Us Economy

What factors led to the slowdown of the US economy in 2001? Have matters improved in 2004? Evaluate the risks of a downturn in 2005 if oil prices remain over $40 a barrel. What are the effects on the European and Asian economies?

The US economy throughout the 1990s was positive with an upward trend up to the end of the decade. The US economy was expanding at an average rate of 4.5% a year from 1996 -2000. US' GDP growth in 2000 was at 4.1%, which was very high for a developed country and when compared to other economies, e.g. Japan's 1.5% and the European Union's 3.5% GDP growth in 2000.

The economy was booming during this period, and the growth of the economy led the United States to nine years of consecutive expansion in 2000, which was the longest ever in its history.

However, the US economy suffered a slowdown in 2001 as the GDP fell to -0.4% in the third quarter of 2001. This downturn occurred within the course of a year and led to this weakest performance since the first quarter of 1991 when the economy shrank 2.0% at the end of the last recession.

This slowdown of the US economy in 2001 was due to several factors, primarily being the weaknesses in the manufacturing and IT sectors. The NASDAQ composite which was comprised of technology-related companies in 2000 suffered what came to be called the dot - com bubble burst. On March 10, 2000, the NASDAQ composite reached a record 5048.62, which was more than double the value only a year earlier. The burst of the bubble occurred possibly due to Microsoft being declared a monopoly in the US after they lost the high profile antitrust case. The build up to this dot - com bubble was due to high interests in the introduction of the internet which caused a boom in this technologically related market in the mid 90s. The stock prices soared as companies were being highly over valued until the bubble burst. This dot - com bubble in 2000 was one of the initial and important contributor to the slowdown of the US economy in 2001 as by 2001, a majority of those listed in the NASDAQ composite have stopped trading. Many people's investments were lost and with the closure of several tech-related companies, there was an increase in unemployment as 36,000 employees lost their jobs as of November 2000.

1The technology-heavy NASDAQ IXIC index peaked in March 2000, reflecting the high point of the dot-com bubble.

The slowdown of the economy was also due to rising crude oil prices as illustrated below in the graph.

These concerns made a negative impact on consumer confidence, and thus led to decreases in output and income, which affected the country's GDP.

The tragic event of September 11 2001 where a terrorist attack in New York City led to thousands of deaths was the incident which triggered an acceleration in the slowdown and turned it into an economic recession. This event also led to increases in oil prices. The airline industry suffered heavily and there was a considerable slow down in the tourism industry. The New York Stock Exchange, the American Stock Exchange and NASDAQ remained closed on the day until reopening on September 17. This became the longest closure since the Great Depression in 1933. The Dow Jones Industrial Average (DJIA) once opened on September 17 had the biggest ever one day point decline as stock market index fell 684 points, or 7.1% to 8920. Within a week, the DJIA had fallen 1369.7 points or 14.3, also making it the largest one week point drop in history. The value of the U.S. stocks lost equaled $1.2 trillion.

The rate of unemployment soared as a result of this with a striking 800,000 jobs being lost in the months of October and November 2001 combined, and this three months increase in the rate of unemployment from September to November became the fastest three - month increase since 1982. This potentially leads to a negative impact on consumer confidence.

In order to reduce the severity of this downturn, as well as increase consumption and investment, the Federal Reserve cut interest rates 10 times in 2001 from 6% in January 3, 2001 down to 2% in November 6, 2001. This significant cut in interest rates should also help strengthen the country's employment, reducing the rate of unemployment.

Furthermore, GDP was stimulated through the use of fiscal policy when US President George W. Bush, on June 7th 20001, signed a $1.35 trillion tax cut. This was one of many tax cuts that were part of a policy to secure GDP growth.

In 2002, the GDP gained by 0.4% and the economy seems to have gotten back on track as matters improved. The rate of GDP growth became the strongest in the third quarter of 2003 during the months of July to September, when the GDP grew by a rate