Recession?!?!?!!

oh no! a recession? That's not so good....

On November 5th, billionaire investor George Soros stated on November 4^th that the U.S. economy is "on the verge of a very serious economic correction" because of the credit crunch and other economic problems in our nation. He elaborated his belief at a lecture at New York University. Are we really on the verge of a recession? Let's look first to how the businesses of our nation are responding to our current economic situation.

Business reactions indicate that businesses are not confident in America’s economy in the near run and that many predict a recession on the loom. At the Reuters Finance Summit in New York earlier today, Howard Lutnick, CEO of Cantor Fitzgerald, told fellow business peers that “ there is a serious risk to the economy" that a recession will occurs because of the credit crunch. The CNN Money of October 20, 2007 notes that the credit crunch has already severely weakened the mortgage industry and by extrapolation, the housing market. The Wall Street Journal further explains by saying that this crisis is slowly spilling into other sectors and has weakened the economy to the point where widespread defaulting is occurring. In fact, the credit crunch has forced many businesses to absorb the defaults of hundreds of thousands of Americans, with a current bill of up to $700 billion. Given such economic factors, it’s no wonder why John Duffy, current chairman and CEO of stock brokerage Keefe, Bruyette & Woods, said believes out economic status in the near future to be "In the toilet."

How about the consumers? Consumer confidence has been dropping as well, indicating that the economy is not doing as strongly either from a consumer perspective. Indeed, the October 30, 2007 Retuer’s headline was “Consumers gloomiest after Katrina aftermath.” In the article, it notes that the consumer confidence index dropped about 4% below what was estimated by leading economists at the time, even when such economists believed they had taken the current credit crunch and housing bubble woes. This finding has shocked many investors into believing that other consumers are losing faith in the current state of our economy, which is one of the first steps to a recession. Pierre Ellis, a senior economist at research firm Decision Economics is fearful that this statistic reflects the fact that more Americans are saving and that less are spending: "Consumers are definitely getting more gloomy. The question is whether that will be reflected in their spending." If consumers are spending less because of their decreased confidence in the economy, then a vicious cycle will begin that will inevitably lead to a recession. This statement links me to my third and final point.

But of course, nothing is as important as demand in predicting our economic situation. Consumer demand is decreasing, which is a sign of a looming recession. It seems that Mr. Ellis’ fears are coming true and that Americans are spending less. The Reuters of October 25, 2007 reports that a recent study found that demand of long-lasting manufactured goods dropped unexpectedly in September continuing into October. Such goods include cars, computers, machines, tables, and other goods that are non-consumable. The Economist of November 5, 2007 notes that such an indicator might suggest that our economy is on the verge of a recession since a recession, by definition, is when the economy slows down due to decreased demand for goods. However, the Fox News of the same date noted that the study did not necessarily indicate the threat of a recession because consumable goods were still faring strong. The problem with this analysis though is that since consumable goods are elastic on balance, meaning consumers must buy them in order to survive, the non-durable goods market typically is second to decline in demand in the face of a recession. However, the fact that the demand for durable goods is declining is reason enough to be suspicious of an impending recession.

While economists have certainly been wrong before and where sunny weather was to be, torrents of rain came instead, given enough information, their predictions will be right. Thus, when we ask ourselves the vital question: “Are we looming on the verge of a recession?” the answer is a firm yes. Unfortunately, based on the three key market factors of business reaction, consumer confidence, and consumer demand, it is clear to see that our economy is on the verge of a recession.