Current Shape of US Economy: Will it Witness Another Recession?

Impact of the great recession is still haunting US economy and now talks of another recession are building fresh concerns among traders, investors and general masses from different walks of life. Somehow, this time there is a general consensus that if US is hit by second recession it would be much dramatic than the first one.

Leave the bullets; policymakers don’t even have guts to fire any shots to combat with rising debt situation and the possibility of yet another economic slump.

The US debt ratings are signaling another recession; let’s see how this compares with earlier recession.

Economic Scenario Now and Then

U.S.is already having a debt crisis which has weakened the economy. The government is cutting on federal budget and the unemployment rate is also on verge of increase. The scenario was different back in 2007. Health, Industrial output, income and jobs were much better the earlier time. U.S recovery from the last recession was a strong issue for debate and now sentiment is building for the worst to happen.

In last recession a lot of people and companies were left under grave debt and bankruptcy. The government’s use of economic tools to fight with the situation was questionable. Now with the debt crisis, the new measures to combat with second recession seem limited. Tensions have increased with the decision to downgrade the credit rating of the country by Standards & Poor.

President’s Outlook for US Economy

President Obama is focusing on the economy expansion strategy. The President made it clear that the main focus to combat with the hovering situation will be economy expansion and job creation. But expansion this time will be a tough nut to crack because of the unstable fiscal position.

Problems in Comparison to 2007

The scenario is totally different today and economy is in much worse condition than it was back in 2007. In current conditions policy makers have only a handful of options left to deal with the situation.

The working age population has increased by more than 3% since last recession but the jobs have declined by 5% (around 6.8 million) instead.
The unemployment rate has increased from 5% in 2007 to 9.1 % and that too at the time whenU.S.is having credit rating problem. The government is struck in the dilemma of maintaining credit rating or spending on federal budget of unemployed.
Adjusting the inflation, personal income fell by 4%, Private income from wages and salary for the month of June is also down. Lowering income levels will passively affect demand in economy.
Home prices are actually down by 24% since 2007.
Industrial Production is down by 8%
Federal debt was 64.4 % in 2007, now it is 100% of GDP.
Interest rates are already at zero and can not be lowered further
In order to liquidate financial market, Fed has already bought millions of mortgages securities and Treasury bonds.

Vicious Circle

Working hours of employed have also reduced resulting in less income. The private employers are keen on reducing their spending. The second recession will have unpredictable consequences on businesses as a result of the vicious circle. With business houses providing less jobs and lesser income scope, the income power of households will reduce which then will mean less consumption of products and services of business houses. In a consumer driven economy, it would be hard to break circle.

Something is Still in Favor

Though the economic conditions are worse than last recession but one thing can make it a soft landing. The corporate profits after adjusting for inflation were 22% high for Q1 this year when compared with Q4 of 2007’s.

The corporate sectors are concerned over the economy’s future and are hesitating over further investment. This means that they are holding a lot of cash. The corporate cash can buffer to layoffs if the demand drops.