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The Recession: Causes and Effects

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Executive Summary


There was a recession in United States in the late 2008 which carried away in the 2009 as well making an impact on the entire world. The inflation rate soared high with all the things expensive around the corner. A person's earning power and purchasing power, everything reduced and in fact in some countries it ended. People started saving and cost cutting on almost all the objects and almost in all the aspects of life. The demand for the goods reduced and thus the supply which impacted on many jobs around the world. People were fired from the job without any prior notice. A majority of the population went unemployed. Every consumer started saving in the maximum way they can. There was a situation of panic in almost all the houses in different parts of the world. The stock market got crashed and so as the banks. Banks lost their clients, people started living and enjoying inside their house. Corporate reduced their expenses in the form of salaries and job cuts. People travelling in business class started travelling in economy. It was a major blow for the world all over. Money lost its value. Developed nations were the worst affected. No investors were ready to invest further money. But there was also few countries like china and India where this panicked situation did not occur. Although, it did reduced their balance of payment and trade but it did not made much impact on the people living in these countries. They were much relaxed in comparison with different parts of the world. India has developed its own domestic market which never tried to made an impact of the recession. Exports were reduced and so does imports, There were jobs cuts for the BPO's but there were many alternatives to the people for the jobs. US economy did made around 60 percent of the impact on India but the impact were actually not seen anywhere in India.

India has developed its domestic market quite strongly. It has all the local tradesman and local customers. Although there were price rises in some of the few products but they were never taken seriously by the Indian people because the country is used to high and low prices because of the changing government on random basis. The living standard of people in India were still increasing at the time of the recession when the rest of the world were affected by the high rising costs of everything and were into the “Saving Mode”. In another words there was an economic downfall in India and could not be called as “Recession”.


The standard text book definition of a recession is:

“Negative Economic Growth for two consecutive quarters”. This means there must be a fall in real output for a period of 6 months.

However, not all of them as analyst/economists are happy with this definition. The reason being this are:

  1. Rise in Population: If the population increase is by a single percent in a year. The Real GDP growth of a half percent will mean the decline in the GDP per Capita. Therefore, a country like USA, where the population is increasing day by day, it is really important to have a check on it.
  2. Inaccurate Statistics: Generally Gross Domestic Product statistics are not accurate and they need to be amended. So, In consequence of that, if there is a growth of 0.4%,that actually means the growth is declining by 0.3%. Sometimes, the economist rounds up the figure and use it in the practical calculations.
  3. Growth under incline Rate. If dimension is growing by an average of 3 percent every year, this means there is an economic growth of 0.9 percent every year, which means there is an increase in spare capacity and hence, it is likely to raise the percentage level of unemployment. Hence, Few economists suggests, there is a recession if there is a rise in spare capacity. But, its a confusing statement as it means growth in the economy of about a percent means a phase of the recession. Also, according to some economist, it refer to a beginning phase of the recession and deep decline in growth rate are the special features of the recession.
  4. Level of Unemployment. The most important discussion and the area of concern at the time of recession is the rise in the percentage level of unemployment. If there is a sharp increase in people's losing jobs and getting unemployed, this shows an economy is in recession. It might be quite controversial to say about this situation that it is not in recession if the unemployment level has risen up by half a million in spite of the country's positive growth. A point of consideration here is about the level of unemployment rise which is caused by the supply side and not the demand side factors.
  5. Result of Survey: Give a thorough research on the topic with the world's economists and it will be quite interesting to find their subjective response. According to few economists, a figure less than fifty percent decline to accept the economic recession in USA and vice versa.

NBER Definition of Recession- NBER announces the occurrence of the recession in USA. The definition by NBER is: A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

NBER further tells us that:

“There is no fixed rule about what weights are assigned to the various indicators, or about what other measures contribute information to the process.”

This statement is quite clear about the recession but it is not certain about the time period or its occurrence time and what exactly can cause the recession.

Recession - My personal View

According to my personal view, recession occurs when there is a decline in real GDP. If there is a small growth of say,0.4 percent we can expect a recession or at least we can say that the economy is well behind the trend growth. However, we should always consider the point that a recession does require a decline in Gross Domestic Product for at least one quarter. Also, in brief, we can say, recession is a steep decline in Real GDP per Capita.

Depression is defined as:

‘Depression is when a person looses his job and he do not have any money flowing into his account to support his family.' Drastic decline in the real GDP causes a situation of depression. It is when the productivity of the output falls for more than eighteen months or by more than, four percent. There was a steep decline in the great depression of 1929-33 of almost eighteen percent.

so there is a difference between A recession and A depression. And the idea behind this ,is, the scenario between recession and depression is known as Economic Downturn.

Therefore, an economic downturn is the balanced structure of recession and depression.

Indicators of Recession

The economist involved in the financial and advisory fields generally mention the stock market situations as an indicator of recession. According to them, In Western Europe and North America, the prediction of the recession can be made by sudden and sharp decline in the average performance of the share market. These performances can be checked by DowJones or Standards & Poor's 500 index.

However, this definition seems to be quite insufficient. By looking into the history of the stock market, about their high and low stock indicators, gearing up with the past seventy years of the analysis report nothing has been found that could be relevant with the definition or is even closer to the definition of the recession.

Moreover, if we analyse the current recession or the recessions of the past two decades, it does demonstrate a downfall of the stock market. But if we analyse it carefully we will find all the stock market crashed after the recession came in. Therefore, we can't take it as the indicator of recession rather than it just tell us one factor responsible and effected at the time of recession.

