Why the US Faces Economic Recession

The development of the US economy has been characterized by the stable growth and the general trend has been positive, until the present moment, when the US economy is stricken by a significant recession. In fact, many specialists (Williams) agree that the current situation in the US economy bear signs of economic crisis and, in general, it is possible to speak about the economic recession, which has slowed down the development of the American economy consistently and threatens to the future perspective of the American economy in highly competitive international environment.

At the same time, it should be pointed out that the deterioration of the economic situation in the US can and does affect substantially the world economy. It is not a secret that the US economy is one of the leading economies of the world and its position was and still remains very strong. In this respect, it should be said that its role becomes even more important in the context of the contemporary process of the economic globalization, which accelerates the economic cooperation and interaction between countries. On the one hand, this process stimulates economic development and growth in different parts of the world, while, on the other hand, it makes countries extremely dependable on the situation in foreign markets. In such a situation, the current recession of the American economy produces a negative impact on the development of the world economy at large and some countries in particular (see Table 1). Naturally, the US is the country, which is the most affected by the economic recession. This is why it is extremely important to analyze the currents situation in the US economy and find out major causes of the economic recession, its effects and possible perspectives of the further development of the US economy.

On analyzing the causes of the economic recession in the US, it is important to underline that it is hardly possible to distinguish some primary cause, which provoked a chain-reaction and resulted in the current recession that is observed in the US. As the matter of fact, it is rather a variety of factors that produced a significant impact on the development of the US, especially in recent months and probably a year, which resulted in the current problems the US economy is facing. However, at this point, it is worth mentioning the fact that the current economic recession may be viewed as an outcome of the less significant but still quite serious deterioration of the economic situation in the early 2000s after the terror attacks on September 11. In this respect, it should be said that, in that epoch, the deterioration of the economic situation was provoked by the profound crisis in the aviation industry because the use of the aviation became insecure and the demand on the services of airline companies decreased substantially. As a result, the entire industry was practically ruined and many American companies operating in the aviation industry could not fail to avoid bankruptcy. Naturally, such a situation in the aviation industry provoked the general slowdown in the development of the American economy and it is even possible to estimate that the aviation industry has not fully recovered till the present moment.

Nevertheless, along with the crisis of the early 2000s, caused by the crisis in the aviation industry, it is possible to name several other factors that have more direct influence on the current economic recession in the US. Basically, the main causes of the US economic recession were clearly defined by G.W. Bush, who recently admitted the fact that “the nation faces “economic challenges” due to rising oil prices, the home mortgage crisis and a weakening job market” (Stolberg and Herszenhorn, 1). However, it should be said that specialists (Williams) admitted the fact that the US economy will face the economic recession on the basis of the data collected in 2007 and prior years (See charts a-d). In this respect, it should be said that the economic recession in the US was really provoked by the home mortgage crisis, which became probably the strongest factor that revealed and aggravated other problems of the US economy.

In fact, the role of the home mortgage crisis can hardly be underestimated because this crisis practically undermined the stable functioning and development of the US economy. It should be said the decrease of the housing market in the US could be observed since 2005 that naturally could be viewed as a direct indication to the upcoming crisis of the market as well as the deterioration of the economic situation at large, crisis in the financial market of the US and, as a result, the slowdown of the economic growth which outflow into the economic recession that could be observed nowadays in the US. However, it is necessary to underline that specialists (Williams) lay emphasis on the fact that the housing market of the US is not in the freefall (see Chart a). In fact by 2007 and till the present moment the situation in the housing market is relatively stabilized, but the problem is that the current housing market suffers from a substantial fall that has occurred since 2005. At the present moment, the housing market is really in a very difficult position and, what is more important, it does not really demonstrate positive trends to the growth, while it is one of the major priorities of the US economy to revive the housing market and return its financial dynamic, at least, to the past level that existed a couple of years ago. In such a way, the overcoming of the crisis in the housing market can open the way for the activation of the American economy at large, its stabilization and ongoing growth.

In actuality, the housing market, in spite of its extremely difficult position, still demonstrates some weak trends to the growth (see Chart b), though it is obvious that such a growth is absolutely insufficient for the rapid recovery of the US economy, at least in the short-run. In this respect, it should be said that the US economy also faces other problems, along with problems in the housing market, which deteriorate the situation in the national economy and prevents it from the growth. In fact, the US economy has weakened consistently (see Chart c) and naturally, such a crisis could not be provoked by the home mortgage crisis.

At this point it is necessary to agree with G.W. Bush that the growing oil prices also produced a negative impact on the economic development of the US and contributed consistently to the current economic recession in the country.

In fact, the oil prices have already hit the ceiling and reached the unprecedented peak of 100 USD/b. Obviously, in such a situation, it is very difficult to maintain a high level of the economic growth because the consumption of energy, which naturally means the consumption of oil and its products, at least remains stable or even growth, while the growing oil prices make the costs of production consistently higher. Taking into consideration the weakening currency rate of the US dollar, it should be said that the situation is absolutely unfavorable for the US economy. It proves beyond a doubt that the US economy has to overcome the current crisis and minimize the negative effect of the growing oil prices.

In this respect, it should be said that the growing oil prices and the weakening of the US dollar have caused another serious problem the high inflation rate, which has reached 5,8% in 2007 (see Chart e). Obviously, the high inflation rate prevents the national economy from the fast recovery and prolongs the negative trends in the US economy that are observed at the moment. However, specialists (Williams, 2007) forecasts the decrease of inflation down to 2,2%.

On the other hand, speaking about the negative impact of the unemployment, it should be pointed out that the situation in the labor market is not really as dramatic as the President G.W. Bush attempts to depict for Americans.

In fact, the unemployment rate is 4,6% (see Chart e) that is not very high and, in actuality, it is not critical. However, it is obvious that if the situation is to continue to deteriorate than the unemployment rate will grow higher.

Nevertheless, the current situation in the US economic is not totally pessimistic. It should be said that the US industry capacity utilization rate shows price pressures remain high and could push ”˜core’ CPI higher (see Chart d), but still it is possible to overcome the crisis in the US. In this respect, the recent efforts of the Fed to cut interest rates may be quite effective, but they are not sufficient for the total recovery of the US economy. In this regard, it is necessary to develop a clear and effective economic program that could stimulate the recovery of the US economy and increase the business activity in the country.