Upcoming Presidential Elections – Where is the US Economy?

on Aug 28, 2012

In 2008 the American people chose Barak Obama with the hope that he would lead them out of one of the worst financial crises in history. Four years later presidential elections are once again around the corner and the US economy has somewhat recovered – but to what extent and for how long?

President Obama came into office at a time when the unemployment rate was headed to a staggering 10 per cent and the US economy was shedding 800,000 jobs a month. In 2011 and so far this year, by contrast, employers have been adding about 150,000 jobs a month. Although the situation is much improved, job creation is still not high enough to bring the unemployment rate below 8.1 percent. Analysts foresee no change in the labour market till the end of the year, meaning the rate will most probably remain somewhere north of eight percent at election time in November.

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Prices in the housing market have been falling for the past five years and nationally existing homes have lost about a third of their value. Today, foreclosures and short sales continue to be a commonplace. Economists are however seeing improvement in the market as mortgage rates are at record lows this summer, making new homes historically very affordable. Yet the gap that opened in 2007 when the housing bubble burst is way too large to be made up in one presidential mandate.

!m[](/uploads/story/327/thumbs/pic_1_inline.png)Investment-wise, the stock market seems to be one of the best performers. The Dow Jones has shot up to 13,160 from 10,400 last October, a gain of 20 percent and putting the leading market barometer back nearly where it was in 2007, before the onset of the financial crisis. Trading volumes are however much lighter, which shows investors are still fearful of entering the market. Some analysts are predicting a big drop incoming in September due to dire news from both Europe and China, explaining why, despite encouraging gains in the equities markets, many investors remain wary of taking significant positions.

A new challenge facing Americans is an approaching ‘fiscal cliff’, with a variety of tax increases and spending cuts scheduled to come into effect in 2013. On the upside, the new measures will decrease the enormous government deficit by $500 billion (£316 billion). The bad news is the deficit reduction will most likely come at the steep price of around a two percent slowdown in economic output and will push the US into a mild to moderate recession. Analysts opine however that many of the fiscal cliff spending cuts and tax increases will be watered down or delayed, in the belief that the US Congress will be unwilling to allow simultaneous expiry of tax cuts for the middle-class and implementation of austerity-based reductions in spending.

Global woes are what worry US politicians and policy-makers the most. John Authers from the Financial Times recently published an article explaining why the US should hope for, rather than fear, being overtaken by China as the world’s number one economy, which the International Monetary Fund has forecast to happen by 2017. Authers argues there is nothing wrong with China overtaking the US and that with a population four times bigger than the US China will eventually surpass it in GDP terms. On the contrary, according to Authers, US businesses and the American economy will benefit from a stronger China, because it will create enough demand in the market for their own production.
Following on this logic, politicians in the US should be more concerned because China’s recent performance has been disappointing with declining growth, weak stock market and a growing housing bubble. Whoever becomes the next president of the United States of America should be looking at China not as a geopolitical rival but rather as a crucial opportunity for boosting the domestic US economy via the massive demand for American goods and services which a recovering and strongly performing Chinese economy will surely generate over the next presidential term.


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