Monday, March 17, 2008

Is US Economy in Recession?

Recent weeks have offered a range of depressing economic statistics on the US economy. Although technically the economy is not in a recession, most analysts feel the economy is on the brink of recession and most debate centres around how protracted and deep the forthcoming downturn will be.

Different Sectors of the US economy

Housing Market.

The housing market has been experiencing severe problems for over 12 months. House prices have fallen 10% from their peak and there is evidence that the fall in house prices is accelerating. [Source 1] For a long time rising house prices have enabled US homeowners to maintain high levels of consumer spending through equity withdrawal. The fall in house prices will definitely harm consumer confidence and consumer spending. The concern is that if house prices continue to fall, it will increase the number of people with negative equity and the fall in consumer spending could become quite damaging.

Credit Crisis

The troubles of America's 5th biggest investment bank, Bear Sterns, has been a significant development in the past week. It is illustrative of the problems caused by the credit crisis. Bear Sterns has lost significant investments in the subprime markets and other banks became nervous and started to withdraw their cash. The authorities hope it can be passed off as a one off, but, similar problems could potentially occur in other investment banks as well. There is still a real prospect of further credit defaults; many homeowners could soon face the prospect of higher interest rates as their introductory period ends. The blow has been softened by lower rates, but, this doesn't alter the fact many loans were inappropriate in the first place.
Students of the great depression will know how damaging any bank collapse can be to the economic system. Although Bear Sterns looks to have been rescued by J.P.Morgan there is a real danger that worse is still to come. (Forget soft landings at Guardian)

Falling Stock Markets

The falling stock markets are mainly a reflection of the economic and financial weakness. In particular the problem stems from the lack of confidence. One of the most worrying feature has been the way credit markets have 'frozen' 3 times in the past few months. The problem is even acute in triple AAA markets where loans are supposed to be very safe.

source: Economist
Note: Freddie Mac and Fannie Mae are two quasi government agencies responsible for issuing government debt.


Unemployment in the US is currently low 4.8% (data at US dept of Labour) However, 2008 has seen a worrying increase in unemployment and job losses. This has been particularly obvious in sectors such as construction and manufacturing. Since 2006 nearly 400,000 jobs have been lost in trade jobs (electricians e.t.c) and construction.

Weakness of the Dollar

The weakness of the economy and reduction in interest rates have only served to further weaken the US Dollar. Ironically, the dollar's devaluation is helping to boost US exports which at least help provide some growth. But, exports will not be able to take up all the slack from lower consumer spending. Also the weak dollar creates other problems such as more expensive imports and a decline in confidence about investing in the US.

The Good News on the US economy?
  • Tourists are attracted to the US because of the low dollar
  • Exports are rising, helping to reduce the trade deficit.
  • The efforts to stimulate the economy - lower taxes, lower interest rates could prove successful in avoiding a full scale recession. However, there is also a danger that monetary policy will prove ineffective. i.e. even cuts in interest rates to 1% may be insufficient to encourage consumers to spend money. The gains from lower interest rates may not be able to offset the losses from the housing market.
  • There is a feeling that markets may have overreacted to some of the bad news. Although others will argue that markets are still overvalued.
  • GDP growth is still positive GDP stats
  • However, most forecasts predict negative growth by May. The real question will be - how long lasting will the recession be?

1 comment:

Grant Montgomery said...

Is the U.S. in recession? Absolutely. How long will it last? My guess, probably not short term.

While far from an election topic, the next Administration have a major challenge come November.
Keeping in mind that the U.S. annual gross domestic product is about $15 trillion.
• The Bush administration revealed America's budget deficit will climb to a record high of more than half-a-trillion dollars.
• As of February ’08, the meltdown in the US subprime real-estate market has led to a global loss of 7.7 trillion dollars in stock-market value.
• In order to bail out Fanny Mae and Freddy Mac , Congress increased the national debt by a whopping $800 billion sending it over the $10 trillion mark for the first time in history!
• Since the passage of NAFTA and the creation of the World Trade Organization in 1994, America’s massive trade deficits has surpassed $5 trillion.
• Foreigners own $2.5 trillion more of American assets than Americans own of foreign assets.
• There are roughly $6 trillion in US dollar-backed assets around the world which could be quickly dumped if foreign holders of US dollars start selling their paper on the open market.
• The non-partisan Government Accountability Office that says the U.S. government faces a $53 Trillion shortfall to cover the costs of promised benefits in its entitlement programs: Medicare, Medicaid and Social Security.

And did I mention that the U.S.’s national debt is expanding by about $1.4 billion a day -- or nearly $1 million a minute.