To measure the inbound recession, the best measurable indicator is an inverted yield curve. Inverted yield curve shows the point on which the investments in long term fall (specifically, those holding a period like as term deposit) under the yields on the deposit of short term. This shows the utmost importance of the identification of the market itself. The yields and pricing on investments generally relates to the demand and supply models. If the value of the money is going to decrease in the future, it is going to be a problem for the borrowers and lenders as well. No one will borrow the money on high rates and the lenders will have the affect of it. No person will ever borrow money when the value of the money will depreciate. Therefore, when we calculate and formulate the risk, it makes sure that the market observes a decline in the upcoming value of money, which includes the rate of the price and rate of the yield.

Market yield is determine by the expectations of the investors, risk prising and knowledge about risk and if in long term the yield gets shortened, the economy is going to be in the same level. Therefore, the further market expectations can be predicted on the basis of the yield curve. According to the experimental data, this works in the reality as well and not only theoretically. Although, the yield curve is not so perfect but the little knowledge and understanding of it by the borrowers, investors, and individuals give them enough understanding to handle the market in a better position than anyone else. They are likely to make few rational decisions on based of these calculations. On the basis of the calculations figured out of the above yield, five out of the six inverted yield curves in the past thirty years have predicted a weak economic environment, which is said to be an informal decision about the recession. Quite interesting to see this theory of risk pricing is in correlation with the quality of the recession predicted. At the time of recession, say, at the present scenario, most of the investors are not ready to take risk and trying to withdraw the money from the invested market. There is no investment at the moment where the investors can expect a good return and so they are trying to sell off their /shares and have control on their money. Due to the risk involve at the moment for loss off all the money invested, they are particularly thinking to invest in the best safest place which they can think off so that the money can be in circulation. These safe investments are called as “quality investments”.

At the end, NGO's along with the conference board has published an index of leading economic pointers which can be used in the prediction of the economic activities and the business cycles. This index has the listing of ten itemised observance and many more subjective metrics in consumer's behaviour with the calculations of the hours per week they work. This index made an experiment of the recession which tried to figure out the recessions of the past fifty years and was successful enough to predict around two hundred percent of the times of the economic withdrawals which had actually been in the past. This helps them in getting a solid base knowledge of the occurrence of the recession and their indicators. This knowledge can help investors in knowing the correct time of investing money and coming out of it and they can predict accurately about the business cycles, recessions occurrence time and other effective economic metrics can help them to move out or stay decisions to rent profits from the investments which they make to generate their revenue and income with a strong level of prediction of the uncertain cause of the economic recession. However, most of the experts say, that the current knowledge of this is not going to give any outcome in the near future as the situations differ from time to time and it will be of no use by predicting from the historical data's. This might be wrong and investment decision can still be risky in the future, if by using the same method of historical dates.

Causes of Recession-

Fall in the aggregate demand also commonly known as AD is one of the important cause of the recession. Following are the causes of decline in AD in United States in the recent time:

  1. Credit Crunch: there has been lots of difficulty of borrowing the money in the US because of the high mortgage defaults. Many banks and financial institutions lost their money and after that they were quite reluctant in lending money. This made borrowing a very expensive method which leads to the less investment by the consumer. Investments were quite low which made the shortage of the money in the market.
  2. Defaults in Mortgage: companies introduced introductory offers for the people taking mortgage instantly and when this introductory offer ended, the interest rates increased which made it quite expensive. People's disposable income got reduced and which lead to default in the payment of mortgage rates by the people.
  3. Rising Costs: There has been an increase in the oil prices, energy rates and food prices which increased the production cost in almost all the things which lead the Aggregate Supply (AS) curve to shift from right to left. Lower income consumer can't afford the costly and expensive times due to which the demand got reduced and became a cause for the recession.
  4. Decline in the House Prices: Loosing the value of assets is quite trouble giving situation to the households. This situation reduces consumer's wealth and it prevents equity withdrawal through remote gagging. With decline in house prices consumers tend to spend less because of the depreciating value of their money and assets.
  5. Bankruptcy: The financial institutions and banks like Bear Sterns and Northern Rock going bankrupt made people fear of spending the money. They were now, more into savings and prefer staying at home rather than moving out.

According to Keynesian theory-“ Fall in AD will result in Fall in Real GDP.” Real GDP effects depends upon the slope of the Aggregate Supply curve. Lets assume, the economy being very close to the highest level, then the lower Aggregate Demand curve would shift a bit and cause a very small fall in Real GDP.

Decline in any of the constituent can cause economic crisis.

Example, Say-MPC= x, cost of borrowing=y

If “X” increases the interest rate by 4%, “Y” would also increase which in turn will make saving quite attractive. Therefore, the consumers will save more and spend less. Spending will be only done on the basic requirements which will benefit them in lots of savings. On the other hand, if the government increases the tax rate and lower its spending, Aggregate Demand would fall as well.

Let's see the above figure. If we assume, there is a decline in Aggregate Demand then the multiplier effect may magnify the initial downward movement in the point “A”. Let's take an example of the factory where the production of the factory reduces, then definitely, the company would try to cut its cost and would reduce the labour from its factory because that will save them extra money. Now, as these workers are jobless, they are going to spend very less which will cause a secondary decline in Aggregate Demand, which will make the fall in Real GDP to a great extent.

A positive rate of economic growth can be determined by consumer satisfaction level and the business growth level. If everything goes positive and there is a satisfied market then there won't be any reduction in the demand even if the interest rates are hiked by the banks and the government.

Moreover, if people are unsecured about their job and finances, they will start saving and spend the minimum they can, Which will cause the Aggregate Demand to decline or may be move at very slower rate. Hence, the consumer's predictions and expectations of the future should be safe and secure which might be very helpful in the circulation of money and the well balanced demand and supply curve.

Example: Let's assume a country, say -United Kingdom. The most important feature of the country is based on International trade. Therefore, if there is a recession in other parts of the world the country will get affected as demand for their products will decline, and the export margin for the country will also decline due to the very less demand from the international boundaries. And this cycle will repeat in the UK's economy as well, where people's demand will also reduce leading to the economy into the crisis.

