ERP_2009_Chapter1 - CHAPTER 1 The Year in Review and the...

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31 CHAPTER 1 The Year in Review and the Years Ahead F ollowing 6 consecutive years of expansion of the U.S economy, the pace of real GDP expansion slowed in the first half of 2008 and turned negative in the second half. Payroll jobs began to decline in January, following a record 52 months of continuous growth. The observed pattern of output, employment, and other key indicators led the Business Cycle Dating Committee of the National Bureau of Economic Research to declare that the economy peaked in December of 2007, beginning a recession that continued throughout 2008. The reorientation of the U.S. economy—which had been underway in 2006 and 2007—away from housing investment and consumer spending and toward exports and investment in business structures continued through the first three quarters of 2008. However, the reorien- tation was neither smooth nor graceful, as falling house prices initiated a cascade of problems beginning with mortgage delinquencies and falling prices of mortgage-backed securities. This eventually threatened the solvency of several major financial institutions and ultimately resulted in several failures and forced mergers along with a major decline in the stock market beginning in late September. To respond to these problems, policymakers have under- taken a wide range of actions during the year, including: personal tax rebates and bonus depreciation allowances for business (the Economic Stimulus Act of 2008, enacted in February); support for the housing market (the Housing and Economic Recovery Act of 2008 in July); large-scale investment in finan- cial assets (the Emergency Economic Stabilization Act of 2008 in October); a reduction in the Federal funds rate from 5¼ percent in August 2007 to almost zero by December 2008; and the implementation of a variety of programs by the Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and other agencies to provide liquidity to financial institutions and to mitigate strains impairing the functioning of the overall financial system. In the wake of mounting problems with the performance of subprime (higher risk) mortgages, financial markets became stressed beginning about August 2007 and became substantially more stressed after mid-September 2008. After a slight decline in real gross domestic product (real GDP, the total value of all goods and services produced in the United States after adjusting for inflation) in the fourth quarter of 2007, policy actions— including the enactment of a fiscal stimulus program and the initial round of Federal Reserve rate cuts—helped maintain positive real GDP growth in the first half of 2008. These actions likely delayed the downturn in output but were not sufficient to prevent the steep falloff in employment, production,
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32 | Economic Report of the President and aggregate spending that appears to have begun in mid-September. After the mid-September failure of Lehman Brothers (an investment bank), the emergency loans to AIG (an insurance company with extensive involvement
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ERP_2009_Chapter1 - CHAPTER 1 The Year in Review and the...

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