Whither the U.S. Economy?
24 Pages Posted: 5 Apr 2010
The nine months leading up to April 2009 were among the most difficult and uncertain in U.S. economic history. A series of destabilizing events had led to substantial uncertainty and panic throughout the economy: Three of the five largest U.S. investment banks had failed, the stock market had fallen by 40%, the Fed had doubled its balance sheet, and the federal budget deficit had expanded to well over $1 trillion. Moreover, the crisis had spread from the United States to the world's leading economies and seemed to signal the beginning of an extraordinary rebalancing of the world economy. This case explores the challenge facing the U.S. economy in spring 2009, the global economic forces and trends affecting the economy, and the likely course of key macroeconomic variables: real and nominal interest rates, exchange rates, GDP growth, inflation and budget deficits.
May 14, 2009
WHITHER THE U.S. economy?
In spring 2009, the U.S. economy was at a crossroads. The previous year and a half had been marked by plummeting asset prices, a crumbling real economy, and rising unemployment—by all economic measures, awful. The policy response to this crisis, meanwhile, was positively enormous, leading some to worry that the cure was worse than the sickness, but by mid-April 2009, a bit of optimism was returning to financial markets, and there was some talk of “green shoots.” Just six months earlier, in fall 2008, many wondered if any sizeable U.S. bank would remain intact; by contrast, in April, looming bank failures were not a prominent concern, and a few banks had even reported profits. The sting of the 12-month performance of equity markets—down about 40% year over year—was eased by a rise of about 20% in the previous month. Still, the future seemed far from certain. Was a modest midspring rally in fact a dead-cat bounce, or was the U.S. economy beginning to turn the corner?
Reading the economic tea leaves in the midst of profound uncertainty seemed more art than science, but every decision, business and personal, seemed to hinge on one's take on the economy. And making sense of the U.S. economy was just part of the problem. The crisis and its resolution were truly global in nature. The world's major economies had come to depend on the U.S. consumer as the spender of last resort—often, first resort—but growth from the source had tapered off dramatically. Extraordinary opportunities would naturally accompany a new economic direction, but to identify that direction one would need to ponder many tough questions: What would carry the global economy if U.S. consumers retrenched? If the government's cure was worse than the sickness, how long would foreigners, who owned $ 6.5 trillion in U.S. bonds, continue to finance U.S. indebtedness? Was the dollar primed to lose its world reserve currency status? Or would the U.S. economy again prove its resilience and evolve to lead the world out of the Great Recession?
The Solemn Scorecard
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