According to the classical economist's beliefs, If there is any decline in Real GDP, they won't be permanent and will come to the finishing point when the labour markets get set themselves to the new price margin. They also argue on the point, If there is a decline, no matter big or small, in the Aggregate Demand, there will be fall in Real GDP. Hence, with a small shift in the price margin, wages will fall and finally SRAS will have a positive shift towards the right and gradually it will benefit in the economy returning to the original level at YF and the recession will come to an end.

But, speaking harshly on these above valuations about the great depression of 1930, Keynes said, the long period of negative growth points about the markets show that they can't get clear automatically. He argued on the following reasons:

  1. Whenever there is a situation of recession, people have the tendency to save more rather than spend. They try to do savings as much as they can as they are really unsecure about the upcoming days, this is known as “Paradox of Thrift”.
  2. The factories or the business segments cut the wages and salaries to reflect downward movement in the prices but originally the workers are really harsh on it because a reduction in the salary/wages does not give them enough purchasing power and saving power.
  3. Now, if the salaries are deducted of the employees/workers, they would have less purchasing power, therefore, the demand will fall which will make the total impact on the AD curve, which will continue to decline at a rapid pace.

Keynesian policies: An inspirational success

Keynes introduced the power of elimination of the fear of people of depression with the practical examples.

Before the Second World War, there were 8 U.S. recessions which got transformed into the situation of depression (1807, 1837, 1873, 1882, 1893, 1920, 1933, and 1937). Since the Second World War, there were 9 recessions (1945-46, 1949, 1954, 1956, 1960-61, 1970, 1973-75, 1980-83, and 1990-92) - out of which not a single recession transformed into the situation of depression.This is a wonderful gift to the world by Keynes.

Supply and demand factor

When there is an excess of supply and demand in the market, a recession can take place within an international boundary which can later spread to the entire world. When the industries hire more and more labour and start the production at maximum level with the perception of the high demand in the market, they get a set back if the taste of the consumers has changed. When this situation arises supply in excess can cause the company loss and can be forced to reduce the prices. The companies then try to regain the loss by cutting employment and getting rid of the produced items. So in this case the excess supply factor would reduce and can be very slow.

Along with this there is another situation which does occurs frequently from the side of the consumers. When the consumers demand is more than the supply side, the industries take benefit of it by increasing the prices of the products and by reducing the production of its products. And at this time, the products prices will be higher than it used to be because of the scarcity of the products in the market. Now, the consumers think, that the prices can exceed further, therefore, they buy the products in lots of quantity to satisfy their needs and excess demand. These poor industrial balances start giving a hint of industrial recession which spreads in the market affecting everyone. The supplier as well as consumers gets affected by this.


A smaller amount of increase in the price value can click the beginning of the recession in the world market. The price value of all the domestic products like sugar, oil, wheat, rice, fruits, vegetables increases and become very costly which are not easily affordable.

Not only the domestic products prices, but the price of oil also increases with rapid speed. At the moment, if we check the oil prices in the world, they have increased to huge height. The United States makes an impact on the entire world and the economists have warned them to stay in a planned economy to escape the recession or else they along with themselves will carry the entire world into the recessions. This warning should be the wake up alarm for all the countries including the USA.

Crash in the Stock Market

The crash in the stock market leading to fall of all the share prices is also one of the main reasons for the recession. The United States attacked Iraq which caused a major country's revenue and put the entire country in the pressure of monetary problems also led the country lead into recession. According to the local people and share brokers, this war made an impact on the share market of USA which led to the decline in the prices value of the shares. The anti protection team were made against terrorism causing again the huge revenue for the country which resulted in the sharp decline in the share prices. Due to terrorism not only USA but the entire world's share market is going down which is an issue of major concern.

Selling of the Stocks

By the alarming situation of the war, inflation, deflation, hyper inflation, catastrophe people start trading their shares on the large basis. The large investors sell out their shares at very cheap rates and get their money back due to the fear of loosing them. This also marks the factor of the inflation. In the year 2008, there was maximum trade of shares and the value of all the shares were at the bottom level.

Saving factor of House Holds

Most of the consumers are saving the money which is not allowing the money to rotate in the current market. The money is kept safely under their respective homes. Middle class families are quite resisting in going out and spending rather than keeping their pockets in tacked for the future. Majority of the money is owned by rich class people and even they are not exposing their money. This means, the money's rotational nature is stopped and hence, the situation of recession is getting worse day by day.

High consumption

One of the major causes of the recession is over consumption. People's attitude of taking the life into a luxurious manner makes them overspend in the form of getting more and more luxury items. They want to build their standard of living and want to show off in the society. Everyone tries to compete with each other in terms of fashion and high status. Along with this the purchases of the luxurious health beauty costumes also make them spend on these products and the reason behind this is just “Show Off” in the society. Going to the expensive restaurants and having the most expensive food with lesser and higher quality also marks their standards. This excessive consumption of money has leaded the world fall into recession and poverty. United States invested billions of dollars into its war with Iraq which made economists alarmed them to be cautious about their future planning and also the consumption of the money in a more better and organised manner.

Contamination in the Asian market

The terrorism threats in Asia are causing the United States under an absolute pressure of recession. USA is taking major steps to avoid the terrorist attacks and threats in Asia and implementing its policies towards it to control the situation otherwise which can make a huge negative impact on the world. The major economic activity in the continent has been on the diminishing line on the graph which can cause the world a very huge burden of the recession which may be later converted into the situation of depression. Dirty environment, poverty, deflation, flood, hyperinflation, stock market downfall are some of the factors which are the areas of concerned in the continent. All these has made the United States quite interested in the enquiries towards the factors of recession and trying to take control of the difficult situation which may be very harmful to he world.

