Sunday, January 13, 2008

African American Money Matters: Recession is Expected

The economy is threatened with a major recession. The housing crisis has caused ripple effects, as many banks have been forced to scale back their lending. Additionally, unemployment is at a two-year high. This has some wondering if the economy is headed for a major downturn.

Wall Street seems to think so. Known as a "leading indicator" for the economy as a whole, the recent slide in stock prices is a signal to some that the economy and corporations are headed toward lower future earnings.

At the beginning of 2007, economists surveyed cited a 1 in 3 chance that the economy would go into a recession. Now, they say it's 50/50. Some think that a recession is a sure thing.

President Bush and Congress are exploring options to avoid a recession, including tax rebates. Lower taxes encourage spending. Federal Reserve Chairman Ben Bernanke is proposing lowering interest rates. Lower taxes and lower interest rates encourage two economic stimulants: more spending and greater investment.

"The recession gorilla is there. The question is can the Federal Reserve do enough to avert a recession?" stated Brian Bethune, economist at Global Insight. "We think the odds are close to 50 percent that there will be a recession. It is high — no question about it."

There is a question of whether the Federal Reserve, the financial governing body for the US, agrees that a recession is on its way.

"The Federal Reserve is not currently forecasting a recession," Fed Chairman Ben Bernanke said last week. "We are forecasting slow growth."

Technically, a recession is a period of two straight quarters of negative economic growth. In other words, six months of slumping.

Some have concerns for African-Americans, who tend to feel the greatest effects of economic downturns. They have also been hit disproportionately by the housing and foreclosure crisis.

Additionally, there is fear that if consumers expect a recession to occur in the near future, they are going to stop spending in order to prepare. Businesses may also stop investing to prepare for the recession. If this is done on a large scale, the effects of the recession will worsen.

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