The
worries of a US recession surged after a key barometer of
the strength of the service sector dropped to its lowest level
since 2001. With the services businesses being the last stronghold
of economic growth and accounting for about three quarters
of the economy, the slump seems inevitable. The Institute
for Supply Management's non-manufacturing index dropped to
41.9 from 54.4 in December 2007. It was the steepest fall
since the index was launched and even the lowest level since
the 9/11 terrorist attack. A value less than 50 indicates
a contraction of service activity, suggesting that the recession
could be worse than the relatively mild one experienced in
2001. Economists are now speculating how long and how deep
the slump will be, as it is going to be a broader and deeper
slowdown than assumed.
It
all started as foreclosures rose and housing prices slumped.
The crisis soon spread to the banks and brokers that invested
heavily in mortgage securities. More recently, the US consumers,
who make up two-thirds of the economy slowed their spending
sharply, thus making the economy look even bleaker. Besides,
weak credit markets, looming current deficit and, of course,
the soaring crude oil prices are adding further pressure on
the economy. To shore up the economy, the US central bank
has aggressively cut interest rates, and the Congress has
passed a proposed $150 bn stimulus package. That package includes
$600 tax rebates for most US taxpayers and some temporary
tax cuts for businesses. US being the sole locomotive for
global economic growth, the impact of US recession is often
inflated.
The
third world economies which were shaken by a series of financial
crises in 1997 began accumulating hoards of overseas assets
resulting in a `global savings glut'. Ben Bernanke, Chairman,
Federal Reserve, says: "Directly or indirectly, capital
flowing into America from global investors ended up financing
a housing-and-credit bubble that has now burst, with painful
consequences." In other words, though America's financial
system had numerous banking regulations, the world's surplus
funds resulted in a global savings glut—funds all dressed
up and nowhere to go. Paul Krugman, Professor, Woodrow Wilson
School says, "The real sin, both of the Federal Reserve
and of the Bush administration was the failure to exercise
adult supervision over markets running wild." Critics
also believe that Fed's policy of low interest rates has inflated
the housing bubble. |
