Recession

This article is about a general slowdown in economic activity. For other uses, see
Recession (disambiguation).

In economics, a recession is a business cycle contraction, a general slowdown in

economic activity over a period of time longer than a few months.[1][2] During recessions,
many macroeconomic indicators vary in a similar way. Production, as measured by Gross
Domestic Product (GDP), employment, investment spending, capacity utilization,
household incomes, business profits and inflation all fall during recessions; while
bankruptcies and the unemployment rate rise.

Recessions generally occur when there is a widespread drop in spending often following
an adverse supply shock or the bursting of an economic bubble. Governments usually
respond to recessions by adopting expansionary macroeconomic policies, such as
increasing money supply, increasing government spending and decreasing taxatio

In a 1975 New York Times article, economic statistician Julius Shiskin suggested several
rules of thumb for defining a recession, one of which was "two down quarters of GDP".[3]
In time, the other rules of thumb were forgotten,[4] and a recession is now often defined
simply as a period when GDP falls (negative real economic growth) for at least two
quarters.[5][6] Some economists prefer a definition of a 1.5% rise in unemployment within
12 months.[7]

In the United States, the Business Cycle Dating Committee of the National Bureau of
Economic Research (NBER) is generally seen as the authority for dating US recessions.
The NBER defines an economic recession as: "a significant decline in [the] economic
activity spread across the country, lasting more than a few months, normally visible in
real GDP growth, real personal income, employment (non-farm payrolls), industrial
production, and wholesale-retail sales."[8] Almost universally, academics, economists,
policy makers, and businesses defer to the determination by the NBER for the precise
dating of a recession's onset and end.

Attributes
This section requires expansion.

A recession has many attributes that can occur simultaneously and includes declines in
component measures of economic activity (GDP) such as consumption, investment,
government spending, and net export activity. These summary measures reflect
underlying drivers such as employment levels and skills, household savings rates,
corporate investment decisions, interest rates, demographics, and government policies.

Economist Richard C. Koo wrote that under ideal conditions, a country's economy should
have the household sector as net savers and the corporate sector as net borrowers, with
the government budget nearly balanced and net exports near zero.[9] When these
relationships become imbalanced, recession can develop within the country or create
pressure for recession in another country. Policy responses are often designed to drive the
economy back towards this ideal state of balance.

A severe (GDP down by 10%) or prolonged (three or four years) recession is referred to
as an economic depression, although some argue that their causes and cures can be
different.[7] As an informal shorthand, economists sometimes refer to different recession
shapes, such as V-shaped, U-shaped, L-shaped and W-shaped recessions.

Type of recession or shape

Main article: Recession shapes

Recessions and subsequent growth periods may have distinctive shapes when graphed. In
the US, V-shaped, or short-and-sharp contractions followed by rapid and sustained
recovery, occurred in 1954 and 1990–91; U-shaped (prolonged slump) in 1974-75, and
W-shaped , or double-dip recessions in 1949 and 1980-82. Japan’s 1993-94 recession was
U-shaped and its 8-out-of-9 quarters of contraction in 1997-99 can be described as L-
shaped. Korea, Hong Kong and South-east Asia experienced U-shaped recessions in
1997-98, although Thailand’s eight consecutive quarters of decline should be termed L-
shaped.[10]

[edit] Psychological aspects

Recessions have psychological and confidence aspects. For example, if the expectation
develops that economic activity will slow, firms may decide to reduce employment levels
and save money rather than invest. Such expectations can create a self-reinforcing
downward cycle, bringing about or worsening a recession.[11] Consumer confidence is one
measure used to evaluate economic sentiment.[12] The term "Animal Spirits" has been
used to describe the psychological factors underlying economic activity. Economist
Robert J. Shiller wrote that the term "...refers also to the sense of trust we have in each
other, our sense of fairness in economic dealings, and our sense of the extent of
corruption and bad faith. When animal spirits are on ebb, consumers do not want to spend
and businesses do not want to make capital expenditures or hire people."[13]

[edit] Balance sheet recession

The bursting of a real estate or financial asset price bubble can cause a recession. For
example, economist Richard Koo wrote that Japan's "Great Recession" that began in
1990 was a "balance sheet recession." It was triggered by a collapse in land and stock
prices, which caused Japanese firms to become insolvent, meaning their assets were
worth less than their liabilities. Despite zero interest rates and expansion of the money
supply to encourage borrowing, Japanese corporations in aggregate opted to pay down
their debts from their own business earnings rather than borrow to invest as firms
typically do. Corporate investment, a key demand component of GDP, fell enormously
(22% of GDP) between 1990 and its peak decline in 2003. Japanese firms overall became
net savers after 1998, as opposed to borrowers. Koo argues that it was massive fiscal
stimulus (borrowing and spending by the government) that offset this decline and enabled
Japan to maintain its level of GDP. In his view, this avoided a U.S. type Great
Depression, in which U.S. GDP fell by 46%. He argued that monetary policy was
ineffective because there was limited demand for funds while firms paid down their
liabilities. In a balance sheet recession, GDP declines by the amount of debt repayment
and un-borrowed individual savings, leaving government stimulus spending as the
primary remedy.[9][14]

