OF

(IMPACT OF RECESSION IN U.S. ECONOMY)

Submitted in the partial fulfillment of the Degree of masters of business

administration

SUBMITTED BY:- GUIDED BY:

Name Deepika Mehta miss. Kanika jhamb
Regd. No 10902548
Rollno RS1901A02

SUBMITTED TO
Department of management Lovely Professional University Phagwara
 ACKNOWLEDGEMENT

I take this opportunity to present my votes of thanks to all those guidepost

who really acted as lightening pillars to enlighten our way throughout this
project that has led to successful and satisfactory completion of this
study.
We are really grateful to our COD Mr.Devdhar shetty for providing us
with an opportunity to undertake this project in this university and
providing us with all the facilities. We are highly thankful to Miss Kanika
Jhamb for her active support, valuable time and advice, whole-hearted
guidance, sincere cooperation and pains-taking involvement during the
study and in completing the assignment of preparing the said project
within the time stipulated.
Lastly, We are thankful to all those, particularly the various friends , who
have been instrumental in creating proper, healthy and conductive
environment and including new and fresh innovative ideas for us during
the project, their help, it would have been extremely difficult for us to
prepare the project in a time bound framework.

Name DEEPIKA MEHTA

Regd.No 10902548
Roll no. RS1901A02
 IMPACT OF RECESSION IN U.S. ECONOMY

What is recession?
An economy passes through different phases of economic cycle, one of them is recession.
It is observed when prices tend to increase, standard of living falls, unemployment rises
and business stop expanding.

“Recession is:
o GDP is slowing
o Expansion of business slowly
o Falling employment rate
o Fall in housing prices.”

Another indicator of recession is GDP (gross domestic product) of a nation. Some

economist believed that negative GDP growth for two consecutive quarters led to
recession. However, it is said that recession starts – several quarters of slowing down in
relation to positive.

Recession in a layman language means "A country (in this case) wherein buyers resist to
buy, and where the sellers are keen to sell." So the whole balanced equation gets affected
and supply becomes more then the demand.
Due to various reasons it happened:
Banks such as citi bank have failed due to their weird system i.e. if a person buys an asset
and have less money in their bank account,
the bank will provide the other money, say a million dollars, (they are rich, remember
plus the love their local people out there), then another bank approaches the person and
gives him a loan to repay back the other bank, but what happens here is, the bank which
comes in later doesn't get its money and it suffers huge bad debts.
The finance minister of India is wrong in the sense that recession won’t affect in India but
after the decline in American stock market, the Indian economy is to moving towards
slowdown, there is no liquidity and stock market are crashing to. The person investing in
future suffered huge losses.
Not only India is suffering from this us recession, but its root spread to whole world.
Dropping U.S. stock prices drag down markets elsewhere, which has already happening
and its not stopping?

Definition of recession:

Economic recession is defined as significant decline in the economic activity across a

globe, lasting longer than few months. It can be seen in variables like GDP growth,
industrial production, retail, real personal income & employment.
In economics a recession is a slowdown in economic activity & contraction of business
cycle over a long period of
time. Recession leads people
loose their jobs, banks
became bankrupt.

Identification of
recession:-
Economic statician Julius
shishkin in 1975, New York
Times article suggested
several rules of thumbs for
identifying a recession. In
time, the other rules of
thumb were forgotten &
recession is defined as fall in
G.D.P.(negative real
economic growth).
In the United States the
business cycle dating
committee of the national
bureau of economic research
(NBER) is generally seen as
the authority for dating US
recessions.
Attributes:
Economist talk about various shapes
V-shaped,
U-shaped,
L-shaped,
W-shaped
In the .U.S, V-shaped or short –and-sharp contractions followed by rapid & sustained
recovery occurred in 1954 & 1990-1991.
U-shaped (prolonged slump) in 1974-75
W-shaped or double-dip recession in 1949 & 1980-82
Japans’ 1993-94 recession was u-shaped.

Predictors of recession:
1) Drop In the stock market, the beginning of recession.
2) The model “inverted yield curve” by economist Jonathan h.wright, uses yields on
10 year & 3 months treasury security as well as the fed’s overnight fund rate.
3) Unemployment rate changes within in 3 months.
4) Home prices were lowered down.

Government responses:
• Economist believe that recession is due to inadequate aggregate demand in
the economy.
• Emphasize on more use of macro economic policies, at the time of
recession.
• Strategies for an economy to come out of recession depending on which
economic school the policymaker follow.
• Monetarist emphasize on the more use of monetary policy.
• Keynesian economist favored increased government spending lead to
economic growth.

