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.