[edit] Liquidity trap

A liquidity trap situation can develop in which interest rates reach near zero (ZIRP) yet
do not effectively stimulate the economy. In theory, near-zero interest rates should
encourage firms and consumers to borrow and spend. However, if too many individuals
or corporations focus on saving or paying down debt rather than spending, lower interest
rates have less effect on investment and consumption behavior; the lower interest rates
are like "pushing on a string." Economist Paul Krugman described the U.S. 2009
recession and Japan's lost decade as liquidity traps. One remedy to a liquidity trap is
expanding the money supply via quantitative easing or other techniques in which money
is effectively printed to purchase assets, thereby creating inflationary expectations that
cause savers to begin spending again. Government stimulus spending and mercantilist
policies to stimulate exports and reduce imports are other techniques to stimulate
demand.[15] He estimated in March 2010 that developed countries representing 70% of the
world's GDP were caught in a liquidity trap.[16]

[edit] Predictors
Although there are no completely reliable predictors, the following are regarded to be
possible predictors.[17]

• Inverted yield curve,[18] the model developed by economist Jonathan H. Wright,

uses yields on 10-year and three-month Treasury securities as well as the Fed's
overnight funds rate.[19] Another model developed by Federal Reserve Bank of
New York economists uses only the 10-year/three-month spread. It is, however,
not a definite indicator;[20]
• The three-month change in the unemployment rate and initial jobless claims.[21]
• Index of Leading (Economic) Indicators (includes some of the above indicators).
[22]

• Lowering of asset prices, such as homes and financial assets, or high personal and
corporate debt levels.

[edit] Government responses

This section requires expansion.
See also: Stabilization policy

Most mainstream economists believe that recessions are caused by inadequate aggregate
demand in the economy, and favor the use of expansionary macroeconomic policy during
recessions. Strategies favored for moving an economy out of a recession vary depending
on which economic school the policymakers follow. Monetarists would favor the use of
expansionary monetary policy, while Keynesian economists may advocate increased
government spending to spark economic growth. Supply-side economists may suggest
tax cuts to promote business capital investment. When interest rates reach the boundary
of an interest rate of zero percent conventional monetary policy can no longer be used
and government must use other measures to stimulate recovery. Keynesians argue that
fiscal policy, tax cuts or increased government spending, will work when monetary
policy fails. Spending is more effective because of its larger multiplier but tax cuts take
effect faster.

[edit] Stock market

The examples and perspective in this article deal primarily with USA and do
not represent a worldwide view of the subject. Please improve this article and
discuss the issue on the talk page. (September 2008)

Some recessions have been anticipated by stock market declines. In Stocks for the Long
Run, Siegel mentions that since 1948, ten recessions were preceded by a stock market
decline, by a lead time of 0 to 13 months (average 5.7 months), while ten stock market
declines of greater than 10% in the DJIA were not followed by a recession.[23]

The real-estate market also usually weakens before a recession.[24] However real-estate
declines can last much longer than recessions.[25]

Since the business cycle is very hard to predict, Siegel argues that it is not possible to
take advantage of economic cycles for timing investments. Even the National Bureau of
Economic Research (NBER) takes a few months to determine if a peak or trough has
occurred in the US.[26]

During an economic decline, high yield stocks such as fast moving consumer goods,
pharmaceuticals, and tobacco tend to hold up better.[27] However when the economy starts
to recover and the bottom of the market has passed (sometimes identified on charts as a
MACD[28]), growth stocks tend to recover faster. There is significant disagreement about
how health care and utilities tend to recover.[29] Diversifying one's portfolio into
international stocks may provide some safety; however, economies that are closely
correlated with that of the U.S. may also be affected by a recession in the U.S.[30]

There is a view termed the halfway rule[31] according to which investors start discounting
an economic recovery about halfway through a recession. In the 16 U.S. recessions since
1919, the average length has been 13 months, although the recent recessions have been
shorter. Thus if the 2008 recession followed the average, the downturn in the stock
market would have bottomed around November 2008. The actual US stock market
bottom of the 2008 recession was in March 2009.

[edit] Politics
Generally an administration gets credit or blame for the state of economy during its time.
[32]
This has caused disagreements about when a recession actually started.[33] In an
economic cycle, a downturn can be considered a consequence of an expansion reaching
an unsustainable state, and is corrected by a brief decline. Thus it is not easy to isolate the
causes of specific phases of the cycle.

The 1981 recession is thought to have been caused by the tight-money policy adopted by
Paul Volcker, chairman of the Federal Reserve Board, before Ronald Reagan took office.
Reagan supported that policy. Economist Walter Heller, chairman of the Council of
Economic Advisers in the 1960s, said that "I call it a Reagan-Volcker-Carter recession.[34]
The resulting taming of inflation did, however, set the stage for a robust growth period
during Reagan's administration.

