Political Science

After the worst recession in recent history, the US economy started showing signs of recovery in response to stimulus packages introduced by the government. The bad news is that the economy failed to achieve the expected growth rates projected by financial experts. Unemployment figures continued to rise, consumer spending fell and export revenues shrunk (Gross, 2009). Several factors are responsible for this situation and analysts are predicting it will take a little longer before the economy registers growth rates above 5.

From the year 2000, the construction industry and the building frenzy that accompanied the housing boom provided a significant growth engine for the American economy. Rising demand for houses and improved property prices meant that investors borrowed heavily to finance new housing units. Such loans were acquired at high interest rates with investors expecting that the housing boom will ensure their investments paid off. Unfortunately the boom ended and the subprime crisis enveloped the whole industry. Falling property prices meant investors could not recoup their investments, and home owners faced with bankruptcies were unable to repay their mortgages (Keilis-Borok et al., 2008). The current oversupply of houses has contributed to the slump in the industry and until the glut of housing units ends, the construction industry is not expected to contribute meaningful to gross domestic product (GDP).

Competition from foreign exports has hurt American producers and affected export sales globally. Emerging economies are better placed to compete on the basis of price as labor costs are much cheaper than those in the US. American multinationals are increasingly turning to outsourcing as a cost cutting strategy. This alternative has the effect of exporting jobs which denies the local economy much needed funds to jumpstart the economy in terms of increased employment and higher disposable incomes.

The baby boomer generation is retiring and as such their spending patterns are changing.  Reduced incomes have forced this generation to cut back on their consumer habits (Keilis-Borok et al., 2008). This has resulted in lowering the national consumer spending index by a few percentage points. Depressed demand has forced manufacturers to cut back on production outputs and hiring of additional labor.

In addition to the effect of retiring baby boomers, the American public has become acutely aware of the need to cut back on consumer spending to save for retirement.  The recession eroded personal savings invested in fixed and liquid assets (Siegel, 2002). Most people now find it prudent to put their money in saving accounts rather than invest it in assets that could lose value overnight. This has reduced consumer spending and slowed down economic recovery.

Reduced consumer spending has led to job layoffs as most industries failed to balance their income and expenditure accounts. Rising unemployment has significantly impacted economic growth and decreased consumer spending even further (Keilis-Borok et al., 2008). With fewer people earning salaries, the economic stimulus package has failed to improve the overall performance of the economy as domestic demand is at an all time low.

The need to protect American interests and inherent responsibilities as the worlds only superpower has placed immense strains on the financial status of the US. Forced to borrow funds to finance wars in the Middle East and support fledgling democracies globally, the American budget deficit has been growing at an unmanageable rate.

In conclusion, the expected growth rates have failed to materialize because consumer spending has declined, export earnings have shrunk, and global responsibilities continue to divert vital funds from the economy to non- productive areas. Until such a time that consumer spending increases, foreign wars are halted and unemployment figures fall, the economy will continue to register modest gains.