Reasons Why the American Economy is in Recession
The condition of the economy of the United States is significant to consider as it measures the worldwide financial system. Since it is now in recession, this paper will discuss the nature of the said financial crisis, causes and its implications to the country and its people. In order to recognize the damaging effects of recession, this paper ultimately aims to have a clear discussion of the reasons why the American economy is in recession.
Reasons Why the American Economy is in Recession Introduction
The current global financial crisis has traced its roots and is apparently attributed to the significant economic collapse of one of the world’s powerful and established economies, which is that of the United States. In fact, the American economy, which is considered to be as a very influential and stable financial system, has now been regarded as the turning point of worldwide recession or which signals the eventual economic downturn of other countries. This is because the American economy evidently spells the potential outcome as far as the economies of other nations. Hence, when the U.
S. economy is down, economies around the world are expected to be dragged simply because of their seeming reliance to the economic or financial structure of the former. While the recession of American economy has been noticeable for the past years, the U. S. government just recently made it official. This is for the reason that the country has appeared to just only have submitted to the problem and accepted the fact that it now needs the support of other countries particularly those whose economies can now survive on their own and are not directly affected by the American economy recession.
Now, the U. S. and a large part of the world are faced with the most terrible economic catastrophe since the renowned The Great Depression. Hence, it is empirically essential to determine and analyze the reasons behind why the economy of a dominant nation such as the U. S. is now feeling the heat and damaging implications of recession. American economists and concerned authorities have normally credited the recession to the apparent bungled decisions and activities made to manage the economy’s money supply.
However, there is still a need to dig deeper and search for other causes of the recession in order to come up with a clear and comprehensive presentation and study of the said economic concern. This action is primarily aimed at providing the public with an understanding of the nature, grounds and harmful effects of recession to the American economy as well as that of other countries and most importantly, in order to ultimately resolve the issue and find ways to prevent it occurring again in the future.
Recession of American Economy, an Overview According to Cush (2008), lead developer of the Recession site, recession in the economic field normally refers to a condition where a nation’s gross domestic product or GDP obviously maintains a negative development component in a span of approximately six months or around two successive quarters in minimum (Cush, 2008).
Aside from the said general description, the authorized reviewer of downturns in the U. S. , which is called the National Bureau of Economic Research or NBER, characterizes recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales” (“The American Economy,” 2008).
Based from the above descriptions, it is significantly obvious that the existing American recession has likely met the criteria and that its harmful implications are already being manifested within the country’s financial system and are visibly felt by people. Since the NBER has officially affirmed that the economy is in a slump status, the government and many sectors specifically those which are gravely affected are now trying their best to appear less battered and emerge liberated when this economic condition is over.
The economic condition of recession has afflicted the American economy since the eighteenth century. The various circumstances concerning the previous collapse in the economy included a disruption of trade and real estate markets, devastation of the shipping industry, crash of the banking system, unemployment, fall of the agricultural sector, slump in manufacturing, collapse of the stock market, monetary reduction, labor influx, inflation, tightening of monetary policy, oil price increase and even terrorist attacks.
In particular, the current recession is caused by increasing oil costs which has resulted into escalating food prices and worldwide inflation, credit crisis which paved the way for bankruptcy and rising unemployment rate, all of which led to the growth of recession around the world (Cush, 2008). Additionally, the causes of recession are also a staunchly argued subject matter thus Cush further stated that its primary reason is, in fact, the actions which were carried out in an apparent attempt to rule and influence the supply of money in the American economy.
This is where the obligations or functions of the Federal Reserve were questioned and blamed because the actions taken turned out to be the reasons why the economy crushed. Beside this, it was also traced that even when the economy manifests temporary occurrences such as unstable oil costs and armed conflict, these factors also contribute to the eventuality of recession (Cush, 2008). Beyond the history and causes of recession, its implication is maybe the most inflicting element and which is the ultimate concern of a country and its people.
