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The economic weakness experiences in the half of 1985, gave way to a faster growth in the later part of the year improving the expectation of a better business era in 1986. Nevertheless, substantial uncertainties remained as the country moved into its fourth year of cyclical expansion. These uncertainties include consumer spending and the declining dollar effect on inflation and production, the path of inventory investment and federal government’s fiscal policies. The U. S economy experienced a mixed performance in 1986.
inflation fell to its lowest rate compared to the last 20 years but output growth also slowed to a well below average pace. A mixed performance was just had been predicted by a forecasting model maintained by researchers at the Federal Reserve Bank of Minneapolis (litterman 1985). However, that prediction has projected different mix, which was rising inflation and above average growth. Growth and Inflation 1986 was a year of expansion; the vigorous youth of this expansion was from 1983-1984. This was when the U. S economy began to recover from its recession.
In those years, inflation-adjusted the GNP had a bounce back to an annual rate of 5. 6 percent. This expansion lost most of its vitality from 1985-1986. On average, GNP expanded to about 3. 2 percent. The recent growths were slower, 2. 9 percent in 1985 and 2. 2 percent in 1986. However, gains against inflation continued. The rate of inflation fell from 3. 6 percent to 8 Joseph H. Davis. “An Improved Annual Chronology of U. S. Business Cycles since the 1790’s,” 2005. NBER Working Papers 11157, National Bureau of Economic Research, Inc. 3.
3 percent in 1985 and then in 1986, it fell to 2. 2 percent, the lowest since 1964. The slow down in growth from 1985-1986 changed the image of the current expansion. The economic performance in 1986 could be best described as so-so expansion. Apart from the declined inflation and consumer energy bills, other good points were falling interest rates and robust stock markets. These helped spurred the healthy growth in residential investment and consumer spending. This spending was mostly on durable bills like autos. The unemployed portion of the labor force also declined a little bit in 1986.
This was about 0. 2 percentage point. The bad points of the year, which helped slowed down the overall growth were deterioration in the nation’s trade balance and sharp cuts in business investments and inventories. Another contributor to the negative growth of the economy was the declination of oil prices. This is because; most of the cuts in the component of business structures of fixed investments were in the domestic energy industry. 9 Sherman, Howard J. , and Kolk, David X. Business Cycles and Forecasting.(1996). New York: Harper Collins.
Bruce T. Grimm, “Alternative Measures of U. S. Economic Activity in Business Cycles and Business Cycle Dating,” BEA Working Papers 0024, Bureau of Economic Analysis. 2005. Burns, Arthur, and Mitchell, Wesley. Measuring Business Cycles. New York: National Bureau of Economic Research. (1946). Balke, Nathan S & Gordon, Robert J. “The Estimation of Prewar Gross National Product: Methodology and New Evidence”. February 1989. Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 38-92.