Four Challenges to a Sustainable Economic Recovery |

After the longest period of economic contraction since 1947, the economy grew at a rate of 3.5% during the third quarter, signaling what many are calling the end of the recession. The stock market responded to the news with a 200 point gain as investors celebrated the return of economic growth, but many question whether the growth is sustainable. Some are calling the quarterly number an economic head-fake and expect that the economy will being to contract again due to the many challenges continuing to face the economy.

There is no doubt that economic headwinds remain in spite of the strong quarterly growth in the economy. Several factors are likely to weigh on the economy for quite some time, including the following:

– Government Spending- One of the major factors driving the growth of the economy has been government spending. Government spending is always a factor in the growth of the economy but it has played a pivotal role over the past several months as lawmakers have tried to jumpstart the economy. Spending on programs like cash for clunkers encouraged consumers to spend on big ticket items, fueling economic growth. Still, even though the government checkbook seems to know no limits, spending can’t continue at its current pace forever.

– Interest Rates- The Fed lowers interest rates in an effort to ease the pressure on the financial system, and in spite of interest rates being at historic lows for the past several months, the economy has struggled mightily. Rates can stay low until inflation becomes a factor, but they can’t stay low forever. Will the economy be able to grow with tighter credit conditions that arise as a result of higher rates? Time will tell.

– Unemployment- The number of Americans continuing to receive unemployment benefits dropped unexpectedly today but there are no false illusions that the unemployment problem is going to be solved anytime soon. For Americans out of work, the fact that the recession might be over means very little, as they remain in depression-like conditions. Hiring numbers remain uninspiring and most companies want to make sure this recovery stays on track before expanding their payrolls again.

– Inflation- The government is flooding the economy with money for various projects across the US, spurring job growth but risking the purchasing power of the dollar at the same time. Some economists expect inflation to remain mild for the next few years, but most predict that it will increase at some point and many think that inflation will be rampant within the next few years. The Fed will have to fight inflation by raising interest rates but they seem content to wait for inflationary signals to appear before formally addressing the potential problem.

In the end, we won’t know for several months whether or not this recovery is sustainable. The GDP number is an important step in the recovery process, but there are still major challenges that need to be addressed that could easily either enhance or derail the recovery we’re seeing signals of today. The above 4 areas will be important to watch closely in the coming quarters if the hope is for a sustainable recovery.

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