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US heading for worst recession in 26 years

DerekLeung

Alfrescian
Loyal
THE FORECAST
US heading for worst recession in 26 years
October 22, 2008




SENIOR officials at the US Treasury and Federal Reserve are confident that a repeat of the Great Depression will not happen.


FEELING DOWN: A trader on the floor of the New York Stock Exchange. PICTURE: AFP
And they believe the rescue plan for US banks will succeed in preventing a financial system meltdown. But they know that a sharp economic downturn is on the cards. And many fear the worst.

The US economy appears to be plunging into what many experts believe will be its worst recession since 1982, reported the Financial Times.

Princeton professor Alan Blinder, a former Fed vice-chairman, said: 'It looks to me like the economy has fallen off a cliff.'

He said it was all but certain that the US would face a recession worse than that of 2001 and 1990-1991.

'The game is now about making sure this recession is less deep and less long than the 1982 recession,' he said.

Mr Larry Meyer, chairman of Macroeconomic Advisers and a former Fed governor, said: 'We may be talking about one of the most severe recessions in the post-war period.'

Worse than expected

Professor Frederic Mishkin of Columbia university, another former Fed governor, said: 'The actual deterioration in the data in the last few weeks has been much more severe than anyone was expecting.'

Recent action by European governments and the US has helped stabilise the international banking system and policymakers believe that as the markets becomes more comfortable with the arrangements, the credit crunch will ease.

But Professor Mishkin remained cautious, saying: 'We are moving in the right direction...

'But we won't know whether it is enough until we see how the market responds. A lot of damage has been done already.'

In the US, unemployment, currently at 6.1per cent, is expected to rise, some say to above 8per cent, and the Fed believes it is likely to peak at about 7.5 per cent - a level last seen in 1992.

Rising unemployment is likely to worsen the housing slump and increase defaults on loans and credit cards.

The US also entered the crisis with a very low savings rate, unlike, say, Japan in the '90s. This makes consumers more likely to cut back on spending.

This is likely to lead to a recession.

Actually, consumers, who account for 72 per cent of the US economy, are already cutting back.

The nation's general economic weakness is likely to worsen corporate defaults, including private equity deals.

This second wave of bank losses might prolong the credit crisis and some worry it could end in deflation.

Standard models suggest that the US central bank should cut rates further from 1.5per cent to 1per cent and lower.

But Fed officials fear this will not have much impact.

They also see rate cuts as a secondary issue, compared with other issues such as bank recapitalisation, asset purchases and borrowing guarantees.

Some believe even these actions might not be enough.



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THE IMPACT


Job losses hit Silicon Valley
A SPATE of job losses has started to spread across Silicon Valley, reported the Financial Times.

The trademark optimism of the region's technology start-ups has turned to pessimism - reminding many of the dotcom bust of 2001.

The mood change was highlighted at a private meeting this month by Californian blue-chip venture capital firm Sequoia Capitals, for the companies it has backed.

Those at the meeting were greeted with a presentation that began with a slide showing a gravestone and the words 'RIP good times'.

Mr Seth Sternberg, co-founder of an instant messaging company, who was at the event, said: 'We are just hiring for critical roles', after scaling back more ambitious expansion plans.


Even celebrities are flying economy
FORMER Destiny Child's singer Michelle Williams has been flying around the US to promote her third solo album, Unexpected, and she's been doing it in economy.

If you spot her in first class, it's probably because she's upgraded using free miles.

'We all have to adjust. We just have to deal with it,' she said. 'These (fuel) prices are not going to come down.'

Overall, corporate jets are being jettisoned in favour of less luxurious planes, reported the Los Angeles Times.

Last month, traffic by jet-engine aircraft fell 14per cent, compared to a year ago, while traffic by less prestigious piston-driven planes rose by 24percent.

Mr Dan Probert, who runs an air charter brokerage, said: 'Big corporate jet customers are dropping down to smaller and lighter jets. Bascially, everybody is trading down.'


Economy down, but sale of value meals up
IN bad times, people turn to value meals. And that's what the US is seeing, reported the Chicago Tribune.

Its fast-food restaurants are rolling out big discounts and diners are lapping it up.

A foot-long Subway sandwich is now US$5 ($7.40), about a dollar less than last winter.

New and cheap items - like an under-US$1 taco - are also being unveiled at places like Taco Bell, Burger King and KFC.

That suits people like Mr Dorin Budjei, who runs his own flooring company.

'I only go where they have deals,' he said.

Fast food is the part of the restaurant business that usually does best when the economy crashes. In the June-to-August period, customer traffic at fast-food restaurants was up 1.5percent, according to market researcher NPD.
 
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