The money supply's expansion is the work of the Chairman of the Federal Reserve Board. He is the one who can influence the economy without much notice. He can take immediate decisions on the raise or drop of the interest rates which can be even by fifteen percent. He makes the economy run by developing the movement of unemployment or the balance of the demand and supply. There have been many chairmen who were quite successful in managing the floatation of the interest rates but some were not successful as well. It has been agreed by all the economist, the person who can control the money supply should be enough influential and enough intelligent to handle it.

On contrary, President of the United States has influence only on the long term on the economy. The decision taken by him at the time of his rule, they are implemented on a long term which may come into action even after his term gets over. Borrowing and spending decisions also take considerable time to pass through all the stages of confirmation and then getting it implemented in the economy.

Therefore, the president is not at all responsible for the recessions as many people point the situation towards them. It's the chairman of the Federal Reserve who is responsible for the economic imbalances in the country. Many economists have agreed on this and has announced as injustice done to the presidents. There have been examples in the US economy where actions have been taken against the then presidents at the time of recession, which actually is not correct at all. Carter was punished for that high unemployment and inflation in the country and so as George Bush. However, if it was the president who was controlling the money supply they will be considered into the merit list.

Impact of Recession

The people's purchasing power reduced as the companies reduced their labour and the workers still with them got cuts in their salary. Therefore, when the demand was low, production was low. All the prices of the small to big things became costly and people started saving rather than spending. Frequent flight travellers used trains as an alternative and similarly, in all the things in the market, consumers started opting for the cheaper substitutes which made a heavy impact on the business industry. The stock prices crashed down and people lost their life time savings in the stock market. Banks announced their loss or some banks did announce their bankruptcy as well.

Historical review of recessions

Recessions in the world

Due to the unavailability of the proper acceptance of the definition of a global recession, IMF considers global recessions when the global growth is less than 3%. According to the estimates of IMF, global recession does occur in a cyclical phase of 8 and 10 years. As per them, the past three global recessions of the past 20 years, the global output per capita growth was in negative or less than zero. The economists with IMF states the global growth rate of 3 % or less would slowdown the overall growth of the countries. The recessions of 1990-1993,1998, 2001-2002, and 2008-2009 had a massive decline of the growth rate below zero.

USA has faced many expansions and contractions since 1854 which has an average of seventeen months of contraction and thirty eight months of expansion. Meanwhile, since USA entered in 1980's they have faced only 8 periods of negative or zero growth in the economy over a fiscal quarter or more, and four periods considered recessions:

  • January-July 1980 and July 1981-November 1982: 2 years total
  • July 1990-March 1991: 8 months
  • March 2001-November 2001: 8 months
  • December 2007-current: 15 months as of March 2009

From 1991 to 2000, the U.S. experienced 37 quarters of economic expansion, the longest period of expansion on record.

NBER in USA announces the arrival of the recessions in its economy and have succeeded in conforming correctly the economy in recession over a decline period of two quarters. But, there is a point of consideration of the recession of 2001 which involved the preceding of two quarters of alternative decline and weak growth in spite of the decline of the two consecutive quarters.

Stock market and recessions

Anticipations have been made by the economists about the recessions of the decline in the stock markets. However, the stock market crashes after the recession is in. In the recent period of time, there have been many sounds of crash from all over the world's stock markets. According to Siegel, in the Long run, since 1948 there have been 10 recessions which were preceded by a fall in the stock market with an average time period of around six months, however, there have been some stock markets in the Dow Jones which crashed below ten percent but still they did not come into recessions.

The impact of recessions can be also seen on real estate market which however last much longer than the recessions and take a good number of quarters to gain the momentum again. It's almost next to impossible to predict the business cycle. And Therefore, Siegel on this argues strongly and say it's almost impossible to make timings investment decisions on based of these economic cycles. In fact, NBER also takes quite a bit of time to determine about the negative growth in all the sectors brining down the economy to a halt.

Whenever, there is a decline in the economy, the consumers tend to adopt the stuffs of daily requirement from the market in whole sale and keep them in their stocks. Tobacco, contraceptives and medicines industry grow even at the time of negative economic and tends to hold a better position than any other industry. The stock market gets better day by day as the economy progress at a span of time. Once the economy is at worst i.e. after the lowest decline, market tends to grow and the stocks moves really fast building its strong position once again. There have been issues and objection over the health care companies progress. This is so because, they are in a better position than any other industry at the time of recession and after the market recovers; it is quite interesting to watch their stocks progress. Some companies diversify their risks and invest into the international projects which may provide them safety and a better industry position however, the countries which are very closely trading with USA also gets affected by the US recession.

There has been a trend set of the recession by their historical figures and therefore, the investors begin discounting a recovery when the recession has crossed its halfway. The average length of a recession in US has been taken as thirteen months; nevertheless there are many recessions which have been shorter in period than thirteen months.

Therefore, the present recession discounting period had already been started in the November 2009 and the market is growing with a good speed and trying to gain the momentum once again and is expected to be in a good position by the Middle of 2010.


The administration gets the blame or the credit for the economy of its country. The political controllers has to make sure the country's economy is running into a good position, which has actually made disagreements about the arrival of the recession. Whenever, there is a downturn in an economy in can be considered a position of the expansion of condition reaching to the level of an unsustainable state and should be taken relevant measures to correct them at an early stage rather than waiting for it to expand into the entire world. Although, it is not easy to understand the exact causes of the specific cycles, correct steps should always be taken so that a slight decline in the economy should also not make a heavy impact on its regions and the country's trading with it.

