RECESSION 2012

RECESSION 2012(U.S.)

Odds that the U.S. economy will enter recession are now close to 50-50 as unemployment heads on a path higher and pressures from Europe intensify, Goldman Sachs economists said.

Recession in US affects almost whole of the world economy.

It may be the beginning of new recession or just that the last one never ended.

Several evident reasons for the recession to continue.

Unemployment is still close to 10% and is expected to increase.

BASIC REASONS

Housing still stinks. Credit is still really tight. Cuts in government ceiling because of debt

ceiling deal. Unemployment is still really high. Chinese economy is slowing too. Oil prices are still high. Investment yields are down. Inflation on food, energy and health care is

still bad. Auto industry is not as healthy as it appeared

HOUSING MARKET Housing could be single largest drag on the

American economy. After total home equity collapsed by 60

percent between 2006 and 2009, housing has continued its slow slide.

Real estate research firm Zillow reported that "negative equity in the first quarter reached new highs with 28.4 percent of all single-family homes with mortgages underwater, from 27 percent in Q4.”

Weakness in the housing market hurts the real estate industry, construction, finance, and net wealth.

ACCESS TO CREDIT

Many very large companies can borrow money at rates as low as 2% because of strong cash flows, but banks have been much less willing to loan money to smaller companies with little money on hand.

The slow economy and weak consumer demand makes financial institutions reluctant to lend to small businesses, the main driver of economic growth.

Individual borrowers find themselves in a similar position.

DEBT CEILING DEAL

The deal struck on Sunday will cut government by $1 trillion in the next ten years and by $70 billion in the next two years.

While $70 billion is only 0.5% of the economy, the economy only grew 0.4% in the first three months of 2011.

Government could be the only thing standing between stasis and growth in these early years of a fragile recovery.

UNEMPLOYMENT

Unemployment creates two immediate problems.

First, people without jobs drastically curtail their spending.

Second, government spends tens of billions of dollars to keep them from becoming destitute.

This reduces GDP growth, increases federal deficits, and squeezes state budgets.

High unemployment also pushes down wages, so that people in their 20s must accept low wages to enter the workforce.

CHINESE ECONOMY SLOWDOWN

China drives the global commodities market, which has buoyed the recovery from Southeast Asia and Australia to South America.

But as Chinese purchaser manufacturing and export numbers have fallen, the government has also raised interest rates to tamp down inflation.

As a result, U.S. exports to China could decline, hurting firms with large overseas, such as GM, VW, Wal-mart and Yum! Brands

END OF STIMULUS

The inauguration of a new Congress is 2011 was the nail in the coffin of deficit spending.

Now that the 2009 stimulus has wound down and the 2010 tax cut has run into high gas prices and weak overall growth, job creation and GDP has had a horrible year.

A recent UBS Investment Research analysis predicted that state and local governments will cut 450,000 jobs this year and next.

OIL PRICES

Oil price spiked in early 2011, as unrest in the Middle East and strong worldwide growth pushed supply down and demand up.

Economists estimated that higher oil prices had swallowed the 2010 tax cut in the first five months of the year.

But prices have since fallen, as the U.S. economy has faded.

AUTO INDUSTRY

The auto industry has staged an impressive comeback, although its profitability is based as much on layoffs as new sales.

GM and Chrysler have emerged from bankruptcy, and year-over-year monthly sales improved late last year and through April.

But May sales stalled, and GM's revenue dropped by 1% compared to May of 2010.

INFLATION

Nothing damages consumer confidence as badly as a rapid rise in prices.

Starbucks recently increased the price of a bag of coffee by 17% because wholesale prices have risen by almost twice that rate in the last year.

Cotton prices nearly doubled in 2010, and summer clothing prices are up as much as 20%.

Weakness in the housing market is pushing more families to apartments, which is raising rent inflation.

HOW LONG WILL IT CONTINUE ? Recession 2012 is nothing but

prolonged recession from 2009. Its recovery does not seem to be

easy. Even if it ends ,its aftereffects will

exist for years.

CONCLUSION

US economy recession in 2012 is expected to hit 40% mark with unemployment rate expected to go above 10%.

The downturn is expected to be relatively brief and shallow.

Growth forecast is expected to be around 0.5% in the first half of 2012.

BIBLIOGRAPHY

B.V.Krishnamurty – Article Brian Carr –

Savingwithoutbudget.com Jeff Coxx – Economic Times, 3rd

August 2011 Anthony Karidakis – Slow Recovery