The current state of the economy in the U.S. is generally favorable. Looking at the major macroeconomic variables, they are all at reasonable levels and more important they are trending in the right direction. This paper will look at critical variables such as the GDP, unemployment, inflation and interest rates.
The GDP is currently growing at 3.9% for the third quarter of 2014, after a 4.6% increase in the second quarter (BEA, 2014). This is healthy GDP growth. Over the past several years, the economy has been growing at a slower rate, during what was a sluggish recovery from the recession in 2009. But the current levels show that the GDP is finally getting to the point where it has recovered almost entirely, and growth is picking up. This is a positive trend in the economy. This means that the GDP will continue to grow. Right now, monetary policy is expansionary, so if that eases up, then the GDP growth might slow a little bit. But if monetary policy remains unchanged these high GDP growth rates should continue, especially given the lower fuel costs we are seeing now, something that is usually associated with economic growth.
The second metric is the unemployment rate. The unemployment rate spiked in October 2009, so five years ago, and has been falling ever since. The unemployment rate lags behind other indicators. The current unemployment rate is 5.8%. This is the lowest level since July 2008 (BLS, 2014). It is worth considering that the rate is continuing to fall, as the trend has been ongoing for the past five years. The unemployment improvement should continue for another year at least until it hits the normal level in the 4.4-4.5% range.
The third metric is the inflation rate. The Federal Reserve tries to manage inflation and wants to maintain an inflation rate of 2% per annum. This rate will allow for some returns for investors — deflation is bad for investments — but it will not allow the erosion of real wages too quickly. Wages are sticky, so a lower rate of inflation gives employers time to keep wages up-to-date with the cost of living. The current inflation rate is 1.7%, in October 2014 (BLS, 2014). This rate of inflation is lower than the target inflation rate, despite the fact that the GDP is increasing. This might have something to do with the decline in…