The Freedom From Debt Blog

Recession is a nasty word that nobody likes to hear. For this reason, many economists shy away from declaring a recession. However, here are three reasons that we believe a recession is imminent.

 

Negative Job Growth

 

August 2007 is the first time in four years that we had negative job growth. There are many reasons for this, including massive layoffs from mortgage lenders and other housing-related shutdowns. Also, many businesses are predicting an economic downturn.

 

As is customary in times of uncertainty, businesses are holding off on hiring decisions to see how the economy will respond. Riskier ventures are shelved and manufacturers pay closer attention to rising inventories. We know that consumers also tend to buy less when they feel threatened by a struggling economy.

 

A reduction of 4,000 jobs may not seem like a lot, but it may be just the tip of the iceberg. Any reduction in jobs is a tell-tale sign that the economy is retracting. Additional job losses are possible in coming months.

 

Housing Market Worries

 

The subprime mortgage market has been hammered by foreclosures that are hitting record levels in some local markets. Such massive foreclosures have caused mortgage giants such as Countrywide to trim their workforce by thousands of workers.

 

Mortgage lenders are preparing for a brutal cash shortage. They are already finding it harder to secure cash to make new loans. Many skittish investors are pulling out of an industry that has begun to freefall.

Some industry estimates put the foreclosure risk at one out of every seven subprime borrowers. It is only going to get worse as the next round of rate hikes hit adjustable rate mortgages.

 

Homebuyers who could not afford a normal house payment were steered into ARMs with seemingly lower monthly payments. Now these homeowners are seeing their monthly payments skyrocket. Foreclosures and bankruptcies will continue to rise for the next couple of years.

 

Federal Reserve Policy

 

Many investors propped up the subprime mortgage industry by purchasing the risky securities that provided capital for new loans. Investors ignored some of the signs of trouble because they expected the Federal Reserve Board to lower interest rates to compensate.

 

The Fed however refused to bail out irresponsible investors. Instead, the Fed has announced that their focus will be on economic progress and inflation. Given the fact that so many homeowners are facing foreclosure, it seems only fair that the investors that contributed to the subprime mess should share in the misery.

 

Recession will teach us to behave more conservatively in our spending and investing, as it always does. These are lessons that we will soon forget however, once recession is over.

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