Economic Fact Book USA

The United States is the world’s largest economy accounting for around 18% of world
GDP. Although the US is the third largest exporter in the world, it has a fairly low exports
per capita ratio of only 13%. Combined with being the world’s leading importer, this has
led to a current account deficit that has been on the increase over the last few decades.
The US was hit hard by the recession of 2008-09, which was kick started by huge losses in the housing market, through subprime loans in particular. The recovery has been weak so far, with the housing and labour market in particular remaining depressed – posting an unemployment rate of 9.0%, more than half of the lowest 2007 level.

To help stabilise both financial markets and the real economy, the US Congress first established the USD700bn Troubled Asset Relief Program (TARP) in October 2008, with the purpose of, among other things, purchasing equity in US banks and other industrial corporations. Furthermore, it provided an additional USD787bn fiscal stimulus – two thirds through additional spending and one-third through tax cuts to create jobs and to help the economy recover.

As a result, government debt and deficit has been on the increase since the onset of the crisis. The deficit rose to over 10% of GDP in 2009. With an estimated deficit of around 9.5-10% in 2011, we are seeing only very weak signs of improvement. This has sent US debt through the roof and we expect it to surpass 100% in 2012. Furthermore, this development highlighted the frozen state of the US legislature, resulting in the downgrade of US government debt by Standard & Poor’s in August.

The Federal Reserve has been conducting expansive monetary policy, using both conventional instruments – lowering the leading rate almost to zero and unconventional measures. These include among other measures, quantitative easing, where the Fed bought both mortgage backed securities and Treasury notes, worth USD2.8tr or 19% of GDP, providing some easing in financial markets.

Like most of the western world, the US is faced with some significant demographic challenges over the coming decades. As the so-called baby boomers born in the decades immediately following World War II reach retirement age, they will start putting serious strain on the public budget, primarily through growing Medicare, Medicaid and Social Security expenses. With public debt rapidly approaching 100% of GDP, this leaves very little scope for accommodating the pressure on the budget.