Question.3109 - US Economy
Answer Below:
Although there have been marginal improvements in the U.S. unemployment rates, the same continues to be on the higher side at around 8%. However, there are certain signs that suggest that the American economy is starting to kick-start the recovery process. One of the major indicators is the reduced debt-service ratios which have dropped to early-1990s levels. Also, the rising demand for new homes along with rising home prices indicate that recovery is just around the corner. But the recession has changed the psychology of the Americans from being a bullish, risk- taking society to a bearish, risk-averse one. Pre-crisis the economy was in an overspending spree where people made choices to satisfy immediate demand, banks were liberal in sanctioning new loans, corporate were looking at capital investments to scale up operations. However, post crisis, this scenario has reversed and as indicated by the personal saving rate, which has gone up to from 1.5% in 2005 to an average of 4.4% in 2012. In other words, the US society has been transformed from being a spendthrift one to one which has started to spend more responsibly. However, on the flip side, higher savings would drag the economy to slower growth rates as a result of curtailment of business investments and bank loans. Thus the reversed risk aversion attitude has limited the economy's expansion to rates of around 1% to 2% only. A bearish mindset results in lower capital investment which in turn results in a sluggish economy. The converse is also true. This phenomenon also explains sluggish job creation. To conclude, the solution to the slow jobs is a change in public perception/mood/psychology. Further, external stimulus in the form of added demand by way of increase in exports, would also kick-start the recovery process.More Articles From Economics
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