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January 8, 2008

Chances of a US recession may be above 50%

by Richard Kilner

Story link: Chances of a US recession may be above 50%

Following a report showing a sharp increase in unemployment this December, Harvard University economist Martin Feldstein has said the chances of a recession are now higher than 50%.

The November unemployment rate was 4.7%, but it rose to 5.0% to reach a two year peak according to government statistics. At the same time payrolls increased by 18,000, the lowest since 2003.

Previously Feldstein had put the odds on a US recession at 50%, but the latest unemployment figures tipped the scales so that he now believes a recession is more likely than not.

In addition, Feldstein believes the numbers will also damage consumer confidence, which in turn will negatively affect spending which will cause slower growth.

The American economy is slowing after a strong third quarter, as the housing market continues to struggle and the credit crunch looms large.

The US economy saw an impressive level of growth in the third quarter, reaching 4.9%, only for a slow fourth quarter of just 1%.

Alan Greenspan, formerly the chairman of the Federal Reserve, has also stated the uncomfortably high chance of a recession hitting the US in 2008.

The rate of growth for the entire year is predicted to be 2.3%.

Meanwhile, interest rates have fallen from 5.25% to 4.25% in three cuts seen since mid-September last year.

Feldstein believes that additional cuts would be beneficial for the US economy, but not the entire answer to the economic conundrum.

Low consumer confidence could be stoked up by tax cuts, which would consequently cause spending and growth to rise.

However, Lehman Brothers Holdings believe that it is too son to speak of a potential recession, citing the need for more information to ascertain whether the economy is contracting, adding that a recession in the next two years would not be a huge surprise.

 

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