How does the US economy do it?
Europe is floundering. China faces slower growth. Japan is struggling to sustain tentative gains. Yet the US job market is humming, and the pace of economic growth is steadily rising. Five full years after a devastating recession officially ended, the economy is finally showing the vigor that Americans have long awaited.
Last month, employers added 288,000 jobs and helped reduce the unemployment rate to 6.1 percent, the lowest since September 2008. June capped a five-month stretch of 200,000-plus job gains the first in nearly 15 years.
After having shrunk at a 2.9 percent annual rate from January through March largely because of a brutal winter, the US economy is expected to grow at a healthy 3 percent pace the rest of the year.
Here are five reasons the United States is outpacing other major economies:
AN AGGRESSIVE CENTRAL BANK
“The Federal Reserve acted sooner and more aggressively than other central banks in keeping rates low,” says Bernard Baumohl, chief global economist at the Economic Outlook Group.
In December 2008, the Fed slashed short-term interest rates to near zero and has kept them there. Ultra-low loan rates have made it easier for individuals and businesses to borrow and spend. The Fed also launched three bond-buying programs meant to reduce long-term rates.
By contrast, the European Central Bank has been slower to respond to signs of economic distress among the 18 nations that share the euro currency. The ECB actually raised rates in 2011, the same year the eurozone sank back into recession.
It’s worth keeping in mind that the Fed has two mandates: To keep prices stable and to maximize employment. The ECB has just one mandate: To guard against high inflation. The Fed was led during and after the Great Recession by Ben Bernanke, a student of the Great Depression who was determined to avoid a repeat of the 1930s’ economic collapse.
Janet Yellen, who succeeded Bernanke as Fed chair this year, has continued his emphasis on nursing the US economy back to health after the recession of 2007-2009 with the help of historically low rates.
The United States moved faster than Europe to restore its banks’ health after the financial crisis of 2008-2009. The US government bailed out the financial system and subjected big banks to stress tests in 2009 to reveal their financial strength. By showing the banks to be surprisingly healthy, the stress tests helped restore confidence in the US financial system.
Banks gradually started lending again. European banks are only now undergoing stress tests, and the results won’t be out until fall. In the meantime, Europe’s banks lack confidence. They fear that other banks are holding too many bad loans and that Europe is vulnerable to …continued »