Consumer spending and U.S. employment

A recession and its impact

A recession is defined as a halt in economic activity and a decrease in output and services delivered. The recession is the business cycle's downturn phase. The most recent recession lasted from December 2007 to June 2009. The recession was signaled by a 4.3% reduction in real gross domestic output. By the end of June 2009, unemployment had risen from 5% to 9.5%. Home values were also affected, with household net worth dropping by more than $10 trillion in 2009. (Hugie, 2014).

Effects of a recession

The severity of a recession is determined by the length of the cycle and the magnitude of the loss in production. During a recession, a drop in the inflation rate is expected. A recession also implies that the GDP will fall. Other effects of the recession will include fall in average income, high rate of inequality and increased government borrowing. Unemployment is the primary characteristic of the recession in the business cycle. In December 2007, the unemployment in the United States was 5%, and it has been below in the previous years. However, towards recession in June 2009, the rate of unemployment had increased to 9.5% and 10% by the end of October 2009. Previous recessions, especially in 1982, had the unemployment rate rising to 10% but the recession did not last long (Roberts & Terrell, 2014). The 2007-2009 recession is notable because there was a high proportion of long-term unemployment and its post-recession effects were notable. The unemployment demographics indicated that African Americans and Hispanics were the most affected with the unemployment.

Fiscal policy and its role during a recession

Fiscal policy refers to modifications made in the taxing and spending by the federal government with the aim of affecting the demand. The federal government can apply the fiscal policy either to expand or to contract the aggregate demand in the country. During the 2007-2009 recession, an expository fiscal policy was implemented with the intention of lowering taxes and increasing the government expenditure. The government went further to use discretionary fiscal policy during the recession through the federal budget process. The federal government resorted to large fiscal stimulus by increasing spending in 2007-2009.

Monetary policy and its role during a recession

The monetary policy is under control of the Federal Reserve System. The monetary expands or contracts aggregate demand by changing interest rates hence controlling the money supply (Hugie, 2014). During the recession, the Federal Reserve System will lower interest rates and increase money supply thereby reducing inflation. In the 2007-2009 recession, monetary policy was used as a discretionary contra-cyclical policy.

The impact of a recession on international trade

The inflation rate is high during the recession cycle. The increase in domestic inflation rate leads to high cost of exports hence a decrease in exports as foreign consumers prefer alternatives from their country or cheaper imports from other nations. The net effect is a country with high demand for imports and a decrease in exports. The result is a depreciation in the home currency. In the 2007-2009 recession, there was a decline in US exports reducing demand for dollar in the exchange market. There was a considerable reduction in the purchase of goods and services from the US. In contrast, high demand for imported goods increased the supply of dollar in foreign countries. Investors started to withdraw from US economy because the investors were not confident with the economy.

Conclusion

As economic growth and income increases, consumers increase their expenditure on goods and services. During the recession, there is a decreased growth and less disposable income. The rate of unemployment is high hence high inflation rate, low GDP, and decline in the exchange rate. The government intervenes through monetary and fiscal policies intended to increase consumer expenditure.

References

Hugie, S. (2014). Consumer spending and U.S. employment from the 2007–2009 recession through 2022. Monthly Labor Review, 4-9.

Roberts, B., & Terrell, D. (2014). A cohort component analysis of the 2007–2009 recession. Monthly Labor Review, 6-12.