Economists usually teach that to some degree recession is unavoidable, and its causes are
not well understood. Consequently, modern government administrations attempt to take
steps, also not agreed upon, to soften a recession.

[edit] Impacts
[edit] Unemployment

The full impact of a recession on employment may not be felt for several quarters.
Research in Britain shows that low-skilled, low-educated workers and the young are most
vulnerable to unemployment[35] in a downturn. After recessions in Britain in the 1980s
and 1990s, it took five years for unemployment to fall back to its original levels.[36]

[edit] Business

Productivity tends to fall in the early stages of a recession, then rises again as weaker
firms close. The variation in profitability between firms rises sharply. Recessions have
also provided opportunities for anti-competitive mergers, with a negative impact on the
wider economy: the suspension of competition policy in the United States in the 1930s
may have extended the Great Depression.[36]

[edit] Social effects

The living standards of people dependent on wages and salaries are more affected by
recessions than those who rely on fixed incomes or welfare benefits. The loss of a job is
known to have a negative impact on the stability of families, and individuals' health and
well-being.[36]
[edit] History
[edit] Global

There is no commonly accepted definition of a global recession, although the IMF

regards periods when global growth is less than 3% to be global recessions.[37] The IMF
estimates that global recessions seem to occur over a cycle lasting between 8 and 10
years.[citation needed] During what the IMF terms the past three global recessions of the last
three decades, global per capita output growth was zero or negative.[38]

Economists at the International Monetary Fund (IMF) state that a global recession would
take a slowdown in global growth to three percent or less. By this measure, four periods
since 1985 qualify: 1990–1993, 1998, 2001–2002 and 2008–2009.

[edit] United Kingdom

Main article: List of recessions in the United Kingdom

The most recent recession to affect the United kingdom was the Late-2000s recession.

[edit] United States

Main article: List of recessions in the United States

According to economists, since 1854, the U.S. has encountered 32 cycles of expansions
and contractions, with an average of 17 months of contraction and 38 months of
expansion.[8] However, since 1980 there have been only eight periods of negative
economic growth over one fiscal quarter or more,[39] and four periods considered
recessions:

• July 1981-November 1982: 14 months

• July 1990-March 1991: 8 months
• March 2001-November 2001: 8 months
• December 2007-June 2009: 18 months[40][41]

For the past three recessions, the NBER decision has approximately conformed with the
definition involving two consecutive quarters of decline. While the 2001 recession did
not involve two consecutive quarters of decline, it was preceded by two quarters of
alternating decline and weak growth.[39]

[edit] Late 2000s

Main article: Late-2000s recession

Official economic data shows that a substantial number of nations are in recession as of
early 2009. The US entered a recession at the end of 2007,[42] and 2008 saw many other
nations follow suit. The US recession of 2007 ended in June, 2009[43] as the nation
entered the current economic recovery.

[edit] United States

The United States housing market correction (a possible consequence of United States
housing bubble) and subprime mortgage crisis has significantly contributed to a
recession.

The 2008/2009 recession is seeing private consumption fall for the first time in nearly 20
years. This indicates the depth and severity of the current recession. With consumer
confidence so low, recovery will take a long time. Consumers in the U.S. have been hard
hit by the current recession, with the value of their houses dropping and their pension
savings decimated on the stock market. Not only have consumers watched their wealth
being eroded – they are now fearing for their jobs as unemployment rises. [44]

U.S. employers shed 63,000 jobs in February 2008,[45] the most in five years. Former
Federal Reserve chairman Alan Greenspan said on April 6, 2008 that "There is more than
a 50 percent chance the United States could go into recession."[46] On October 1, the
Bureau of Economic Analysis reported that an additional 156,000 jobs had been lost in
September. On April 29, 2008, nine US states were declared by Moody's to be in a
recession. In November 2008, employers eliminated 533,000 jobs, the largest single
month loss in 34 years.[47] For 2008, an estimated 2.6 million U.S. jobs were eliminated.
[48]

The unemployment rate of US grew to 8.5 percent in March 2009, and there have been
5.1 million job losses till March 2009 since the recession began in December 2007.[49]
That is about five million more people unemployed compared to just a year ago.[50] This
has become largest annual jump in the number of unemployed persons since the 1940s.[51]

Although the US Economy grew in the first quarter by 1%,[52][53] by June 2008 some
analysts stated that due to a protracted credit crisis and "rampant inflation in commodities
such as oil, food and steel", the country was nonetheless in a recession.[54] The third
quarter of 2008 brought on a GDP retraction of 0.5%[55] the biggest decline since 2001.
The 6.4% decline in spending during Q3 on non-durable goods, like clothing and food,
was the largest since 1950.[56]

