The slowdown in the U.S. economy has already begun, and analysts don't see things getting better anytime soon. Slowdowns in the late '80s and '90s were similar, but the current one may be on an even larger scale.
If the situation continues to worsen, the first casualties could be stock prices and company valuations. Many companies will go bankrupt or will have to restructure to survive. Reductions in hiring and capital spending will be the norm. Hedge funds and private equity funds will be hit badly, and banks will continue to declare write-offs. The government may raise taxes or reduce services.
Warning Signs
The following signs have alerted analysts to the onset of the economic downturn:
- Businesses often need short-term credit to pay for their operations. Unfortunately, many of the credit markets have clogged up, and banks are hoarding their reserves.
- As companies have failed to borrow money, they have been forced to utilize their own internal funds from profits to finance expansion projects.
- Home builders are not able to reduce their inventory of unsold homes as sales have fallen.
The U.S. economy expanded vigorously over the past several years. It generated jobs and kept inflation under control. However, a closer look reveals that headwinds were developing even as the economy created positive macroeconomic outcomes.
According to economists, despite job gains in 2008, on a calendar-year basis, the economy will add just 1.1 million jobs, and the unemployment rate will hover at around 4.9 %.
Mortgage rates will surge to 7.4%, and the rate for three-month Treasury bills will touch 4.9%. Analysts also believe that by the end of 2008, oil prices will be at around $66 per barrel. Private housing starts could be as low as 1.63 million, and existing home sales may drop to 5.27 million. Sales of light vehicles are expected reach approximately 16.8 million units this year.
The Helping Hand
Federal Reserve chief Ben Bernanke has recently agreed that the outlook for the U.S. economy in 2008 is not positive. However, he assured the public that the central bank was willing to act decisively to keep the economy on track. Analysts interpret this to be a strong indication of a forthcoming reduction in interest rates. Since last summer, the bank has already cut rates three times.
Referring to banks' reluctance to lend after writing off billions of dollars of loans, Bernanke said it was in their best interests to find a systematic way to restructure loans. He believes that higher oil prices and lower equity prices are the factors that could further dent consumer spending. However, when asked about a possible recession, Bernanke said, "The Federal Reserve is not currently forecasting a recession."
Testing Times Ahead
To most Americans, the economy is a bigger concern than the war in Iraq or the political crisis in Pakistan. The latest economic indicators have also prompted President Bush to talk of economic challenges.
Undoubtedly, the nation is facing tough times ahead, but it would be ill-advised to expect the gloom and doom to last forever. Many economists hope that even if the economy slows down in the first half of 2008, it will pick up a little in the second half.
