United States: Economic Profile

Background:

The U.S. economy slipped into recession in December 2007, and the ensuing downturn has been the sharpest post-war downturn in terms of both output and job losses. A wide range of government monetary and fiscal stimuli, such as substantial support to the financial system to unfreeze the credit pipeline, tax cuts to support consumer spending and incentives to the housing and auto sectors have led the freefall in economic activity to stabilize by mid 2009. While the U.S. economy is showing signs of entering a recovery phase, the shape of the recovery remains a subject of considerable debate. Some analysts suggest that the sharp correction in economic activity has led to significant pent up demand that will drive a V-shaped recovery. However, several factors suggest that as government support measures are phased out, there is a higher likelihood of a U- shaped, sluggish recovery. U.S. consumers, who account for 70% of the economy, have seen sharp income and wealth losses during the recession and the climbing unemployment rate indicates a jobless recovery.  Consumers are still highly leveraged and are unlikely to spearhead the recovery, unlike previous U.S. recessions. While an improvement in exports could be a source of positive growth, in the near term, the rest of the world is unlikely to replace the U.S. consumer. Industrial production will get a boost from inventory restocking, but a sustainable rebound will depend on a recovery in final demand. The banking sector remains far from healthy and tight credit conditions for both firms and consumers will constrain spending and investment. U.S. labor productivity has risen during the current recession, though the performance can be attributed to cost cutting than to productive investment or technological progress like in the late 1990s. As a significant part of the U.S. population reaches retirement age, productivity is likely to decline. While a V-shaped recovery implies that the economy will post above potential growth (3%-5%) for some quarters before resuming potential growth, a U-shaped recovery implies that growth will be below potential in the coming quarters, with some estimates suggesting that the structural weakness in the economy may cause potential growth to shift to a lower 'new normal’ of 2% -2.5%.