A slowdown or recession in the u.s. in 2008

If we talk about us. Economy or world economy ,can expect medium economic growth of
2-3% & moderate inflation 2% for coming years while from 30 years unemployment
remains low

Stock market & recessions:

 • Stock market declines to lead to recession. In long run Siegel since
1948, stock market decline were lead by a stock market, by a lead time
of 0 to 13 months, while 10 stock market declines of greater than 10%
of the djia were not allowed by a recession.
• Real-estate market was too affected by recession.
• Business cycle is unpredictable; seigel says that not possible to take
advantage of economic cycles for timing investment .even the national
bureau of economic research (NBER) takes time to determine if a peak
or trough has been occurred in the u.s.
• Economic slowdown leads high yield stock such as fast moving
consumer goods, pharmaceuticals & tobacco tends to hold up better.
• ‘Half –way rule’ is a term in which investors start discounting an
economic recovery about halfway through a recession.

Causes of recession
Every economist in this world believes that recession is something that can’t be avoided
.in an economy there are period of high growth ,slow growth or no growth. For an
economy to b e called as healthy it should have contraction as well as expansion.
Economy can be said in recession only when GDP falls for two consecutive years.
The causes of economic recession is still a mystery but lot of theories are
attached as what all cause economic recession. These are caused by such
factors which have a wide impact on economy. examples-increase interest
rates. but inflation actually continued to rise. And it was this combined with
how easy it was to borrow money that caused our economy to spiral out of
control to where we now sit in 2008. Most economists believe that we are
currently heading towards a recession, not to mention that quite a few tend to
think we are already there.
Recession is generally caused by the steps to control the money supply in the economy.
In us people believe that it is due to federal reseve. Its basic responsibility is balance
between money supply, intrest rates, inflation.if it is not balanced than economy is out of
control.

Is the American economy in a recession-?

The production of crude oil has plateaued.

• Reduction of wages.

• Sub prime mortgage crisis

All world stock markets are affected badly due to us economic recession .financial
analyst says that usa is the main reason behind all financial problems in whole globe.
many of them says it is the beginning of crisis. Some specialist there is nothing like
recession in the us economy. they take it in a positive manner that shares are now
available to you at low prices .

USA has been affected from eleven crises termed as recessions. Recession were caused
by tremendous factors, and their consequences were more serious than current ones.
In 1945 recession was effect by the end of Second World War, through this American
industry gained a lot? As the war ended, solders became jobless. Hike in oil prices create
a crisis in the USA in 1973-74,1979-1980 and 1981-1982.

1990-1991 & 2000-2001- recession associated with investment crisis.

Important characteristics are rise in employment factor and decline in production.

Mild crisis –it’s a previous crisis between the two centuries, featured as 6% reduction of
the industrial output.

Hike in Unemployment rate up to 5% at he end of 2007, causes a drop in stock market

before new year holidays.
Sub-prime crisis:

The sub-prime crisis deals with the mortgaging problem in the us economy.
Many reputed banks like Citibank freely lended cash for people in u.s.a to buy
houses via. The mortgage route from past few years. People in u.s.a buy
houses against mortgages with banks & couldn’t able to repay the mortgage
charges. In this, bank took back all the houses but get a huge loss due to
devaluation of property.(lost billion of dollars)
Sub-prime lending
(near prime ,non-prime or second chance lending) in finance means making
loans that are In the riskiest category of consumer loans and are typically sold
in the market from prime loans.
Various ways to determine risk:
 size of the loan
 traditional or non-traditional structure
 Borrower credit rating
 rate of borrower debt to income or assets
 ratio of loans to value or collateral
A standard definition of sub-prime in United States is sub-prime loans are
usually classified as those where the borrower has a FICO sc ore below 640.
Sub-prime include-
Mortgages,
Auto-loans,
& credit cards.
The first sub-prime was initiated in 1993.Lots of companies entered the
market with prime interest rate i.e. to low and real interest became negative
allowing sub prime rates to flourish.
Sub-prime lending: for increasing market, lenders have to bear the risk with
Lending to people with poor credit facilities. For ex –they lend money to those
who have bad credit. The score FICO denotes lender rate of default. The
person with credit score below 620 is having higher default than those with
score above 720.lenders has various ways to lower down the risk. In the case
of sub-prime loans the risk is being reduced with higher interest rates.
People started that something is going in financial markets, those who are up
to date with equity & debt markets amylase this within few weeks. They call it
as sub-prime meltdown.
Basically these institutions were lending money to those people who can’t
afford houses can now have there own houses.
What is the impact of sub prime on Lending Club and its members?