A Nov 17, 2008 report from the Federal Reserve Bank of Philadelphia based on the
survey of 51 forecasters, suggested that the recession started in April 2008 and will last
14 months.[57] They project real GDP declining at an annual rate of 2.9% in the fourth
quarter and 1.1% in the first quarter of 2009. These forecasts represent significant
downward revisions from the forecasts of three months ago.
A December 1, 2008, report from the National Bureau of Economic Research stated that
the U.S. has been in a recession since December 2007 (when economic activity peaked),
based on a number of measures including job losses, declines in personal income, and
declines in real GDP.[58] By July 2009 a growing number of economists believed that the
recession may have ended.[59][60] The National Bureau of Economic Research announced
on September 20, 2010 that the 2008/2009 recession ended in June 2009, making it the
longest recession since World War II. [61]

[edit] Other countries

This section does not cite any references or sources.

Please help improve this article by adding citations to reliable sources. Unsourced material may
be challenged and removed. (February 2008)

A few other countries have seen the rate of growth of GDP decrease, generally attributed
to reduced liquidity, sector price inflation in food and energy, and the U.S. slowdown.
These include the United Kingdom, Ireland, Canada, Japan, China, India, New Zealand
and many countries within the EEA. In some, the recession has already been confirmed
by experts, while others are still waiting for the fourth quarter GDP growth data to show
two consecutive quarters of negative growth. India along with China is experiencing an
economic slowdown but not a recession. Also Africa and South Africa are experiencing
economic slowdown and global outbreak. Australia avoided a technical recession in
2009, and had positive growth against the overall global economic downturn.

Since history seems to repeat itself, maybe we could learn something about the current
possible recession by studying this country's recession history.

I work with investments, so I'm particularly concerned with recessions because they can
have a very negative impact on investment account values. I'm going to look at the
recession history with particular focus on how each recession affected the Dow
Industrials Stock Index. I have Dow Index data back to 1930, so we will start there.

I have known for some time that the market moves in approximately 15 year cycles. The
market goes up for 15 years then seems to go sideways for the next 15 years. This growth
and then consolidation pattern happens frequently through out history.

Let's first consider the Dow Industrials index from 1930 through 1945.

This period started with the great depression. We all know the effect the depression had
on stock values. The Dow lost over 88% of its value between 1929 and 1933. It made a
nice rebound following the depression. It increased 345% over the next 4 years. We will
see there is a theme in the recession / expansion cycle. Recessions are relatively short and
can be very violent to investors in the stock market. The expansion period following
recessions are much longer and historically quite good.
One thing you need to be extremely aware of. Numbers and percentages can be
deceiving. I just mentioned that the index lost 88 percent, but then gained 345%. Sounds
like you made up all your losses and then some. Not quite.

The dirty little secret to investment losses is this: if you lose 50% of your portfolio, you
need to make 100% just to break even. This is an ugly little fact, but let's look at it in real
life. If you had $100,000 and lost 50%, you would be left with only $50,000. How much
do you have to earn on your $50,000 to get back to even? You need to earn another
$50,000. This is 100% of what you currently have. You lost 50% and must gain 100%
just to break even.

Let's put this into real life. In 1929 the Dow had a high of around 380 and in 1933 a low
of about 48. This is an 88% decrease in value. Over the next 4 years it went from 48 to
187. This is a 345% increase. Sounds like you made up the 88% loss and then some.
Unfortunately you have only gained back just over half of what you lost. This also is a
recurring theme. When a recession takes huge bites out of portfolio values, it normally
takes many years just to break even again. Not to get ahead of myself, but the Nasdaq has
only regained about half of what it lost during the last recession. And this is 7 years later!
The Dow and S&P 500 took about 6 years to finally break even. The kind of time periods
required to recover definitely make the study of the recession history worth while.

Now that some of the back ground work is complete lets look at the next 15 years, from
1945 through 1960. In 1955 the Dow finally got back to where it was before the great
depression. This was a very long 25 year wait. Imagine the poor retirees that retired
before the depression and never again regained their original portfolio value!

Remember the last 15 years were mostly down then sideways (1930 through 1945). This
next 15 year time period (1945 thru 1960) had very mild recessions with the worst only
causing a 15% drop in the Dow. Overall, the Dow gained 267% over these 15 years. This
is very good reward for a minimum amount of risk. This leads us to the next 15 years,
1960 to 1975.

The 15 year cycle is definitely in effect. The last 15 years were very tame yet had a nice
return. These 15 years were not for the feint of heart. Gain was very little over the period,
but volatility was killer. The period started out with a wonderful 75% gain, but gave it all
back by the end. The recessionary periods were very violent. The reward available in this
market was much smaller than the risk. It would have been nearly impossible to be a buy
and hold investor and have stayed with the market.

Thus far, we had a 15 year period that was horrible (1930 thru 1945), one that was very
nice (1945 thru 1960), then another horrible one (1960 thru 1975). Without looking
ahead, we might guess that the next 15 year time period would be another nice one. The
market consolidated over the last 15 years and should be ready to move ahead again.

