Economic Schizophrenia - The Us Economy On A Growth Path

Economic Schizophrenia or a bipolar condition is what the new report by the UCLA Anderson School of Management terms as the state of the US economy

. The first quarterly report by the School suggests that while the US economy seems to be settled on a growth path, job creation is going to continue to be a problem. That is truly a split personality syndrome - economic growth without job creation! Just what is the reason for this split personality economic scenario plaguing the US economy? As per the report, the government stimulus packages have set the US economy on a growth path, but businesses seems to be hesitant to take long term hiring decisions based on the temporary government spending packages.

At the same time, the report does suggest that with the US economy on a growth path, employment generation would commence soon, but could be a bit slow. The sectors of business equipment and software, exports and home construction have all shown signs of revival according to the report. Besides housing, the rest of these are making positive contributions to the US economy. The report forecasts that the economy, which grew 5.9% in the fourth quarter of last year, is likely to slow down to 3.2% in the current quarter and should be around a little over 2% for the rest of the year. It appears that the earlier higher growth rate was a due to the booster injection provided by the fiscal stimulus and as its impact wears off, the growth rates are stabilizing to a normal level, which, hopefully, the economy should be able to self support.

However, the rather slow growth rates are unlikely to help the unemployment situation and the unemployment rate is likely to be in the range of 9.6% to 9.7% for the year. Nearly 15 million Americans are out of work at present and the current rate of expansion of the economy is unlikely to bring much cheer to their status.

The report has also issued a note of caution on the buildup of inflationary pressures in the US economy due to a loose monetary policy having been pursued for an extended period. The fiscal stimulus of the government has also added to liquidity in the economy. Inflationary pressures seem to be calm at present as demand for goods and services is subdued due to the high unemployment rate and the general psyche of the consumer. However, as the economy catches speed, employment generation will pick up and consumers will have larger disposable incomes for consumer spending. Once they loosen their purse strings, all the excess liquidity lurking in the system is likely to lead to sudden inflationary pressures. The US Fed needs to keep a watchful eye on the economy and start raising rates gradually so as to be in a state to combat inflationary pressures, before it zooms to unmanageable levels.

If inflation in the US economy goes to unmanageable levels, the US dollar could lose some of its sheen and depreciate. Thus, management of inflation will be a key job for the US to maintain the strength of its currency.

by: Pete Migz

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