U.S. Economy is Likely to Deteriorate Further

The U.S. economy shrank in the last quarter of 2008 by 3.8% annual rate, a level not seen since 1982. But is this a sign that the economy hit the rock bottom or an indication of a further slump?

Several economic indicators are showing that the economy is likely to contract further. For example, the Institute for Supply Management's factory index fell to 35.6 in January; readings less than 50 signal a contraction and the measure has been below that level since February 2008. Moreover, retailers and manufacturers keep on announcing plans to slash payrolls and cut production to get rid of unwanted goods. To make things even worst consumers are cutting on expenses. For example, in December personal spending fell 1 percent and the savings rate rose to 3.6 percent, the highest level since May.

Indeed, at Trading Economics we think that the worst is yet to come and the only measure that can soften the recession may be the right implementation of the fiscal stimulus package. However, the current package which is likely to include $275 billion in tax cuts and handouts, $300 billion in short-term spending and longer-term investments in infrastructure, has been very controversial. In fact, as much as tax cuts and aid to states for providing health care and unemployment benefits spending may bring the relief to the needed, the long term investments may be not very effective. It is likely that some $240 billion may get stuck somewhere in the middle of distribution process and fill the pockets of service providers.

Anna Fedec, contact@tradingeconomics.com
2/3/2009 4:14:35 PM