Probability of US Recession

In previous article, we discussed about US recession, history, past recessions and how to fight it. Today, we will take up – ‘The probability of US Recession’. This is bit interesting topic, where every analyst is having his own views on predicting the chance of going into recession.

There is significant speculation about a possible U.S. recession in 2008. As per Merrill Lynch analysts, the chance of a recession is 65%. Main Reason being:

- Increase in unemployment rate: Because of rising population, the US needs to create on average 120,000 additional jobs per month to keep the employment rate stable. But in August the US actually lost 4,000 jobs. This looks more a trend than a blip: the new-jobs data for June have been revised down from 126,000 to 69,000, and for July from 92,000 to 68,000. In August, jobs in construction fell by 22,000, and in manufacturing by 46,000. This suggests that the slowdown has spread from housing to other sectors.

- The US housing market correction (a consequence of US housing bubble) and sub prime mortgage crisis have significantly contributed to anticipation of a possible recession. (financial jobs are going to be slashed after the recent troubles. For instance, Countrywide, the biggest mortgage financier, is slashing 12,000 jobs and Lehman Brothers 2,000 jobs.)

Not all the news is bad !! While some economists are confident about a recession, others are not convinced about a recession. Wages for non-supervisory workers are up 3.9% over the last year. Productivity continues to rise. GDP-growth (real seasonally adjusted annual rate) for the last quarter of 2007 was 0.6 as revised on February 28, 2008. It was 2.2 for all of 2007.

Hence optimists think that the US economy will have a soft landing, and keep growing, albeit at a slower rate. Much hinges on whether the housing bust will cause a sustained fall in consumer demand. That is what will lead to recession.

economic cycle

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.

Past recessions in US

The US economy has suffered 10 recessions since the end of World War II. One of the biggest recessions was in 2001, ending ten years of growth, the longest expansion on record. From March to November 2001, employment dropped by almost 1.7 million. The dot-com burst hit the US economy and many developing countries as well. The economy also suffered after the 9/11 attacks. In 2001, investors' wealth dwindled as technology stock prices crashed.

How to fight recession

Tax cuts: This is 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.

Hike in spending: 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.

So... What exactly Recession is?

US Recession is one of the favorite subjects of journalists across the world. Every now and then, in every news channel and newspaper, one can see gurus predicting US recessions with some calculated probability. This article will cover insight of US recession and will address following points:

• What exactly Recession is?
• Why chances of US Recession are increased? AND
• Impact of this on Indian economy.

The official definition of recession is when GDP growth is negative for consecutive two quarters or more. However, one can feel like in a recession before it has officially started because it is usually preceded by several quarters of slowing but positive growth. It feels like a recession when,

• GDP growth slows,
• Businesses stop expanding,
• Employment falls,
• Unemployment rises, and
• Housing prices decline

As per wikipedia:

A recession may involve simultaneous declines in coincident measures of overall economic activity such as employment, investment, and corporate profits. Recessions may be associated with falling prices (deflation), or, alternatively, sharply rising prices (inflation) in a process known as stagflation. A severe or long recession is referred to as an economic depression. A devastating breakdown of an economy (essentially, a severe depression, or a hyperinflation, depending on the circumstances) is called economic collapse. Newspaper columnist Sidney J. Harris distinguished terms this way: "A recession is when your neighbor loses his job; a depression is when you lose your job."

Keep watching this space to know more about US recession and its impact on Indian economy!!