This year was full of twists for the world’s largest economy, since the worst financial crisis since the Great Depression continued to weigh down on economic activity in the United States as well as the rest of the globe. The recession continued to hammer down economic activity, as unemployment rose to the highest level in 26 years. The major highlight of 2009 was the inauguration of Barrack Obama as the new President of the United States of America. Obama was already facing challenges ahead of him from a deteriorating economy to a rising budget deficit, where Obama had promised Americans with change. Although Obama tried to force some change, but when it come to the economy conditions proved to be much worse than expected, and accordingly Obama was forced to take some extreme measures in order to help support economic growth in the world’s largest economy. Some have criticized Obama for his measures, but almost no one can deny that those measures were indeed one of the focal reasons that helped the U.S. economy avert another depression.

Obama didn’t waste anytime before he requested former President Bush to release the second half of the Troubled Assets Relief Program (TARP) and start his term lobbying for one of the biggest fiscal stimulus plans in the history of the United States, but after much debate in the U.S. Congress, in addition to the Feds and Treasury signaling that failing to act would indeed send the economy into another depression. A final figure was finally reached between the House of Representatives and the Senates; the fiscal stimulus plan totaled $789 billion and mainly focused on infrastructure spending as well as tax breaks, which included tax credits for first time home buyers by $8000.

In addition, TARP money was also made available by the U.S. Congress; however, Obama stressed the need to limit executive compensation and dividends payments, after AIG used the bailout money from the government to pay for executive compensation and bonuses. This enraged Americans, especially since AIG, which was acquired by the government in order to prevent bankruptcy to use tax payers’ money to pay for those bonuses.

Meanwhile, Obama's efforts throughout this year to come up with a plan for one of his campaign promises had paid off, where he finally introduced his proposal on healthcare. The plan seems to be decent one and will help cut healthcare costs over the long term, yet the proposal was still criticized from Republicans, mainly since it was seen as a step closer into carrying the United States into communism, but to be fair, the plan had several positive points; providing better healthcare for Americans, and therefore forcing insurance companies to provide healthcare for those who need it.

Moving on to the U.S. Treasury; Mr. Timothy Geithner succeeded Henry Paulson as the new Treasury Secretary, Geithner’s appointment by President Obama was applauded in financial markets, especially since Geithner was seen as the right man for the job. However, Geithner also faced huge challenges ahead, including the need to insure stability in the financial system.

Geithner announced that Stress Tests will be held to assess the current liquidity needs for major U.S. banks and financial institutions; final results showed that 10 out of the 19 largest banks needed to raise as much as $74.6 billion in capital in order to survive the financial crisis, where the Bank of America, Wells Fargo, GMAC, Citigroup, Morgan Stanley were among those banks that were deemed to be in need for additional capital injections; while financial institutions like American Express, Bank of New York Mellon, Goldman Sachs, and JPMorgan Chase were among those that were deemed to have sufficient capital.

Additionally, the U.S. Treasury also designed a bailout plan for the financial sector, where the Treasury will purchase up to $1 trillion legacy assets through the Public-Private Investment Program; the program is designed to “repair balance sheets throughout the financial system and ensure that credit is available to households and businesses.”

Meanwhile, the Federal Reserve Bank kept its  benchmark interest rates unchanged throughout this year at a historical low between 0% and 0.25%, as the Feds continued to provide support through monetary policy; where the Feds undertook a very aggressive Dovish stance, in order to help boost economic growth and promote economic activity.

The Feds also continued to support credit markets in specific, as well as financial markets in general, through several liquidity programs that were aimed at easing credit conditions and facilitate lending; however, credit conditions remained tight during the year, but financial markets continued to improve over the course of this year as a result of the Feds’ ongoing support.

The Feds decided during the year to increase their balance sheet by more than $1 trillion; starting the Mortgage-Backed Securities (MBS) and Agency Debt Purchases program, as well as increasing the total amount of purchases to $1.25 trillion and $200 billion respectively. Furthermore, they also decided to undertake a quantitative easing policy for the first time in the history of the United States, by purchasing $300 billion of U.S. Treasuries in order to increase liquidity and further facilitate lending through ensuring that long term interest rates remain low, which would support the mortgages sector and ensure that mortgage rates remain low as well.

On the other hand, this past year was marked by huge bankruptcies in several sectors, other than the financial sector, as banks and financial institutions remained under huge stress due the credit crisis; where Citigroup Inc and Bank of America were forced to take aid from the government, as Citigroup received $45 billion in cash injections as well as $306 billion in guarantees, while Bank of America the largest U.S. bank by assets, received guarantees of $138 billion for agreeing to take over Merrill Lynch & Co. and Countrywide Financial Corp. as well as approving to cut dividends to 1 cent per share. However, if any losses should occur the FDIC, the U.S. Treasury, and the Feds will all share part of any losses.