Cush explained that while GDP growth exists, the gasping symptoms of recession become more evident in various sectors and fields such as those which were previously experienced by the American economy in past recession incidents. Worst, when the financial system is continued to be exposed and hit by lasting recession, the condition eventually results into economic depression (Cush, 2008). Reasons behind the Recession
In order to attain a better understanding of this financially-induced predicament which struck and is continuously hitting the American economy, it is worthy to identify and acknowledge the underlying reasons behind why the country’s economy is in recession. To explain further the previously cited reason concerning the actions taken by the Federal Reserve apparently to manipulate the economy’s money supply, Cush made it clear that such factor was considered because it is the said financial entity which is in charge of keeping money supply and interest values stable while in a perfect balance with inflation (Cush, 2008).
Cush further analyzed that when the Fed lost balance in this situation, the American economy was able to escape and compelled to rectify itself. This action was what specifically happened in 2007 when the Feds’ financial policy of bringing in remarkable supply of money into the market made the interest rates lesser even if inflation remained. However, when the said action is mixed with loosen financial policies such as in lending structures just to be able to alleviate the borrowing of money, the activities within the financial system were not uphold which paved the way for the economy to reach a freezing point (Cush, 2008).
Meanwhile, Richebacher (2006) generally said that for the U. S. , the fast and sharp deterioration in the increase of consumer spending is the initial or even crucial factor which caused the looming and led to the eventuality severe American recession. In an effort to evaluate the said economic condition and additional development possibilities of the American economy, Richebacher said that the initial and significant detail to consider is that the economic recovery of the country since the latter part of 2001 has been regarded as the weakest so far in the entire postwar era.
He added in particular that the inflation-adapted per hour and weekly compensations are evidently low nowadays as compared to the rate at the beginning of the economic resurgence in November of 2001 (Richebacher, 2006). Secondly, even if there is an inflation adjustment, the medium household earning plunged for the past five years and was even four percent less in 2004 as compared during 1999. Next is that the overall employment rate since the first quarter of 2001 is apparently up by 1. 9 percent while jobs in the private sector was placed at 1. percent. Ironically, while more jobs became more available, the unemployment rate turned out to be short for the primary reason that a significant number of Americans have yielded searching for their respective works (Richebacher, 2006).
Additional and seemingly factors may also be considered as grounds which caused the American economic recession. These include the fact that employment growth has suddenly dropped for the past months specifically from 200, 000 jobs in the early part of the year to only 75,000 jobs in the middle period.
Another reason is that the employment increase is only felt or seen coming from the spurious businesses and which tried to suggest that there is a growth within small and new companies which were not taken in the payroll appraisal yet the truth is there is a slump among existing industries and organizations. Lastly, indebtedness in the private households rose by 70 percent which was coupled by a general improvement in actual not reusable individual income by 12 percent (Richebacher, 2006). Rise in Consumer Spending
An awfully distorted GDP account which apparently showed an increase in American consumer spending of a record high of 5. 2 percent years ago was, in fact, only placed at 1. 3 percent. This is because people just confidently settled and focused on the bigger consumer spending rate without realizing that it should really be in a yearly figure hence a smaller rate. To be more specific, Richebacher revealed that the horrible reality about the sudden increase in consumer spending, which was manifested in the past years, has truly and efficiently damaged.
However, Richebacher also noted the significant and abrupt weakening of consumer spending which he regarded as the decisive factor thus a serious American recession is now happening. With this, he commented that the strength of consumer spending in the coming years is reliant to the prospects of maximum cash-out credit refinancing as compared with increasing housing costs. Sadly, one does not need to be smart just to realize that what Richebacher said is absolutely impractical and unattainable nowadays and considering the current recession that the American economy is experiencing (Richebacher, 2006).
Accelerating Credit Expansion Richebacher stated that by analyzing the rush in credit expansion, it is now suspected that the slowing down of American economy has something to do or related with the actions made by the Feds such as the rate hikes. In short, regardless of the decisions made by the Feds, the fact remains that the existing credit expansion remains to accelerate. This is where the economy is affected because the more credit expands it then results into less activity within the financial system if it has to be gauged by GDP (Richebacher, 2006).