• First, the impact was almost null in our members. as they are engaged in
increasing liquidity & settling the market rate of interest is fixed ,current
borrowers and lenders will see no changes in payment

•Borrowers will see us as a great alternative to banks. there are large number
of banks had to raise their credit standards because they are unable to sell their
portfolios.

• We offer good returns and relatively low risk, making lending a good
strategy for many people over the long term.

U.S. recession 2008 and can it affect India

Indo-US bilateral trade has been incredible, except that nuclear deal that is
facing a tough time.indias finance minister says India will not be affected by
us recession. but trade & commerce is affected somehow. Investors are agreed
with this view point.
Is there 2008 recession there? If all other countries are
affected by it why not India. The crisis can be seen in us policies, no as such
problem for India. The jobs are there for Indian youths, BPO are working 24
hours & there are opportunities & tremendous potential in other sectors. it may
be infrastructure, real estate,health care has no effect. Indian students still
prefer to study abroad.

Since us is one of the powerful nation, a recession there will have its effect
globally.usa can do one thing they can cut their capital investments in a
country, if they want to control recession at the end. This year was not a good
start for Indian economy. If stocks won’t raise then the investor can have
tough time. is recession coming to India’s boundary? The rupee may have
appreciated against shrinking dollar. India can affect in terms of B.P.O. The
Americas food chain in India will have impact.i.e. Downsizing on employee &
its promotional measures. Prolonged recession will lower down recession.

India can get affected by the BPO units becoming less aggressive. The American food
chains that have opened up will be impacted. There could be down sizing on staff and
advertising. The equity market will see a slide in a few months, if things go out of
control. Consultants across the world are hoping that they will be able to keep their
clients upbeat in the face of recession. The prolonged recession is likely to result in
further weakening of the dollar.
 According to the World Bank officials, the credit crunch will reflect on decline in
business development, unemployment, weaker consumer outlays and longer period of
depressed consumer prices. In India strong technological advancement have engineered a
buoyant growth rate.

Recession’s impact on lifestyles

The benefit of recession to our surrounding is people know how to manage their budget in
terms of their workplace, family or as individual. In whole universe people are spending
money too in an optimum manner. one of the area that hit recession in u.s. is marriage,
survey conducted by ING direct.29% of American believed that there marriages were
being ruined by the current recession, compared with just 24% of french,23% of
Canadians and 12% of Germans.

Do you think is marriage “cost” more in America? The survey finds that Americans are
willing to sacrifice some fewer things ,when household belts need to be tightened. As
Americans don’t give up their cars & pets easily and they often to support their lifestyle
postpone retirement.

As food is considered as necessity and number one priority globally. 30% of Americans
says they will sacrifice their automobiles as one of the three items that it would give at
last while with 14% of Italians. 22% American says they would give up their pets,
compared with 15% French.

Eating would be one sacrifice that American can do to save money by cooking food at
home and take to their workplaces (51% as compared to 20% of Italians).

Whether it’s your sweet home, your workplace or any of the surrounding each &
everything is affected by recession. Some of the steps should become an habit like

• Cutting costs.
• saving more money
• Learning to build a financial buffer for their future.
Impact of recession in U.S.A. : financial sector

The impact of the financial crisis is “stronger and longer than expected” and there is a
strong need to know its effect on domestic economy, according to Dr.D .subba Rao,
governor of reserve bank of India.

As according to “financial times” it pointed the us recession have major impact on world
economy. There a article published on august 10 “the world must prepare for Americas
recession”-it says us recession will be controlled by three forces :

Housing slowdown,

Higher oil prices,

Higher interest rates

The us consumer is suffering from higher debt & reduction in real wages. The effects of
housing slump would be more disastrous than stock bubble in 2000.As houses are much
important component than a stock & 30% increase in us employment is due to housing. It
can be controlled by cutting interest rates. Recession in us is spread widely. When the
group of seven industrialized countries slashed industrial policies and eased fiscal policy.
The global power us is slowing, its effect can be seen globally.

The financial crisis of 2007-2009, it can be called as worst financial crisis it is related to
the great depression of 1930s.it lead to the failure of businesses, banks and a significant
decline in economic activity. The collapse of global housing problem, bank solvency,
declines in credit availability, damaged investor confidence caused a effect in stock
market.
Impact on financial institutions:

Financial institution was badly affected by economic recession of usa. The international
monetary fund estimated large us and European banks lost more than $1trillion on bad
loans.