The recession of the 1980 is perceived to have been caused by the close monetary policy adopted by Paul Volcker, chairman of the Federal Reserve Board, before Ronald Reagan took office, and this policy was fully supported by Reagan. Economist Walter Heller, chairman of the Council of Economic Advisers in the 1960s, said that “I call it a Reagan-Volcker-Carter recession.

People generally assume that steps taken by government in making laws and rules and regulations and implementing them into the country has some influence over the recession. The economist also becomes clueless about the exact reason of the causes of the recession and gets wrong about the solutions to defend their statements later on because they are even helpless with the situation when it comes to a reality and very often their all projections and assumptions gets wrong. They are not able to prevent the recession and also sometimes they make the recession last longer just because of their wrong calculations based advices.

Current recession in some countries

According to the official released economic data 2009, it shows that a major of the world economy has entered into the recession. The United States entered the recession in the beginning of 2008 and continues to spread its economic downfall in the entire world.

The United States housing market correction (a consequence of United States housing bubbles) and subprime mortgage crisis has contributed significantly to bring the recession at rapid pace in US.

There have been many recessions US people have seen and they have faced them in their own way of handling it but however in the past twenty years we have seen, recession hasn't made much impact on the private house holding consumption which we are seeing now. Private consumption has dropped drastically which seems to be an indicator of severity and depth of the current recession. The value of the houses have been dropped drastically along with the drop down in their pensions savings, people are watching their wealth and savings going into the wastage and they seems to be helpless, and also people are in dilemma of losing their jobs and trying to look for some other options. The unemployment level in the country has raised to its maximum with employers shedding 65000 jobs in the beginning of 2008 which was the record level of unemployment percentage rise in the past 20 years.

On April 6, 2008 former Federal Reserve chairman Alan Greenspan said “There is more than an 80 percent chance the United States could go into recession.” And this statement did followed by the live practical examples in the country in the most recent times. The Bureau of Economic Analysis reported on October 2008 that an additional 166,000 jobs had been lost in September. Nine US states were declared by Moody's on April 30, 2008, to be in a recession. Employers eliminated 533,000 jobs in November 2008, the largest single month loss in 34 years. For an estimate for 2009 beginning 3 million jobs were cut in US.

The economic growth of US rise up to 1 percent in the year's first quarter with some analysts stating that this won't make much impact on the current economic recession because the prices of oil, food and steel has risen so much that it is almost impossible them to grow with this growth of the economy which did happen in the second quarter, the US economic growth in the country again dropped by 70% , which was the biggest decline since 2000 in US. There was a 7% decline in spending of the consumers on non durable goods, like food and clothing. This decline can be recorded as the largest decline since 1950.

There was a report issued later on by NBER that the US was in recession since December 2007 and this was based on the calculations of the loss in personal income of the people which did included the loss of the property values and jobs of people and also the negative movement of the real GDP.

Other countries

There was a major dropdown of the GDP growth rate which pushed the inflation to a great extent in a number of countries which included Canada, Australia, Japan, United Kingdom, New Zealand, European Countries, India and China. All the experts have confirmed their economic status about this country to be in recession with China and India as exceptions where there was a definite loss of the real GDP but not enough loss to be considered as Recession, as defined by NBER.

Current crisis in the US

The defaults on sub-prime mortgages (home loan defaults) have led to a major crisis in the US. Sub-prime is a high risk debt offered to people with poor credit worthiness or unstable incomes. Major Banks have landed in trouble after people could not pay back loans.

The housing market soared on the back of easy availability of loans. The realty sector boomed but could not sustain the momentum for long, and it collapsed under the gargantuan weight of crippling loan defaults. Foreclosures spread like wildfire putting the US economy on shaky ground. This, coupled with rising oil prices at $100 a barrel, slowed down the growth of the economy.

Past recessions in the US

The US economy has suffered 10 recessions since the end of World War II. The Great Depression in the United was an economic slowdown, from 1930 to 1939. It was a decade of high unemployment, low profits, low prices of goods, and high poverty.

The trade market was brought to a standstill, which consequently affected the world markets in the 1930s. Industries that suffered the most included agriculture, mining, and logging.

In 1937, the American economy unexpectedly fell, lasting through most of 1938. Production declined sharply, as did profits and employment. Unemployment jumped from 14.3 per cent in 1937 to 19.0 per cent in 1938.

The US saw a recession during 1982-83 due to a tight monetary policy to control inflation and sharp correction to overproduction of the previous decade. This was followed by Black Monday in October 1987, when a stock market collapse saw the Dow Jones Industrial Average plunge by 22.6 per cent affecting the lives of millions of Americans.

The early 1990s saw a collapse of junk bonds and a financial crisis. The US saw one of its biggest recessions in 2001, ending ten years of growth, the longest expansion on record.

From March to November 2001, employment dropped by almost 1.7 million. In the 1990-91 recessions, the GDP fell 1.5 per cent from its peak in the second quarter of 1990. The 2001 recession saw a 0.6 per cent decline from the peak in the fourth quarter of 2000.

The dot-com burst hit the US economy and many developing countries as well. The economy also suffered after the 9/11 attacks. In 2001, investors' wealth dwindled as technology stock prices crashed.


