The savings/investment aspect of GDP has seen excellent growth in recent years during the recent bull-market following the recession of 2001. After sometime, the 17 straight rate hikes prior to the feds last meeting have started to filter into the economy and decelerated a substantial portion of the growth in conjunction with high energy costs throughout the summer.
The manufacturing sector continues to show growth however the purchasing manager index dropped .2% since July and numerous components of the PMI indicated a slowdown in expansion. Chemicals, Beverage and Tobacco, Metals, and Electronics all showed strong growth recently. Despite the strong growth displayed by these industries, it is critical that energy costs remain low and federal rates remain stable. An increase in either the federal funds rate or spike in energy costs will make it difficult for the capital intense operating structures of these industries to reinvest in technology, employees, R/D, etc. to continue expansion. Similar concerns remain for non-manufacturing industries and the high probability of energy costs rebounding in the late 1st to early 2nd quarter of next year will place added pressure on these sectors growth opportunities.
President Bush's temporary tax relief program in 2003 still in use today and looks to be permanent. The tax relief program prevents a tax increase on families and small business.
In addition, Bush looks to double the child tax credit, reduce the marriage penalty, cut taxes on capital gains and dividends, create new incentives for small business to invest, and possibly reduce income taxes. This stimulates GDP in the following succession:
Decrease in net taxes à increases disposable income à consumption increases à increases real GDP demanded
Government spending continues to run up their budget deficit. Congress plans on additional funding by reducing 141 programs totaling 14.7 billion. Other fiscal policy pending progress includes programs geared toward defense and homeland security, information technology, medical liability reform, and the Advanced Energy Initiative. Advances in energy research will provide more efficient and reliable energy in solar, wind, and nuclear to assist hybrid and electric car production.
Government spending plays a vital role in the growth of the economy by filtering money back into the economy through public and private goods. Continued government spending leads mild growth opportunities in the GDP as a decrease in tax liability may be offset by the budget tightening.
Net exports have shown tremendous growth in the several years. This can be related to change world environment around us. The advances in technology have made the world smaller by making it easier to exchange data around the world and have allowed companies to move into areas that were formally unavailable to them.
The rise in trade organizations such as the World Trade Organization and the promotion of free trade has also made it easier for companies to move their production overseas where they can produce it more effectively.
The rise of free trade and the advances in technology has lead to increase foreign competition and the rush for globalization which gives consumers more options on products and increase the competition for market share. The trade deficit has lead to several the rise of several fear about how globalization could affect both the US and world economy.