Dow Futures Down, World Markets Dip Sharply; Is an American Recession Coming?

Is a recession in America's future? If so, how will it affect the U.S.'s position in the world economy? Markets around the world were down around 5 to 7 percent today, as investors retreated for a number of reasons.

More worrisome, as the Business Spectator of Australia reported, market futures in the U.S. continued to fall several hundred points while the NYSE took the Monday holiday off. The situation, analysts say, has been building for some time, but investors and businesses have been hoping it wouldn't go too far. An article from Chinese news service Xinhua reported the U.S. Federal Reserve Chairman as seeing several increased risks in the coming year that would dampen consumer spending, an important factor in avoiding recession, which is defined several ways but generally involves a short period of negative Gross Domestic Product growth, something that has occurred less frequently in recent decades, according to the Federal Reserve Bank.

The current housing market, the increased cost of energy, and lower share values mean that consumers will be more careful, the chairman said. Meanwhile, other factors are affecting stock markets, including the credit crunch, where the cost of insuring bond issues is rising which may affect the creditworthiness and desirability of corporate bonds.

An additional factor may be the current political race in the U.S., as the state of the American economy, as perceived by the public, is said to be a key factor in voters' forming of their opinions. In 2004, an election year, Businessweek published a commentary piece accusing the Bush administration of influencing the definition of a recession period at the start of George W. Bush's presidency four years earlier, moving it about a month back so that it was during the Clinton presidency, even though factors that led to the recession were unlikely to have developed in Bush's month in office, suggesting the importance of public perception of economics in the political process.

Another factor considered in risks for the coming year is consumer confidence, a result of both the financial situation of the general public, and the perception of the economy which for most is a result of media-provided information. The media information consists of relaying campaign messages from presidential candidates, economic numbers and authoritative interpretations, and now the news of a "stimulus package" which, ABC News reports, many economists see as more of a political solution than an economic one, and raises the alarm that the economy needs government intervention.

In the rest of the world, growth rates as listed by the IMF are much higher than the U.S., except in parts of Europe. Xinhua's report of the Federal Reserve Chairman's remarks note that global growth could help pull the U.S. out of any tendency towards a recession by providing a strong export market, especially with a weak dollar. Over the longer term, any U.S. recovery will be guided by how the credit and consumer confidence situations are handled.

The ABC News article noted that George W. Bush's father, at the end of his presidency, chose to let the economy recover on its own. His choice was successful, but the recovery arrived shortly into his successor, President Bill Clinton's first term. Politicians have taken note that action may be more important politically, though the end recovery may or may not be a result of the action taken. The Fed Chairman has noted, however, that a stimulus applied too far into a recovery may destabilize the economy further. International markets are clearly watching the U.S. economy, and with globalization of markets the U.S. could find itself a less significant player if it does not recover well.

At this point, the current downturn in world markets appears to show the reluctance of investors to predict the future, waiting until U.S. reaction, both political and economic, stabilizes enough to reduce risks in the current market. Economists meeting at Arizona State University noted that the world has gotten used to a period of growth, and has perhaps become more skittish, not about a significant market failure, but a lack of expected returns and opportunities. While some are concerned that a return to a "bear" market may occur, the improving economic conditions in the last two decades suggest that the global economy is still able to bring opportunity over the next decade. Whether the U.S. market is able to benefit as it has, or enters a period of retrenchment may be the biggest concern at this point.

"US stock futures sharply lower on recession fears", Kristina Cooke, Reuters, http://www.businessspectator.com.au/bs.nsf/Article/US-stock-futures-sharply-lower-on-recession-fears-B3LRL?OpenDocument

"Fed Chief: Downside Risks Become More Pronounced", http://news.xinhuanet.com/english/2008-01/18/content_7442336.htm

"U.S. Economic Forecast for 2007: Cooling Off but No Recession", http://knowledge.wpcarey.asu.edu/article.cfm?aritcleid=1344

"St. Louis Fed: Series: GDPC96, Real Gross Domestic Product, 3 Decimal", http://research.stlouisfed.org/fred2/series/GDPC96/

"Business Cycle Expansions and Contractions", http://www.nber.org/cycles.html

"IMF Datamapper", http://www.imf.org/external/datamapper/index.php

"Inventing 'The Clinton Recession'", Michael J. Mandel, http://www.businessweek.com/magazine/content/04_08/b3871044.htm

"Politics, Not Economics, Demands Stimulus", John Cochran, http://abcnews.go.com/Business/Story?id=4163141&page=2