OF (IMPACT OF RECESSION IN U.S.

ECONOMY)

Submitted in the partial fulfillment of the Degree of masters of business administration SUBMITTED BY:Name Deepika Mehta Regd. No 10902548 Rollno RS1901A02 GUIDED BY: miss. Kanika jhamb

SUBMITTED TO Department of management Lovely Professional University Phagwara

ACKNOWLEDGEMENT

I take this opportunity to present my votes of thanks to all those guidepost who really acted as lightening pillars to enlighten our way throughout this project that has led to successful and satisfactory completion of this study. We are really grateful to our COD Mr.Devdhar shetty for providing us with an opportunity to undertake this project in this university and providing us with all the facilities. We are highly thankful to Miss Kanika Jhamb for her active support, valuable time and advice, whole-hearted guidance, sincere cooperation and pains-taking involvement during the study and in completing the assignment of preparing the said project within the time stipulated. Lastly, We are thankful to all those, particularly the various friends , who have been instrumental in creating proper, healthy and conductive environment and including new and fresh innovative ideas for us during the project, their help, it would have been extremely difficult for us to prepare the project in a time bound framework.
Name DEEPIKA MEHTA Regd.No 10902548 Roll no. RS1901A02

IMPACT OF RECESSION IN U.S. ECONOMY

What is recession?
An economy passes through different phases of economic cycle, one of them is recession. It is observed when prices tend to increase, standard of living falls, unemployment rises and business stop expanding. “Recession is: o o o o GDP is slowing Expansion of business slowly Falling employment rate Fall in housing prices.”

Another indicator of recession is GDP (gross domestic product) of a nation. Some economist believed that negative GDP growth for two consecutive quarters led to recession. However, it is said that recession starts – several quarters of slowing down in relation to positive. Recession in a layman language means "A country (in this case) wherein buyers resist to buy, and where the sellers are keen to sell." So the whole balanced equation gets affected and supply becomes more then the demand.

Due to various reasons it happened: Banks such as citi bank have failed due to their weird system i.e. if a person buys an asset and have less money in their bank account, the bank will provide the other money, say a million dollars, (they are rich, remember plus the love their local people out there), then another bank approaches the person and gives him a loan to repay back the other bank, but what happens here is, the bank which comes in later doesn't get its money and it suffers huge bad debts. The finance minister of India is wrong in the sense that recession won’t affect in India but after the decline in American stock market, the Indian economy is to moving towards slowdown, there is no liquidity and stock market are crashing to. The person investing in future suffered huge losses. Not only India is suffering from this us recession, but its root spread to whole world. Dropping U.S. stock prices drag down markets elsewhere, which has already happening and its not stopping?

Definition of recession:
Economic recession is defined as significant decline in the economic activity across a globe, lasting longer than few months. It can be seen in variables like GDP growth, industrial production, retail, real personal income & employment. In economics a recession is a slowdown in economic activity & contraction of business cycle over a long period of time. Recession leads people loose their jobs, banks became bankrupt.

Identification of recession:Economic statician Julius shishkin in 1975, New York Times article suggested several rules of thumbs for identifying a recession. In time, the other rules of thumb were forgotten & recession is defined as fall in G.D.P.(negative real economic growth). In the United States the business cycle dating committee of the national bureau of economic research (NBER) is generally seen as the authority for dating US recessions.

Attributes:

Economist talk about various shapes V-shaped, U-shaped, L-shaped, W-shaped In the .U.S, V-shaped or short –and-sharp contractions followed by rapid & sustained recovery occurred in 1954 & 1990-1991. U-shaped (prolonged slump) in 1974-75 W-shaped or double-dip recession in 1949 & 1980-82 Japans’ 1993-94 recession was u-shaped.

Predictors of recession:
1) Drop In the stock market, the beginning of recession. 2) The model “inverted yield curve” by economist Jonathan h.wright, uses yields on 10 year & 3 months treasury security as well as the fed’s overnight fund rate. 3) Unemployment rate changes within in 3 months. 4) Home prices were lowered down.

Government responses:
• • • • •

Economist believe that recession is due to inadequate aggregate demand in the economy. Emphasize on more use of macro economic policies, at the time of recession. Strategies for an economy to come out of recession depending on which economic school the policymaker follow. Monetarist emphasize on the more use of monetary policy. Keynesian economist favored increased government spending lead to economic growth.

