Analysis of 1997 U.S. Macroeconomic Predictions
The U.S. economy ended 1996 at a blistering pace of 4.7% growth rate of real GDP in the fourth quarter. Despite this strong growth, the inflation rate remained relatively low in fact the CPI showed its lowest core growth rate in the last 34 years. This low inflation along with low unemployment finished off a very healthy year for the U.S. economy. These numbers seem to indicate a positive trend for the U.S. economy in 1997. Real GDP is expected to grow at a strong to moderate rate of 2.25%, with CPI rising around 3% and the unemployment rate between 5.25-5.5%.
In order to see how these projections were arrived at it is most important to look at the factors that make up real GDP. Consumption, Investment, Government Spending, and Net Exports. When these factors are analyzed separately the overall picture of real GDP becomes clearer. The growth rate of real GDP is important because it tells us the rate that the economy is growing. Once the rate of growth is determined, we will be able to look at the predictions for interest rates, unemployment, and inflation, since all of these are heavily influenced by the growth rate of real GDP.
Real GDP is the market value of all goods and services produced in a given year. It is the most important measure of growth in an economy. Since a dollar of production is equal to a dollar of income, real GDP not only gives an idea of production but also of the well being of the society in general. It is not enough simply for real GDP to rise, it must rise at a healthy rate (around 2.0%) each year in order for there to be enough jobs for new entrants into the labor force. If real GDP falls or fails to rise enough, unemployment will increase and the overall standard of living will fall. However, if real GDP rises too much inflation may occur which also lowers people’s standard living by eroding their purchasing power.
In 1997, real GDP in the United States is expected to grow at an annual rate of around 2.25%. Growth is not expected to be as dramatic as the 4.7% rate of growth shown in the last quarter of 1996. But, overall the economy should show moderate to strong growth throughout the year.
When looking at the factors that make up real GDP, the most important factor is personal consumption. Personal consumption is the measure of household spending on durable goods, non-durable goods and services. (11, p 227) This accounts for about 65% of real GDP. This illustrates the fact that the U.S. economy is a consumer driven economy since personal consumption exerts a bigger influence on the economy than all the other factors combined. Since the economy is so dependent on consumers, their attitudes are very important in predicting future performance.
The main way of tracking consumer attitudes is the survey of consumer confidence. This survey released by the Conference Board, measures how consumers feel about the economy, local job market, and their own financial condition in general. This is very important because the amount of confidence people have in the economy greatly influences their spending habits. If people feel confident they are going to spend more freely and are more willing to go into debt to finance large purchases. If people do not feel confident they begin to save more money and attempt to pay off their debts. Both of these represent a leakage from consumption.