Jan 31 2008

The business cycle rears its ugly head!

Salon.com: Economic growth slows from a sprint to near-paralysis – How the World Words

From the article:

However you slice it, a drop from 4.9 percent quarterly GDP growth to 0.6 percent is a bona fide cliff dive. There is now a very strong possibility that economic historians will say a recession began in December 2007, when consumer spending finally began to buckle, unable to stand any more pummeling by the housing bust.

But it’s not yet a done deal. There is some encouraging news on the jobs front, where the service sector is ticking right along, offering some cover to the dwindling band of optimists who think a recession can still be avoided. But pessimists have the heavier artillery on their side. The main component of the slump in GDP was the housing bust — residential fixed investment declined by 24 percent in the fourth quarter of 2007. And there is no evidence yet that the housing bust has hit bottom. The most recent statistics on new home sales, housing starts, and building permits all plumbed depths not seen in at least a decade.

the Business Cycle

Discussion Questions:

  1. Where on the business cycle does the US economy appear to be from the article?
  2. What component of GDP has most contributed to the slowdown in growth? Why has this component slumped?
  3. What options does the government have to try and turn around the recent decline in growth and the likelihood of a recession.
  4. What options does the Federal Reserve have for trying to turn the economy around?

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About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

20 responses so far

20 Responses to “The business cycle rears its ugly head!”

  1. Angel Liuon 31 Jan 2008 at 7:15 pm

    I think that in a optimist's point of view, the American economy is still in the peak range, where there's declining growth but growth nevertheless. Yet, a pessimist might suggest that the economy is already in recession, since December 2007.

    The biggest hit is perhaps the housing market slump. Many occupations relate to real estate, such as construction laborer, interior designers, sales, furniture, water, electric…So if the housing market is at an all time low, that means many people will be unemployed; as a result, income lowers, spending diminishes, and GDP dropped from 4.9% to 0.6% growth.

    As President Bush promised in his final State of the Union address, the government will reduce taxes to encourage public spending. The rationale behind it is that when people have money, they tend to spend more. Hopefully, they will insert it back to domestic products.

    The Federal Reserve can help by reducing interest rates so people might start considering investing in real estate again or purchase a new home. If the housing market can climb back up from the trough, it might help the overall American economy.

  2. Helenon 01 Feb 2008 at 6:54 pm

    Because a recession is defined as a negative change in GDP for two consecutive quarters, we don't know for sure yet, at least from this article (which said that a recession probably started in December), that America is officially in recession. But even so, we can assume that America is either right over its peak with the possibility of slipping into recession any minute, or already sliding down the downward slope of the business cycle.

    The decline in consumer spending (C) is the main component of the slump in GDP, which is primarily caused by the housing bust. Because America is experiencing a "credit crunch" (basically means that people can't get the loans they need from banks because banks are hyper-paranoid from the many who have defaulted on their loans), investment, an important aspect of the housing "industry", has declined.

    The US government focuses on fiscal policies, and in dealing with this ominous recession, it has announced a reduction in taxes and an increase in government spending, in hopes of boosting consumer spending.

    The Federal Reserve, on the other hand, deals with monetary policies. It has lowered interest rates in order to trigger more borrowing and spending by households and firms.

  3. KatherineYangon 02 Feb 2008 at 5:33 pm

    America is currently at the peak of the cycle, closer to the recession phase or at the very beginning of the recession phase. But until we know the GDP figures, there is not yet any certainty that the economy is in recession.

    The article calls it the "housing bust". Real estate was a huge market in the American economy because previously, interest rates in banks were low, buying a house was a great investment. More and more houses were being built to satisfy the increase in demand until demand began to decrease because about 60% of Americans now live in their own homes, there are no longer as many people in the housing market. This leads to decreases in price for houses on the markets and has caused many Americans to feel they are poorer than before they bought their homes.

    The US government decreased taxes in hopes to increase consumer spending to replace the spending lost in housing investments.

    The Federal Reserve could lower interest rates in hopes of encouraging people in taking loans to reboost the housing market.

  4. yunqimokon 02 Feb 2008 at 6:03 pm

    It is impossible to really tell at this point, since a recession needs at least two quarters of declining output, but the US probably is at the brink of a recession. Hopefully, however, that this is merely part of the business cycle, but that the overall trend will still be on that is improving.

