The crisis in the financial sector that originated in 2007 had a catastrophic effect on the broader sectors of economy and what followed was worst global recession since Great Depression of 1929. We have correctly mentioned about recession setting in
Engines of US Economic Recovery
The financial crisis has affected all the major economies of the world with western economies in the midst of recession while growth has considerably slowed down in the emerging economies. It is expected that the emerging economies will be the first to revive and lead the global economic recovery but world is looking up for signs of revival in United States, the largest economy in the world representing more than 20% of the world economy.
The engines that have lifted the
Inventory swings played a key role in economic recovery following recession in 1973-75
Inventory swings played a key role in the 16-month recession of 1973-75 and the recovery that followed. Companies slashed stocks in 1974 and 1975 as demand dropped, and then rebuilt them rapidly the following year. That raised 1976 GDP by 1.4 percentage points, the biggest such contribution in 21 years.
Consumer spending and Housing sector powered economy after 1983 recession
Consumer spending and housing powered the economy out of recession in 1983, as pent-up demand sent purchases of cars and homes soaring. The unemployment declined at a rapid pace.
Housing sector contributed to recovery in 1992
In 1992, housing again was a big help. Along with capital spending, residential construction spurred the biggest contribution to growth from investment since 1984.
The economic recovery of 2009, which seems to be gathering pace, will be slow and driven by government spending which is in contrast to past rebounds, where growth was boosted by a robust revival of private-sector demand following the slowdown.
Green Shoots of US Economic Recovery 2009
Green Shoots is a phrase coined by Federal Reserve chairman Ben Bernanke, which he mentioned for the first time in a March 2009 television interview. The Fed president mentioned the term to describe signs of a thaw in frozen credit markets leading to economic revival.
We look at some of the leading economic indicators to determine if there are indeed green shoots of economic revival.
Stability in Financial Sector will restore the credit flow
The special measures that the Fed and other central banks of the world took seem to have yielded desired results in bringing stability to the financial sector. The record corporate bond sales and fall in LIBOR (London Interbank Offered Rate) that banks charge each other for loans suggest that that credit market is slowly reviving.
The fall in LIBOR is significant since it affect the cost of loans in wider economy, for both businesses and individuals. LIBOR (London Interbank Offered Rate) rates, a widely used reference rate for financial instruments across the world has witnessed significant decline. Six month LIBOR is currently at 0.98 compared to 1.16 a month ago and 3.09 a year ago. The low interest rate will improve corporate profitability and drive the investments.
Even the financial sector is becoming stables after months of volatility it will be sometime before permanent stability will be restored. As the governments support the big financial institutions, the small and medium ones are still vulnerable to failures as the consumer delinquency remains high amid declining housing market and rise in unemployment.
But the systemic risk to the financial system has receded as regulatory authorities are in better control of the situation than they were at the time of Lehman Brothers failure and disruption to businesses which followed due to credit seize is unlikely to happen again.
Institute for Supply Management’s index indicates expansion of US Economy
Manufacturing Index
Another leading economic indicator and commonly tracked index suggest that worst is behind past and economy is inching on the path of recovery. It is still uncertain as to how long the economy will take to recover and return to growth rates of the past.
The manufacturing industry was in freefall since September 2008 when the Lehman Brothers bankruptcy occurred leading to credit squeeze. This is reflected in the ISM factory index data for
Month | PMI | | Month | PMI |
Jun 2009 | 44.8 | | Dec 2008 | 32.9 |
May 2009 | 42.8 | | Nov 2008 | 36.6 |
Apr 2009 | 40.1 | | Oct 2008 | 38.7 |
Mar 2009 | 36.3 | | Sep 2008 | 43.4 |
Feb 2009 | 35.8 | | Aug 2008 | 49.3 |
Jan 2009 | 35.6 | | Jul 2008 | 49.5 |
Average for 12 months – 40.5 |
Source: www.ism.ws
The pace of deterioration has slowed down since January 2009 and gradually started inching upwards reflecting improving prospects for manufacturing industry.
The latest month, June 2009 data indicates that the manufacturing contracted at a slower rate in June as the PMI registered 44.8 percent, which is 2 percentage points higher than the 42.8 percent reported in May. This is the 17th consecutive month of contraction in the manufacturing sector. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.
A PMI in excess of 41.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the PMI indicates growth for the second consecutive month in the overall economy. Even the average index value of 42.5 for the three months in second quarter indicates that economy is on the rebound. Based on the data above we can infer that the April 2009 might be the last month of recession.
According to Norbert J. Ore, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee, "The past relationship between the PMI and the overall economy indicates that the average PMI for January through June (39.2 percent) corresponds to a 0.6 percent decrease in real gross domestic product (GDP). However, if the PMI for June (44.8 percent) is annualized, it corresponds to a 1.1 percent increase in real GDP annually.
NMI (Non-Manufacturing Index)
Even the ISM non manufacturing index (NMI) for June registered 47 percent, indicating contraction in the non-manufacturing sector at a slower rate compared to May's reading of 44 percent.
Month | NMI | Month | NMI |
Jun 2009 | 47.0 | Dec 2008 | 40.1 |
May 2009 | 44.0 | Nov 2008 | 37.4 |
Apr 2009 | 43.7 | Oct 2008 | 44.6 |
Mar 2009 | 40.8 | Sep 2008 | 50.0 |
Feb 2009 | 41.6 | Aug 2008 | 50.4 |
Jan 2009 | 42.9 | Jul 2008 | 49.6 |
Average for 12 months — 44.3 |
Source: www.ism.ws
The manufacturing and non manufacturing data available from ISM suggest that the recovery is underway. But the recovery will be slow and gradual and a robust economy with growth rates of pre recession era will take time to materialize. Housing Sector and Consumer spending are the two critical factors likely to determine the pace of economic recovery.
Factors to Determine Future Direction of US Economy
Housing Sector
US housing sector is a significant contributor to the
The stabilization of the financial system and lower interest rates, plus initiatives to support the
Consumer Spending
Consumer spending is a critical determinant of the direction the economy takes as it accounts for more than 70 percent of the economy. Consumer spending has remained weak through out the recession on account of increasing unemployment and declining home prices. In order to have a sustained and robust recovery, consumer spending needs to grow which is an area of concern since the unemployment is expected to continue to climb and touch 10% even as the economy shows early signs of revival.
Unemployment
The
The only bright spot is the declining pace of job losses. From November to March — after the collapse of some prominent financial institutions — the labor market lost an average of 670,000 jobs each month while from April to June, the decline slowed to 436,000 a month. The labor market is going to lag the recovery process to a certain degree. The unemployment will remain high in 2010 leading to constrained consumer spending and a slow recovery.
Emerging Nations to lead Global Recovery
The majority view is that the emerging nations are going to lead the global economic recovery as
Conclusion
The worst of economic crisis is behind us and there is cautious optimism for the future. Based on analysis of leading economic indicator we can conclude that the worst
There won’t be swift economic rebound and a gradual recovery will take place as unemployment rises further and consumer spending remains constrained. The companies cost reductions have helped them to show good quarterly earnings but sales growth is yet to catch up. Companies are going to be reluctant to add investment and jobs until they get better sales.
Additionally there might some short term disruptions on way to a robust growth as the economic situations in
Emerging nations leading the global recovery signifies shifting of economic power to these nations. These emerging nations are expected to be driver of global growth in the near future.
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