  1. Recession means lower spending power of people and therefore, people don't like them. Economists and the politicians are still playing their game of repercussions and citing decoupling of the United States. These are going to make its impact on the entire world. Let's see its impact on India now.
  2. Recession in US means its impact on the entire world. And hence, India is no exception. Since, US have the world's one fourth GDP, any loss or any decline will affect the entire world. India has lots of trade with US and thus it did made an impact on India. However, other parts of world were most affected in comparison with India because India and China are developing economies and had developed their own domestic market which has resulted in less dependency on the United States. There would have been a lot of impact on India, if the economy of India would have been the same economy in 1980's.
  3. The fear of US recession did made an impact on the Indian Stock Market which crashed drastically just because of a huge panic situation. On Januray21 and January 22,2009 saw a quite high decline on the National Stock Exchange of India losing almost $US450 billion. However, later on , After the Federal Reserve cut down the interest rate, NSE bounced back with a strong figure of the increase of 2.5% with Nikkei, Hang Sang and Kospi increasing the same.
  4. The bubble burst in 2001-2002 affected Dow Jones by declining its share prices by 23% and National Stock Exchange of India went down by 15%.
  5. Since a decade there has been a lots of change and India has emerged as a very strong progressing economy and that's the reason in the year 2009, National Stock Exchange went down by just 9% while other countries stock market were heavily affected. India maintains a healthy export trade market with US and therefore, the share market declined to some extent.


  1. An economic disaster in US will lead to restructure the asset distribution of pension funds. CalPERS is investing additional US$ 25 billion to its international portfolio which will make an impact on India as well. Since CalPERS is in business in India, therefore a large portion of the revenue will come to the Indian economy. These are the additional funds which can be used to build and maintain the infrastructure projects, of roads, railways, airports, seaports along with the same contract which was fixed at the time of dealing and therefore, this will mark a positive thing for India.
  2. The IT industry in going to be hit a lot as India generate most of its IT business from US. Since, US had a decline in its economy; about seventy five percent of the IT industry will get affected. This can lead to job cuts and lowering the costs of the companies. Well, this scenario can be taken as threat or an opportunity. This is a wonderful time to develop and produce new products; new software's and can be innovative in its own way which will ease the pressure of dependency on the US economy. This can be done and the losses will be recovered which was due to the service sector. In this way, India can diversify itself and the risks can be distributed so that the risk can be minimised.
  3. The manufacturing segment in India, if increases the productivity and the quality of their products and offer their products at lower price, they can come out of the losses made by US economy on their business. Since, India has its own vast and diversified market; this is one of the best ways to regain its revenue losses for the companies. India, China and Korea are the leading manufacturers in the world. They have dominated the world market with their production and if there can be possible regional groupings between them; they can be the world leaders in all aspects of business.
  4. The Indian tourism is the industry which is expected to go into loss in this recession. Therefore, India has to gear up and be very aggressive in promoting its tourism. The government should be bit liberal in its rules and regulations so as to attract many tourists from all over the world. India is a safe budget investment place when it comes to tourism and therefore, we should take the advantage of this and promote in the best possible way we can.
  5. US Dollar is depreciating its value in comparison to Indian Rupee. The Indian markets traders are requesting the government to act as middleman and advice reserve bank of India to reduce the rates. But, there is something which everyone is missing. The appreciation of “Rupee” is not only a negative sign but also a positive sign. Think from different prospects, India can take the advantages of this and reduce its overall import bills and widen the trade deficit. Cutting down rates can be done at any point of time, Reserve Bank Of India can take its decisions once it see, the situation is under control and we are into a well balanced economy. They can increase the liquidity in the Indian economy and can be a silent observer in domestic demand. A strong consumer's demand from within the country will give the world a good competition after the recession is over.

US companies have outsourced its major work to India and now, when US is in recession, all the outsourcing work will effect India's growth in GDP resulting in decline in 1-2%. Along with the outsourcing work, India has increased its exports to US over the period of five years, which will also go down. Hence, it won't be surprising to see the revenue margin going down for the companies who are related in any form with US. Also, US recession is spreading all over the world, and therefore, companies dealing outside the international boundaries will also the net decline in their profit margin. Export companies are worried about the depreciating value of dollar against rupee but the other phase of this depreciation is beneficial for the country as well. Weakening in the dollar's value means investors from all parts of the world will get lured to invest in India. More and more flow of foreign income can be expected in the country. Oil prices can also see a downward slope at the time of recession which can decline its price to 70$ a barrel. US is the world's largest economy and most of the Asian's economy is dependent on them to grow. Decline in its economy will have a major impact on the Asians market in spite of the domestic market created by them. It's not easy to escape from the downturn of the world's largest economy.

According to Sudip Bandyopadhyay, director and CEO of Reliance Money: “Complete decoupling is impossible in the globalised world.” “But India may remain relatively less affected by adverse global events.” To wide off the losses and the gap produced in the company's Income statement, Indian companies are diversifying themselves by spreading into the Asians and European markets.

As per Manish Sonthalia, head, equity, Motilal Oswal Securities “ if the US economy contracts much more than anticipated, the whole world's GDP growth-which is estimated at 3.7 per cent by the IMF-will contract, and India would be no exception.”

The impact of recession in India was quite late especially in the domestic market. Some areas did get affected soon like the outsourcing business and IT industry, leather and handicrafts because of their international in nature. Therefore, these sectors can have sharp negative effect because they are volatile in nature.

C.J. George, managing director, Geojit Financial Services, says “profits of lots of re-export firms may be affected.” For example- China import raw materials and then add values in it and then sell it in the international market.

Along with the outsourcing hit, the Information Technology's business will get the worst hard hit from the US recession because of the one-fourth revenue generation from US. This can result in the low demand which can result in the decline of the IT budgets of the Fortune 500 companies. Zinnov Consulting, a research and offshore advisory, says “besides companies from ITeS and BPO, automotive components will be affected.”

Lokendra Tomar, senior vice-president, Integreon, a BPO firm, says “the US recession is likely to have a dual impact on the outsourcing industry.” “Appreciating rupee along with poor performance of US companies (law firms, investment banks and media houses) will affect the bottom line of the outsourcing industry.” It will maximum impact the small outsourcing business which operate at a small net profit margin of 7%-8% and its they who will really struggle in the initial phase of the crisis.

