Will the US economy enter into Recession in 2008?

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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.

House Repossessions.

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.

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Imports – Exports and the Balance of Payments

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Readers Question: What counts as an import on the Balance of Payments?

Current Account measures trade in:

  1. Goods,
  2. Services,
  3. Investment incomes
  4. Net Transfers

A Debit on the credit account occurs when the UK imports goods and therefore money flows from the UK to oversees to purchase it. If debits are greater than credits the UK will have a current account deficit.

Examples of debits

  • UK consumers buy Chinese manufactured toys
  • UK consumers go on holiday to China
  • A Chinese firm in the UK sends back profits to China.
  • UK firms import raw materials from China.

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UK Unemployment in 2007 lowest for 22 years

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Amidst all the gloom surrounding global credit markets and house prices, it is easy to forget some of the strengths and developments in the UK economy. One of the most remarkable features of the UK economy is the sustained reduction in unemployment. Falling from a peak of 3 million in 1992, the official method of …

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OPEC and Oil Prices in 2008

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Readers Question: What will happen if OPEC continued to increase oil prices?

Firstly, the rise in the price of oil is not just due to the activities of OPEC. It is partly due to the rising demand from countries such as China.

If OPEC continue to contribute to higher oil prices in 2008 it would have the following effects.

Oil Exporting Countries.

  • Higher prices would lead to higher oil revenues. This would improve their current accounts and also government finances.

Oil Importing Countries.

  • Would see a deterioration in their current account deficits.
  • Inflation. – Higher oil prices is likely to lead to cost push inflation. This is because the price of oil effects the cost of producing many different goods.
  • Economic Growth. Economic growth may slowdown if oil prices continue to rise. However, it would have to be  a fairly significant rise in prices to have a permanent effect.

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Categories oil

Costs and Benefit of Tescos

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Readers Question Is tesco’s power a net benefit or a cost to the wider economy?

In the UK, Tesco have over 32% of market share for supermarkets. It is a similar situation as the US, where supermarkets are dominated by Walmart. Tesco is now the largest private sector employer in Europe. (working for Tesco)

It is an emotive issues whether Tesco is Good or bad for society and consumers.

Benefits of Tesco

1. Economies of Scale.

The large size of the firm means that it can benefit from economies of scale in areas such as bulk buying, transportation, distribution, marketing and technology. Economies of scale mean higher output leads to lower average costs and lower prices for consumers.

2. Diversification

The large size and financial resources of Tescos means that it has been able to diversify into other products such as Mobile Phones, insurance, petrol, credit cards and banking. In these areas, Tesco has helped to increase competition, provide more choice and help lower prices for consumers.

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Cost Utility and Cost Effectiveness Analysis

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Cost Effectiveness analysis looks at economic decision making to weigh up the costs and effects of a particular economic action. It is a way to measure the costs and the benefits from a decision. In a way it is similar to cost benefit analysis. However, cost effectiveness analysis doesn’t necessarily have to categorize all the benefits into a  monetary value. (Although it should be a single measure) For example, this may look at various methods of reducing pollution. It would compare the costs and see how much pollution can be reduced by. Cost effectiveness analysis could also be used for deciding which method of electricity generation to use.

Cost Utility Analsyis 

Cost Utility Analysis involves looking at whether an action should be undertaken. In particular, it looks at the cost of the action compared to the increase in utility. In health economics this is particular with regard to life expectancy

For example, cost utility analysis may be used in health care to decide whether someone should be treated.

The cost of treating someone with a rare cancer may be £400,000. If this leads to an increase in life expectancy of 1 year. We can say the cost utility of this treatment is £400,000 per year.

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Indian Economy 2008

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Indian Economy 2009 Behind China, India is the second fastest growing economy. According to a survey by Goldman Sachs, India will become the 3rd largest economy by 2035. This is measured in $US. If we use PPP (purchasing power parity) which takes into account local purchasing power, India already has the 3rd largest economy. However, …

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