    The biggest decline is in the housing market. When the US was on an expansion towards the peak, people must have bought and over invested on the housing market. Now, in times of imminent recessions, people are trying to sell to be rid of such a costly investment. Thus, the housing bust occured.

    The only the US government can do is forucs on fiscal policy, balancing THEIR budget, and encourage consumer spending.

    Thhe Federal Reserve could actually decreases interest rates to cause the real wages of people to go up, and thus increase consumer spending.

  5. kevinhuangon 02 Feb 2008 at 6:50 pm

    1. It would probably be in between the peak and the trough. Although the article says its not a done deal I think 4% change in GDP is most definitely a done deal.

    2. The decline would be from the housing market probably because people invested too much in the housing market late last year and now in facing the recession these people are desperately trying to sell their property for exceedingly low prices.

    3. One option they have already tried is the tax rebate. Another one they are also trying is by lowering interest rates so there is more money flow which will increase a demand in consumer expenditure which will bring about more jobs. I personally think that the first option is not likely to be sucessful while the second option will take time to take effect.

    4. Decreasing interest rates so there is more money flow.

  6. kxc.024on 04 Feb 2008 at 10:55 pm

    Currently, the economy of the United States is going into a recession (they might deny it but it's quite obvious unless some serious miracle happens) due to the depreciating value of housing. It's probably going down because people are just renting nowadays, instead of buying houses.

    I think the best chance the US government has of turning this recession around is to promote the growth of the service sector.

  7. Conrad Liuon 08 Feb 2008 at 1:24 pm

    1. The United States seems to be on the very beginning of a recession. Either that, or it is nearing the end of its peak.

    2. The housing market has most contributed to the slowdown in growth. This is because people invest in the housing market, but this isn't counted into GDP as the houses are merely changing ownership. Finally, as the notion of a recession becomes ever more frightening, these investors sell the houses at low prices–unfortunately, it still only changes ownership, and is thus again not included into GDP.

    3. The Federal Service imposed tax rebates in hopes that consumption would increase, as consumers with more money will naturally spend more.

    4. As many others have said, decreasing interest rates can help consumers obtain more money, and so will be encouraged to spend more.

  8. Tarynon 08 Feb 2008 at 9:48 pm

    1. As many have stated already, it is not possible just yet to tell if the US is going into a recession or not. Most recessions are discovered when a country is in one, and I personally believe that the US is headed that way. From an economic standpoint, that is not necessarilly a bad thing because an expansion follows a recession; a natural part of the economic cycle.

  9. TimChuon 10 Feb 2008 at 6:46 pm

    The US economy seems to be approaching the peak of an expansion since rates have been constantly decreasing.

    The housing market seems to have contributed a lot to this slowdown. This is because a house is an investment and counts as a changing of ownership. It does not factor into the GDP

    The government will try to decrease taxes so people can spend more, thus increasing the GDP

    The federal reserve can decrease interest rates to help consumers.

  10. judychenon 12 Feb 2008 at 1:58 am

    1. In optimistic's opinion, the US economy is still in peak wheresa in pessimistic's view, it's already in recession.

    2. The slowdown in growth is in housing market. Because when US economy is in peak, most of people bought houses. However, as US economy is approaching recession, most of people sells houses.

    3. The US government has to focus on fiscal policy.

    4. The Federal Reserve should reduce the interest rate, so people's wage would increase and increase the consumer spending.

  11. Dana Y.on 12 Feb 2008 at 1:35 pm

    1. Although it is hard to definitely pinpoint the status of U.S. economy, I believe it is quite clear that U.S. is slipping to a road to recession, regardless. Nowadays, stock markets are plummeting nearly 3% a day, and according to "Newsweek" magazine, "The U.S. Economy Faces the Guillotine."

    2. According to this post, the most signifant contributor to U.S. recession is the "housing bust." Overinvestment in houses has led to the precarious rising prices of houses as well as too much easy credit, but as citizens became wary of their own demand as well as the current economic situation, their demand dwindled. This contagion has now led to the brink of recession.

    3. The U.S. government should focus on fiscal policies by passing an innovative measure (ex: tax cut) that would bring more money into circulation, thus increasing consumer demand, which inevitably will lead to a rise in supply (and employment and a healthy economy).