This period began with a 6 years of continued consolidation (going sideways), but when
it was done consolidating, it moved up very nicely. It moved from around 800 in '82 to
2800 by 1990. This represents a 250% increase for the period. The volatility for the
period was pretty tame, at least if you look at the volatility caused by recession. The
largest pullback in value was the '81 to '82 recession which was about 18%. There was a
large pullback in August of '87 of about 30%, but wasn't caused by recession and didn't
take that long to be regained; all in all a very fruitful 15 years.

This would lead me to believe that the next 15 years (1990 thru 2005) would be
tumultuous again as the market needs to digest its gains.

The roll the market had going continued for the first half of this period. It gained 300% in
just 8 years. This was more in the first half than the others gained in their entire 15 year
period. This didn't go un-noticed however, and the market promptly took back a healthy
35% through the next recessionary period. It took until mid way through 2006 to finally
get back to even from the highs seen in '99. Once this was achieved, however, the Dow
just kept going. It extended its gains through the expansion period, hitting new highs once
again.

This brings us to today. There is much talk about the beginning of another recession.
We're at the end of a period that should have shown consolidation, but instead had
another large run up. This run up wasn't without sizeable volatility. We've just broken a
long term support line. I've drawn support lines through the years following recessions
and had you sold when the support line was broken, you would have been saved a lot of
grief during the next recession.

In summary, I would say that the recession history points to our next recession causing
havoc on the Dow. When will the next recession be or are we already in it? I've covered
this dilemma in another article. Personally, I think we are already in it. I believe the Dow
just broke support and has a lot of potential to continue downward.

John M. Norquay
Chief Compliance Officer
PivotPoint Advisors, LLC

If you're concerned about your 401k in this market environment, then visit 401k Plan
Facts. Help is available.

Article Source: http://EzineArticles.com/?expert=John_Norquay

Learning From History -Recessions In The USA

What can we learn from the history of past economic recessions in America?
From the Great Depression, the oil crisis in the 70's through to Black Monday and the
dot-com bubble. We explore the causes of recession and look at the current economic
situation in 2009.

What Is The Definition Of A Recession?

An ecomonic recession is broadly defined as a downturn in the GDP (gross domestic
product) of a nation for at least two successive quarters, ie 6 months.

What's the difference between a recession and a

depression?
If the GDP of a country drops by at least 10% then this can be classed as a depression. By
these standards, the last depression America suffered was The Great Depression in the
1930's.

The worst drop in recent times was during the oil crisis in the 1970's.

Economic Recession History Blog

USA recessions, current economic news and practical recession survival
tips.

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Impact of global recession on India

America is the most effected country due to global recession, which comes as a bad news
for India. India have most outsourcing deals from the US. Even our exports to US have
increased over the years. Exports for January declined by 22 per cent.
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Impact of global recession on India

America is the most effected country due to global recession, which comes as a bad news
for India. India have most outsourcing deals from the US. Even our exports to US have
increased over the years. Exports for January declined by 22 per cent.
RECESSIONS ARE the result of reduction in the demand of products in the global
market. Recession can also be associated with falling prices known as deflation due to
lack of demand of products. Again, it could be the result of inflation or a combination of
increasing prices and stagnant economic growth in the west.

Recession in the West, specially the United States, is a very bad news for our country.
Our companies in India have most outsourcing deals from the US. Even our exports to
US have increased over the years. Exports for January have declined by 22 per cent.
There is a decline in the employment market due to the recession in the West. There has
been a significant drop in the new hiring which is a cause of great concern for us. Some
companies have laid off their employees and there have been cut in promotions,
compensation and perks of the employees. Companies in the private sector and
government sector are hesitant to take up new projects. And they are working on existing
projects only. Projections indicate that up to one crore persons could lose their jobs in the
correct fiscal ending March. The one crore figure has been compiled by Federation of
Indian Export Organisations (FIEO), which says that it has carried out an intensive
survey. The textile, garment and handicraft industry are worse effected. Together, they
are going to lose four million jobs by April 2009, according to the FIEO survey. There
has also been a decline in the tourist inflow lately. The real estate has also a problem of
tight liquidity situations, where the developers are finding it hard to raise finances.

IT industries, financial sectors, real estate owners, car industry, investment banking and
other industries as well are confronting heavy loss due to the fall down of global
economy. Federation of Indian chambers of Commerce and Industry (FICCI) found that
faced with the global recession, inventories industries like garment, gems, textiles,
chemicals and jewellery had cut production by 10 per cent to 50 per cent.

How to tackle the global slump?

“Our economy is shrinking, unemployment rolls are growing, businesses and families
can’t get credit and small businesses can’t secure the loans they need to create jobs and
get their products to market,” Obama said.

“With the stakes this high, we cannot afford to get trapped in the same old partisan
gridlock.