As per Dharmakirti Joshi, director and principal economist of CRISIL,” recession will seriously affect the portfolio and fixed investment flows.” “Corporate will also suffer from volatility in foreign exchange rates.” The export balances will drop down and hence, the exporters have to face difficulties if they stick to the same plan of business.

NYMEX Crude Oil Future Prices in U.S. Dollar

U.S. Economy

  • Year-old recession will continue for another six months, making it one of the longest and most severe in post-war history.
  • Key underpinnings of the recovery in the second half of 2009 will be federal economic stimulus and resolution of the financial crisis.
  • Major risks to the economy include uncertainty about the extent of bad investments in mortgage and other securities.

Labor Markets

    • Payroll losses will average 218,200 jobs per month in the first Six months of the year, slowing to 41,700 jobs per month in the Second half of 2009.
    • Unemployment rate will rise to 8.2 percent in the second half Of the year.
    • Turnaround in the labour market will be later than that of the Overall economy, as employers wait for evidence of growth.

Monetary Policy

      • Fed will maintain historic low target for key interest rate Before raising it towards the end of 2009.
      • Inflation will be relatively low over the year, and core Inflation will slow.
      • Central bank is widely expected to pursue financial lending and Monetary stimulus initiatives.

World Economy

      • Financial crisis is considered the most serious since the 1930s, while the global economic downturn compares to that of 1982.
      • Averting a worse downturn will depend critically on simulative policies, with more fiscal stimulus needed in industrial and developing countries.
      • Emerging markets will continue to grow but at a much slower pace, contradicting the idea that they are independent from the industrial countries.

The start of the year is always a time to look at the year that was and the one that will be.

December 2007 has been marked as the official start of the current U.S. recession. The official dating only occurred a few weeks ago by the official body NBER (National Bureau of Economic Research).

The dating of the start of a recession is always well after it has begun and the dating of the end of the recession will always be well after it has ended. I bring this up first as there is good news here. Now that we are 12 months into this current recession, we can find comfort in knowing that we are 12 months closer to the end of it. When it ends we will find out many months after. By the time the recessions end, the stock markets often have already created strong returns.

Prior to December 2007 we started to hear rumblings of sub-prime mortgage issues in the housing market. I think we can all agree that the sub-prime issues were the springboard to the malaise in the current economy. During the height of sub-prime madness “NINJA” mortgages were created. NINJA stands for “No Income, No Job, No Assets.” From these alone we can see why the housing, credit, and sub-prime issues came to be - how foolish are those who allowed this to happen!

Since World War II, the economy has seen 13 “pull backs.” Each and every time, the contraction was temporary. And from recessions, bull markets have always been born. Such is the nature of the markets. One could argue


The current financial crisis and recession hit the American economy fast and hard. It has reached every corner of our economy, from the housing sector and mortgages, to banking and investment houses, to construction, to the auto industry and technology, to retail and the hospitality industry. The 1.2 million jobs lost so far in 2008 have made the crisis an even larger hurdle to jump. Recent job cuts by Circuit City (CC) and Ford Motor (F) have lifted the unemployment numbers to the highest in 14 years, and the stock market seems unable to recover from current plunges. Retail sales have stalled, with little hiring going on for the 2008 holiday season, and retailers' hopes for a favourable end to the year have plummeted. There is not only a lack of consumer confidence and a lack of investor confidence; there is a lack of political confidence in any of the policies being offered to help the economy recover. This bodes ill for a fast recovery. Any V-shaped bounce back in economic numbers is highly unlikely until fundamental problems-such as a glut of foreclosed homes on the market, consumer debt, and credit availability for business-are resolved.

These conditions would favour a U-shaped recovery, though there are forces at work that could extend and deepen the current crisis. Firm and effective regulation of financial markets must be at the heart of any recovery, as the American public has lost faith both with the market itself and their own ability to make financial decisions. They have been encouraged by the administration, by credit card companies and by banks to increase their personal debt in the hopes that future gains would be forthcoming to all. Not only did gains not materialize, they have contracted. Job security has become shaky, thus making it less likely personal debt will be repaid. This in turn affects the free-flow of credit throughout other parts of the economy. We are in an ugly circle of repayment affecting debt load, affecting credit availability, affecting the economy at large.

Paul Krugman, economist at Princeton and recent winner of the 2008 Nobel Prize for Economics, has recently favoured an L-shaped economic recovery or rather, a U-shape with a long bottom line before the uptick. The American economy will have to work out the trouble some issues already in place before growth can resume. But the American economy being as resilient as it is, this bottom progression' should not last very long. Experts expect that an upturn should be under way by late 2009 or mid-2010 at the latest.

The service industry of India will be the worst hit of the recession. Sixty percent of the Indian people are indulged into service sector and this sector contributes about 52% to India's GDP growth. This industry dominates the income generation sections and therefore, if it declined its growth, then India's overall growth will be hit. But this hit will not make much impact because it's not totally depended on US economy. Due to job recession there was job cuts in all over the world. But things were quite different in India. There were no or very few job losses in India. People do say about TCS, software, consulting company fired about 700 employees due to recession. But the fact was, these were the people who weren't producing any result for the company. They were not productive and no company wants to keep liabilities with them. There is no job insecurity to the skilled people.

NASSCOM India produced a report stating, about the shortage of almost 6 million people in the IT sector. Therefore, India is still a massive place to find a job.

The tourism industry in India is also going to grow without any brakes. The massive population of India is in itself are the best consumers of the travel industry. There is not much dependency of the tourism industry on the external factors. India is rapidly growing with the GDP growth rate of almost 9% only behind China.

