Thursday, June 16, 2011

U.S. Economy Shows Slow Recovery

FT: Bernanke signals no new round of easing
FT: Wall Street Dips on Bernanke Speech
FRB: Speech by Bernanke on U.S Economic Outlook

On Tuesday, Chairman of the Federal Reserve, Ben Bernanke, announced that the economy of the United States is showing a slower than expected economic growth so far this year. In his speech, Mr. Bernanke stated that aggregate output, which is the sum of all the national income, increased at an annual rate of only 1.8% in the first quarter. The hamper in economic activity is partly due to the disruptions in the chain of supply caused by the earthquake and tsunami in Japan. Many goods that the United States imports from Japan such as cars and electronic goods were not produced and shipped due to the catastrophe. This disruption caused some U.S. companies to not receive their supplies for large amounts of time and thus significantly affected the production of these companies. Therefore, the decrease in national income is partly due to the fact that the U.S. market had less products to sell.

Another important factor in determining the speed of economic growth is the ability and readiness of households to spend. According to Bernanke, even though household incomes have increased due to a better job market, consumers have been cautious in spending due to the increase in food and energy prices, declining home values, restrictive credit markets, and a still-high level of unemployment.

Furthermore, another explanation for the slow growth of the economy is the fact that the real estate industry remains unstable. Although home prices and mortgage rates are at a historical low, many potential buyers are unable to purchase new homes due to strict loan guidelines that do not allow these buyers to qualify for home loans. Lenders have tightened up their lending practices, in part, because of the losses suffered during the subprime-mortgage crisis. These new guidelines are making it harder for some borrowers to obtain financing to purchase new homes. Also, house prices have fallen drastically. Many home owners cannot sell their homes for the price they initially paid and therefore are reluctant to sell.

Likewise, constraints on the demand for housing along with a large inventory of foreclosed properties has resulted in extremely low levels of constructions of new homes. The constructions industry plays a vital role in the growth of the economy because with each new construction project comes more employment opportunities. Construction also leads to the sale of more goods, products, and materials necessary to build. Thus, when there is no demand for new construction, the economy suffers as all these benefits that flow from constructions suddenly come to an end.

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