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For module five case assignment, we will define what a recession is and indicate whether we think another one is on the horizon. I will explain why I think a recession may be near. I will also explain what factors in the economy will have the biggest impact on the business cycle. Finally, I will discuss whether I think the business cycle is dead.
During the periods of September 2001 to November 2001 the U.S. experienced a terrible time in our country for our economy; it was a recession. Even though it was only for a short period of time and it wasn’t as bad as it sounds, there were people who got laid off from work, that suffered a decrease in personal income, and that felt the effects of the stock market decline. American’s felt that their comfortable lives were starting to unravel. This was not a “high point” for our economy and it’s definitely not what America wants to endure again. However, there has been talk that America may be close to another recession. A recession occurs when there are two consecutive quarters when the economy shrinks. The size of the economy is measured by gross domestic product, which is the value of all goods and services produced within the United States. (http://en.wikipedia.org/wiki/Early_2000s_recession)1
The quarterly Anderson Forecast by the University of California at Los Angeles predicts growth in the gross domestic product of just over 1 percent for the fourth quarter of 2007 and first quarter of 2008. Economic growth will remain “tepid” for the remainder of 2008 and return to 3 percent in 2009, said David Shulman, senior economist for the forecast. That growth is just above the traditional definition of a recession. “Of course, when the economy slows to a 1 percent pace, it runs the risk of falling into an actual recession”, Shulman wrote. (http://www.cbsnews.com/stories/2007/09/12/business/realestate/main3253507.shtml)2 The housing slump has been the biggest weight on the national economy. The combination of higher interest rates and weaker home prices during the housing slump had its toll on homeowners. Foreclosures have climbed to record highs as more and more overstretched people find it impossible to make their mortgage payments. Housing has played a critical role in the current economic expansion. About 30% of the employment growth nationally over the last 3 years was directly due to housing. The direct effects of the housing sector are the jobs in new construction, renovations, and remodeling, building materials, mortgage brokerage and real estate sales. The indirect effects of housing are also critical and lead to spending on home appliances, furniture, and other household-related goods. In addition, the wealth effect associated with higher housing prices further increases spending on goods and services. (http://www.liu.edu/cwis/CWP/other/centers/pdf/recession_report06.pdf)3
Every indicator of the housing market released over the last few months demonstrates that the housing sector is declining and may be headed to a recession. For instance, in the first quarter of 2007 residential investments fell 15.4 percent. Sales on new homes are down 21.6% over the past year and inventories of unsold homes are at an 11-year high. Existing home sales declined in July, 2006 to a two-year low. Inventories of existing homes are at a record 7.3-month supply. Housing starts have declined for five straights months and are down over 13% on a year-over-year basis. The homebuilders’ confidence index is at a 15-year low. Construction spending declined by 1.2% in July coupled with a sharp drop in private construction. The index is now down 16% over the last 12 months. (http://www.liu.edu/cwis/CWP/other/centers/pdf/recession_report06.pdf)3 The housing sector is not the only hurdler that may cause our economy to fall into a recession.
Oil prices remain very high at approximately $107 a barrel. (http://www.oil-price.net/ )4 This is something the American economy has been struggling with for quit some time. Interest rates have increased significantly since mid-2004. This increase makes it harder for people to afford homes and automobile payments; they end up paying more interest than principle. An estimated $1.8 trillion in adjustable rate mortgages will reset this year, thus, the higher mortgage payments will further restrain consumer spending. We can see this by all of the houses for sale that have been on the market for months. I live in a neighborhood with 45 houses and 13 of them have been up for sale for at least 6 month or more. Also, the consumer debt burden has risen while the savings rate is negative. To add to all of that, in August 2006 chain store retail sales went down, job growth declined and consumer confidence declined sharply. (http://www.liu.edu/cwis/CWP/other/centers/pdf/recession_report06.pdf)3 This leads me to believe that a recession may be around the corner. I am normally optimistic; however there are many hurdlers to overcome. If we don’t fall into a recession, then I do think our economy will continue to slow down tremendously.
The recurring and fluctuating levels of economic activity that an economy experiences over a long period of time, explains abusiness cycles. The five stages of the business cycle are growth, peak, recession, trough and recovery. (http://en.wikipedia.org/wiki/Business_cycle)4 I believe the trend that will have the greatest impact on the business cycle is the increase in interest rates. If interest rates continue to rise, our economy will not be able to afford products using their credit. If we halt the spending with credit in our economy, we will definitely go into a recession. Some say that the business cycle is dead, I often agree with that. A few weeks ago—after February data showed shrinking orders and shipments of manufactured goods, weakening wholesale trade, and flat consumption—advisers privately told President Bush that the economy could be falling off a cliff (http://slate.msn.com/id/2081427/)5. For these reasons I believe we are going to continue to struggle with consistency in our economy. We are in a serious economic problem right now. I don’t think we every really fully recovered in September 2001. The dollar closed at a record low versus the Euro, the oil prices are at a record high and we have lost $85,000 jobs in the last two months. These are definitely issues that influence my opinion. Not to mention our low housing and financial markets. As I talked about above, houses are sitting on the market because Americans can’t afford them. I am generally an optimist; however, it’s hard to ignore the facts.
For module five case assignment, we defined what a recession is and indicated whether we thought another one is on the horizon. I explained why I thought a recession may be near. I also explained what factors in the economy will have the biggest impact on the business cycle. Finally, I discussed whether I thought the business cycle is dead.
1. http://en.wikipedia.org/wiki/Early_2000s_recession
2. http://www.cbsnews.com/stories/2007/09/12/business/realestate/main3253507.shtml
3. http://www.liu.edu/cwis/CWP/other/centers/pdf/recession_report06.pdf
4 http://en.wikipedia.org/wiki/Business_cycle
5.. http://slate.msn.com/id/2081427/