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Posts Tagged ‘inflation’

A survey that was conducted between March 2th and March 9th by Bloomberg News suggests that unemployment in the U.S. will reach 9.4% in 2009, and the figure far exceeds the one of 8.8% which was projected in a similar survey carried out just a month ago.

The findings of the survey also deviate strongly from the forecast that was presented by the Obama administration when it submitted its budget proposal last month. The White House forecast projected a 7.9% unemployment rate next year, and a higher unemployment rate might mean that the $787 billion that it requested will not be enough.

The U.S. economy has already lost 4.4 million jobs since the recession began in December 2007, and employers recently cut 651,000 workers from payrolls, making the unemployment rate in February the highest since 1983.

Michael Feroli, who is an economist at JPMorgan Chase & Co., in New York said, “Even if things become less apocalyptic it doesn’t mean the unemployment rate will come down. It’ll be a long term restraint on growth. Even when the economy gets back to normal, what’s normal is going to be defined down”.

Federal Reserve policy makers predicted in January that the U.S. economy, which is the world’s largest would shrink by 2.5% this year, which would be the biggest loss since 1946, and then expand by 1.8% the following year and both figures were less than last month’s estimates.

David Rosenberg, who recently predicted that the jobless rate would reach 10% by the end of the year, is the chief North American economist at Banc of America Securities – Merrill Lynch, in New York, said, “As unemployment rises, more Americans won’t be able to make mortgage or car payments, choking off growth and leading to even higher joblessness. We are really in a vicious cycle and this problem requires a massive positive shock to aggregate demand. The fiscal package as it is constructed falls short on that score and the stimulus has to be a lot bolder that what we have seen right now”.

Rosenberg then went on to suggest that the federal government give a $1 trillion interest free loan to state and local governments, which account for around 13% of the economy and employ about 20 million people, “This comes down to the heart and soul, the fabric, of the national economy; cops, teachers, school custodians, firefighters, highway construction workers”.

Kay Krill who is President of the Ann Taylor Stores Corp., said,
“The financial crisis and rising unemployment especially hurt our company as did extremely weak macroeconomic fundamentals, including historically low consumer confidence and a broad-based decline in consumer spending”.

Robert Carnell, who is Chief International Economist at, ING Wholesale Banking in London, also believes the jobless rate will continue to rise into 2011 and said, “The efforts may still fall short, resulting in a very anemic recovery that will deliver very few jobs. The unemployment rate will tick up slowly but surely and people coming into the labor force looking for a job will find it very difficult”.

Major U.S. companies that will be adding to the rise in unemployment include,

Dow Chemical Co. that recently announced that it will lay off 3,500 workers following its merger with Rohm & Haas Co.

General Motors Corp. says it will cut a further 47,000 jobs globally.

FedEx Corp. which is the second-largest U.S. package-delivery firm says that it will be cutting another 900 jobs in addition to the 1,100 that it made last year.

According to various reports Obama’s intended stimulus package will be enormous and most experts believe the U.S. budget deficit will soon exceed 1.3 trillion.

How big is that?

It’s about 9% of the country’s GDP (gross domestic product) and to put it into even better perspective Ronald Regan’s record breaking amount was 6% of GDP!

The big question is though, what plans does the incoming administration have apart from a huge stimulus package which if used alone could well make a bad situation much worse?

Economists, for the most part divide the U.S. economy into four parts.

1) Consumer spending

2) Investment into business and housing

3) Government spending

4) Net exports

Consumer spending is at an all time low; housing construction has collapsed and businesses are afraid to invest; and the incoming government is set to prime the pumps with massive amounts of money.

So export-led growth would seem the way to go but the problem with that is that many other countries such as China need that too, and they can produce goods at a much lower cost than America can.

What is the huge stimulus package that’s waiting in the wings supposed to do?

In essence, it’s simply to buy time with the thinking being that by propping up production and boosting employment and pubic confidence in the short-term that Americans will have time to repay their debts after which they will hopefully go back to higher spending. They’ll buy houses again, meaning that home construction will restart, bringing with it heightened business investment.

1) IHS Global Insight predicts that unemployment will peak at 9.2 percent in early 2010.

2) Right now investors have rushed to buy long-term treasuries because they fear inflation, but the interest rates are so abysmally low that they will most likely seek any better alternative the moment it appears. The government’s response would of course be, to raise interest rates!

3) Rapid and huge rises in the federal debt might well cause a new lack of confidence that would in turn prolong the problems.

4) And finally, added to all the other problems will be the retiring baby-boomers and the huge strain that they will put on the economy.

Right now there is growing controversy over whether or not FDRs stimulus actually helped or hindered recovery from the Great Depression with many economists now saying that he lengthened it by several years.

For better or worse it is clear however that America is going to get a huge stimulus package but what Americans and the world will soon need to know is what the follow up plans are – if there are any at this juncture.