Back in March I wrote this essay – Is the US heading towards recession?
According to some doom mongers the US is already in recession. They point to the ‘collapsing’ housing market and the rise in ‘repossessions’
The irony is that US economic growth has remained unexpectedly high at 4.9% in 3rd quarter of 2007. Growth has averaged over 2.1% since 2001 (US economic snapshots)
Unemployment remains at 4.5%, although this masks some disguised unemployment, – it is hardly the sign of a full blow recession.
Nevertheless there are several warning signs that could push the US into recession by the end of 2008
Why US Recession is Likely
House Price Fall.
US house prices fell by 4.5% in 2007. (In some cities they fell by more). Falling house prices reduces consumer wealth and consumer confidence; this will lead to lower spending. (Consumer spending has been the main driving force behind the US economy in recent years)
There are also concerns that the fall in house prices could accelerate due to the glut in house supply and the fact more people are coming to the end of cheap mortgage terms.
There has been a record rise in home repossessions. The foreclosure rate on homeowners has risen to a 17 year high of 5.59%.
Global Credit Crunch
Due to mortgage repossessions, especially on sub prime mortgages, banks have had to write off a lot of bad debts. This has caused an increase in the cost of lending. For example, 3 month dollar Libor spreads have jumped by 60 to 80 basis points in recent months.
Slower Growth in Asia and Europe
Growth in Japan and Europe may be also sluggish in 2008. Both the Eurozone and Japan are struggling from strong currencies.
Weakness in the Dollar.
The weakness in the dollar is due to fundamental economic imbalances such as the large current account deficit. There are concerns that if the dollar keeps devaluing the Federal reserve may be reluctant to cut interest rates. Because cutting interest rates will lead to a weaker dollar. However, if they fail to cut interest rates it is more likely to slow down the economy.
Slowdown in Job Creation
Although more jobs have been created due to a rise in the population. There is evidence of a slowdown in job creation which could be an indicator of recession. – Job creation slowdown at N.Y.Times
Forecasts for US economy
Morgan Stanley is the first major Wall Street bank to warn that it is may now be too late to stop a recession, – Morgan Stanley issue recession warning