Will USA go into recession? Essay

Published: 2020-04-22 15:06:56
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Category: Recession

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United States of America boasts of being the largest economy in world with Gross Domestic Product (GDP) as estimated in 2006 reaching at peak of more than US$13 trillion with the GDP increase by only 2. 2 percent, and now it has also become worlds biggest country in debt. Year 2007 witnessed substantial slowing in annual average GDP growth due to the housing downturn and credit crunch and it is estimated that GDP will weaken further in 2008, as growth is expected to fall to 0. 8% in 2008, which will only lead to recession in countrys economy.

(Country Data 2008) 60 per cent of economists think that United States would recover from crises of recession, found out by Bloomberg News but 40 per cent of the economists at Goldman Sachs, Morgan Stanley, JP Morgan and Merrill Lynch are demanding for the cut in the interest rates as they are predicting recession to sure to enter United States Economy. (Mecklei 2008) In its statement to the Times in 2007, Professor Shiller, co-founder of the S$P Case/Shiller house-price index stated that American real estate values have already lost around $1 trillion [?

503 billion]. That could easily increase threefold over the next few years. This is a much bigger issue than sub-prime. We are talking trillions of dollars worth of losses. (Jagger 2007) There is very little doubt that the economy of United States is showing a downward trend. Its proof lies in the fact that the economy of United States has only added to its list 17,000 non-farm jobs previous month, and the season sales during holidays have shown the lowest trend in last five years.

More over economic view indicates the ISM (industrial production) index too is showing all over fall to below the 50 level, and the position of mortgage market is also not so positive. With continuous increase in inflation rate, individuals and families were forced to follow the low down payment or in low interest mortgages, making it difficult for them to repay. Now they are eager to sell their property at a faster rate that can lead to supply increasing the demand, which will bring down the prices of homes and condos and moreover the slow down of residential and commercial construction will further dampen the economy.

Another biggest factor to dampen the economy is the rise in prices of crude oil resulting from the crises of Middle East, Americas interference in Iraq and increase in demand of the oil especially from China. Rise in prices of crude oil is only bringing about the increase in the cost of production and reduction of profit level adding burden on the production and consumption level in the domestic sphere. But here optimistic note lies in the fact that economic slow down can in turn reduce the prices of oil.

(Armentano 2008) Third factor is devaluation of dollar in the international money rate owing to Iraq War and the over supply of dollars by the Federal reserve. Some feel that devaluation of dollars is beneficial when there are exports and will have positive outcome for the economy as a whole. But this is partially true as the dollar is used in the purchase of crude oil and if the dollar rate is reduced, then automatically it results in the increase in prices.

Also dollar is used as a major currency to be kept as reserve by foreign banks and governments for investments such as US treasury Bills and Bonds. Devaluation of dollar rate makes investments less attractive bringing about reduction in the bond prices. As well as dollar paying investments also severely push up interest rates and prevent any efforts of Federal Reserve to reduce interest rates and any further effort of Federal reserve may again be seen as a sign of even further devaluation of dollar. (Armentano 2008) United States is now undergoing a trade deficit of 6.

5 per cent of Gross Domestic Product and this gap is increasing each day and citizens are spending more towards foreign goods and United States dollar being the International currency, government is printing its own money to reduce the deficit. This money surplus, countries are using to purchase US Treasury bonds as currency reserve. Japan is the largest creditor and China is the buyer of United States currency and the United States was using this foreign money to cover up 90 per cent of its federal deficit, which was running at a rate of about $ 2 billion dollar each day in 2005.

(Nai-Keung 2005) This simply means Americans are spending more than they are earning. Over and above, war in Iraq has cost America US$700 billion, and is now dependent on the central banks of Japan, China and other nations attracting them to invest in United States treasury to keep their interest rates at low level. The deficit also leaves very little room for United States Government to make modifications and plans to increase their expansionary fiscal policy.

These trends in the economic world began to be realized at the grass root level with unemployment rate to be seen at least 5. 5 percent and likely to increase to 6. 5 per cent by 2009. Though fall in stock markets is not direct indicator for recession, but with the fall, mood has been set in. All these reasons are quite indicative of the fact that nothing can save United States to enter in recession, but a note of optimism can be seen in some corners of economic repercussions, as said by Bernanke, current Fed Chairman heard telling the House Budget Committee on Wednesday.

If the housing sector begins to stabilize and if some of the inventory corrections that are still going on in manufacturing begin to be completed, theres a reasonable possibility that well see some strengthening of the economy sometime during the middle of the year. (Schoen 2007) In other words, Bernake is optimistic about the current scenario and his words are clear, if certain modifications are done, United States can be saved from going into recession.

 

REFERENCE LIST

Armentano, D. January 2008. Three reasons why the US faces recession in 2008. Retrieved on February 26, 2008 from W.W.W: http://www.moneyweek.com/file/40120/three-reasons-why-the-us-faces-recession-in-2008.html

Country Data. February 2008. Economic data. Retrieved on February 26, 2008 from W.W.W: http://www.economist.com/countries/USA/profile.cfm?folder=Profile-Economic%20Data

Jagger, S. December 2007. Top economist says America could plunge into recession. Retrieved on February 26, 2008 from W.W.W: http://business.timesonline.co.uk/tol/business/economics/article3111659.ece

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