A slowdown or recession in the u.s. in 2008
If we talk about us. Economy or world economy ,can expect medium economic growth of 2-3% & moderate inflation 2% for coming years while from 30 years unemployment remains low

Stock market & recessions:

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• •

Stock market declines to lead to recession. In long run Siegel since 1948, stock market decline were lead by a stock market, by a lead time of 0 to 13 months, while 10 stock market declines of greater than 10% of the djia were not allowed by a recession. Real-estate market was too affected by recession. Business cycle is unpredictable; seigel says that not possible to take advantage of economic cycles for timing investment .even the national bureau of economic research (NBER) takes time to determine if a peak or trough has been occurred in the u.s. Economic slowdown leads high yield stock such as fast moving consumer goods, pharmaceuticals & tobacco tends to hold up better. ‘Half –way rule’ is a term in which investors start discounting an economic recovery about halfway through a recession.

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Causes of recession
Every economist in this world believes that recession is something that can’t be avoided

.in an economy there are period of high growth ,slow growth or no growth. For an economy to b e called as healthy it should have contraction as well as expansion. Economy can be said in recession only when GDP falls for two consecutive years. The causes of economic recession is still a mystery but lot of theories are attached as what all cause economic recession. These are caused by such factors which have a wide impact on economy. examples-increase interest rates. but inflation actually continued to rise. And it was this combined with how easy it was to borrow money that caused our economy to spiral out of control to where we now sit in 2008. Most economists believe that we are currently heading towards a recession, not to mention that quite a few tend to think we are already there. Recession is generally caused by the steps to control the money supply in the economy. In us people believe that it is due to federal reseve. Its basic responsibility is balance between money supply, intrest rates, inflation.if it is not balanced than economy is out of control.

Is the American economy in a recession-?

The production of crude oil has plateaued. • • Reduction of wages. Sub prime mortgage crisis

All world stock markets are affected badly due to us economic recession .financial analyst says that usa is the main reason behind all financial problems in whole globe. many of them says it is the beginning of crisis. Some specialist there is nothing like recession in the us economy. they take it in a positive manner that shares are now available to you at low prices . USA has been affected from eleven crises termed as recessions. Recession were caused by tremendous factors, and their consequences were more serious than current ones.

In 1945 recession was effect by the end of Second World War, through this American industry gained a lot? As the war ended, solders became jobless. Hike in oil prices create a crisis in the USA in 1973-74,1979-1980 and 1981-1982. 1990-1991 & 2000-2001- recession associated with investment crisis. Important characteristics are rise in employment factor and decline in production. Mild crisis –it’s a previous crisis between the two centuries, featured as 6% reduction of the industrial output. Hike in Unemployment rate up to 5% at he end of 2007, causes a drop in stock market before new year holidays.

Sub-prime crisis:
The sub-prime crisis deals with the mortgaging problem in the us economy. Many reputed banks like Citibank freely lended cash for people in u.s.a to buy houses via. The mortgage route from past few years. People in u.s.a buy houses against mortgages with banks & couldn’t able to repay the mortgage charges. In this, bank took back all the houses but get a huge loss due to devaluation of property.(lost billion of dollars) Sub-prime lending (near prime ,non-prime or second chance lending) in finance means making loans that are In the riskiest category of consumer loans and are typically sold in the market from prime loans. Various ways to determine risk:  size of the loan  traditional or non-traditional structure  Borrower credit rating  rate of borrower debt to income or assets  ratio of loans to value or collateral A standard definition of sub-prime in United States is sub-prime loans are usually classified as those where the borrower has a FICO sc ore below 640. Sub-prime includeMortgages, Auto-loans, & credit cards. The first sub-prime was initiated in 1993.Lots of companies entered the market with prime interest rate i.e. to low and real interest became negative allowing sub prime rates to flourish. Sub-prime lending: for increasing market, lenders have to bear the risk with Lending to people with poor credit facilities. For ex –they lend money to those who have bad credit. The score FICO denotes lender rate of default. The person with credit score below 620 is having higher default than those with score above 720.lenders has various ways to lower down the risk. In the case of sub-prime loans the risk is being reduced with higher interest rates. People started that something is going in financial markets, those who are up to date with equity & debt markets amylase this within few weeks. They call it as sub-prime meltdown. Basically these institutions were lending money to those people who can’t afford houses can now have there own houses.

What is the impact of sub prime on Lending Club and its members?
• First, the impact was almost null in our members. as they are engaged in increasing liquidity & settling the market rate of interest is fixed ,current borrowers and lenders will see no changes in payment

•Borrowers will see us as a great alternative to banks. there are large number of banks had to raise their credit standards because they are unable to sell their portfolios.

