It has been 5 years now, but the world economy is still hovering over with ill effects of global economic recession. Different economist define recession in a different way but one common definition which can be derived is that recession is long lasting and prime reason for slowdown to economic activity(GDP). GDP is considered to be the broadest indicator to measure economic activity. Our following section will discuss how the economic activities in US has actually decreased since the beginning of market turmoil.
Fall in Consumer Consumption Expenditure:
Consumption Expenditure is the most integral component of GDP calculation and consumer consumption accounts for 70% of total consumption expenditure. Since the advent of recession, US Economy saw fall in consumer consumption expenditure which during third quarter of 2008 changed by -3.8% and -4.3% during last quarter of 2008. Consumption expenditure was not only felt in consumer consumption but also in durable, non-durable and service sector.
Fall in Private Investment:
Private Investment was the most severe area in which recession had its deep impact. Economists have recognized the impact of the central role of investment and technology as key contributors to economic growth. Thus, with fall in investment spending and adoption of new technology by business houses in US, GDP suffered a steep decline. The reason for low investment expenditure were:
- With reported job loss and high level of unemployment, it was obvious that income of consumers were decreasing and with forecasted low level of demand resulted in lower investment and finally a negative effect on GDP factor.
- Destruction of US banking system and limited access to low cost credit also affected the economic activity.
Fall in Import Levels:
Foreign Exchange business is the last component of GDP Factor and even this arena was not left unaffected by US Recession. With low consumer demand, the import market was deeply affected. With advent of recessionary period during 2008, the fourth quarter of the year saw decline in import by -17.5% which was accelerated to -40% during 2009. While the US government was considering policies to recover the US economy, declining imports increase the harm on the rest of the world.
Job Loss/ Unemployment:
Economic recession in US had a severe impact on the job and employment of the people. Post the recession period, the unemployment rate in US has increased from 4.9% during December 2007 to 9.7% in August, 2010. The reports of US Labor agency declares that there were 15 million people who were unemlpoyed by 2011, twice the number as at the start of the recession. These rates were highest in US economy since 1948. The figure below is a clear indication as how recession brought surge in unemployment rates in US.
Correlation between falling US GDP and Rest of the World:
With an old saying that’’ When US economy comes down with cold, rest of the world experience pneumonia’’. This fact is relevant that since US Dollar is used for most of the international transactions, anything that happens in US will affect rest of the world. With slow economic growth in US, the overall demand in the economy had a severe fall. Further as Federal Reserve increased the interest rates, the foreign exchange value of US Dollar will go up and this affects the buying power of US Economy. After the recession, US dollar was not worth of what it should be and this has made the Americans to buy less. As a result, many countries which export to US saw great fall in their demand.
Thus, not only US Economy was affected by recession but the whole rest of the world.
How Does The US Economy Affect The World Economy? (n.d.). Retrieved January 18, 2014, from worldfinancialwatch.com: http://www.worldfinancialwatch.com/us-economy/how-does-the-us-economy-affect-the-world-economy/
Irons, J. (2009, September 30). The long-term impacts of the recession. Retrieved January 18, 2014, from Epi.org: http://www.epi.org/publication/bp243/