Why is US in Recession?

Readers Question: Why is US in Recession?

 

According to the latest statistics provided by the Economist April 24th 2008

  • US economic growth is 2.4% year on year.
  • In the last quarter, growth is 0.6%. This is still a long way off the technical definition of a recession – negative economic growth for two consecutive quarters.

Nevertheless people have been predicting that the US will soon enter into recession. This is because

1. Credit Crunch. Banks have lost money in lending sub-prime mortgages, which involved high levels of defaults. It is not just mortgage companies who have been affected, but, banks who lent to the mortgage companies. The result is that there is a shortage of funds for borrowing and bank lending has become more difficult.

2. Housing Crash. This is probably the biggest factor dragging the US towards a recession. House prices are falling because

  1. Shortage of mortgage funding
  2. decline in confidence
  3. Prices became overvalued.
  4. Increase in supply now accompanies falling demand

Falling house prices creates:

  • Negative wealth effect – much less chance to re-mortgage and gain increased equity
  • Falling confidence – both these cause lower aggregate demand and lower growth.

Rising Debt levels The past few years have seen a rise in debt and decline in savings ratio, reflected by the growing current account deficit. This means there is little scope for increasing consumer spending. As confidence in the housing market and wider economy falls, consumers are looking to increase savings and deal with their debt, rather than further increase it.

Rising Cost Push Factors. Rising prices of oil and food are increasing the costs of production (for A level students it causes the AS curve to shift to the left leading to higher prices and lower output)

There are more factors, but, I feel that it is the housing market and decline in consumer spending which is the major factor in threatening a recession.

I wrote this in 2007, but the factors are still pretty relevant today

By on May 1st, 2008

One thought on “Why is US in Recession?

  1. What’s to Come?

    “The United States. We are the world’s all-time champion superpower, hyper-power consumer. We consume $700 billion more than we produce” (Aronica 59). This is truly alarming aspect of American economy. With the recent unemployment rates rising and the national deficit steadily increase I have great concern for the future state of the United States as the super power of the world. What made the United States a super power were innovative thinkers, hard workers, inventors, and a bit of luck. How can the United States stay on top as the super power with our dependence of other nations for our needs?
    Yes, the internet has opened up innovated ways of doing business. The internet has assisted in cutting costs and increasing efficiencies, but is also eliminating jobs. The automation of car manufacturing was a start to such revolutionary changes in company philosophies. Companies like Net Flicks, Red Box, DVDs Now, and other mail order industries and internet companies. Ebay, Craig’s list, and Amazon are examples of new businesses that have come about by the internet. These companies have little to no overhead costs. Their customers provide inventory, distribution of the inventory, and they simply collect a percentage of the purchase that transpires on their site.
    IT jobs, labor services, and telecommunication centers are being transferred to oversea countries like China and Dubai. These countries are under cutting American salaries and providing services at a fraction of the cost. Companies are out to protect their bottom line and such business decisions are resulting in rising unemployment rates in the United States. However the United States continues to consume rather than save or reduce spending. Job loss as a result of cheaper labor, rising costs of living, more import than export is resulting in a lost of super power status. What will become of our economics? Can we possibly remain the super power with imports far exceeding exports?
    “A number of countries have strategic economics… with very high savings rate and consumption is low”(Aronica 60). No other country is interested in America’s plan. The United States is indebted to other countries, falling behind in the education areas especially in the areas of Math and Science. “We go to war, our president tells us, ‘Go buy more.’”(59). Did 9/11 wake up the sleeping giant? How we come to our senses yet? Or is the change that is in effect the start of our demise in the realm of the super power? Are the changes to health care, unemployment, and tax policies changing the terms of America’s democracy? Are we headed down a path toward socialism? How will our ignorance further impact economics, the political arena, and social standings of the United States in regards to the rest of the world? Will we still desire to keep up with the Jones’s next door or is it now keeping up with the Ling’s in China?

    Work Cited

    Aronica, Ronald, and Ramdoo Mtetwa. The World is Flat? A Critical Analysis of Thomas L. Friedman’s New York Times Bestseller. Tampa: Meghan-Kiffer Press, 2006.

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