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FINANCIAL LITERACY PROGRAM

The State of the US Economy (August 2020)

By Humza Hussaini, M.A.

It should perhaps come as no surprise that the US Economy has suffered greatly as a result of the coronav1rus pandemic. All the key indicators of economic prosperity paint a dire picture of 2020. In this article, we will explore 4 key indicators of the economy and understand what the numbers tell us.

  1. Gross Domestic Product (GDP)

A country's GDP is the dollar value of all the goods and services that are produced in the country over the duration of one year.  In 2019,  US  GDP was $21.4 Trillion.  In contrast, the  GDP of the entire planet in 2019 was $87.7 Trillion. This means that almost a quarter (24.4%) of the world's income is generated in the United States, a country which hosts only 4% of the world's population! This is what people mean when they say "America is the richest country in the world".

The GDP is an important number. However, the number you will often hear on the news and being discussed among economists is the 'GDP Growth Rate'- This is a measure of how much the country's GDP changes from one year to another. It is expressed as a percentage. If the GDP Growth Rate is positive, this means that the economy is growing. A negative GDP Growth Rate means that the economy is smaller this year than it was previous year.

The Federal Reserve Bank of the United States (The Fed) reports GDP numbers quarterly. In July 2020, the US GDP Growth Rate was -9.5%. This means (roughly) that Americans are making 10% lesser money than they did at the start of the year. If GDP goes down for two quarters in a row, we say that the economy is in a "Recession". The US economy in 2020 is going through a major recession because of the lockdowns that were imposed due to the coronavirus pandemic.

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2. Unemployment Rate

People who are willing and able to work but can't find a job are called Unemployed. The Unemployment Rate tells us what percentage of those looking for work can't find a job. A high unemployment rate is a sign of an economy that is producing less than what is possible. There is always a small percentage of the workforce that is unemployed due to workers in between jobs. This is called the Natural Rate of Unemployment and is around 3%-5%. In March 2020, the US unemployment rate was 4.4%. When the Coronavirus lockdowns started in April this year, the unemployment rate jumped to 14.7%! A drastic rise in the number of people who are looking for work but can't find a job.

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3. Inflation Rate

The prices of goods and services change over time. The percentage change in the price of goods and services over time is called the inflation rate. It is the job of the US Federal Reserve Bank to keep inflation between 2% - 3%. This is so that the US Dollar maintains its value over time . In April 2020, the inflation rate dropped under 1.2%. This was because of a sharp reduction in demand for goods and services. Many people lost their jobs and reduced their spending. Those who had jobs started saving more of their income in the off chance that they lose their job.

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4. Interest Rate

The cost of borrowing money is called the interest rate. The US Federal Reserve Bank sets the interest rate in the United States. The Fed uses the interest rate to affect the inflation and unemployment rate. This is called  "Monetary  Policy".  lf the inflation rate is low and unemployment is high, the  Fed lowers the interest rate. This makes it cheaper for businesses to borrow money and invest in new ventures. It also makes it cheaper for ordinary people to borrow money to buy a house or buy more goods on credit. The Fed hopes that when businesses invest to increase production and consumers can borrow cheaply, there will be more demand for goods and services which in turn creates more jobs for people to make those goods and services. This is what the Fed has been doing since April 2020. In the graph below we can see the sharp drop in the interest rate! As of today the interest rate is 0.25%, the lowest it's been since 2016.

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