President Bush’s positive words continuously supporting the economy has finally come to a delayed end. On Monday, President Bush finally admitted that America faced “economic challenges,” prompting a Congressional review of a stimulus package. The secret is finally out – America may be facing a recession.
2007’s exuberant equities market run was not built upon economic nor financial fundamentals. Instead, when you take economic indicators into consideration, 2007 should not have experienced the dramatic level of market growth. With the dismal holiday season, combined with financial factors that can no longer be masked by exuberance, the reality of the recession has finally hit the market. In fact, the start of the 2008 market year has been one of the worst in history, paralleled only by the pre-recession 1978.
In the most recent survey conducted by the New York Times, economists predicted a 42% chance of America’s economy toppling into a recession. In December, this number was 38%, and it was only 23% last July.
Preparing for the 2008 American economy
Although the American economy has not yet officially declared its status as a recession, there are many recessionary conditions that precipitate the confirmation. Rising unemployment, inflationary conditions, credit crunch, falling housing prices, negative or falling sentiments, huge budgetary deficits, falling dollar values, and weakening stocks are all major factors. It is believed that the US economy is facing all of these conditions at present.
Since the US economy has extensive involvement with many major world economies, American recessionary conditions may in turn lead to global recession. But is the US economy really in recession? Indeed, the economic indicators were poor in the United States in 2007, while they were strong in many countries around the world. To understand the pending reality, it is important to evaluate the indicators of a recession:
- Unemployment – The latest US unemployment data revealed that December’s unemployment rate grew from 4.7% to 5%. On average, the unemployment rate has traditionally hovered around 6%. However, historically a rate of 5% is indicative of a recession occurring within three months. As a response, the stock markets took a deep dive on this report, and analysts announced it as another recessionary symptom.
- Pricing pressure – The burden on consumer wallets will continue to grow in 2008, placing additional strain upon the American economy. In November, the CPI was 4.3% greater than the previous year. The CPI, along with inflation, is anticipated to increase further, at least in the short-term by rising oil prices.
- Other factors – There are other inflationary indicators impacting the US economy, such as falling housing prices, tightening credit markets, tumbling value of the US dollar, ballooning national credit or budgetary deficits, and rising energy prices.
Proposed Remedial Measures
The Bush administration, Congress, and the Fed are all considering many measures to combat recessionary conditions. These include tax packages, interest rate relief, liquidity injection, energy conservation, and other strategies. However, as indicated by market sentiment this past trading week, these preventative measures may not sufficiently tackle the wider issues hitting the economy, such as reduced business spending, spiraling energy prices, and huge budgetary deficits.
Investing through 2008
With the US presidential elections due in 2008, an additional level of uncertainty is added to the teetering recession. Until the next president is announced, our economy may continue to experience uncertainty, as investors wait to determine clear policy direction from the government.
Although there are strong recessionary conditions, US economy may not finally fall into any deep recession. Indeed, 2008 will be a crucial year for that conclusion, with a strong 50/50 chance of a recession or recovery.
Keep an eye on the continued fall of housing prices. Should the sub-prime mortgage default value increase beyond $100 billion, this will create an even deeper catalyst against the overall equities market – especially in the consumer discretionary sectors, which will add fuel to recessionary conditions.
The key to maintaining your portfolio through 2008 is to keep a close eye on the indicators and the pulse of the US economy. For those who have a lower risk tolerance, you may want to watch on the sidelines with your cash, waiting for cheap opportunities to present themselves. However, keep in mind that the US dollar’s value itself is falling, and thus, your cash at the end of 2008 may have depreciated in value. The solution may just lie in international investments, especially in countries whose economic strength can overcome the impact of the American economic downturn.