U.S. Economy

The United States economy is currently not looking very good. Over the past couple of months the economy has taken a turn for the worst and we could be headed into a recession in the coming months or years. The biggest problems are in the real estate and mortgage markets. In 1999, housing prices rose at huge rates and lenders began offering riskier mortgages, which caused homeowners to keep piling up huge debts. People were taking out loans and balloon mortgage payments that they really could not afford. The problem began in late 2007, when housing prices began to fall and the system fell apart causing huge numbers of defaults on home loans and foreclosures. Currently, 5.6% of mortgages are delinquent, the highest rate in 21 years, and 2.5% of mortgages are in foreclosure, the highest rate ever (Fox 2). This has caused banks to lose huge amounts of money and as a result credit is becoming more difficult to get for consumers and businesses. With credit harder to get, consumers have cut back on their spending, which is very bad for the economy since around 72% of economic activity comes from consumers (Gross 2). Retail sales dropped .4% in December, which is disturbing because usually December is the biggest month for retailers. Other factors that show the economy is slipping are that inflation was at 4.1% in December and has steadily been rising (Fox 3). In 2007, food prices rose almost 5% and gas prices rose almost 30% from the year before. Unemployment rates also went up above 5% this month, which is the highest they have been in over 2 years (Fox 3-4). The GDP in the 4th quarter of 2007 also fell significantly from the quarter before. All of these signs and more indicate that the economy in the U.S. right now is not good and that a recession could be on the way.

It is not looking good for the economy right now in the U.S. The housing crisis that I mentioned earlier and resulting backlash through the entire economy has been building for awhile now but it has just came into the forefront in the past couple of weeks. We really haven’t faced a downturn like this since the Depression. Last Tuesday, January 22, the Dow Jones industrial average fell almost 600 points and was already down 9% in 2008 (Gross 1). Immediately the Federal Reserve took action and cut the interest rates three-quarters of a percentage point, the biggest cut in 24 years. Today, not even a week later, the Fed again cut interest rates, this time by a half-point (Aversa 1). This move is an effort to keep the economy out of a recession by getting money back into the banks and encouraging them to keep lending credit to turn the economy upward. Whether or not it will work remains to be seen in the coming months. The government also announced another move to a couple weeks ago to help get the economy going again and avoid or slow down a recession. President Bush and the House are currently developing a $145 billion stimulus plan that would give tax relief to citizens by sending them individual checks for $300 and up. The plan would put over $100 billion into the hands of consumers and the government hopes that money would be spent and put back into the economy (Wolf 1). While all these things are good news for the struggling economy, most economic experts believe that a recession of some kind may be impossible to avoid and the question is how bad will it be?

My reaction to all of this is somewhat mixed. The economy is certainly not in currently in good shape because of the housing and mortgage crisis and