February 18, 2013
Essentials of Personal Finance (FP/120)
Current State of Economy: In the year 2013
Now that the fiscal cliff fight is over and the debt ceiling debate hasn’t reached a fever pitch — not yet, anyway — it seems like a good time to take a step back, assess the economic outlook, and see what it means for American families. The good news is that the U.S. has enjoyed more than three years of uninterrupted economic growth and falling unemployment since the recession ended. The bad news is that this has been the weakest rebound since World War II. Economic growth has averaged less than 2.25% since the recovery began and is estimated to have slowed to less than 1% in the most recent quarter. Unemployment is still way above where it should be at this point.
Budget problems remain the chief impediment to faster growth. The fiscal cliff deal did little to reduce the annual deficit, almost $1.1 trillion last year. Not that entire amount needs to be eliminated, though. Part of the current deficit is simply the normal result of a weak economy. Moreover, if the economy were growing at its historical average rate of 3.25% a year, the U.S. could afford to run a deficit of half a trillion dollars or so. Even so, the deficit still needs to be reduced by something like $300 billion a year. That means further spending cuts and tax hikes that will be a drag on the economy.
Consensus estimates are for slightly slower growth this year – an estimated 1.8%, down from 2.2% in 2012. The most optimistic economists foresee a small improvement in growth this year, followed by 3% or more in 2014. While that would get the economy back to its long-term average growth rate, it would remain far short of the powerful rebound that normally follows a recession.
For the past three years, unemployment has been coming down slowly but steadily. The most recent report calculated that 155,000 jobs were added to the U.S. economy in December and that...