Реферат: The US Economy after September 11th. Decline or Rapid Growth? (Экономика США после 11-ого сентября. Снижение или Быстрый Рост?)

The US Economy after September 11th.  Decline or Rapid Growth?

Katya Banina, group #110.

On acommon Tuesday, September 11th music on my favourite radio stationwas interrupted by a special news block, which reported that an airplane toreinto the one of the twin-towers of the World Trade Centre in New York. My firstthought was about dramatic weather conditions that could have led to such aterrible accident. I couldn’t even imagine that it might have been a terror actor something like that. In some minutes together with millions of people allover the world I was watching views of the catastrophe on TV and couldn’tbelieve my eyes. If I hadn’t heard about this before, I would have definitelythought that a new Hollywood movie was on. The understanding and feeling ofwhat had happened and of the scale of this came only after some hours ofembarrassment and shock…

But business and economic spherescan’t afford hesitation and delay. On this day ruined not only the walls of theWorld Trade Centre, but also, which is much more important for the economy, theassumption of the USA being a standard of stability, trust and prosperity.Businessmen, investorsand brokers recognised that the faster they reacted,the more they benefit (or probably the less they lose) in the situation. Marketresponse was immediate. Words of Alan Greenspan, chairman of the FederalReserve, illustrate it: “Greateruncertainty for business and consumers hits economic activity, at least in theshort term”.

Already since the beginning of the year2001 economists have been arguing about whether the economy of the UnitedStates was declining or not. The situation, indeed, was not very obviousbecause of a number of attempts of the Federal Reserve to stimulate theexpansion by cutting the interest rate. Today, however, practically all of thespecialists say that the American economy is in recession. Now there is nocommon view on how long and how deep the recession will be and how to evoke therecovery. To illustrate this I want to note that one group of economistsbelieve that cause of this recession is notterrorism, but rather the economic and financial imbalances that built upduring the late 1990’s, and that the incident of the September 11thwas only a jolt to aggravating the situation. Firms overinvested andoverborrowed due to inflated expectations about future profits. Householdsborrowed heavily too, believing that share prices would rise forever. Thus, itwill take time to bring consumption, investment and loans to their natural rates.Despite this, there is also a point of view that the events of September 11thhave made a V-shaped recession and recovery more likely: a swift slide down oneslope, sufficient to propel the economy up the next.Now it is high time to consider facts, mainly statistical, which areimportant in the analysis. It’s better, to my mind, to begin with thepessimistic prognosis.

Economic datapublishedsince September 11th have, not surprisingly, been gloomy. America's industrial production fell in September by 1%. That was its12th successive month of decline, the longest unbroken fall since1945. The current manufacturing activity had plunged to its lowest level sinceFebruary 1991. The 5.8% output loss of the past 12 months is already greaterthan in the recession of 1990-91. Retail sales also fell in September, by 2.4%,consumers cut back their spending in September by the largest amount in nearly15 years. To cope with sagging sales, manufacturers have sharply cut backproduction and shed workers. The nation's unemployment rate leaped from 4.9% inSeptember to 5.4% in October, the biggest one-month jump in more than 21 years.This is the highest unemployment rate since December 1996. 415,000 jobs wereeliminated during the month, which represented the biggest cut in payrollssince May 1980. Manufacturing, airlines, travel agencies, hotels, retailerswere among those suffering big losses. ''Companies are in survival mode andthey are cutting jobs to control costs,'' said economist Ken Mayland ofClearView Economics. ''The tragic events of September 11th and theiraftermath probably tipped the economy into recession. People are waiting forthe other shoe to drop.'' There is one more indirect evidence of the toughstate of staff policy in American companies: many of them are planning tocancel traditional Christmas Parties due to their poor financial condition.

Thus, according to the GDP report of the government,the economy contracted in the third quarter.

