Economic Slowdown
What do you see as the main reasons for the present economic slowdown in the US?
For the last ten years the US economy has experienced an extraordinary long boom and the “Goldilocks economy” seemed to last forever. But the economic situation in the US has changed. Share prices plummeted, consumers are becoming more and more pessimistic about the economic outlook and the chances of a prolonged downturn and a full – fledged recession are rising. For many investors and Americans it was a rude awakening. Now they wonder what caused the economic slowdown and what are the main reasons for the present economic downturn in the US.
If we take look at the bible, there is written down that seven years of plenty were followed by seven years of lean. That means that what goes up must come down; that is the law of the business cycle. For the last 50 years, the previous recessions have been triggered off by a familiar process. First there were several years of expansion, then the consumer price inflation built up and as a consequence the Fed raised interest rates what squeezed demand. Then the companies had to cut production and the economy slowed down and sometimes even moved into a recession.
But this time it is different. This business cycle is different from those throughout the post-war era. This time the economy did not slow down because of price inflation and the Fed did not force interest rates much higher. The economy weakened so dramatically because companies quickly cut production and employment as disappointing sales led to an involuntary inventory accumulation.
The high inventory built-up resulted from a drop in consumer spending. This could be explained by the consumer fatigue. During the long boom nearly everybody bought the new high – tech equipment, computers and DVDs, and now the market is saturated. The computer industry has not convinced consumers that the new computers do much that their PCs at home cannot. As a consequence, companies had to cut production to reduce their high inventories and therefore many workers were made redundant and this led to a further decline in consumer spending.
Profit warnings from companies, especially in the high – tech sector, were the main reason why many stocks nosedived. The tech – laden NASDAQ was hit hardest and plunged about 60% since its peak in 2000. As so many Americans own stocks in times of the...