In time of recession, India battles global imbalances

angalore:In the time of recession, there seems to be a growing debate for global
imbalances.However, India is at the forefront of creating demand for countries battling
slowdown. It was the second biggest net importer of goods and services in 2009, just
behind the US, providing a market for countries battling contracting domestic demand.

India imported $69 billion of goods and services in 2009, while the US was a net
importer of about $699 billion. This means that India injected demand into the global
markets by creating a demand for products, helping in creating jobs and sustaining other
economies. "Countries such as US and India are injecting demand into the global demand
because we have deficits. Actually, India is second largest contributor to the global net
demand. In 2009, India contributed something like 6.5 percent of the total net injection of
demand," said Arvind Virmani, ex"Countries such as US and India are injecting demand
into the global demand because we have deficits. Actually, India is second largest
contributor to the global net demand. In 2009, India contributed something like 6.5
percent of the total net injection of demand," said Arvind Virmani, executive director-
India, International Monetary Fund .ecutive director-India, International Monetary Fund .
Traditionally India has been a net importer, which earlier was seen as a sign of
dependence on other countries. But globalization has changed this thinking as currently
India is a big market for exporting nations. "India has provided markets for other
countries," said Madan Sabnavis, chief economist, Care.

Most of the industrialized nations have grown to a level where they are net exporters in
value terms, as they export high technology objects and in turn import the basic low value
products."Countries like China, Germany and Russia which are withdrawing demand
from the system because they have surpluses," Mr Virmani said emphasizing on the need
for balance in global growth.

Hit hard by the global financial crisis in 2008 most of the developed world is still
grappling with the problem of inadequate demand and growth, which is fueling
joblessness. They have tried both a mix of fiscal monetary measures to expand their
economies to get over the problem.
The latest US Fed?s move to print money to buy $600 billion of government bonds has
come under scathing attack from China and some other emerging economies. The
decision is expected to depreciate the value of dollar by about 20% over next eight
months when this cash will reach markets.

China, under pressure from the US for keeping its exchange rate low to make its exports
competitive, did not lose much time in criticising the Fed move seen largely targeted at
keeping the dollar undervalued.

"There is an imbalance in the global economy, which has to be removed if we are to have
a sustainable global recovery especially in a period in which there is a huge shortage of
demand," Mr Virmani said.

Impact of recession in American economy on India

Introduction

The fear of a recession looms over the United States. And as the clich goes,
whenever the US sneezes, the world catches a cold. This is evident from the way
the Indian markets crashed taking a cue from a probable recession in the US and
a global economic slowdown.

Weakening of the American economy is bad news, not just for India, but for the
rest of the world too.

So what is a recession?

A recession is a decline in a country's gross domestic product (GDP) growth for

two or more consecutive quarters of a year. A recession is also preceded by
several quarters of slowing down.

What causes it?

An economy which grows over a period of time tends to slow down the growth as
a part of the normal economic cycle. An economy typically expands for 6-10 years
and tends to go into a recession for about six months to 2 years.
A recession normally takes place when consumers lose confidence in the growth
of the economy and spend less.

This leads to a decreased demand for goods and services, which in turn leads to a
decrease in production, lay-offs and a sharp rise in unemployment.

Investors spend less as they fear stocks values will fall and thus stock markets fall
on negative sentiment.

Stock markets & recession

The economy and the stock market are closely related. The stock markets reflect
the buoyancy of the economy. In the US, a recession is yet to be declared by the
Bureau of Economic Analysis, but investors are a worried lot. The Indian stock
markets also crashed due to a slowdown in the US economy.

The Sensex crashed by nearly 13 per cent in just two trading sessions in January.
The markets bounced back after the US Fed cut interest rates. However, stock
prices are now at a low ebb in India with little cheer coming to investors.

Current crisis in the US

The defaults on sub-prime mortgages (homeloan 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

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 recession, 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.

Impact of an American Recession on India

Indian companies have major outsourcing deals from the US. India's exports to
the US have also grown substantially over the years. The India economy is likely
to lose between 1 to 2 percentage points in GDP growth in the next fiscal year.
Indian companies with big tickets deals in the US would see their profit margins
shrinking.

The worries for exporters will grow as rupee strengthens further against the
dollar. But experts note that the long-term prospects for India are stable. A weak
dollar could bring more foreign money to Indian markets. Oil may get cheaper
brining down inflation. A recession could bring down oil prices to $70.

The whole of Asia would be hit by a recession as it depends on the US economy.

Even though domestic demand and diversification of trade in the Asian region will partly counter any drop in the US demand, one simply can't escape a downturn in the world's
largest economy. The US economy accounts for 30 per cent of the world's GDP.

Says Sudip Bandyopadhyay, director and CEO, Reliance Money: "In the globalised world, complete decoupling is impossible. But India may remain relatively less affected by
adverse global events." In fact, many small and medium companies have already started developing trade ties with China and European countries to ward off big losses.

