There seems to be no respite for the ailing US economy as unemployment rises and housing prices continue their downward march. The official unemployment report that is expected later this week is likely to report losses of an additional 445,000 jobs in December on the back of two million jobs lost between January 2008 and November 2008. The latest expected job loss would take the nation’s unemployment rate to 7%.
Rising unemployment usually leads to a reduction in purchasing power in the economy and a contraction in demand. This is clearly indicated by a 4.6% drop in US factory orders in November 2008, which incidentally shrank in the previous three months consecutively. A straight fall in factory orders for four months happened last in 1992. The services sector, which forms nearly 80% of the US economy also contracted third month in a row in December. The stock market, which may be regarded as a barometer of economic performance, is reflective of the economic malaise, in experiencing its worst ever year since the Great Depression.
The anticipated results for 2009 do not make the situation much happier. As per the US Fed’s reports, the US economy is expected to shrink much faster in the first half of 2009 that anticipated. The housing market is also expected to deteriorate further and so is the real GDP.
To fight the existing and the persisting economic menace, President elect Barack Obama seems to have a plan, which he needs to get passed by the US Congress. While making announcements about the plan Obama has retreated that the US economy is in a state of dire sickness. According to him the situation is getting worse and that the government needs to act now in order to break the momentum of the recession. Obama’s proposal includes tax cuts divided between individuals and corporates in order to provide stimulus to production as well as consumption. The tax incentives for individuals are likely to be around $150 billion and over $100 billion for businesses. In order to boost employment generation, Obama has also proposed tax credits of $3000 per job created. Another $500 billion are likely to be targeted towards government spending on improving infrastructure with the objective of job creation. The total proposed stimulus package is likely to be around $800 billion. How much will Obama’s stimulus help assuage the deepening recessionary tendency is hard to gauge as the US economy seems to be caught in the vicious cycle of contracting demand leading to curtailed business activity resulting in shrinking incomes leading to further reduction in demand. It may be noted that though Obama’s proposal attempts to stimulate both demand side and supply side dynamics, the proposed government stimulus package coupled with the previous packages amount to debt for future generations. Thus, the government will need to utilize the proposed funds very judiciously such as not to burden the future of America greatly.
The US dollar seemed to have strengthened on the good news, pushing gold prices down early this week. However, the dollar began to pare its early week gains and thus no particular trend seems to be emerging as yet.