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Secretary of the Treasury Timothy F. Geithner (L) and William C. Dudley (R), President and Chief Executive Officer of the Federal Reserve Bank of New York, listen to Federal Reserve Chairman Ben S. Bernanke (C) speak during a hearing of the House Financial Services Committee on Capitol Hill March 24, 2009 in Washington, D.C.
The fourth quarter of 2011 was much better for the U.S. economy than the year as a whole. But if you can believe it, it actually disappointed many economists. The economy grew at a rate of 2.8 percent, a vast improvement over the sub-2-percent growth that typified the year. But we were looking for 3 percent GDP growth.
I know, I know — 0.2 percent doesn't sound like such a big deal. Unless your yearly GDP is $14.5 trillion and you need to add something like 350,000-400,000 jobs each and every month to bring unemployment down to pre-crisis levels (nationally, it's at 8.5 percent now).
The Fed on Wednesday said it expected to keep interest rates at rock bottom levels at least through late 2014, and Chairman Ben Bernanke said the central bank was mulling further asset purchases to speed the recovery.
The central bank warned the economy still faced big risks, a suggestion the euro zone debt crisis could still hit hard.
"We're still repairing the damage done by the financial crisis. On top of that we face a more challenging world. We have a lot of challenges ahead in the United States," U.S. Treasury Secretary Timothy Geithner said at the World Economic Forum in Davos.
Prospects of sluggish growth could hurt President Barack Obama's chances of re-election in November.
The economy grew 1.7 percent in 2011 after expanding 3 percent the prior year, and the unemployment stood at a still-high 8.5 percent in December.
The truth is that no one is completely sure why the economy is expanding at such a sluggish pace, after such as severe recession. We should be seeing GDP growth at 5-6 percent. Most economist point to the still-struggling housing market and the lack of debt financing as the two core problems. Both are challenges to the banking system, lending credence to the thesis that financial crises can take 7-10 years to fully work themselves out. As it stands, we're roughly four years into this one.
The U.S. can bump along with GDP growth around 3 percent and not fall into a recession. The unemployment level will very slowly decline, with the emphasis on "very" and "slowly." For example, the White house doesn't see 6 percent unemployment returning until 2017 — five years from now! Worth noting that back in 2008-09, when unemployment moved up to 6 percent, people starting getting pretty worried about the future.
Slow growth is better than no growth, of course. But it does mean the country is vulnerable to a global shock of some sort, such as a European debt crisis even worse than the one Europe is current dealing with/not dealing with. It also means that even though the economy isn't technically in recession, people fell like it is. And then there's always the business cycle. It's still out there. Slow growth may prevent a brand new recession from hitting for a while. But recessions are inevitable. That's why the Fed has decided to keep interest rates so low. Now is not the time to withdraw support from the economy.
The question is whether the fiscal side will join the party — "fiscal" meaning "government spending," be it in the form of further stimulus or tax hikes/cuts. And the way things are going, we'll have to wait until November to find out.