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Tuesday, February 5, 2008

The Recession & unemployment Rate

The sputtering U.S. economy has gotten everyone from the financial markets to the Federal Reserve to Congress in a panic. But here's a disheartening message for those already worried about economic growth -- it could get much worse.

Most economists who believe a recession is already here or at least near are looking for a relatively short and mild downturn, perhaps lasting only two or three quarters. But many of those same economists say they also can envision a worst-case scenario where spending by consumers and businesses falls off sharply, unemployment heads higher than normal during a typical recession and housing and credit market problems worsen.

We can easily imagine [the economy] going into a free fall. The danger is that housing prices continue to tumble and accelerate, people's ability to pull out equity will evaporate, and you'll see a serious downturn in consumption.

Stocks slump on recession fears, here is the video given below entangled with fierce job cut.

Below are the three eminent economist’s views to find out their biggest economic fears.

Greenback blues David Wyss, chief economist with Standard & Poor's, said that among his biggest concerns is that overseas investors could pull back on investing in the dollar and other U.S. assets. That could cause an even greater sense of fear among U.S. consumers and businesses, as stock prices fall and bond yields rise, which in turn would lift mortgage rates and be a bigger drag on the already battered housing market.

"Americans could just get scared by a barrage of bad news," Wyss said. "The stock market could continue going down because of foreigners pulling money out, and between that and home values going through the floor, it could lead to a real pullback of spending, particularly by Baby Boomers who are getting close to retirement."

Wyss said he's also concerned that oil prices could shoot higher, even if a recession cuts into global demand. He said supply disruptions in the Middle East could send oil prices up to $150 a barrel and help deepen any recession. He also added that in his worst case scenario, the unemployment rate would climb to 7.5 percent by early 2009, up from its current level of 5 percent.

He also believes gross domestic product, the broad measure of the nation's economic activity, could wind up as much as 2 percent lower at the end of 2008 than it was at the end of 2007. That would be the biggest downturn since 1982. Many of those forecasting a recession this year are expecting GDP to show a slight gain by the end of the year.

House of pain. Edward McKelvey, senior economist at Goldman Sachs, agreed with Wyss that, in a worst case scenario, GDP could fall 2 percent this year..

His biggest fear is that home prices could fall much further in the coming months. In fact, Goldman and economists at Merrill Lynch have both predicted that home values could fall another 15 percent, on top of the 10 percent drop from earlier peaks that has already taken place.

McKelvey said further declines could cause much deeper problems for consumers and credit markets.

"One of the most likely candidates would be credit markets acting more violently than we thought, a tightening of the supply of credit to businesses and households," he said when asked what could bring about his worst case outlook.

"You could also see a more substantial response by businesses to the downturn through layoffs, cuts in their spending and business plans," he added.

Bank woes just beginning. Paul Kasriel, chief economist at Northern Trust, said he thinks there's a good chance that the economic pullback will be much steeper than now widely assumed. This weak forecast is based on his belief that the billions in dollars of writedowns already reported by Merrill Lynch (MER, Fortune 500), Citigroup (C, Fortune 500), JP Morgan Chase (JPM, Fortune 500), Bank of America (BAC, Fortune 500) and other big banks are just the beginning of the problem in the financial sector.

Kasriel said that if banks have to report more losses due to bad bets on subprime mortgages, they will be unwilling, or unable, to make large loans to businesses and consumers.

So even if the Fed keeps cutting interest rates, the impact of the cuts may be "less potent" than rate cuts in previous recessions since consumers and businesses may not be able to borrow enough to keep spending. That could make this recession more like the one in 1991-92 than the relatively short and mild recession of 2001.

"Historically, and not surprisingly, recessions accompanied by declines in consumer spending tend to be more severe. And people are going to be constrained from spending by the declines in housing," Kasriel said.

He added that state and local governments might have to cut back spending as a result of declining tax revenue. And that would be another sizable blow to the overall economy.

"People forget about state and local government spending, but it represents 11 percent of GDP," Kasriel said.

If we’re already is recession, off course we’ll face job cuts and other spending problems in this entire economy till it recovers. Just asked for an opinion poll for my readers what they think about this recession and whether it stuck the job market adversely, you can visit the poll. I would appreciate all your comments.

Reference: By Chris Isidore, senior writer


K. Shankar said...

Hi Dibyendu,
Already signs for this have started. TCS has issued Pink slips to 500 employees owing to the negative impact of Dollar Depreciation and many IT/ITES companies are recruiting people with much lesser salaries and IT companies are now contemplating to work on Saturdays for additional productivity. Oil price push could only aggravate the situation.

I am addressing a seminar to be attended by CFO's on Impact of Rupee appreciation in the Indian Companies as one of the speakers in Windsor Manor Hotel on 14th Feb.

The topic needs thorough Brain storming and analysis by experts and economists to avoid or deepen the crisis further.


Nupur Goel said...

The fall in the US economy will effect the Indian economy,in an unfavourable manner,especially the outsourcing industry. More and more US companies will look towards local companies, resulting in a reduction in the number of projects outsourced to Indian IT/ITES/BPO/KPO companies. As a result of which, work at the companies will stagnate leading to a fall in the recruitment levels. TCS is a live example of this. They have degraded salaries of existing employees and have laid back a good number of employees.

Gary Walton said...

I believe that only certain types of recruiting/staff aumentation will be effected drastically. As corporations tighten their budget belts to gear up for this recession, they tend to spend in areas that will help them run better and leaner. With that being said I believe that the Information Technology sector of staff augmentation will sustain itself and do quite well. It will be more beneficial during these uncertain econmic times and in this economic climate that large and midsize corporations should and I think they will, increase their contingent labor needs. It is cheaper in the long haul to "rent" out the expertise they need to sustain themselves and stay competitive than to hire people on directly and incur all the costs that are inherent with that business choice. Corporations will need to budget for this if they are to weather this storm properly.

Ajay Chaudhari said...

Hi Dibyendu,
I belive that the worst hit will be IT/ITES enabled companies. Further hits will be on those working in highly competitive margins with the base currency as the US Dollar. Profits may remain a certain number of USD but a weaker dollar means lesser take home pay. Salaries cannot be increased. Corporates will have to tighten their belts to become leaner and meaner to get the work out of lesser resources.
It will get tough.
best regards
Ajay Chaudhari

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