Musthafa Ebadi
US Economy grows yet unemployment is higher.
by Musthafa Ebadi on August 25th, 2011

Thursday, August 26, 2010

Over the last six months the US economy has been growing at a steady pace while the unemployment numbers are also on the rise. In Quarter 1 of 2010 we saw the US Gross Domestic Product grew at a 3.2 percent annual rate as household spending climbed at the fastest pace in three years, figures from the Commerce Department showed on April 30th 2010. Other reports at the time also indicated the world’s largest economy accelerated to start the second quarter.

In Quarter 2 of 2010 while the US economy slowed down due to lack of job creation it still grew at a 2.4 percent annual pace! Yet in the month of July there were nearly 131,000 jobs lost in the United States taking the unemployment percentage to 9.5%. So the obvious question is if the economy is growing why are we seeing erosion in employment instead of expansion?

According to me this employment contraction can be attributed to businesses being extra cautious with their investments and growth plans which ultimately stall job creation.

If you study the impact of the 2008 recession as reported by the US Department of Commerce’s annual revision report you will realize why the businesses are conservative when it comes to investment.

The report released on July 30th this year puts the 2008 recession as the worst U.S. recession since the 1930s and even deeper than previously estimated, reflecting bigger slumps in consumer spending and housing.

The report also indicated that the the world’s largest economy shrank 4.1 percent from Q4 of 2007 to Q2 of 2009, compared with the 3.7 percent drop previously on the books, and household spending fell 1.2 percent in 2009, twice as much as previously projected and the biggest decline since 1942.

The economy also lost 8.4 million jobs during the recession that began in December 2007, the biggest employment slump in the post-World War II era.

The above numbers could send chills to any CEO or business owner in US and hence almost every sector is playing with extra care, and will continue to do so for the next few months. Everyone is waiting to be assured that the economic turnaround is sustainable and the rebound is not temporary.

History has shown that at the end of every recession the unemployment rate actually increases and will reach its highest levels before it goes back down.

According to U.S. Treasury Secretary Timothy Geithner, in an interview on ABC's "Good Morning America" aired on June 29th 2010 the unemployment rate could rise for a couple of months before it goes down.

"It's possible you're going to have a couple of months where it goes up," Geithner said in an interview taped on June 28th 2010.

"But what we expect to see ... is an economy that's gradually healing, of course we want to do what we can to reinforce that process because it's not growing back as quickly as we'd like."

What could prolong this trend of less than expected or acceptable job creation rate is also the November congressional elections in United States. I am not a political analyst but I have been reading that there are significant races in a “toss up” in this year’s congressional elections that could shift the balance of power in Washington leading to uncertainty in the political spectrum of the United States, and hence a continued stalling of job creation over the next four to six months.

Ultimately though I strongly believe this economic turnaround issustainable long term and as we continue to see this trend and traction along with evaporation of the current political uncertainly in the next few months the US unemployment rate will start sliding.

I am an optimist and very optimistic about the future. How about you?

Thanks for reading.

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