2. Large Companies Start Giving Depressing Profit Figures.
3. Borrowers Start Defaulting.
4. Credit Card Purchases Shoot Up.
5. Prices Of Essential Commodities Shoots Up.
6. Companies Stop Filling Vacancies.
7. Prices Of Property And Stocks Come Down Drastically, But Nobody Buys Them.
8. The Country's GDP Goes Down.
9. Savings Are Used For Day-To-Day Expenses.
10. You Start Worrying About All Of The Above.
Granted number 10 is a bit silly, but 10 looked better than 9. I'm taking these 10 causes/symptoms of economic recession and fitting them with the current US climate. Since we have already covered #1, lets move on...
2. Large Companies Start Giving Depressing Profit Shares As we approach the Christmas season, the very last thing you want to see is stocks prices plummet. Somehow they always drop when approaching the holidays, but the retailers don't really see drops in their revenue. This year that has not been the case. As 3rd quarter earnings came in we saw huge companies like Nokia, GM, Banks, Marriot, Dell & major clothing retailers had lower profit shares. In fact, these stores had not even met their estimated profit after economists calculated in the dire US consumers situation. This tells us people don't have the extra income to spend and what they do have their not spending. The banking scare has caused a rippling effect through to consumers.
What can be done to fix depressing profit shares? Well, after 9-11 George Bush told people to go forth and spend. I similar scenario might help out here, but it's just not realistic and certainly not a long-term fix. The bad news is there is no short term fix for this one. There will be fluctuation in the market and retailers will have to drop prices and adjust their estimated profit earnings for a while. It would be fantastic and best if American consumers didn't fall back into the same bad spending habits that got us here, but that would require us to buy less SUV's and mic-mansion like houses which history tells us is also unrealistic. So, fasten your seat belts...this one may take a while to work itself out.
3. Borrowers Start Defaulting. When you combine higher than usual inflation (see below) with high job lose (see previous posting) then you get higher defaults. It's like a really big domino game. The US scenario has gone a step beyond this one and the lenders themselves have started defaulting. Any questions??
Possible Fixes: Individually lower interest rates, set fixed interest rates and/or let borrowers have longer repayment periods. This late in the game, its better to have people make very small payments on loans than give up and stop paying completely. If the majority of borrowers continue paying their loans, it brings a little bit of stability back to the system.
4. Credit Card Purchases Shoot Up. It is estimated that each US consumer is carrying an average of $8000 in credit card debt. I'm not sure how accurate this number really is though, because while I know some people maxed out in credit card debt, I don't think this is the norm by any standards. I found a great article by Liz Weston suggesting that average is something more like $1,900 which sounds much closer to the truth. But I was still confused about how all this relates to the bigger picture, so I dug some more and found this fantastic web site that lists all sorts of fun facts. The most relevant here was that the average American household’s credit card debt in 1990 was $2,966. In 2007 it was $9,840. Meaning that the amount of equity American's are using credit cards for has almost tripled from 1990 to 2007. If your having problems making bills and the cost of living increasing disproportionately to your salary, its understandable this number would shoot up. Possible Fixes: inflation is a natural part of every growing economy. The bad news is in order to fix the credit crunch, the US treasury has already lowed interest rates which in turns makes the dollar slightly weaker and cause more inflation. The reason the US treasury only decreased the federal interest rate by 0.5% instead of 1% is that inflation has already been a huge problem in 2008. In truth the only thing that will keep American's from going back to these spending habits is a change in all or our habits. Ever single American would need to curb their spending and credit card use for this symptom to be fixed. In the mean time, a good rule of thumb is not to buy anything you can't afford in cash.
5. Prices Of Essential Commodities Shoots Up.
When gas prices dipped to $2.99 yesterday at a local gas station, I whooped with joy then called all my husband so he could fill up too. I was able to fill up for under $50 for the first time in months. The rising gas costs are even more depressing when put into long-term perspective. In 2007 a congressional report said that the average American household was spending 85% more on gasoline than just 5 years ago. With a normal inflation rate of 3%, figures like that are alarming at best. With the rising price of gasoline, the cost to transport food rises as well and that extra cost is passed through to consumers on everything from groceries to clothing to energy bills. An acceptable inflation rate is 3%, any hiring and job markets can't keep up by raising living wages (If such things really do exist). Since November of 2007, the rate of inflation (average price of commodity goods) skyrocketed above 3% and has been thrashing it's way back and forth between 4 & 5%.
Today, inflation sits at 4.95% and year to date economists think it will be closer to 6.1%. Ouch! If you're not feeling this in your monthly budget, tell me where you're shopping!!Possible Fixes: Tell the US treasury to hike up interest rates. Everyone will save money and prices will naturally fall because no one is buying anything. Unfortunately, prices will eventually go up again because we do have a vibrant economy. The US economy is still the biggest in the world and the best at what it does...grow! Given this rather sizable bump in the road, I'm still positive we will recover with enormous vitality, stronger than ever.
6. Companies Stop Filling Vacancies.
This is a rather hard one to judge. Suffice it to say, office space is at premium only near the beaches right now and in the job I now have, I know for a fact we aren't filling vacancies. Empty office space is a sure-tail sign of looming economic disaster. Office space was empty been sitting vacant since November of 2007 and no one is building new office space. Being involved in what little real estate and construction that I am, I can confirm this is very much the case. Check out this article on Salt Lake County as an indicator for what I can only tell you is a nation-wide trend right now.
Possible Fixes: The market is straightening itself out as we speak. Hardly any office buildings are being built and those in office space are taking advantage of the depressed market. Credit needs to be freed up expediently to let businesses run more smoothly and fill office space.
7. Prices Of Property And Stocks Come Down Drastically, But Nobody Buys Them.
It's a buyers market right now, but good luck finding a loan. Those who were invested in the stock market lost thousands and no ones knows where the bottom is, so no one is buying anymore. That is, except for Warren Buffet who seems determined that Goldman & Sacks is the nextbig ticket item and he wasn't too far off. Goldman & Sacks seemed to be first in line for the Government buy-out program annouced late last week. More on that to come...
8. The Country's GDP Goes Down.
The very definition of a economic recession is when GDP goes down for over 3 consecutive quarters. The US GDP is looking at 3 consecutive years. In 2006 GDP was 2.8%, then 2% in 2007 with a forcasted GDP of 1.9% in 2008. In spite of all this, I take solice knowing that China is also been ill-effected. Proff positive the asian giant is still swade by US happenings. It's record GDP growth of 10% has now dipped below 10% and economists have brought forth new analysis showing the giant may come into 5% and other semi-normal growth rates in the next 5 years. And all US consumers rejoyced!
9. Savings Are Used For Day-To-Day Expenses.
Wasn't able to find much here....don't really know...you tell me?
10. You Start Worrying About All Of The Above.
If you are reading this, its proof positive that these things do matter. Even if they don't keep you up at night, financial worries are effecting everyone. In light of that I suggest you make time each day to take stock of all thing in your life and all the reasons to be happy.
In Sum, many of these problems are linked and without credit flowing to businesses, these problems will only deepen over time. These compounding factors help us see why banks and lenders are so important to the overall US economy.
For Other References & Fun pundits on the US Economy:
Renaming The US GDP
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