The first bank affected was northern rock (a middle sized British bank).the bank led its
security from the bank of England. In feb2008, British government having failed to find a
private sector buyers and was given in public hands. Initially companies affected during
recession is home construction and mortgage lending

The impact of recession: banking sector

The Recession in the banking industry has adversely affected the cash flow for the
industries. When industries cannot raise funds for their expansion or operation then the
industrial output would come down. This in turn would affect the GDP of the nation. It
may affect the employment situation in the country also.
Famous banks who got bankrupt:

 Lehman Bros
 Merill Lynch
 Fannie Mae and Freddie Mac
 AIG
 Bear Sterns

Impact of recession in USA: retail sector

In these days retail sector ranging from bad to awful.With few exceptions, the news in the
retail sector here these .many retail chain are shutting their doors, other are filling for
protection from creditor and most are slashing prices to try to attract increasingly
restrained consumers.” Survival of the fittest” says Marshall Clark. The weakest retailer
will be out this year.
Commercial construction laws, especially in the retail sector, its demand has gone.
According to prominent Spokane developer Dave black says, most of the retail done with
restaurant, as people has to eat.
In retail sector, employment has fallen drastically. a survey shows 25,400 workers are
employed in retail trade.furnitures store were closed during this year. It doesn’t mean all
retailers are suffering. White elephant store say for us business is good. It focuses on
lowering their prices than competitors.
Recession was brutal on many sectors of the economy. The retail chain was affected for
just a simple reason i.e. retail industry depends on the ability of people to be able to buy
stuff. Business profits depend upon customers purchased retail industry is directly
affected by it. You can take an example of Paper Company it can rely on other companies
to purchase paper products. it means retailer is directly affected by consumer. When
person all of sudden don’t have to buy goods, go out to eat and for shopping has much. It
has been observed that sales were lower than previous year. when the consumer don’t
have money to spend then how the retail is going to earn.
The retail industry was badly hit by recessions they still needs consumer money.
Hopefully things will start to pick up as recession seems to end soon and again the money
starts flowing from consumer pockets.
.

The impact of recession: financial services and insurance sector

In current scenario, investors have lost their trust from financial services
sector. Trust is an important factor, when it comes to earn money.Thats a
fact that global turmoil has affected investors badly. Do you know how it
affects job market? Its answer is crystal clear –

“No revenue, no spending” “no spending, no cost cutting” and no jobs and
salary cuts. The rule is being quite unfair according to human aspects.
Several reasons can be-

• Market responds as situation abroad.

• Inurance sectors are badly affected in uk and usa
• Fear of loosing money.
• The financial service providers loose the confidence of the investors.
• Organizations expect the position from bad to worse.
• Can’t decide how to fight with recession effectively.
• Choose the easier path.
• Looking at the cause rather than the solution.
• pressure to perform beyond one’s capacity
• companies use to follow international trade
The recession affected the Indian capital market adversely to the global
changes .insurance a like sun life, Tata, AIG started cost cutting measures by
reducing hiring of employees. You can take example of icici prudential; it
has taken drastic steps in terms of layoff & reductions.

OIL PRICES CAUSED THE CURRENT RECESSION:

Hike in oil prices cause current recession. Defaulting mortgages are a symptom of the
high oil prices. Higher oil prices started four of the last five world recessions.

Shows that four out of the past five recessions have followed spikes in oil prices
Impact of recession: real estate

Commercial real estate faces its worst year in 1991-1992 in industry depression. From a
report it is known that the project looses of 15 t o 20 percent in real estate values from the
mid-2007 peak. Cash-rich offshore buyers are the main beneficiaries of the real estate
downturn in the us, it took advantage of weak dollar and they are going to buy trophy
properties in 24 major countries.
A report says that commercial market will recover soon as compared to housing market.
The losses in housing market are benefiting the apartment market.
Before a rebound, the following needs to happen:

• The housing condition is bad and there are no chances of recovery. As sub-prime
crisis is at the tip of iceberg.
• The demand for space falling won’t affect real estate markets by 2009.

• Private real estate markets need to rectify-lenders force owners to become sellers.
• buy discounted loans

• Have a focus on 24 hour coastal cities.

• Market recovery can be there if people invest in publicly-held real estate
investments.

• Focus on neighborhood retail centre.

Prepare to hold or buy multi-family, hold; office, hold hotels
If we talk about investesment, Seattle and San Francisco markets have been in the top two
beating New York city. New work has lost it ranked and came fourth after Washington.

