Recessions in the US Economy

 Recessions in the US Economy

Recession: What Happened?

The US economy went into a recession between 2003-2004. During this time, several issues cropped up which lead economists to believe that financial markets had entered an overdrive. They further believed that they would last for years, causing investors to invest heavily in risky assets out of fear (Grunert & Guilfoyle 2008). However, it was not until July 2006 that the Federal Reserve started raising interest rates. By September of the same year, stocks had already dropped by 40 % (Krugman & Wells 2012). This saw the stock market crash on October 24th, resulting in more than 500 companies becoming bankrupt, among them being Lehman Brothers and GM. Such events led to job losses, low investments, rising prices of houses and other durable goods, as well as a drop in incomes and consumer expenditure as consumers took less care of their expenses as compared to their earlier spending patterns (Dodd 2009). Economists and other analysts of that time predicted that the economy would remain stagnant for an extended duration as the recovery process continued. At first, it took only 6 months, but even then, the country experienced a negative growth rate of 0.2 % as compared to the 3.5% growth that was witnessed before the crisis began (Krugman & Wells 2012). It is evident that such predictions were premature, given the immense damage caused by the global pandemic in March 2020, affecting m
ore than two billion people worldwide. Despite all this, experts still expect the economy to turn around within a decade from now.

The Social and Economic Impacts of the Recession

The main causes of the recession can be attributed to three major factors which include the excess in housing demand, reduced private investment, and excess supply in production. As previously stated, the number of job losses rose fast as workers lost their jobs as businesses lost their revenue (Dodd 2009). The price of oil began climbing upward and this eventually pushed down the value of commodities such as gold. Some sectors such as finance and real estate suffered the most as these markets offered lucrative returns compared to those of manufacturing and transportation (Grunert & Guilfoyle 2008). For instance, banks were forced to forego borrowing money to ensure that they do not run credit risks. Their customers also stopped buying homes, as the value of equity in the American housing sector fell dramatically following this incident. People could no longer afford new cars and instead opted to use public transportation which resulted in a lack of transport for citizens.  The government also had to issue bonds and put the national debt at $13 trillion, while foreign investors were discouraged by the decision to cut taxes on domestic firms. These economic reforms were aimed at improving income distribution but failed badly to address the root cause of the problem. Thus, despite the problems that arose as a result of the recession, many nations in this world are yet to recover and adapt to changing times.

Conclusion

Looking at the statistics of the last five decades, it is apparent that recessions have become part of the cycle of history, as they continue to affect nations all over the world. Given that the 2007-2009 recession was different from everything else, this makes it essential to investigate whether it can happen at any point in the current century. In our case, we saw evidence that the occurrence of previous crises in the past few decades can occur within this short one. However, it is difficult to determine the exact reason why the US economy went through a similar recession, just like other countries, for example, Japan. There could be many contributing factors, but the dominant ones revolve around excess housing demand, a decrease in investments, and poor management of risk at the hands of organizations. Therefore, it is crucial for policymakers and other stakeholders to understand the core reasons behind every slump they experience to come up with effective ways of mitigating its adverse consequences. Ultimately, these events can offer lessons to other economies which currently face the challenge of managing inflationary pressures.