U.S. Economy Is Likely to Deteriorate Further (Update)

The U.S. economy shrank in the last quarter of 2008 by 6.2% 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 35.8 in February; readings less than 50 signal a contraction and the measure have 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 and companies are cutting on expenses. For example, consumer spending dropped at a 4.3 percent annual rate last quarter, and business investment plunged at a 21 percent pace, the most since 1980.

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 fiscal stimulus package. However, the package which includes tax provisions, transfers for state and local governments, investments in infrastructure, renewable energy, health care and technology 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 a lot of money may get stuck somewhere in the middle of distribution process and fill the pockets of service providers.

Anna Fedec, contact@tradingeconomics.com
3/3/2009 9:35:33 AM