The US economy: an update •

In a previous article published in this Review (Sacchetti 1999) I high-lighted four trends in the US economy which I believed to be not sustainable. It was stated that a reversal was likely, but that the time of the turnaround was not predictable. My opinion remains unchanged. In what follows I shall rapidly review three of the four trends, and shall give a factual account of what happened during the last 4 to 5 years. The fourth trend, i.e., the developments in the country’s exter-nal accounts, will be discussed in more details because of the magni-tude of the problem, of the difficulties to solve it due to its complexi-ties and because of the possible implications, for the US and the world economy, if a solution is not found (and even if it is found through an organized approach). In a broad perspective, it can be stated that at least from the fi-nancial point of view (but potentially also from an economic point of view) the country is in worse condition than in 1998. It is highly leveraged throughout. The federal budget, which was in surplus in late 1990s, closed the fiscal year 2003-04 with a deficit of $ 413 billion, in sharp contrast with a surplus of $ 69 billion in 1998, and high surplus of $ 236 billion in 2000. Consumers increased their indebtedness in all forms (mortgage, equity lines of credit, revolving loans); and, due to the rapidly increasing current account deficits, the country’s debtor position vis-à-vis the rest of the world has considerably worsened. At the end of 2003, it was −2,651 billion dollars compared with −1,322 billion dollars in 1997. It should be mentioned, however, at the same time that the GDP rose from $ 8.995 trillion in Q2 1998 to $ 10.778 trillion in Q2 2004, or by 19.8%. This period included a minor reces-sion in 2000-01. After that recession the rate of growth was heavily influenced by a number of measures in the fiscal and monetary fields