Dollar devaluation:
According to an article “us dollar heading for collapse - Robert Reich”.
This article says that lot of people are blaming other countries for the loss of American
jobs. People are talking about the reduction in jobs in America, India, china that to
politically. It shows that free trade has been revived as a great economic evil in the us.
Globally business are been done on euros not us dollars.
Devaluation of us dollar means a decline in the purchasing power of dollar that leads to
decline in living standards. any person who has investment in dollar will be suffer from a
decline. Dollar will impoverish-
50% white middle class
40% other barely will survive
5-10% Americans will prosper from this decline
Us dollar is known to be world trading currency it means all prices of goods & services
are deal in us dollars. The countries dealing with us will raise their prices due to
devaluation. commodities such as oil,coffee,chromium,copper,iron etc. are setting a
record price in relation to devaluation i.e. decline in us dollar.
As the us dollar is regarded as world reserve currency. as no currency is backed by gold
and silver. Central bank must hold us dollars and treasury instruments.
The us dollar is serving the same purpouse as gold & silver in backing the currency.
Dollar is called as fait currency. It means has no precious metals backing it and is
accepted by faith. The only currency that maintained an intrinsic value is gold and silver.

What causes dollar devaluation?

When the us dollar begins to fall in value, as a federal
reserve bank printing too many dollars too cover budget defecits,causing inflation ,a
decline in purchasing power. Budget deficits are spending more than tax revenue. Trade
defecits.import is more than exports are the two reasons behind the dollar decline.

How world economy is affected by us?

The United States of America has the world’s largest economy. According to 2007, GDP
is $13.84 trillion. Its three time the size of the next largest economy, Japan with a GDP of
$4.4trillion.the recent meltdown in us housing and credit markets have resulted in
slowdown in us economy.

The trend of the real GDP growth rate of the US economy is shown in the following graph.
THE US economy and the world economy are linked with each other.Econmic
developments in the country have a major influence on production, employment, and
prices. The fear of recession spread over the United States. As when clinch goes,
whenever the us sneezes, the world catches a cold. Weakening of the American economy
is bad news, not only India but for the whole world.

Liquidity crunch and overcome:

What does liquidity crunch means? it can also be said as credit squeeze or credit crisis, is
a reduction in availability of loans or credit or it can be said tightening the conditions to
take loan or credit.
A credit crunch generally is the reduction in obtaining loans due to rise in official rates. A
number of reasons might be there that bank generally lowering down or stopping their
lending activities. It is due to a decline in collateral used by the banks to secure the loans,
an exogenous change in monetary conditions. Direct credit controls are imposed by
central government in banking system.

Why is it caused?

It is caused by a sustained period of carelessness and inappropriate which results in losses

for lending institutions and investors in debt when the loan turns sour and bad debts
become known.
It is generally caused by reduction in the market prices of previously over inflated assets.
In the case of a credit crunch, it may be preferable to “market to market” and if necessary
go for liquidation or selling.
Recession: a recession is a decline in a country’s gross domestic product ,for two
consecutive years.
Difference between recession and depression
While looking at the changes in GDP. In depression, any economic downturn in which
GDP declines by more than 10 percent. In recession it is less severe.
Factors causing recession are:

• Exports become more expensive due to high strength of currency and demand
reduced. It affected manufacturing badly.

• High interest rates-government is trying every possible effort to reduce the

inflation and maintained a tight monetary policy which reduced inflation; it is
one of the causes of recession.

Cause of bubble:
At the period of low interest rates, institutions (lending) kept on lending multiple
mortgages on the property as second and third mortgages to persuade investors buying
more properties at sub prime rate. It kept the demand for housing in upward direction.
• Low interest rate kept on fueling this boom and creation of the bubble.

• Raise in demand for real estate properties.

• Projected growth in financial sector.

• Increased borrowing from institution.

• Multiple borrowings on the same property.

• Growth in demand for housing sector leading to housing bubble.

Steps world bank taken to overcome recession:

World leaders are meeting at the G20 conference in London to address the global
economic recession. The government must ease credit at a rapid rate, recapitalize the
banks and take measures like reducing job losses rate.
Major sector affected by this recession:
Real estate
Banking
Credit card
Insurance companies
Aviation sector
Employ sector
The following are the practical steps we need to take to get wealth:
1. review your strength and weaknesses
2. Self employment
3. Choose a market niche
4. Planning
5. take off as soon as possible
6. be focused and remain focused
7. make provision for charity
8. save consistently
9. invest your savings wisely
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