Manish Sonthalia, head, equity, Motilal Oswal Securities, says 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 only silver lining is that the recession will happen slowly, probably in six months or so. As of now, IT and IT-enabled services, textiles, jewellery, handicrafts and leather
segments will suffer losses because of their trade link. Certain sections of commodities could face sharp impact due to the volatile nature of these sectors. C.J. George, managing
director, Geojit Financial Services, says profits of lots of re-export firms may be affected. Countries like China import commodities from India, do some value-addition and then
export them to the US. The IT sector will be the worst hit as 75 per cent of its revenues come from the US. Low demand for services may force most Indian Fortune 500
companies to slash their IT budgets. Zinnov Consulting, a research and offshore advisory, says that besides companies from ITeS and BPO, automotive components will be
affected.
During a full recession, US companies in health care, financial services and all consumer demand driven firms are likely to cut down on their spending. Among other sectors,
manufacturing and financial institutions are moderately vulnerable. If the service sector takes a serious hit, India may have to revise its GDP to about 8 to 8.5 per cent or even less.

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 oursourcing industry. Small BPOs, which are operating at a
net margin of 7-8 per cent, will find it difficult to survive.

According to Dharmakirti Joshi, director and principal economist of CRISIL, along and severe recession will seriously affect the portfolio and fixed investment flows. Corporates
will also suffer from volatility in foreign exchange rates. The export sector will have to devise new strategies to enhance productivity.

Counter strategy

Karthik Ananth, senior consultant, business development, Zinnov, says there is already a shift in business strategies of corporate India. Large IT and BPO firms have started
looking at other markets like Europe, and even the domestic market, to spread their risks and reduce the impact of the rising rupee. This can be best seen with Infosys setting up an
India centric team.

K. Ramachandran, head, advisory desk, BNP Paribas Private Banking, says Indian companies will have to adopt a multi-pronged strategy, which includes diversification of the
export markets, improving internal efficiencies to maintain cost competitiveness in a tight export market situation and moving the product portfolio up in the value chain to impart
resilience.

The IT sector too is keen to defend its position. R.S. Rethinasamy, vice-president, Finance Aditi Technologies, says that in case of a full-blown US recession, the onsite staffing
business will see a decline in sales and profit. "At the same time, it can increase the offshore work. Recessions at this juncture may not last for more than two to three years. Smart
companies will continue to make investments so that they can be ahead of the competition when the US economy comes out of recession", he says.

This means corporate India will have to spend a lot more to develop market and supply chain links in alternate markets like Asia and Europe. Experts say the export dependent
sectors of the economy need to re-focus on local demand and income from non-dollar economies.

The European, West Asian and the African countries may offer viable short-term alternatives to our export-dependent sectors. BPOs, for example, will have to re-negotiate with
their clients and fix appropriate price for their services.

Can India be a market option? Zinnov says IT firms can definitely find a market in India, but the deal sizes are likely to be small. India has a huge, small and medium enterprise
base and it is the right time to tap this segment. As for automotive components, consumer electronics and mobile devices, they have already found a market in India and have also
started looking at tie-ups in China and other BRIC countries.

Consequences of US recession on India job market

Worst affected because of US recession will be the service industry of India.

Under service industries come BPO, KPO, IT, ITeS etc. Service industry
contributes about 52% to India's GDP growth. Now if that is going to get hurt
then it will also hurt India's overall growth but very slightly. India is not going to
face a major impact due to US recession. People may say that there is going to be
a huge job loss due to recession. and will cite the example of TCS firing about 500
employees but these were employees who didnt perform and for cost cutting one
have to reduce Non performing asset and that exactly what has been done. There
is no threat to the skilled people. According to NASSCOM India will have a
shortage of about 5 million skilled people in IT/ITeS. So there are lots of
opportunities.

Apart from this India's travel, tourism and power industry is going to grow at a
better rate. This is again a good sign. India has a huge population so a huge
consumer base so we dont have to always depend on US for our growth. India's
GDP is expected to grow at the rate of 8.5-8.9 % which is again way above the
growth rate of US and only second highest in the world after China.

This recession gives us opportunity to be innovative and to think out of box so

that the US directly dont affect our robust growth. Due to increasing Rupee
exporters are having a hard time but it has been noted that our exporters are not
that efficient and in past they got the benefit of depreciating rupee. So now its
time to be innovative and more effective and increase the over all efficiency and
go for systematic cost cutting to balance the rupee effect. Infact there are lots of
scope for improvement. In West Africa goods at departmental stores are sold at
the rate 5 times than Indian price and Indian goods are not exported to several
countries in West Africa. Its an excellent opportunity for our exporters.

Conclusion

Over the past couple of months, fears of a slowdown in the United States of
America have increased. The impact of the subprime crisis along with a
slowdown in mortgages has led to a significant lowering of growth estimates.
Since the United States dominates the global economy, any slowdown there
would have an impact on most of the global economic variables.

