The strength of an economy is measured in terms of unemployment rates, economic growth rate, and the rate of inflation. Economic analysts and interpreters must accurately monitor the trends of the above parameters to keep track of the economy and give advice to the government accordingly. As a result, data have always been collected, analyzed, and recorded to monitor the state of the economy. In the US, Federal Reserve is obligated with the responsibility and this essay, therefore, looks at the significance and trends of the economic parameters.
Unemployment Rate in the US
The unemployment rate refers to the percentage of jobless citizens and it is the most significant parameter used to analyze the labor market. It is the sole responsibility of the federal government to ensure that unemployment rates are kept to the minimum as the high unemployment rate increases the rate of interest. High-interest rates are detrimental to economic development. Lowering unemployment rates is fundamental in an economy in that it means most citizens get paychecks. With enough money to use, there will be an increase in their propensity to spend leading to economic growth. However, low unemployment rates are a possible cause of high inflation. On the other hand, high unemployment rates are synonymous with a stagnating economy, low paychecks, and a low propensity to spend. The unemployed should be willing to work and must have been aggressively searching for a job in at least the last 4 months. In addition, the labor market only recognizes services of those aged 16 years and above.
From January 2007 to the end of the year 2009, the total number of jobless US citizens stood at 6.9 million. This survey was conducted for those who add held their jobs for the last three years. The figures reflect an almost 100% increase from the same figures between January 2005 and December 2007. This observation was greatly influenced by the economic crisis that struck the US and the other world major economies. About two-thirds of the unemployed population was reemployed in the succeeding survey. This can be attributed to the recovery efforts directed at the economy; for instance, bail offs and other economic strategies instigated by the Obama administration. In the current year, a 95,000 decline in nonfarm payroll employment was witnessed in September whereas. The monthly rate of unemployment still stood at 9.6% in the same month. There was a reduction in public jobs following the opportunities created by the 2010 population Census in the US. However, the private sector continued to register growth in employment, 64,000. Below is the corresponding quarterly averages GIF graph;
The inflation rate is a basic economic parameter used to measure the strength of the currency of a country, state, or city. It does vary as it is measured on monthly basis and its main component is the Consumer Price Index (CPI). The inflation rate represents the cost of living as a result of changes in consumer prices. In addition, inflation may be caused by printing too much money within an economic setup or if a country is hit by a financial disaster. An example in point is the recent economic crisis of the world’s strongest economies. Another cause of inflation is an increase in the cost of fuel which leads to higher transportation costs. Increase transportation costs cause a general rise in the cost of goods leading to inflation. The table below shows inflation rates in the United States from 2000-2010.
Table of Inflation Rates by Month and Year (1999-2010)
Source: US Inflation Calculator
The table shows a steady decrease in inflation rates from 3.4 in 2000 to 1.6 in 2002. However, the succeeding years realized increased rates of inflation to 3.4 in 2005. There is a valid reason to explain these trends. In the year 2000, OPEC set an oil price band of between $22-$28 per barrel. Conflict in the Middle East raised the price to $24 and following successive production reductions due to effects of the war, there was an oil price surge that can only be compared to that of 1970s. The increased oil prices in 2005 explain the high inflation rates in that year. The following years registered decreased inflation rates to 2.8 in 2007. However, the year 2008 experienced high inflation due to the most talked-about economic crisis. The crisis weakened the capital market and the overall effect of Wall Street had negative effects on major companies and institutions. Due to layoff of workers by the affected companies, CPI significantly reduced causing inflation rates to rise. From 2000, inflation hit an all-time low of -0.4 in the year 2008 following economic recovery under new government administration.
Economic Growth Rate
Economic growth rate refers to the percentage of economic growth for a given period. It is expressed without consideration of other economic parameters like inflation. In the real sense, the economic growth rate is the measure of how Gross Domestic Product, GDP or Gross National Product, GNP compares between two consecutive years. GNP is an effective factor to use if an economy widely depends on foreign exchange for its domestic economy. If GDP1 and GDP2 represent GDP for year one and year two respectively, then;
Economic Growth = (GDP2 – GDP1) / GDP1
The economic growth rate can be analyzed to observe the general trend and growth levels of the overall economy. The rate is between 2-5% for the US economy on average; however, at times the rate may go to as high as 10%.
GDP calculation has to consider the effects of inflation and adjust to weed out the impacts on prices of consumer goods and services. GDP is an economic indicator that measures the standards of living of persons; though it does not spell out income distribution within an economy and the negative consequences brought about by population and the positive effects of education and health. In addition, GDP does not consider activities that cannot be expressed in monetary terms such as leisure costs. Due to these deficiencies, GDP is less important to economists as a measure; but, it is crucial as it acts as an economic indicator used universally. To avoid these discrepancies, economic growth has to be expressed exponentially and the exponent should reflect the GDP rate within a year.
The millions of job losses caused by the economic crunch that ended in mid-2009 seriously affected consumers’ willingness to spend. On the other hand, the housing sector has experienced unsustainable growth due to the lack of government tax waivers and the unwillingness of US citizens to buy houses. As a result, there has been a general slow growth (stagnant at 1.7%) of the economy that is now a concern for the Federal Reserves. Consumer expenditure caters for about 70% of the US economy, and it has hit a 2.2% rate in the last quarter, a feat that was only witnessed last in January, February, and March in the year 2007. The corresponding GIF graph is shown below;
Another economic parameter is Consumer Price Index, CPI and its graphs are represented below for the period between 2000 and 2010.
CPI, GIF Graph
The general state of the economy can be interpreted by the use of economic parameters: rate of inflation, rate of unemployment, and economic growth rate. Their trends in the US economy have reflected the ideal events that affect the average life of US citizens. A point in case is the impact of the financial crisis whose consequences led to a recession of the economy which in turn affected the labor market. Therefore, the study of economic trends can be studied by monitoring the economic rates.