Ask the Experts: David Yi

By Greg Schaber

David Yi, assistant professor of economics for the Williams College of Business' Graduate School of Business, addresses America's current economic situation.

Q. Most would agree that the economy placed a key?if not decisive?role in the outcome of the recent presidential election. How is having a new leader likely to impact the economy?

A. Having a new leader in the White House is not likely to have an impact on the U.S. economy, however, a massive new economic stimulus package (about $800 billion) being pushed by the president-elect will most likely help. Obama?s plan includes proposals on infrastructure projects, health care, energy, education and other projects. His plan also includes tax cuts to working families. How fast would this economic stimulus plan lift the U.S. economy from the current recession? That is anybody?s guess. I believe that this plan will not turn things around immediately, although it may soften the damage of the downturn, and the U.S. economy will continue to contract through the first half of 2009. I am hopeful that the stimulus plan will slowly turn things around in the second half of 2009.

Q. The barrage of news reports on the economy sometime makes it difficult to get a clear picture of things. How bad is the economy right now?

A. Well, the U.S. economy is in a recession which means the size of U.S. economy is contracting. Any economy that does not grow indicates a troubled economy. According to the January publication of the Beige Book, which is a summary of economic conditions in the federal bank?s 12 districts, the overall economic activity continued to weaken across almost all of the Federal Reserve Districts. According to the most recent GDP data from the U.S. Commerce Department, the U.S. economy contracted at a 0.5% annual rate in the third quarter of 2008, which is the biggest decline since 2001. Consumer spending, which accounts for two-thirds of U.S. GDP, declined at a 3.8% annualized rate in the same period. According to the latest Labor Department report, the nation?s unemployment rate shot up at 7.2 percent in December 2008, its highest level since early 1993. That puts U.S. job losses at 2.6 million for 2008. Some experts anticipate that unemployment could rise up to 8.5 percent or 9 percent during 2009. Some even warn that the U.S. could see double-digit unemployment in the absence of immediate appropriate action.

Q. What will it take for things to turn around in a meaningful way?

A. This is a tough question to which I believe there is no clear answer. Reports indicate that consumer spending was generally negative, even during the holiday season. This is a clear indication that U.S. consumers are increasingly anxious over job prospects, and keeping their spending habits on the defensive. This is a troubling report, because the decline in consumer spending leads to lost jobs, which leads to even less spending: a vicious cycle that is crippling the U.S. economy. In order to break this vicious cycle, consumers have to turn around and start spending. Tax cuts and government spending, which are part of the massive economic recovery plan by president-elect Obama, would encourage consumer spending and turn the economy around in a meaningful way. However, we should not expect the economy to turn the corner immediately. It takes time for all the plans for additional government spending to actually work their way through the system. Economists believe that it could be at least another 6 to 12 months before the economy actually starts to turn around in any meaningful way.

Q. What indicators should we look for?

A. There are many economic indicators that economists use to assess economic condition. Among them, I would say that GDP (which measures the size of our economy), the unemployment rate and consumer spending would provide us with a rough initial picture of whether or not the economy is on the path to recovery.

Q. Realistically, what might we be looking at in terms of time before there?s any real movement that impacts the population?

A. Economists believe that it could be at least another 6-to-12 months before the economy actually starts to turn around in any meaningful way, once the fiscal stimulus package is implemented.