Recession Alert

There’s trouble brewing in the economy and it’s my duty to make you aware of it.

In The Economist's article American Jobs | Recession Alert posted on Friday, September 7th, the monthly jobs figures for August were analyzed with grave concern and caused me to more seriously question the possibility of a recession in America's near future.

Specifically, I looked at what The Economist claimed was a very strong correlation between the monthly employment figures, the recent turmoil in the financial markets, and the worsening housing market.

Apparently the monthly jobs figures for August were much worse than anyone expected with the U.S. economy losing 4000 jobs last month, "the first monthly loss of jobs since August 2003." In addition to this recent shortfall in jobs during August, revisions were made to the past several months' jobs figures. The updated figures indicated that the economy has been adding far less jobs per month than is needed to keep the unemployment rate from steadily rising.

While this entire article focuses on the labor market from an economist's point of view, I found it very interesting and important reading to anyone.

Since the shutting down and massive double digit losses in value of two multi billion dollar Bear Stearn's hedge funds this summer (Source: Reuters: Bear Stearns hedge funds near shutting down), I have been on the alert for further macroeconomic economy shaping events and news relating to a recession. If you don't know already, these hedge funds invested in securities backed by subprime mortgage loans. Subprime mortgages are loans made to homeowners with poor credit, unlikely to be paid back.

Wall Street created and packaged these loans into securities that investors such as pension funds, endowments, and individual investors could purchase. Additionally, ratings agencies such as Moody's rated these securities with Triple A, outstanding ratings.

However, these securities have recently posted huge losses because subprime borrowers simply cannot pay their mortgages and homes are foreclosing in the U.S. housing market at extremely high rates since the beginning of this summer.

As a result, investors who have literally poured billions of dollars into these investments have posted huge losses on their accounts.

Of greater importance however is that homeowners who were "sucked" into buying these subprime mortgages by companies such as Countrywide are unable to make the mortgage payments required by their loan contracts. Consequently, many homeowners are being evicted from their homes in the U.S. at rates never before seen.

This entire fiasco has caused the credit market to turn into chaos in the last month as it has "reduced the flow of credit to all borrowers while increasing the cost of borrowing for credit-worthy borrowers." In other words, so much credit was extended to purchasers of subprime mortgages for homes they could not afford, U.S. financial institutions no longer are willing to extend credit to even regular businesses and individuals ("credit-worthy borrowers") for their normal financing needs.

The Wall Street Journal in this article, "Recession 2008?" discusses the repercussions of the housing market troubles I have just discussed and supports the claims I have made.

However, John Makin in his article further points out "the fact remains that house prices continue to fall" and the housing market is still in trouble." While I have already discussed the August jobs figures, the housing market and credit markets in detail as possible indications of a recession down the road, further factors support this argument.

As the Wall Street Journal article by Mr. Makin notes "American recessions are unusual because negative consumption growth is, in most cases, a necessary condition for a recession." However, Mr. Makin predicts in the fourth quarter of 2007 exactly that - a sharp drop in U.S. consumption growth "driven by a credit crunch, a persistent and possibly enlarged drag from residential investment, and slower business fixed investment."

These signs are all troubling and obviously more recessions have been predicted than have actually occurred. However, we should certainly be alert and possibly anticipate an economic slowdown in the U.S near future.

Why should we care about an economic slowdown or recession? Because many of us are young women and men soon to enter the workforce who will be looking for jobs that companies may be much less willing to extend us offers for in addition to a myriad of other political, social and global economic reasons that may be discussed in the future.