The National Bureau of Economic Research defines a recession as “a significant decline in economic activity, spread across the economy, lasting more than a few months”.
Are we at or near that point in the US? I’m sure hearing an awful lot of negative economic news lately, some items global and others personal. Some of the signs that economists watch include:
Federal Reserve Direction
US Federal Reserve Board Chairman Ben Bernanke warned in mid-January that the US economy is slowing dramatically. He hinted that the Fed would aggressively cut interest rates in response.
Wall Street appears to be demanding a rate cut of half a point this month, followed by further cuts to bring the federal funds rate down to 3 percent or even lower – even less than the inflation rate.
While the consumer price index showed a 4% inflation rate throughout 2007, the core inflation rate (less food & energy) is less worrisome, with a fairly pedestrian 2.4% increase over that same period.
Energy Prices Rise
Oil hit a record $100 a barrel in early January. While gas prices have dropped a little from their most recent high, analysts are suggesting that the price of gas may skyrocket to more than $4/gallon by summer.
Oil giant Exxon set a U.S. record for the biggest quarterly profit for 4th quarter 2007, posting net income of $11.7 billion. At the same time, the company has appealed its multi-billion dollar punitive damages for the 1994 Exxon Valdez disaster to the Supreme Court.
Analysts say we should not look to oil companies to pull us out of our current economic trend. Gee, you think? Big oil appears to be primarily interested in profiting at the expense of the consumer and the environment.
In our household, we’re selling our ½ ton pickup truck and buying a fuel-efficient MINI to help manage ever-increasing fuel costs.
Consumer Spending Slows
Retail spending for the 2007 holiday season was the lowest it’s been in five years, actually posting a .04% drop from the previous year.
This wasn’t due to any personal lack of spending this last holiday season.
Unemployment Rate Grows
An unemployment equal or greater than 5% is an indicator of a recession. In December 2007 the US reached that number. The job market is soft. Fewer jobs are being created, job openings are down across the nation, and employers are tightening their belts.
I work in the slowing technology industry. My prospects for continued employment look decent, but I can see the impact everywhere; vendors are laying off, buyouts and mergers are rampant, capital is tight, and “doing more with less” is reaching a level of statistical improbability.
Housing Market Drops
In the savings and loan crisis of the late 1980s, people with homes worth less than their mortgages just stopped paying, and foreclosures were epidemic. We’re seeing symptoms of the same problem now, with a couple of the nation’s biggest lenders posting huge losses last quarter.
Homeowners with adjustable mortage rates and/or subprime mortgages find themselves unable to afford their payments, and home equity loans have exacerbated the problem. Housing values are starting to decline, as much as 20% in some areas. Our house’s value seems to have dropped about 7% from last year’s high, but thankfully we still have plenty of equity.
Stock Market Weakens
A 20% decline from the high is an indicator we’re in a bear market, yet another indicator that we’ve entered a recession. Current figures indicate that representative index funds have seen a drop of around 15%.
My employer has seen its stock prices drop dramatically and we are operating frugally. My 401(k) dropped 15% in value in the last year, in spite of significant salary and employer match contributions.
Some analysts indicate that massive levels of debt underlying the world economy system are about to impact countries throughout the world in a profound and persistent way. The most anxious are concerned about the possibility of a worldwide economic collapse.
Many countries around the world are showing signs of a possible recession in early 2008. Ten minutes on Google helped me compile this short and non-inclusive list of countries with their own economic challenges:
– Hong Kong
– Eastern Europe
Should we need to endure a recession, my husband and I are relatively fortunate. We are both employed in relatively secure professional positions, we have significant equity in our home and we have both short term and retirement savings. Offsetting that, our oldest is starting college in a couple of months.
We hope for the best, but are preparing for the worst. What are your thoughts on the economy? Can the feds help avert a more catastrophic downturn, or are we in for a bumpy ride?