• We offer good returns and relatively low risk, making lending a good strategy for many people over the long term.

U.S. recession 2008 and can it affect India
Indo-US bilateral trade has been incredible, except that nuclear deal that is facing a tough time.indias finance minister says India will not be affected by us recession. but trade & commerce is affected somehow. Investors are agreed with this view point. Is there 2008 recession there? If all other countries are affected by it why not India. The crisis can be seen in us policies, no as such problem for India. The jobs are there for Indian youths, BPO are working 24 hours & there are opportunities & tremendous potential in other sectors. it may be infrastructure, real estate,health care has no effect. Indian students still prefer to study abroad. Since us is one of the powerful nation, a recession there will have its effect globally.usa can do one thing they can cut their capital investments in a country, if they want to control recession at the end. This year was not a good start for Indian economy. If stocks won’t raise then the investor can have tough time. is recession coming to India’s boundary? The rupee may have appreciated against shrinking dollar. India can affect in terms of B.P.O. The Americas food chain in India will have impact.i.e. Downsizing on employee & its promotional measures. Prolonged recession will lower down recession. India can get affected by the BPO units becoming less aggressive. The American food chains that have opened up will be impacted. There could be down sizing on staff and advertising. The equity market will see a slide in a few months, if things go out of control. Consultants across the world are hoping that they will be able to keep their clients upbeat in the face of recession. The prolonged recession is likely to result in further weakening of the dollar.

According to the World Bank officials, the credit crunch will reflect on decline in business development, unemployment, weaker consumer outlays and longer period of depressed consumer prices. In India strong technological advancement have engineered a buoyant growth rate.

Recession’s impact on lifestyles
The benefit of recession to our surrounding is people know how to manage their budget in terms of their workplace, family or as individual. In whole universe people are spending money too in an optimum manner. one of the area that hit recession in u.s. is marriage, survey conducted by ING direct.29% of American believed that there marriages were being ruined by the current recession, compared with just 24% of french,23% of Canadians and 12% of Germans. Do you think is marriage “cost” more in America? The survey finds that Americans are willing to sacrifice some fewer things ,when household belts need to be tightened. As Americans don’t give up their cars & pets easily and they often to support their lifestyle postpone retirement. As food is considered as necessity and number one priority globally. 30% of Americans says they will sacrifice their automobiles as one of the three items that it would give at last while with 14% of Italians. 22% American says they would give up their pets, compared with 15% French. Eating would be one sacrifice that American can do to save money by cooking food at home and take to their workplaces (51% as compared to 20% of Italians). Whether it’s your sweet home, your workplace or any of the surrounding each & everything is affected by recession. Some of the steps should become an habit like

• Cutting costs. • saving more money • Learning to build a financial buffer for their future.

Impact of recession in U.S.A. : financial sector
The impact of the financial crisis is “stronger and longer than expected” and there is a strong need to know its effect on domestic economy, according to Dr.D .subba Rao, governor of reserve bank of India. As according to “financial times” it pointed the us recession have major impact on world economy. There a article published on august 10 “the world must prepare for Americas recession”-it says us recession will be controlled by three forces : Housing slowdown, Higher oil prices, Higher interest rates The us consumer is suffering from higher debt & reduction in real wages. The effects of housing slump would be more disastrous than stock bubble in 2000.As houses are much important component than a stock & 30% increase in us employment is due to housing. It can be controlled by cutting interest rates. Recession in us is spread widely. When the group of seven industrialized countries slashed industrial policies and eased fiscal policy. The global power us is slowing, its effect can be seen globally. The financial crisis of 2007-2009, it can be called as worst financial crisis it is related to the great depression of 1930s.it lead to the failure of businesses, banks and a significant decline in economic activity. The collapse of global housing problem, bank solvency, declines in credit availability, damaged investor confidence caused a effect in stock market.

Impact on financial institutions:

Financial institution was badly affected by economic recession of usa. The international monetary fund estimated large us and European banks lost more than $1trillion on bad loans. The first bank affected was northern rock (a middle sized British bank).the bank led its security from the bank of England. In feb2008, British government having failed to find a private sector buyers and was given in public hands. Initially companies affected during recession is home construction and mortgage lending

The impact of recession: banking sector
The Recession in the banking industry has adversely affected the cash flow for the industries. When industries cannot raise funds for their expansion or operation then the industrial output would come down. This in turn would affect the GDP of the nation. It may affect the employment situation in the country also.

