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For the last ten years the US economy has experienced an extraordinary long boom and the Goldilocks economy seemed to last forever. But the economic situation in the US has changed. Share prices plummeted, consumers are becoming more and more pessimistic about the economic outlook and the chances of a prolonged downturn and a full fledged recession are rising. For many investors and Americans it was a rude awakening.
Now they wonder what caused the economic slowdown and what are the main reasons for the present economic downturn in the US. If we take look at the bible, there is written down that seven years of plenty were followed by seven years of lean. That means that what goes up must come down; that is the law of the business cycle. For the last 50 years, the previous recessions have been triggered off by a familiar process. First there were several years of expansion, then the consumer price inflation built up and as a consequence the Fed raised interest rates what squeezed demand. Then the companies had to cut production and the economy slowed down and sometimes even moved into a recession.
But this time it is different. This business cycle is different from those throughout the post-war era. This time the economy did not slow down because of price inflation and the Fed did not force interest rates much higher. The economy weakened so dramatically because companies quickly cut production and employment as disappointing sales led to an involuntary inventory accumulation. The high inventory built-up resulted from a drop in consumer spending. This could be explained by the consumer fatigue.
During the long boom nearly everybody bought the new high tech equipment, computers and DVDs, and now the market is saturated. The computer industry has not convinced consumers that the new computers do much that their PCs at home cannot. As a consequence, companies had to cut production to reduce their high inventories and therefore many workers were made redundant and this led to a further decline in consumer spending. Profit warnings from companies, especially in the high tech sector, were the main reason why many stocks nosedived. The tech laden NASDAQ was hit hardest and plunged about 60 % since its peak in 2000. As so many Americans own stocks in times of the New Economy, a big part of the population lost their money on the stock exchange.
Today about 49 % of American households own stocks, either directly or indirectly for example through mutual funds, compared with only 4 % in 1952. Now that so many Americans lost money on the stock exchange the consumer spending dropped even further. Another reason for the bad performance and the high volatility of the New Economy is that news spread more quickly via internet. In Old Economy days investors read the listings in the newspapers and then they knew if their stocks had swung up or down a little bit. Today investors get information much faster and are able to free every trend and with a click they buy or sell their stocks at the last minute. Therefore the New Economy reacts on every twitch ant twitter and that makes it more volatile.
It is nice if your stocks have price gains of 30 % a day, but it can also be the other way round and you loose very much money. Many of the shareholders experienced that recently. During the long boom many high tech stocks notched up high price gains and therefore they were very attractive. But many investors did not notice that the New Economy was overvalued during the last few years. Now investors are paying the price and see their stocks nosedive. As the consumer spending still is the linchpin of the economy and the drop in consumer spending the main cause of the economic slowdown, the main objective should be to boost consumption.
It is very complicated to access the current economic situation in the US because this downturn is very different from its predecessors. The good old business cycle is still at work, but as you can see there are many different reasons that caused the economic slowdown and some new economic rules occurred with the New Economy. That means that we also have to think of new measures to revive the US economy and prevent a full fledged recession.
Free research essays on topics related to: interest rates, high tech, consumer spending, stock exchange, economic situation
Research essay sample on Consumer Spending Economic Situation