    4. Interest rates should be lowered. This will lead to increased consumer spending.

  12. Claire Moonon 12 Feb 2008 at 4:05 pm

    1. It seems the economy is now hitting the starting point of recession

    2. The "housing bust" must be the component to slowdown the growth because when the US economy was on the peak, people expecting to gain more profit bought too many houses which now in a recession period, is hardly sold in a low price.

    3. The government should focus on fiscal policy, cut tax, spend more money, and ecourage consumer spending.

    4. The Federal Reserve should lower the interest rates which encourages consumer spending.

  13. Margaret Liuon 12 Feb 2008 at 4:09 pm

    1. In recession; people are spending less, economy is not doing as well.

    2. People spending less because of the "housing bust". Personally, I've been waiting forever for housing to get cheaper. I'm surprised the economic decline was not at least SLIGHTLY offset by people buying these cheap houses….maybe apartment dwellers buying nice, fancy houses? Or else this might come later on, and will reveal a new era of expansion.

    3. During the summer, New York City creates June as its most popular shopping month by eliminating all taxes on materialistic goods like clothes and electronics. The timing and strategy of encouraging increased spending was phenomenal as I witnessed friends and city hipsters dropped 2 grand a week. Stores also took this opportunity to entice us with 50% off sales, which only increased spending EVEN MORE. Bring big luggages to new york this summer ladies and gentlemen.

    4. I think cutting taxes will be enough. Too much interference might be bad, maybe test this tax theory out, and if that doesn't work, decrease interest rates.

  14. kevinmaon 12 Feb 2008 at 6:30 pm

    1. I think the US economy is in recession on the business cycle graph.

    2 The "housing bust" is the the component that contributed to the slowdown in growth. When America reached its peak, all the americans started to spend a lot of money using their houses as loans. When they couldn't pay back the loan they lost their houses.

    3 The government should encourage the people to spend more money to boost the economy. They can

    cut tax which would encourage more spending. They should also focus more on fiscal policy.

    4 They should decrease the interest rates. This would give the consumers more money and may encourage them to spend more.

  15. Jeff Yeon 12 Feb 2008 at 6:43 pm

    The U.S. economy is currently in recession, the part on the graph where there's a negative slope. This is due to a "housing bust" because fewer and fewer people are buying and investing in houses and real estate. If the government were to lower taxes, this would result in an increase in consumer spending. Likewise, if the federal reserve decreased interest rates, more consumers would be willing to take chances and invest again.

  16. Nicole Wongon 12 Feb 2008 at 9:47 pm

    The US economy appears to be around the peak area of the business cycle, but is nearing a recession. The slowdown in growth is contributed to the "housing bust" and decrease in investment in houses due to their decreasing values. The government could try to avoid a recession by encouraging citizens to spend more. This could be accomplished by the lowering of taxes. The Federal Reserve, on the other hand, could lower interest rates in order to encourage citizens to invest.

  17. Kristie Chungon 13 Feb 2008 at 10:02 am

    1.) The U.S. economy is currently receding.

    2.) According to the article, the "housing bust" is the main reason for the slowdown in growth.

    3.) The government is going to cut down on taxes and increase government spending in order to try to increase consumer spending, and in doing so, stimulating the economy.

    4.)By decreasing interest rates, the Federal Reserve can encourage consumer spending.

  18. serenatuon 13 Feb 2008 at 4:55 pm

    1. I think the U.S. economy appears to be in the recession part on the business cycle.

    2. I guess the housing market is the biggest component that's causing the slowdown in growth. As more people used their houses as loans, and when they are unable to pay back the loans. They lost their houses.

    3. Fiscal policy the main component the U.S. government should be focusing on now, in order to turn around the situation.

    4. The Federal Reserve should decrease the interest rates in order to allow more money flow; it will help the consumer to get more money, and therefore gives them incentive to spend more.

  19. jenniferchoion 14 Feb 2008 at 6:58 am

    1. It seems like the US economy just stepped into recession phase.

    2. The "housing bust" seems like the main reason for the slowdown. This is becuase people are investing in housing market, but that is not counted in GDP.

    3. Government needs to encourage the people to spend more money by focusing on the fiscal policy. The government also should cut down the taxes to encourage spending.

    4. Decreasing the interest rates, so that consumers will be encourage to spend more.

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