We should take this recession as a positive sign and try to be more effortive and more creative in our approach towards life. We can contribute much to the India's growth because of the sources and available labours in our country. The effort will reduce the cost and the overall efficiency will grow. In fact, our traders as well will get benefit from the dollars depreciation, which we can take the maximum advantage of. We can look for some more countries where we can penetrate the market and gain early momentum. There can be lots of areas where we can work strongly and improve our weak points. India is a land of opportunities which should be explored in the best possible manner. The exporters can target regions of South Africa, West Africa where at the moment the international brands are sold at five times expensive than in our country and gain the advantage of it. Similarly, there are many areas as well where we can go and explore the world with our products, technologies and services.

Indian industries to gain a positive sign during recession

The present global crisis in the economy has made its effects in all the sectors of the Indian markets. However, there has been very low affect of the crisis on the Indian market as comparison to the other parts of world especially when considering US and UK. There has been a report by the IKON marketing consultants that there are many sectors in India which will and which are still increasing with good speed and making the share prices high for themselves and a wonderful opportunity for the foreign investors to look into it.

1) Food and eatables industry in India- India is a land of agriculture where most of the agriculture products are produced. People can't survive without the food and therefore, the food industry is not getting affected a lot. Although, the profit level of these companies have come down, but that does not make much impact on the industry as a whole.

Report issued by the Food Processing Industry(FPI), states, that the industry of food producers are really doing well at the time of global world recessions. As per the data issued, Indian food industry is growing at a soaring height of fifteen percent in comparison of 2003-2004. India has vast industry with over US$ 200 billion which is a one third of the Indian retail sector. The retail food sector in India is expected to grow with the same rapid speed and can cross the margin of even US$ 300 billion by 2020.

2) Indian Railways

The airlines sector was heavily affected in the crisis. With their shares prices floating on the ground, the airlines industry is increasing the price of the tickets which however, is quite expensive for the Indian middle class to afford. India comprises of more than 50 % of middle class families who are more into savings rather than spending. So the frequent travellers are opting for more and more railways in place of the flights which is increasing the revenues of the Indian Railways and decreasing the revenues of the aviation industry. The railways traffic is increasing day by day and the reservations are done in advance for than 6 months which has given them an increase of around 13% in the economic crisis situation. People are using it for more of the freight as well which has also then pushed the earnings by around 11%. Railways have been a very good substitute of the airlines. They have maintained their tickets prices and are generating a good profit table revenue, with the revenue price charts soaring up in the present situation.

3) Public Sector Financial Services- These are also known as PSU Banks. These are government based banks and are directly operated by the government. The private sector banks are cutting jobs to cut down their expenses but its the public sector which is giving the people a job security which has lured lots of people to migrate from private sector to public sector. Also, these banks were not much affected by the crisis so the people's saving were getting good return on their investment and it developed the trust in the domestic people by giving them a safe returns. Around 60 % of people migrated their savings from private sector to the public sector to be on a safer side because of the bankruptcy cases of the private banks in other developed countries. According to a report presented by a market research company named RNCOS, predicts that the Indian banking sector, especially the government owned banks will grow at a strong compounded annual growth of around 25% till 2012.

4) Education system in India- Education is very basic requirement for the people now a days. With rising population in the country, people have also become education oriented and promote their life time savings into the child's future. But, with the rise of the education system, students are more tilt towards the foreign education and not in Indian education which is making the Foreign education systems coming into the country. With the foreign education in hand, students get more exposure to the outside world and they get practical experience of the foreign education in their own homeland. This gives them an exposure to migrate to any part of the world after their studies or for the completion of the part of their study in different parts of the world i.e. in other branches of the same university. International Universities are putting their millions of investment and making the education a world class for the Indian students. D.E Shaw, a United States 36 billion dollar company is investing US$ 200 million into India for the promotion of a high class education system in India.

5) Indian Telecom Sector- in this day to day busy getting life, and people moving out of their houses, mobile communication has become the necessity of the life. It's not possible for people to stay at home always and spend their life. With getting indulged in external activities, people has to stay in touch with family members, friends, and the employers, which is a great mode of communication. With cheap rates offered by the mobile operators and cheap availability of mobile handsets in the market, it has become the primary mode of support and communication in one's life. According to the industry estimates, the telecom sector in India has a base of 240 million subscribers and is expected to add another 90 million subscribers by the end of the year which will make India the second largest telecom market in the entire world. And therefore, even the telecom industry was unaffected at the time of global recession.

6) Information Technology- As per the news report issued by the various news agencies , IT sector is expected to grow by thirty to forty percent in the next two years. However, on the other side, the companies have to decrease its expenses to remain profitable in the current economic crisis. They are now customising the IT solutions which will make a positive impact on the demand of the software industry in India. India is also receiving works from the international organizations. The foreign companies, in order to cut their cost are outsourcing their business in India, so that the quality of the work can be maintained at fewer expenses. According to a report issued by CII( Confederation of Indian Industry, the outsourcing industry is growing at an annual rate of around 40 percent with obtaining the business of e-marketing, media services, project management, copy-editing, insurance which is going to make the outsourcing industry of about US$ 2 billion by the beginning of 2010.

7) Indian Health Care- The Indian health care is still far behind from the international level competition. Even in the metros, one can't find the proper multi speciality hospital. There is a major gap between the demand and supply at all the levels in the society. Due to heavy requirement of the people, especially in the metros, there has been a demand of the psychological consultation. Healthcare, is a vast industry in India with over US$ 49 billion revenues. According to the report submitted by the Health Care Association of India, Indian medical market is expected to cross over US$150 billion by 2017.

8) Luxury product markets in India- The rich class in India will not be much affected by the economic crisis of the world irrespective of the loss in the value of their wealth. They are still into the trend of show offs and will never stop buying the luxurious products. The luxury segment of India is booming at its peak. Companies like BMW, Piegent, Alta Costra have already entered into the Indian markets to target the high rich class society.


The construction companies in India soar to a new height

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