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The Economist: US Economic Outlook




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The author of this entry is responsible for this content, which is not edited by the Wilson County News or wilsoncountynews.com.
Dr. M. Ray Perryman
December 19, 2012 | 784 views | Post a comment

The United States economy is growing, but uncertainty is constraining performance. Firms are hiring, though the pace of increase is too slow to make much headway in improving the job market. The major domestic issue is the “fiscal cliff” which is set to hit at the end of the year; long-term debt and deficit concerns, ongoing election-year dynamics, and fallout from health care law changes are compounding the problem. Internationally, a number of European countries are struggling with major debt issues, tensions remain high in the Middle East and Korea, and the Chinese economy has cooled.

Even so, growth prospects are much better than they were a year ago, and The Perryman Group’s most recent forecast calls for growing momentum over the short-term horizon. While challenges will linger, the pace of expansion is likely to finally increase (assuming the worst aspects of the fiscal cliff are dealt with or at least postponed).

The fiscal cliff coming at the end of this year (assuming Congress and the President fail to take meaningful action) involves the elimination of tax breaks, some of which have been in place for many years, and substantial across-the-board budget cuts. The consensus view is that this outcome would dramatically curtail economic growth, possibly pushing the nation back into a recession.

As we go to press, negotiations are ongoing, with an agreement seeming more or less likely with each new release of information. The implications of the fiscal cliff are potentially severe, though the full effects would not be felt immediately.

There are signs that the housing market has finally begun to turn the corner on a national scale. Recently released S&P/Case-Shiller Home Price Index data indicate US prices continued to rise in the third quarter of 2012, with 18 of the 20 large metropolitan area markets tracked experiencing year-over-year gains. Foreclosure rates have also dropped, and for-sale inventories are falling. Prices are also trending upward in many of the hardest hit regions, a further indication of recovery.

Given its assessment that the recovery is slowing, the Federal Reserve Bank announced another round of quantitative easing on September 13. The Fed will be purchasing mortgage debt (thereby injecting liquidity into the economy) and indicated that its benchmark interest rate is likely to stay low through the middle of 2015. Low rates will work to increase investment once uncertainty is reduced. The Fed recently announced that this program will continue, along with purchases of $45 billion in treasury securities each month; the end date is pegged to the level of unemployment reaching 6.5%.

The European financial situation continues to present a threat to the global economy. Holding together the euro will require substantial commitments from a number of nations at a time when their own growth is relatively sluggish. Tensions in the Middle East are also running high, with Iran’s threat of nuclear weapons, attacks on US embassies, and various nations threatening one another. As a source of much of the world’s oil supply, even minor problems in this region (or, in fact, even the perception that there could be problems) have the potential to lead to a spike in oil prices.

The most likely scenario at present is that the various challenges the US economy is facing are managed without extreme disruptions. As uncertainties are thus worked out, the pace of economic growth can increase. As we go to press, it appears that progress is being made toward dealing with the fiscal cliff (either by the end of the year or early in 2013), thus clearing away a major source of concern.

Given these developments, The Perryman Group’s most recent forecast calls for US real gross product to expand from $13.4 trillion in 2012 to almost $16.0 trillion in 2017, a 3.47% annual rate of growth over the period. Employment is projected to increase from 132.8 million to 142.9 million, a gain of more than 10 million jobs (a 1.47% annual pace) over the period.

The ultimate condition of the US economy will be determined to a significant degree by the outcome of fiscal cliff negotiations and ongoing deficit reduction efforts. The associated uncertainty has been dampening growth prospects for months, and a highly negative outcome could curtail growth. On the other hand, if meaningful (and much needed) reforms are implemented, future prospects are decidedly more positive.

Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.
 
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