The Bureau of Economic Analysis released its 2011 Third Quarter (Q3) Advanced Gross Domestic Product (GDP) number: the US economy grew at an annualized growth rate of 2.5 per cent, an encouraging sign.
Up to 2.5 per cent domestic growth rate in Q3 was expected given 2010 growth rates. Projecting the same for Q4, the annual rate would be 1.7 per cent for 2011. Assuming the same for all of 2012 it would be 2.5 per cent next year at zero per cent Federal Funds rate until structural change can permit the same or a higher growth rate over time.
Notwithstanding the possible 2.5 per cent jobless growth rate through 2012, the first two quarters of 2011 may have experienced far lower growth rates because of budget uncertainties which have now been alleviated through 2013 by the Congress and the White House along with uncertainty about monetary policy by the Federal Reserve over that same period.
Because conventionally unemployment is a lagging indicator it is yet to be seen how many jobs the economy can create to achieve the 3 million lost jobs replacement objective of the White House in 2009 and how long that would take. If created it would bring down the number of remaining jobs to be created to 5 million.
Doing all of this while balancing the inflation objective will necessitate tightening monetary policy at some point in the future by the Fed depending on the rate of structural change.
We, therefore, do not see any possibility for the Obama administration to change its forecast for full recovery in the period 2016-2022.
The Emerging Structure of the US Liquidity Trap
Time Period 2007-2016
Federal Funds Rate 0 – 2.5 per cent
GDP Range 1.5 – 2.5 per cent
Unemployment 8 – 10 per cent
Inflation 0 – 5 per cent
National Debt 100 per cent of GDP
Given the implications of the recent Congressional Budget Office (CBO) report on US income distribution in the period 1979-2007 for change in the top 1% incomes since the monetary expansion of 2007, the primary downside risks to the above policy parameters besides war and any health contagions are: domestic consumption, oil shock and foreign attack on US debt and dollar. In the absence of preparation to address these risks preemptively by the Federal Reserve, Congress and The White House on monetary policy and budget balances to accelerate structural change, probability of negative economic shocks will rise in time.