South-Western College Publishing - Economics  
Two Keys to Long-term Economic Recovery
Subject Economic Recovery
Topic Employment, Unemployment, and Inflation
Key Words

Recession, Recovery, Consumer Spending, and Business Spending

News Story

The economic boom experienced by the U.S. economy over the last few years appears to be slowing. New data indicate a softening economy, but equivocates on just how serious the falloff is. "The economy has come off its peak in the last couple of months," said Martin A. Regalia, chief economist at the United States Chamber of Commerce. "People have dropped their [real GDP growth] forecasts to about 3.5 percent. That's still a pretty solid number."

"Economic data over the next several weeks are likely to follow the theme of slower growth with continued inflationary pressures," wrote Goldman Sachs economist Andrew Tilton in a note to clients. "In addition to a weaker trend of consumer spending, we expect some modest decelerations in factory sector activity."

Anytime an economy grows itself out of a recession, economists expect the economy to experience higher interest rates and the possibility of higher prices. The current recession, with record low interest rates, has allowed consumers to continue spending on housing and other durable goods that can be purchased and financed at relatively low rates. The Federal Reserve, however, has recognized the possibility of inflation. A recent increase in the federal funds target rate aimed to stop price increases. On the other hand, businesses have not been able to capitalize on the lower rates to invest in new equipment because sales have been too low to warrant new investment.

Despite the scattered hints of economic disaster lurking, optimistic analysts expect two sources of economic growth to kick in and sustain the recovery. On the consumer side, an increase in new jobs will increase the overall wage level-which will help maintain consumer spending. On the business side, firms that spent the earlier part of the recovery paying down debt will have the opportunity to respond to increased sales generated by economic growth, by investing once again in new capital goods.

It is still early to make a call either way on continued economic growth, but given the many economic variables that remain strong, the likelihood of maintaining consumer spending and generating new investment spending by businesses is not out of the question.

(Updated September, 2004)


Define the concept of consumer spending and its role in economic recovery.

2. Discuss the relationship between investment spending and economic recovery. Include a discussion of the investment multiplier.
3. This article touches on two phases of the business cycle, recovery and recession. Name and discuss the other two phases of the business cycle.
Source Eduardo Porter, "A Recovery Trying to Keep Its Legs Suddenly Feels Woozy," The New York Times Online, July 12, 2004.

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