The Social Security Trust Fund took in more revenue through payroll taxes leveraged on Baby Boomers than it needed.
--> Foreign countries increased their holdings of Treasury Bonds as a safe haven, also keeping interest rates low.
         
                         Of the total foreign holdings ($4.49 trillion), China owns $1.1 trillion and Japan owns $900 billion. The U.K. owns $300 billion, while Brazil, the oil exporting countries, Hong Kong, Russia and Canada own between $100-$280 billion each. The Bureau of International Settlements suspects that much of the holdings by Belgium, Caribbean Banking Centers and Luxembourg are fronts for more oil-exporting countries, or hedge funds that do not wish to be identified. (Source: Foreign Holding of U.S. Treasury Securities, April 2011; U.S. Treasury report”Petrodollars and Global Imbalances”, February 2006)

                         
Over the next 20 years, the Social Security funds must be paid back as the Baby Boomers retire. Since this money has been spent, resources need to be identified to repay this loan. That would mean higher taxes, since the high U.S. debt rules out further loans from other countries. Unfortunately, it's most likely that these benefits will be curtailed, either to retirees younger than 70, or to those who are high income and therefore theoretically don't need Social Security.

                         
Many of the foreign holders of U.S. debt are investing more in their own economies. Over time, diminished demand for U.S. Treasuries could increase interest rates, thus slowing the economy. Furthermore, anticipation of this lower demand puts downward pressure on the dollar. That's because dollars, and dollar-denominated Treasury Securities, may become less desirable, so their value declines. As the dollar declines, foreign holders get paid back in currency that is worth less, which further decreases demand.

                         
Discouraging economic data continued to show how weak U.S. economy is. The large Federal debt,  S&P downgraded the U.S. credit rating. The U.S. appears to be on the doorstep of a dreaded double-dip recession. The current US economy status...The US economy is plagued by an extraordinary array of growth-impairing imbalances: a record-high trade deficit, a record-high budget deficit, record-high household indebtedness, record-low national saving and asset price bubbles supporting record-high consumer spending.


The bottom line is that the entire negative factor is like driving with the emergency brake on, further slowing the US economy.





No comments:

Post a Comment