Famous banks who got bankrupt:
     Lehman Bros Merill Lynch Fannie Mae and Freddie Mac AIG Bear Sterns

Impact of recession in USA: retail sector
In these days retail sector ranging from bad to awful.With few exceptions, the news in the retail sector here these .many retail chain are shutting their doors, other are filling for protection from creditor and most are slashing prices to try to attract increasingly restrained consumers.” Survival of the fittest” says Marshall Clark. The weakest retailer will be out this year. Commercial construction laws, especially in the retail sector, its demand has gone. According to prominent Spokane developer Dave black says, most of the retail done with restaurant, as people has to eat. In retail sector, employment has fallen drastically. a survey shows 25,400 workers are employed in retail trade.furnitures store were closed during this year. It doesn’t mean all retailers are suffering. White elephant store say for us business is good. It focuses on lowering their prices than competitors. Recession was brutal on many sectors of the economy. The retail chain was affected for just a simple reason i.e. retail industry depends on the ability of people to be able to buy stuff. Business profits depend upon customers purchased retail industry is directly affected by it. You can take an example of Paper Company it can rely on other companies to purchase paper products. it means retailer is directly affected by consumer. When person all of sudden don’t have to buy goods, go out to eat and for shopping has much. It has been observed that sales were lower than previous year. when the consumer don’t have money to spend then how the retail is going to earn. The retail industry was badly hit by recessions they still needs consumer money. Hopefully things will start to pick up as recession seems to end soon and again the money starts flowing from consumer pockets.

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The impact of recession: financial services and insurance sector In current scenario, investors have lost their trust from financial services sector. Trust is an important factor, when it comes to earn money.Thats a fact that global turmoil has affected investors badly. Do you know how it affects job market? Its answer is crystal clear – “No revenue, no spending” “no spending, no cost cutting” and no jobs and salary cuts. The rule is being quite unfair according to human aspects. Several reasons can beMarket responds as situation abroad. Inurance sectors are badly affected in uk and usa Fear of loosing money. The financial service providers loose the confidence of the investors. Organizations expect the position from bad to worse. Can’t decide how to fight with recession effectively. Choose the easier path. Looking at the cause rather than the solution. pressure to perform beyond one’s capacity • companies use to follow international trade
• • • • • • • • •

The recession affected the Indian capital market adversely to the global changes .insurance a like sun life, Tata, AIG started cost cutting measures by reducing hiring of employees. You can take example of icici prudential; it has taken drastic steps in terms of layoff & reductions. OIL PRICES CAUSED THE CURRENT RECESSION:
Hike in oil prices cause current recession. Defaulting mortgages are a symptom of the high oil prices. Higher oil prices started four of the last five world recessions.

Shows that four out of the past five recessions have followed spikes in oil prices

Impact of recession: real estate

Commercial real estate faces its worst year in 1991-1992 in industry depression. From a report it is known that the project looses of 15 t o 20 percent in real estate values from the mid-2007 peak. Cash-rich offshore buyers are the main beneficiaries of the real estate downturn in the us, it took advantage of weak dollar and they are going to buy trophy properties in 24 major countries. A report says that commercial market will recover soon as compared to housing market. The losses in housing market are benefiting the apartment market.

Before a rebound, the following needs to happen: • • • • • • • The housing condition is bad and there are no chances of recovery. As sub-prime crisis is at the tip of iceberg. The demand for space falling won’t affect real estate markets by 2009. Private real estate markets need to rectify-lenders force owners to become sellers. buy discounted loans Have a focus on 24 hour coastal cities. Market recovery can be there if people invest in publicly-held real estate investments. Focus on neighborhood retail centre.

Prepare to hold or buy multi-family, hold; office, hold hotels If we talk about investesment, Seattle and San Francisco markets have been in the top two beating New York city. New work has lost it ranked and came fourth after Washington.

Dollar devaluation:
According to an article “us dollar heading for collapse - Robert Reich”. This article says that lot of people are blaming other countries for the loss of American jobs. People are talking about the reduction in jobs in America, India, china that to politically. It shows that free trade has been revived as a great economic evil in the us. Globally business are been done on euros not us dollars. Devaluation of us dollar means a decline in the purchasing power of dollar that leads to decline in living standards. any person who has investment in dollar will be suffer from a decline. Dollar will impoverish50% white middle class 40% other barely will survive 5-10% Americans will prosper from this decline Us dollar is known to be world trading currency it means all prices of goods & services are deal in us dollars. The countries dealing with us will raise their prices due to devaluation. commodities such as oil,coffee,chromium,copper,iron etc. are setting a record price in relation to devaluation i.e. decline in us dollar.

