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Recession: How Deep And How Long?

BBRED's continuation of a study of Lowcountry recession.
By Phyllis Isley 

Signs of a potential slide into a U.S. recession continue to appear. In the fourth quarter of 2007, productivity slowed and labor costs rose, a double squeeze on business profits. January retail sales were the weakest on record in 40 years, and the economy lost nearly 17,000 jobs. Whether coastal Georgia and the Lowcountry as a region can dodge a national recession depends on how deep and how long such a recession might be. So, what elements may continue to plague the U.S. economy and what factors might amplify or dampen a recession?

Clearly, the housing and financial sectors will remain a huge drag on the U.S. economy through most of 2008. Adjustments needed to clear the excess inventory of homes, including the growing inventory of foreclosures, are subject to the laws of friction. It takes time and money to reallocate resources in what could involve more than one million homes.

With respect to the financial sector, there are absolute and major consequences for all financial markets when billions of dollars of wealth are destroyed. Lowering interest rates to encourage lending will stimulate the economy but that does not eliminate the huge amounts of investment capital wiped out by the sub-prime market crash. When credit-worthy borrowers cannot get investment funds because there are no funds to lend, the entire system of international commerce slows. Add the French financial market loss of $7 billion dollars to U.S. financial woes and a picture emerges of world credit markets continuing to drag on global economies throughout 2008.

What factors may shorten or moderate a recession? There are two. First, the United States has accumulated a massive "war on terrorism" debt, flooding the world markets with dollars. Second, the U.S. dependence on imported oil, the tremendous run-up in world oil prices, and the resulting increasing trade deficit has flushed further dollars into world currency markets. The result may be a situation in which two negatives equal a positive: the double-negative lower value of the dollar is now contributing to higher demand for U.S. goods and services.

In fact, throughout southeast Georgia, multiple cases of the weak dollar making it prudent for foreign companies to build production facilities can be found, furthering the regional advantage of the ports of Savannah and Brunswick. Foreign companies operating here find it less expensive to increase the U.S. content of goods and services. In the global context, a larger, lower U.S. cost component lowers the price of the company's goods and services for the domestic U. S. market, while the weak dollar lowers the price for exporting to international customers.

Proximity to the ports further contributes to a more competitive cost of transportation. Throughout 2008, an increase in foreign investment in U.S. production facilities and an increase in U. S. exports are expected to yield stabilizing economic stimulus, potentially offsetting recessionary pressures.

The final factor moderating a U.S. recession is the "decoupling" effect. The coupling effect is refers to the link between the U.S. and the world economies. At $13.2 trillion, the U.S. economy is the world's largest, despite our tiny 303 million population, compared to a world population of 6.6 billion. Yet, the 10 percent annual breakneck growth of China (now a $2.7 trillion economy) and India (now almost a $1 trillion economy), combined with other large, growing economies in Asia, Japan, Korea and Taiwan totaling $5.6 trillion, has created enough potential demand that those economies may well avoid following the United States into recession, thus, "decoupling."

The jury is still out on the likelihood of decoupling, however. On Feb. 12, the Japanese Economic Ministry forecasted a slowing in the Japanese economy as a result of U.S. economic weakness. In the January meeting of the World Economic Forum, Professor Nouriel Roubini predicted the United States would fall into a recession and, in his view the "world economy cannot decouple from a U.S. hard landing." Morgan Stanley's Asian division chair, Stephen Roach, agreed with Roubini's assessment. They argue that if China, highly dependent on exports to the United States, fades along with Japan, decoupling will be an unlikely event. However, China, with its upcoming modern debut on the world stage as host of the Olympics, is likely to sustain spending well through 2008. If the impulse to impress the world keeps demand up, it could be enough to offset lower U.S. demand.

In summary, the United States faces relentless recessionary pressure in 2008 as the prolonged adjustment to losses in the housing and financial sector drain the economy's vitality and place downward pressure on U.S. growth. Counterbalancing U.S. deficits, its dependency on petroleum and the devalued dollar is likely to support increasing foreign investment in the United States and increasing U.S. exports. Coastal Georgia and the Lowcountry will share these two benefits. China's course in sustaining its economy through the Olympics, along with the benefits of decoupling, may prevent the world from following the United States into a recession. If world demand is sustained, the weak dollar and increased demand for U.S. exports may well make the U.S. recession slight and short.

Dr. Phyllis W. Isley is the director of the Bureau of Business Research and Economic Development at Georgia Southern University. Under her direction, the bureau has been involved in research on issues of critical interest to the region, such as the potential impact of base realignment and closure and the importance of the ports of Savannah and Brunswick. Isley can be reached by e-mail at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .