The economy has long worried about inflation, a general rise in the price of gasoline prices, cars, clothing, meals, and healthcare, but few have worried about deflation and the affect it could have on our economy. Falling prices do however benefit the consumer; every dollar goes a little bit further (Hilsenrath i?? 4). So far this year we have seen a reduction in gasoline prices, lower interest rates, and lower prices in clothing. You would think this is good news and not something to worry about, however sometimes deflation can be even worse than inflation.
Hilsenrath states that companies cut prices during the time of recession in hopes to get the consumer to spend money. While the company is lowering the prices of the product they are also squeezing corporate profit margins. Companies with large debts find it harder to pay them back due to the loss of profit margins. Financial institutions become stuck with mounting levels of loans that aren’t being repaid. Once a company starts to get into financial problems they have no choice but to start lying off employees.
The problem with deflation started after the attacks of September 11th. The people in the American economy started to worry about the future and what affects the attacks on the World Trade Center and the Pentagon would have on them. Companies started lowing the prices of products in hopes that people would start spending money. I feel that as long as the US is at war we will continue to have problems with deflation and companies down sizing in order to stay in business. Companies down sizing and lying off employees bring me to the next problem America is facing, unemployment.
Ford and Hilsenrath have stated while growth in excess of 3% for an economy the size of the U. S. is generally considered healthy, that level might be too modest during an initial recovery phase when stronger growth is needed to recoup the job and income losses that occurred during the recession. Forecasters expect the unemployment rate, which was 5. 7% in November, to rise to 6. 2% by May before edging down ever so slightly to 6% by November 2002.
CNN Money claims that the Labor Department reported that the number of Americans filing for unemployment benefits rose to 392,000 in the week ended Dec from a revised 385,000 the prior week. Economists surveyed by Briefing. com expected 400,000 new claims. I feel that the affect of the stock market and the loses that have occurred since September 11th have made many companies look at relocating products in order to minimize the cost which in turns eliminates the need of certain jobs within the company. Many companies have also merged in order to cut down on there overhead cost like employee salaries. The solution to this problem will depend on the economy and how well it grows in the up coming months.
To support consumer spending, which fuels two-thirds of the economy, despite mounting job cuts, the Federal Reserve has cut its target for short-term interest rates 11 times this year to a level not seen since 1961. The Federal Government is aware of the problems the economy is having and is trying to raise the confidence of the consumers by finding ways to stabilize prices. The news today speaks for itself and the economic issues that we Americans are facing. The war has changed the lives of many people that lost their loved ones in the attacks on the World Trade Center and the Pentagon.
Americans have also lost their sense of security and fear that another attack could happen at anytime. The attacks have shaken the foundation of air travel. Business Journal states that Air travel across the nation fell by 33 percent in September, compared to the same month the year before. The week after the attacks, Denver-based Frontier Airlines announced it was cutting 393 jobs. Chicago-based United Airlines, Denver’s dominant airline, announced it was cutting 20,000 jobs. Again, the loss of so many jobs has impacted the economy and they amount of money people spend.
The fears that Americans have are what I believe to big one of the biggest economic issues. Many people are not going on vacation for fear of flying or the fear of long delays at the airport. The federal government stepped in with a $5 billion aid package in order to assist the airlines with the losses that occurred after the September 11th attack. The airlines are not the only ones feel the hurt of the attacks. If people are not flying then tourist towns are not profiting from vacations the consumer would normally take. The solution to this problem will depend on the American Economy.
If people start to feel less fearful then I believe they will start flying again and taking family vacations. I also believe that until the war is over the airlines will continue to feel the affects of the war and so will most tourist communities.
References
Ford, C. M. , & Hilsenrath, J. E. U. S. Economy to Recover, But Growth Will Be Sub par Wall Street Journal; Brussels; Jan 4, 2002; Retrieved February 11, 2002 from ProQuest Gongloff, M. Home sales are steady, jobless claims rise and durable goods orders slip CNN Money.
