Question

In 2011, despite evidence of improvement in the U.S. economy, what issues threatened economic recovery?

Answer 1

According to one of the reports of boards of governors, Federal reserve, it was acknowledged that there was improvement in the economic health of the country but the pace of improvement was slower than anticipated.

1.One of the reasons discussed by them was that in crisis like housing market boom and busts, the potential growth of the country falls down (atleast for some time). There are several ways in which financial crisis reduces the potential growth of the economy. Like, in the crises like housing crisis, the severe job losses may/can aggravate the mismatch between the jobs available and skills and location of those unemployed. Also, the very high long term unemployment lead to loss of skills and labour force attachment among workers. These factors push up the natural rate of unemployment. Thus, reducing potential growth.

The pace of productivity gains which is also one of important determinant of potential growth was restrained by the crisis. This was due to lower business investment, increasing risk aversion, uncertainty as well as tight credit conditions which hindered the adoption of new technology and business development.

2. Apart from potential growth, a lot of problems arose from the housing market which slowed the recovery of economy.

The lenders were reluctant to lend mortgage loans even to potential borrowers with good credit and had put harsh terms and conditions for lending. This was due to uncertainty in the economic condition and regulatory environment.

Also, a lot of vacant houses remained, which restrained the need of construction of new homes and put housing prices down.

3. Adverse financial conditions faced by borrowers in the credit and capital market also contributed to slow economic recovery. The financial crisis of 2008-09 contracted the global economic activity sharply and led to significant damage in the credit and capital market. Although the actions taken by various central banks helped the stabilization of these market, the tight credit conditions and risk aversion hindered economic activity.

4. The stressed financial conditions in the European countries was also one of the factors acknowledged. The financial stress in Europe caused increase in risks that US financial institutions, businesses and households had to consider while making their lending and investment decisions.

So, all of these factors had threatened the recovery of the economy.