For India, it could mean a further appreciation in the rupee vis--vis the US dollar
and a darkening of business outlook for sectors dependent on US companies. The
overall impact of a US slowdown on India would, however, be minimal as the
factors driving growth here are more local in nature. Unlike the rest of Asia, India
is a strong domestic demand story, so any slowing in the US is likely to have a
more muted impact on India. Strong growth in domestic consumption and
significant spending on infrastructure are the two pillars of Indias growth story.
No sector has a dominant influence on earnings growth and risks to our estimate
are limited. Corporate India is also learning to master the art of efficient capital
management, reduction in costs and delivery of value-added services to sustain
profit margins. Further, interest rates are expected to be stable primarily due to
control over inflation and proactive measures undertaken by the RBI.
Effects of Recession

Even the strongest feel the cracks in the face of an earthquake. The cracks are visible even
during a brief recession. When the markets are disrupted the effect shows. Unemployment is the
greatest dread of any man. How will he feed his family now? Expatriates are being shown the
doors. America which has been home to many people is now turning them out. Branches of
American companies abroad are shutting shop. When there are cuts in the weekly budgets,
priorities changes, when job seekers are dumped there is a big change in lifestyle.

When there are recessions the female employees feel the winds of change first as they are more
vulnerable. They know they will be laid off the jobs. It is difficult to believe, but it is true. Women
who work as receptionists, doing odd jobs in the office, public relations and communications are
picked out when downsizing is done.

Recessions have the tendency to touch sore spots of business. Those which are no longer viable
are shut off. For instance publications that are now low on subscription, advertising and sales get
the first cut. Most companies spend large sums on advertising in print and electronic media. The
PR companies have to work on tighter budgets with maximum mileage. Chances are that
different agencies that were used for different products are now merged. A single agency is given
the job to do. Staff in the office faces retention as now the work load is divided between only the
most necessary employees. The ones left can also forget about the raise in salaries and also
work hard.

As USA faces a visible recession in current times, it is evident that economists are in overdrive to
review the fiscal statistics and give expert opinions. The stock markets have already created a
panic situation in the country. The biggest lenders are now facing a cash crunch and for the first
time they are also admitting it.

Most of the credit has gone into housing, car, security and insurance schemes. Americans who
have invested in such schemes have only their stocks to offer as collaterals and now are facing
the brunt with embarrassing foreclosures. Does this recessive situation warrant a soul search
amongst the other nations who are depending and banking their economies on Uncle Sam’s
federal reserves? The answer is yes. There has been no sustainable development in major
sectors like housing, medical, small scale business. The US economy has reached its peak and
is slowly going downhill.

Jobs are being outsourced to other countries while Americans are themselves jobless. As Asian
countries are getting more employment, even expatriates are returning home. India and China
are major outsourcing backyards for the US. Cheap goods manufactured in China, Thailand and
other poor countries have hitherto relied on the dollar power for sustenance. As the value of the
dollar falls, the American dream is going bust for many. Whether it is the shoe maker or the food
chain or cola giants or even real estate developers, the earning potential has been cut.

Recession in India
Global economic meltdown has affected almost all countries. Strongest of American, European
and Japanese companies are facing severe crisis of liquidity and credit. India is not insulated,
either. However, India’s cautious approach towards reforms has saved it from possibly disastrous
implications. The truth is, Indian economy is also facing a kind of slowdown. The prime reason
being, world trade does not functions in isolation. All the economies are interlinked to each other
and any major fluctuation in trade balance and economic conditions causes numerous problems
for all other economies.

According to official data, industrial growth in august has plummeted to mere 1.3% compared to
the same month in 2007. That definitely is cause of concern for policy makers and industries. This
data also raised fear of low GDP growth of India. It is being suspected that, our country will face
huge problems in achieving even 7.5% growth rate in this fiscal.

1.3 percent industrial growth is the lowest IIP (index of industrial production) data ever registered
since last ten years. April-august industrial growth rate is 4.9% which is also the lowest for the
first five months of a financial year in 14-year period except 1998 and 2001. To make matters
worst, a member of the PM’s economic advisory council and director of the National Institute of
Public Finance and Policy have confessed that India is going through industrial recession.

Several crucial sectors of Indian economy are likely to face serious problems in coming months.
Foremost among them is real estate sector. The demand for houses have reduced significantly
and property prices across India has registered 15-20% fall. Things are likely to get worst as
another 20 percent drop in prices is quite possible in coming six months. The woes of real estate
have spread to construction industry as well. Because of less demand for houses, construction
companies are going to suffer big time. Financial services segment is also likely to be a major
victim of economic slowdown because of less demand for credit and reduced liquidity in market.

These three segments account for almost one third of services GDP and because of their current
and impending plight, attaining 7.5% GDP growth in this current year is quite improbable.
Industrial slowdown will also affect transport services. Transport companies are likely to witness
drastic fall in their business and profits. Global recession will also lead to less tourists coming to
India. That will negatively affect tours and travels industry.

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