The nation failed to recognize and realize that an economy which is motivated by frenzy-based housing system, in turn, demands more credit and debt. This is because the economy initially requires intense borrowing in order to push the housing costs. In effect, heavy borrowing translated capital profits into cash. When this is joined with the current smallest or existing nil actual disposable revenue growth, the outcome is somewhat similar to a credit Moloch consuming credit and which bestowed less and less growth for the economy (Richebacher, 2006).
Harmful Trade Deficit Another reason why the American economy is in recession is the reality about trade deficit. This is because trade deficit fundamentally changed the structure of the U. S. economy in a negative manner. This condition was manifested in the failure of manufacturing industry which is a financial area that depicts the highest level of capital pattern hence could have also been the source of the highest level of growth in production.
Hence, Richebacher imparted that the most significant issue to realize here is that the accrued surpluses in spending and debt in the American economy and its fiscal method for the past decade are the overall extent which surpassed the possibility of debt service from existing income (Richebacher, 2006). Inactive Debt Trap Richebacher said that in an economy with a dormant actual disposable income and which is coupled by a double-digit increase in debt; it is the end users who are led into a cruel debt trap.
There is an accepted perspective that households financially prepare both to withstand any economy-related problems and still carry on with an increased spending (Richebacher, 2006). However, Richebacher viewed that the most significant to consider the reality that people collect debts at a rate which obviously goes beyond their capacities of debt service when based from their existing income (Richebacher, 2006). Hence, the recession in the American economy is attributed with this fact that many have not resolved debt services and other debt-related concerns thereby injuring more and adding to the existing elements of economic recession.
Crashing of Housing Cost Since the debt trap was not resolved or even addressed, the situation resulted into crashing of housing price. Richebacher presented three important features of this recession ground which included a situation wherein a busted house price definitely portrayed a lower instability of housing costs as well as the lower fluidity in housing markets. Next is that the crashing of housing cost exists for the past years and which is longer than the period when equity price was busted.
Most importantly, the link between growth and breakage of the economy was, in fact, even more robust and solid in the housing category than equity costs (Richebacher, 2006). Ignored recession risk warning Apart from the concrete reasons given by Richebacher on why the American economy is now on recession, it is equally worthy to note that the said financial dilemma is also caused by the apparent neglect made by the country to an earlier warning. Judging from the previous years’ economic condition of the economy and the inevitable possibility of another round of recession, former U.
S. Federal Reserve Chairman Alan Greenspan already made a warning, even months before the financial crisis eventually materialized, that the country’s economy is likely heading into recession (cited in “Greenspan warns of U. S. recession risk,” 2007). Greenspan based his warning from the fact that the American economy has been developing at the start of 2000 and that there has been notable indications that the existing economic phase will eventually come to its end.
He noted that when the economy reached the said cycle, there is the tendency that unwavering components will eventually enhance for a recession to happen again. Greenspan particularly cited as an example the stabilization of profit margins which is taken as a warning that the economy is in the ending phased of the development cycle hence recession is impending (cited in “Greenspan warns of U. S. recession risk,” 2007). Despite the warning made by a person who is in authority concerning the financial system, however, the country apparently ignored the caution made by Greenspan.
In fact, he presented specific details which proved an imminent round of recession. Regardless of the Greenspan warning, the nation opted to regard the situation which provided more comfort and continued to relish a temporary economic growth. In doing so, it was unfortunate that the country is now again faced with a damaging financial crisis which effects could have been averted if only the warning was taken into consideration. Conclusion
While it appeared to be inevitable for the country to suffer economic recession, its damaging implications could have been managed in a manner that the country and its people will emerge triumphant over a specific financial crisis. This condition can be made possible if only the grounds which caused the current downturn are effectively analyzed with an aim to draw out solutions. Nonetheless, this period is better to be taken as lesson to be learned.