As the us dollar is regarded as world reserve currency. as no currency is backed by gold and silver. Central bank must hold us dollars and treasury instruments. The us dollar is serving the same purpouse as gold & silver in backing the currency. Dollar is called as fait currency. It means has no precious metals backing it and is accepted by faith. The only currency that maintained an intrinsic value is gold and silver.

What causes dollar devaluation?
When the us dollar begins to fall in value, as a federal reserve bank printing too many dollars too cover budget defecits,causing inflation ,a decline in purchasing power. Budget deficits are spending more than tax revenue. Trade defecits.import is more than exports are the two reasons behind the dollar decline.

How world economy is affected by us?
The United States of America has the world’s largest economy. According to 2007, GDP is $13.84 trillion. Its three time the size of the next largest economy, Japan with a GDP of $4.4trillion.the recent meltdown in us housing and credit markets have resulted in slowdown in us economy.

The trend of the real GDP growth rate of the US economy is shown in the following graph.

THE US economy and the world economy are linked with each other.Econmic developments in the country have a major influence on production, employment, and prices. The fear of recession spread over the United States. As when clinch goes, whenever the us sneezes, the world catches a cold. Weakening of the American economy is bad news, not only India but for the whole world.

Liquidity crunch and overcome:
What does liquidity crunch means? it can also be said as credit squeeze or credit crisis, is a reduction in availability of loans or credit or it can be said tightening the conditions to take loan or credit. A credit crunch generally is the reduction in obtaining loans due to rise in official rates. A number of reasons might be there that bank generally lowering down or stopping their lending activities. It is due to a decline in collateral used by the banks to secure the loans, an exogenous change in monetary conditions. Direct credit controls are imposed by central government in banking system.

Why is it caused?
It is caused by a sustained period of carelessness and inappropriate which results in losses for lending institutions and investors in debt when the loan turns sour and bad debts become known. It is generally caused by reduction in the market prices of previously over inflated assets. In the case of a credit crunch, it may be preferable to “market to market” and if necessary go for liquidation or selling. Recession: a recession is a decline in a country’s gross domestic product ,for two consecutive years. Difference between recession and depression While looking at the changes in GDP. In depression, any economic downturn in which GDP declines by more than 10 percent. In recession it is less severe.

Factors causing recession are:
• • Exports become more expensive due to high strength of currency and demand reduced. It affected manufacturing badly. High interest rates-government is trying every possible effort to reduce the inflation and maintained a tight monetary policy which reduced inflation; it is one of the causes of recession.

Cause of bubble:
At the period of low interest rates, institutions (lending) kept on lending multiple mortgages on the property as second and third mortgages to persuade investors buying more properties at sub prime rate. It kept the demand for housing in upward direction. • • • • • • Low interest rate kept on fueling this boom and creation of the bubble. Raise in demand for real estate properties. Projected growth in financial sector. Increased borrowing from institution. Multiple borrowings on the same property. Growth in demand for housing sector leading to housing bubble.

Steps world bank taken to overcome recession:
World leaders are meeting at the G20 conference in London to address the global economic recession. The government must ease credit at a rapid rate, recapitalize the banks and take measures like reducing job losses rate.

Major sector affected by this recession: Real estate Banking Credit card Insurance companies Aviation sector Employ sector The following are the practical steps we need to take to get wealth: 1. review your strength and weaknesses 2. Self employment 3. Choose a market niche 4. Planning 5. take off as soon as possible 6. be focused and remain focused 7. make provision for charity 8. save consistently 9. invest your savings wisely

BIBLOGRAPHY: www.\recession\America’s recession officially over.mhtion\10 Myths About The Subprime Crisis.mht www.\recession\Article More investment in infrastructure sector to fight recession_ - PTI - The Press Trust of India Ltd_ HighBeam Research - FREE trial.mht www.\recession\automobile.mht www.\recession\Bank of America Joins China as Buyer of Treasuries (Update2) Bloomberg_com.mht www.\recession\bar.htm www.\recession\bar.htm2.htm www\recession\BBC NEWS Business Bush claims no recession for US.mht

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