Deep-Insight

Mighty US juggernaut has slowed down and is facing really rough waters after a very long time. After the oil crisis of 70s this is the first time when US economy is facing such a serious problem. Current generation of Americans is not used to having recession, all the previous downturns in their memory were short lived and shallow. Their economy was able to recover simply due to sheer size of consumer spending in USA. But this time round it is different, this time the slowdown directly affects the amount of cash available with the very same consumers whose colossal spending bailed US economy out during the earlier crisis.

US consumers who account for more than 50% of US GDP have been affected directly by the following four factors

I. Credit Crunch

II. Housing Bust

III. Higher Food and Fuel prices (High inflation rates)

IV. Weakening labor markets

Food and fuel both are necessary for human existence and even much more in America where average food intake is several times the world average and SUVs guzzle gallons of fuel and so consequentially US citizens are facing a proportionate effect of the world wide high prices of food and oil. Weakening labor markets with US unemployment figures at 5.1% and climbing, are making the situation tougher to handle. Credit crunch and the crash in reality sector have left consumers with almost no assets against which to borrow. All this will not go away in a week or a month, it is now a fact that US is in recession and now authorities must concentrate their efforts not on covering up and manipulating figures but on planning and executing a recovery for US economy.

Even though sky is looking gloomy but there is a silver lining on the horizon, if this crisis had taken place say 15 years ago not only US economy but world economy would have gone into a long downward cycle. Now dynamics have changed and most of the analysts predict that even though growth rate around the globe would be reduced but it won’t be very significant. Thanks to changed market dynamics and the rise of Chinese and Indian economies the world continues to surge ahead. With it’s help US economy can recover, global demand is still up and will continue to rise due to frantic pace of growth and development taking place in developing countries. US dollar has fallen in the last year against all major currencies; this can serve as an opportunity for exporters to grab the opportunity and reclaim those rising trade deficits. Instead of depending on domestic demand US should concentrate on international demand and thereafter rebuild the momentum for domestic markets.

I’d like to say that Feds have handled the situation considerably well with timely rate cuts and stopping the chain reaction from the fall of Bear Stains but these are the people who allowed markets to get this far. So they need to be careful in not overdoing things during recovery, interest rates have been reduced greatly and now rising inflation may pose problems to cash and credit-less consumers. A quick recovery is possible but only if things are handled just the right way.

K.V.S.