THE GREAT RECESSION

2008 - 2009
WHAT IS RECESSION
 A Recession is a contraction phase of the business cycle.
 According to National Bureau of Economic Research (NBER)
– “significant decline in economic activity lasting more than a few
months, which is normally visible in real GDP, real income,
employment, industrial production, and wholesale-retail sales”.
 Decline in a country's gross domestic product (GDP) growth for two or
more consecutive quarters of a year .
 In economics, a recession is a general slowdown in economic
activity over a sustained period of time, or a business cycle
contraction.
 Production as measured by Gross Domestic Product (GDP),
employment, investment spending, capacity utilization, household
incomes and business profits all fall during recessions.
WHAT CAUSES RECESSION

 Primarily caused by the actions taken to control the money

supply in the economy.
 When the consumer faces foreclosure and the banker comes
knocking for his pound of flesh.
 Companies and whole countries go bankrupt for want of liquid
funds and cash flow for even daily requirements.
 Currency crisis
 Energy crisis
 Under consumption
 Overproduction
 Financial crisis
 Price of Fuels
EFFECTS OF RECESSION

 Higher levels of
unemployment
 Decline in housing prices
 Decline in the stock
market
 Business expansion plans
being put on hold
 Bankruptcies
 Credit crunches
 Foreclosures
What contributed
recession
 United States housing market correction (a consequence of United States
housing bubbles) and sub prime mortgage crisis.
 US economy accounts for 30 per cent of the world's GDP.
 The value of houses dropping and the pension savings decimated on the
stock market.
 Protracted credit crisis and "rampant inflation in commodities such as oil,
food and steel."
 The 6.4% decline in spending during Q3 on non-durable goods, like
clothing and food, was the largest since 1950.
 Increasing inflation led to higher interest rate.
– As a result borrowing loans and consumer spending stopped.
– People having low credit profile became defaulters.
– Easy liquidity started vanishing.
 US shares fell into the red from their early gains after the NBER
announcement.
SUBPRIME CRISIS

 Involves financial institutions providing credit to

borrowers who do not meet prime underwriting
guidelines.
 Sub prime borrowers have a heightened perceived
risk of default.
– such as those who have a history of loan
delinquency or default, those with a recorded
bankruptcy, or those with limited debt experience.
UNITED STATES ECONOMIC
RECESSION HISTORY

 The United States has

encountered 32 cycles of
expansions and contractions,
with an average of 17 months of
contraction and 38 months of
expansion.
 The US economy has suffered 10
recessions since the end of
World War II, the last of which
was in March 1991.
Crisis in the U.S.
 The defaults on sub-prime mortgages (home loan defaults)
– Sub-prime is a high risk debt offered to people with poor
credit worthiness or unstable incomes.
 Major Banks have landed in trouble after people could not pay
back loans.
 The housing market soared on the back of easy availability of
loans.
 The realty sector boomed but could not sustain the momentum for
long, and it collapsed under of crippling loan defaults.
 Foreclosures spread like wildfire putting the US economy on shaky
ground.
 This coupled with rising oil prices slowed down the growth of the
economy.
FACTORS CAUSING ECONOMY TO
FALL INTO RECESSION

 Rising inflationary environment.

 People tend to cut out leisure spending, reduce overall
spending and begin to save more.
 Individuals and businesses curtail expenditures in an effort to
trim costs.
– causing GDP to decline.
 Layoffs and Unemployment.
 Huge losses in financial sector.
 Shrinking domestic demand and falling asset prices.
 Relaxed policies in lending practices making it extremely easy
to borrow money during inflationary environment resulted in
unsustainable economic activity and the economy coming to a
near halt.
 -800
-600
-400
-200
200
400
600

0
Jun-05

Thousands
Sep-05

Dec-05

Mar-06

Jun-06

Sep-06

Dec-06

Mar-07
June 2005 – December 2008

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08
NET CHANGE IN U.S. JOBS
 100
102
104
106
108
110
112
114
n -0
Ja 7

b -0
e
F 7

rM -0
a 7

r -0
p
A 7

y -0
a
M 7

n -0
Ju 7

l -0
Ju 7

g -0
u
A 7

p -0
e
S 7

t -0
c
O 7

v -0
o
N 7

c -0
e
D 7

n -0
Ja 8

b -0
e
F 8
January 2007 - November 2008

rM -0
a 8

r -0
p
A 8
INDUSTRIAL PRODUCTION

y -0
a
M 8

n -0
Ju 8

l -0
Ju 8

g -0
u
A 8

p -0
e
S 8

t -0
c
O 8

v -0
o
N 8
LIST OF BANKRUPT
AIRLINES

 Dec 26, 2007 - Maxjet Airways files

 March 31, 2008 - Aloha Airlines files and
discontinues passenger
transporting operations
 April 03, 2008 - ATA Airlines files and discontinues
operations
 April 05, 2008 - Skybus Airlines files and
discontinues operations
 April 10, 2008 - Frontier Airlines files
 April 26, 2008 - Eos Airlines files and discontinues
operations
CONCLUSION
 According to Bruce Kasman (chief economist at JP Morgan, New
York) - "A return to growth in the second half of the year is not
equal to a return to health.”
 Since US is one of the major super powers, a recession–mild or
deeper will have eventual global consequences.
 USA may cut their capital investments into the country if they
have to control recession at their end.
 Till the stocks didn’t climb upwards chances were that
investors will loose more money.
 Any significant slowdown in U.S. economy is bound to have
reverberations elsewhere.
 Banks who lend money in a big way have got huge holes in
their lockers.
 Bankers like Lehman Brothers have been sucked in to a black hole
already.
 Without adequate funds in circulation, there is no road to
recovery.
THANK YOU

Submitted By :

Utkarsh Sethi
&
Neeru Rawat