08S7C's Economics Blog

U.S. Recession?

Fears of a U.S. recession mount

Signs that the United States is facing a hard landing from a serious housing industry crisis multiplied Wednesday as forecasters at a prominent bank said that the world's largest economy was in or near a recession.

"Recession has now arrived or will very shortly," Jan Hatzius, the chief U.S. economist for the investment bank Goldman Sachs, wrote in a report Wednesday. Goldman is forecasting a "mild" recession contraction lasting two to three quarters.

Sentiment has grown markedly in the last month that the U.S. economy is in more serious trouble than previously thought. These fears have taken on new significance politically as presidential candidates on the campaign trail hear voters express mounting concern about the health of the economy.

Mindful of the political reality, President George W. Bush this week also acknowledged the United States had weakened considerably.

The Federal Reserve, which has acted with major central banks around the world in recent months to stabilize volatile financial markets, is expected to cut borrowing costs for the third time since September when it next meets January 29-30.

To be sure, the view that the United States will tumble into recession is still held by a minority of economists, and has not been endorsed officially by the Federal Reserve or the U.S. government. But for Goldman Sachs and some other forecasters, a recent report showing that employment growth in the United States had largely stalled was a signal that the broader economy had creaked to a halt as well. Job creation has long underpinned U.S. growth, which is driven largely by consumer spending.

In another sign that the crisis has not abated, the U.S. bond insurer MBIA announced an emergency plan to secure its gild-edged credit rating. The company's rating, a vital part of its business of guaranteeing payment of municipal bonds in the United States, has been scrutinized in recent months because of its exposure to securities linked to the deteriorating U.S. mortgage market.

Europe is also facing the increasingly serious question of whether it can keep up the pace of exports as the United States flirts with recession. Most economists have been sanguine about European growth amid weaker U.S. activity, but an economic contraction is another matter.
European stocks fell sharply Wednesday on concern that European consumers will not be able to pick up the slack as exports slow under the pressure of a strong euro and weaker global growth, particularly in the United States.

Asian markets were up, while U.S. stocks were flat in early trading.

Gold, a refuge in times of crisis but also a marker of exploding commodity prices, also continued its march upward, reaching a record high of $894.40 per ounce before falling back to $880.80.
Rising gold prices have also traditionally be a harbinger of higher inflation, and with price levels spiking in both Europe and the United States in recent months, economists have also begun to mull the possibility of a new "stagflation" - high inflation and low growth.

Headlining a bad day for consumer industries Europe-wide, the British retailer Marks & Spencer tumbled by nearly 20 percent to close at £409.25 pounds after it reported that sales dropped 2.2 percent at stores open more than a year for the quarter that ended in December.

British consumers, hit by higher mortgage payments caused by a global credit squeeze, rising energy costs and more expensive food, have been dialing back on purchases in recent months.
Oil prices, though off the record high of slightly over $100 per barrel reached early this month, show little sign of a serious fall, ensuring that consumers will have less to spend on other things. Oil prices edged up slightly on Wednesday to nearly $97 per barrel after a report by the U.S. Energy Dept. showed that crude stocks had declined.

German retail sales also fell 1.3 percent in November from the previous month, similarly a reflection that consumers are spending more money on staples and energy. Economists have been betting that German consumer spending will pick up in 2008, buoyed by falling unemployment.

"Consumer demand is weakening," said Lucy MacDonald, chief investment officer for global equities at RCM in London, Bloomberg News reported.

"Market conditions have become more difficult, and it looks as if they are going to remain like that for the rest of the year."

What is a recession?
A recession is a decline in a country's gross domestic product (GDP) growth for two or more consecutive quarters of a year. A recession is also preceded by several quarters of slowing down.

What causes it?
An economy which grows over a period of time tends to slow down the growth as a part of the normal economic cycle. An economy typically expands for 6-10 years and tends to go into a recession for about six months to 2 years.
A recession normally takes place when consumers lose confidence in the growth of the economy and spend less.
This leads to a decreased demand for goods and services, which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment.
Investors spend less as they fear stocks values will fall and thus stock markets fall on negative sentiment.

How to fight recession
Tax cuts are the first step that a government fighting recessionary trends or a full-fledged recession proposes to do. In the current case, the Bush government has proposed a $150-billion bailout package in tax cuts.
The government also hikes its spending to create more jobs and boost the manufacturing and services sectors and to prop up the economy. The government also takes steps to help the private sector come out of the crisis.

posted by Debbie @ 1:34 AM