Only two issues grab headlines these days. One is whether the Democratic candidate will be Clinton or Obama, and the other is whether the US economy is already in recession or about to slide into one. That the US economy will be in recession this year seems to be taken for granted by most financial analysts.Warren Buffet remarked the other day:'I would say, by any commonsense definition, we are in a recession.'
The signs are ominous.Property prices are declining by the month, oil and food prices are going up reducing the purchasing power of the people, and those who want to spend are unable to get credit for it.Banks and other lending institutions are busy writing off billions in bad loans and reporting record losses. Top banks and brokerages are compelled to sell equity to foreign investors to fund these losses.
However the Fed on its part is confident of avoiding a recession.It has cut interest rates from 5.25% in September to 3% today, and more cuts are on the way.The fiscal stimulus will kick in shortly. People should remember that although the housing and auto sectors declined by 12% last year, they make up only about 7% of GDP.The balance 93% of the economy grew by a healthy3.8%. It seems that bad news has been exaggerated and the good news has been underplayed.We should note that the agricultural sector and exports are doing particularly well.Thanks to the lessons learnt in the 1970's and the 'just in time' practices adopted in supply chain management, inventories are under control.A brief period of readjustment after several years of uninterrupted growth may in fact not be all that bad in the long run.Once the excesses of the past are out of the system growth should return to normal, latest by the second half of the year.