Growth of the US Economy Slows: Rising Consumer Prices and Trade Deficit with Exporter China

Based on recent reports, the growth of the US economy, which is the biggest worldwide, has slowed during the 2nd quarter of 2006. The decline has been attributed to the increasing interest rates, as well as the rising cost of energy. Needless to say, the recent oil price hikes have not affected the current oil demand, which is expected to reach its peak this summer. The US government though relies on its own oil industries and foreign supplies in order to meet the rising energy demand. Although Venezuela, which is a major oil exporter to the US, is gradually withdrawing its presence in the country, the US has found energy supplies in other allies. The United States has also urged China to practice fair trade in order to prevent imbalances. China, which is another leading exporter in the US, has been blamed for the huge trade deficit affecting the US economy.

During the 2nd quarter, the GDP (Gross Domestic Product) of the US rose by 2.5% per annum compared to the 5.6% rate during the first quarter of 2006. Although the decline has been expected by economists, the result exceeded their previous prediction. Now, analysts are considering to review and revise their initial forecast regarding the growth of the US economy this year. It must be noted that the Federal Reserve has predicted that the American economy would grow by 3.5% in 2006 compared to last year’s 3.2%. However, analysts have said that the nation’s economic development might be affected by several issues such as the rising interest rates, energy costs, and the growing trade gap with trading partners like China, which is a major exporter to the US.

The decline of consumer activity has also been seen as another factor behind the slowdown of the US economy. Due to this, economic experts have predicted that the Central Bank of America might limit the increase of interest rates amidst the pressures of the rising energy prices. It must be noted that the Federal Reserve has been gradually increasing the cost of borrowing as the economy gains more pace. In fact, it raised the interest rates up to a record level of 5.25%. Now, analysts have been speculating whether the Central Bank would increase the rates again this month considering the decline of consumer spending.

Although the foreign products such as those from exporter China have become more attractive due to their lower cost, the rate of spending of consumers was still restrained by the increasing prices of commodity. According to the Department of Commerce, core prices, excluding energy and food costs, have risen at an annual rate of 2.9% during the 2nd quarter compared to the 2.1% rate during the first quarter. Meanwhile, personal expenditures rose by 4.1% compared to the 2% rate during the 1st three months of 2006. The Labor Department also reported that cost of hiring and maintaining workers was another factor behind the nation’s inflation. Meanwhile, the US government has already urged its major exporter China to address the problem of trade imbalances by observing fair trade practices.

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