Is It Time To Turn Negative On The Us Economy?
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Is It Time To Turn Negative on the US Economy?
22 September, 2007 (Singapore) – by Wong Siew Lu
Whether US economy is going into recession has been a debatable issue among economists for quite some times now. It is a major concern of all global investors, as there is a Chinese saying: “If America sneezes, the world will get a flu”. Indeed, US – the world biggest economy still have a huge impact on global macro economy.
Federal Reserve Rate Easing Policy
Undeniably, US economy is indeed slowing down after a few good years. It can be confirmed by FedS decision – announced the surprised hefty fund rate cut of 50 basis point to 4.75% last Tues. Many analysts think that further rate cut might be possible depending if the situation has averted.
The question is whether this rate cut will successful help to minimize the economic weakness snowballs? Has Fed has done too much and too quickly that might imposed another inflationary reaction? Are they making the right decision to upturn the economy situation or just encouraging more risk taking behaviour in Wall Street?
Despite of US president, W. Bush latest comments on ” US economy remain strong” on last Thursday, there are still several issues that draw our attention – Housing woes, subprime crisis, inflation, weak dollars, US companies profit plunge and possible further outflow of foreign investment.
Housing Woes & Subprime Crisis
One major concern is still the housing market slump. Fed official has admitted that recent rate cut might probably has the modest impact on the main problems in the housing market, such as the inventory glut, falling home prices, a difficult mortgage market and rising foreclosures.
Housing market is in its worst recession since 1991. Home building rate slowed down to its 12 years low. House builders are facing problems from oversupply, tighter lending standards, foreclosures and lower prices. They are competing in sales campaign featuring price cuts and other incentives to attract nervous buyer to clear stock of many unsold newly built houses.
In addition, the number of foreclosure filings has more than doubled in the past year, according to a monthly report released by RealtyTrac. Up to 50% of subprime mortgagers are facing foreclosures of their house due to late payments. This has lead to the outbreak of recent severe subprime mortgage crisis.
Many have blamed Greenspan Fed by cutting its benchmark rate to a four decade low of 1 percent after 2001 recession and kept it for too low too long that eventually inflate the housing bubbles. Overstretched home buyers are lured by low borrowing cost previously are now finding themselves run up of debt and impacted by the falling housing prices. This situation will goes worse while more subprime loans got defaulted.
Major Cause of Recession – Inflation Worries
One of the major indicators of recession is the all time culprit – Inflation. While oil prices are hitting its record high in decades, cutting rate seemed to be an unwise decision. Continue rising prices in energy and commodity market will increase the cost of all products and create a chain effect which will eventually lead to increase of essential consumer product prices.
Weak Dollar Trend
Adding the fact of weak dollar does not help on controlling inflation issue either. Depreciation of US dollar has been a trend for the past few years and it has reached its record low towards many major currencies recently. EURO to US dollar exchange rate has hit the record low of 1.41 end