Even with a mild recession in America, then, this couldstill turn out to be the most severe world recession since the 1930s. (Such arecession is commonly defined as annual growth of less than 2%.) Global growth ispredicted to be average 1.5% in 2001 and 2002, its slowest two-year periodduring the past 50 years. This increases the risks for America, becausecontracting trade can amplify a recession. Last year the volume of world tradegrew by 13%, this year growth may fall to zero. When nominal GDP growth fallsso low, central banks have less scope to use monetary policy to boost demand,profits grow more slowly than expected by stockmarket investors, borrowers findit harder to repay debts.

There is also one factor, which some specialistsconsider to be one more evidence of weakening economy: profits of confectionerycompanies grew this year by 15%. Statistics say that this is often anindication of recession, as many people can’t satisfy their luxury wants anymore, but consuming larger amounts of sweets, which are comparatively cheaper.

In addition with the wide-spread view thatthe country has entered its first recession in a decade, analysts arepredicting that inflation pressures, which have been moderating for a year,will retreat further, especially in the area of wage pressures, as the surgingunemployment rate dampens workers' demands for salary increases.

Economists are afraid of that continued fallout fromthe attacks, worries about anthrax in the mail, tumbling consumer confidenceand rising unemployment, will keep consumers tightfisting, further weakening the economy.  

But let us now switch to the moreoptimistic prediction as manyeconomists still reckon that America's recession will be brief and mild. Theypredict that GDP of the USA will decline till the second quarter of the year2002, then will start to recover with quite a strong growth, by 3-4%. If theprognosis turns out to be right, it will be one of the shortest and mildestrecessions on record. And there are three main reasons to believe in it:

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It is argued that firms have already made steps to cutback unwanted inventories and overcapacity.

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In contrast with three previous recessions, oil pricehas fallen.

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America benefits much from monetary and fiscal policy.Interest rates have been cut ten times this year, including three reductionsafter September 11th, to their lowest level since the early 1960’s.President Bush, meanwhile, wants Congress to quickly pass a package aimed atstimulating the economy through new tax cuts, increased government spending,emergency relief, which could amount to 1.5% GDP – the biggest fiscal boost inone year since 1975.

Indeed, the US economy had an advance in October, largelythanks to zero interest-rate financing for new cars. The value of retail sales climbedby 7.1%, the biggest increase ever. Sadly, retail sales dropped back nextmonth, as the effects of the incentives ran out. But even not taking into account cars, retails sales rose by 1% inOctober.

Besides also in October the US dollar reached a3-month high against the Euro due to new hopes for a revival of consumerdemand.

The hope that America's recession will be mild appearsto have helped share prices to recover worldwide. Many stockmarkets have almostregained their levels on September 10th. Main indexes — Nasdaq,S&P 500, DJIA — are edging up, though in comparison with December 31st,2000 they are respectively 23%, 13.6% and 8.9% lower. Considering CommodityPrice index change on October and on the whole year we face practically thesame situation: change of Industrials index on one year is -15.7% and on onemonth +2.7%, change of Food index -2.7% and +3.0% respectively. The same appliesto other commodities as well as for all items.

This might signify that gradual boosting of theEconomy in the last quarter of this year and in 2002 will compensate for thesharp slump in September and the recession will be left behind.

As for meI believe in the USA. There is one common feature of Russian and American folksI can distinguish and admire, it is that in the most dramatic moments eachnation unites and in spite of all obstacles, troubles and difficultiesovercomes the crisis. This has been proved not once in course of history ofboth countries (not without any exceptions, of course).

There are many reasons for a sharpdecline in the US economy, but some factors that could amplify its recovery andfurther growth also exist. Both “for” and “against” were presented above and atthe first glance the pessimistic anticipation seems to predominate. But still Ican’t forget about this “nation spirit” – an unexplainable component, i.e. the so-calledX-factor of success in the most unfavourable conditions. Although, by the way,I may think so under the influence of the American standard of well-being. Butstill taking into consideration this as well as all other optimistic forecasts,I am inclined to believe that the recession will not last for a long time andmay, on the contrary, stimulate the following rapid pace growth.


List of resources used in preparing thereport: 

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The Economist, November 17th,2001.
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