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Decimal Digest
28 Feb 2011

What is driving the US Economy?

In recent weeks, market commenters and analysts have been impressed with the strength of the US economy, seemingly on the back of the indomitable US consumer.

It would be interesting to note some facts, to see if the driving force behind the current economic growth in the USA is really the US consumer.

The table below shows the number of people on food stamps in USA.

Table 1: Number of Persons under SNAP (Food Stamp)

Source: United States Department of Agriculture

The data in the above table shows that currently one in every seventh person in the USA is living off Food Stamps. This data matches with the data from Labor Department stating that employment participation rate has fallen significantly in last five years, and is currently at 64.2%. However, the question remains, what lends strength to the US Economy, if labor is fundamentally in a weak spot? The answer lies in the finances of the US Federal Govt. The chart below shows the estimates, made at various times in the recent past for Federal Deficit for years 2011 -2018

Source: CBO

The above chart shows that the estimate for fiscal deficit for the year 2011 increased from US$500 billion in February 2009 to US$1500 billion in February 2011. The increase in deficit estimate for 2011 is about US$1,000 billion in the last two years.

Interestingly, the nominal GDP for the USA is estimated to have increased by about US$1,000 billion during the 2009 to 2011 period. In other words, if the US fiscal deficit estimates were to remain unchanged since 2009, the nominal GDP for USA would have remained unchanged since 2009, showing a marginal decrease in real GDP. Most of the increase in fiscal deficit is due to transfers to individuals, which in turn is helping the US consumer to spend more, in spite of record high U-6 unemployment rate and other indicators that show the fundamental strain on the US consumer.


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