Moreover, CIT Group was the latest victim of the worst financial crisis, as it filed for one of the largest bankruptcies in the history of the United States, nevertheless CIT will be able to reorganize its operations through deducing its debt by almost $10 billion, although common and preferred equity will most probably be wiped out; including a $2.3 billion cash injection by the U.S. government in preferred stocks.

The Auto industry also suffered the misery of this recession, as the worst conditions for the auto industry since the early 1980s forced U.S. major automakers into bankruptcy; as both General Motors and Chrysler were forced into announcing bankruptcy under Chapter 11, where GM agreed to give the U.S. Treasury a 72.5% stake in order to create a new company.

The U.S. economy remained rather weak over the course of this year, although economic conditions have started to improve during the second half of 2009, yet with unemployment still rising drastically over the course of the year and credit conditions tight as ever, the U.S. economy remained under immense pressure.

The U.S. economy contracted during the first quarter of this year by 6.4%; where spending, investments, inventories, and the housing market all continued to weigh down on economic activity, while the economy contracted by 0.7% only during the second quarter as conditions have started to improve, but still remain generally weak.

The U.S. economy, however, was able to start growing during the third quarter of 2009; where the economy was reported to have expanded by 2.2% according to the second GDP estimate, where the government’s fiscal stimulus managed to help boost consumer spending, which is considered the corner stone for economic growth in the United States. Nonetheless, the U.S. economy is still expected to continue growing over the upcoming period.

Unemployment continued to rise over the course of 2009, where it continued to accordingly weigh down on economic activity, as employers shed workers to reduce costs and survive the recession, although the fiscal stimulus is said to have been able to save or create at least 300,000 jobs this year, and according to the Obama Administration 600,000 jobs were saved or created during 2009, but unemployment maintained its steady rise to reach its highest level since 1983, above 10%.

As for Non-farm payrolls; they declined by 741,000, 651,000, and 652,000 jobs in January through March respectively, and from that point on the pace of layoffs has started to noticeably ease, as the fiscal stimulus managed to helped the labor market and prevent another Great Depression.

This year, unemployment rose from 7.2% reported in December 2008 to reach as high as 10.2% in October 2009, though unemployment dropped in November to reach 10.0% but still continued to hover around the highest level since 1983. The figure failed to meet expectations, since the Feds expected that unemployment would peak between 8.5% and 8.75% on February 2009, however, as the situation emerged the Feds altered their projections and signaled unemployment would peak between 9.8% and 10.1%!

Then again, the Feds do expect unemployment to fall next year as recovery prevails, where unemployment is expected to fall over the next three years, while economic growth is also expected to improve in 2010, before it can return to its long term growth potentials in 2011 and 2012.

As for inflation; prices remained under pressure over the course of this recession, as rising economic slack continued to weigh down on inflation, where the CPI declined in 2009 for the first time since 1955, dropping by an annual 0.4%, which ignited fears of deflation back then; however, as economic activity slightly improved alongside rising energy prices, and the huge amounts of liquidity that were pumped into the financial system, deflation fears faded and were replaced by fears from upside risks to inflation over the long term.

Inflation remains a threat over the long term, specifically since huge amounts of liquidity that were pumped into the financial system will increase money supply, and accordingly inflation. But since the velocity of money decreased over the course of this recession, we did not see inflation rise, but on the contrary it remained well under control and well below the Feds’ target.

The Feds expect inflation to remain well under control over the upcoming three years; measured by the Feds’ favorite indicator for inflation, Core PCE, where it is expected to remain in a range between 1 percent and 2 percent over 2010, 2011, and 2012.

As for the U.S. dollar in 2009; it rose heavily against major currencies during the first quarter, as the U.S. dollar index, which measures the dollar’s strength against 6 major currencies, peaked in March 2009 at 89.624 marking the highest level since April 2006, however, the dollar declined from that point to reach in November the lowest point since August 2008 at 74.170.

The U.S. stock markets followed and fluctuated heavily throughout this year, where stock indices continued to drop throughout the early part of this year, where it hit record lows in March; the Dow Jones Industrial Average dropped on March 2009 to its lowest level since April 1997 at 6469.95, while the S&P 500 index dropped in March 2009 to the lowest since September 1996 at 666.79, and the NASDAQ Composite index dropped to the lowest level since March 2003 at 1265.52.

Meanwhile, stock markets managed to rebound from the March lows, as earnings from major U.S. companies continue to beat market expectations, as optimism over the outlook for the U.S. economy helped boost investor confidence in financial markets, especially as the U.S. economy continued to show signs of improvement during the second half of 2009.

The DJIA was up this year by 18.66% as it was trading near the 10500 levels, 2009, while the S&P 500 index rose this year by 23.34% to trade near the 1100 levels, while the NASDAQ Composite index traded around the 2200 levels and up by 41.89% this year, where it seems that stock indexes will continue their rally over the upcoming period, as optimism prevails, data as of December 22, 2009.


ecpulse.com