Recession is a significant decline in the economic activities of a country for an extended period that can last for more than few months. United States (US), which is the most developed economy, has been experiencing a robust growth since the Great Depression till 2007, when the recession hit the economy once again. It is considered to be the largest downturn in the US economy experienced since 1930s Great Depression and it lasted from December 2007 to June 2009 (Irons 25). This paper studies the causes of the Great Recession of 2008 and its effects on the major macroeconomic indicators of the US economy. The study also highlights the fiscal and monetary policies undertaken by the US government in order to reduce the impact of recession and what were the consequences after the instigation of such regulations.
GDP is an indicator of a country’s economic growth and it is comprised of consumption, investment, government expenditure and net exports. The recession in a country denoted a substantial fall in the GDP which can be caused by the decline in any of its components. The recession began as an effect of housing bubble in the US which had started in 2007 (Verick and Iyanatul 56). The prices of the real estate properties or houses soared up during that period due to excessive demand for housing. Expecting a further rise in prices, speculators entered the market in order to make high profits and a point was reached when supply was more than the demand. The excess of supply resulted in sharp fall in the prices and hence, bubble bursts (Martin 56). The pre-crisis boom in the housing market insisted the financial institutions to provide large amount of mortgaged backed securities and assets at exceptional levels. The following section shows the trends in growth rate of GDP, unemployment, inflation and wages during pre and post crisis of 2007 (Irons 83).
Figure 1. GDP Growth Rate of USA. “World Development Indicators”. World Bank. 2015. Web. 1 Oct. 2015.
The above graph represents the real per capita GDP growth rate of US during the period of 1990 to 2014 in the US economy. It indicates that the economy experienced positive growth rate since 1990 except in the years 2008 and 2009 when the growth rate fell dramatically to -0.29% and -2.77% respectively. The fall in the growth rate was apparent due to the recession that the economy was facing at that time. The fall in the investments in the housing and real estate had direct impact on the economy’s consumption as it constituted a major proportion of consumers’ spending.
The effect of fall in the growth rate of GDP to negative led to decline in the level of employment in the economy to a great extent. The following graph shows the rising unemployment post crisis of 2008.
Figure 2. Unemployment Rate of USA. “World Development Indicators”. World Bank. 2015. Web. 1 Oct. 2015.
USA was successful in reducing their rate of unemployment after 1992 and since then it was low due to proper regulation of labour market and wage policies (Elsby, et al. 158). The crisis of 2008 resulted in the highest rise in unemployment rate to 9.3 % which was mainly because of the fall in overall production of goods and services in the economy owing to recession.
The recession caused negative impact on the wages too, as the firms tried to reduce their cost. The fall in the real wages of the workers further aggravated the consumption level of the economy as the people were left with less money to spend on goods and services.
The following graph shows the rate of inflation in the US economy during pre and post crisis of 2008.
Figure 3. Inflation Rate of USA. “World Development Indicators”. World Bank. 2015. Web. 1 Oct. 2015.
The recession of 2008 had resulted in substantial fall in inflation when the rate dropped to -3.9 % in 2009. The production of goods and services in the economy declined further due to fall in the prices as the producers find it unprofitable to sell at lower prices.
The USA being the most advanced economy and export oriented suffered to a huge extent due to the crisis. The major exports (machineries, automobiles, technologies and equipments) are pro-cyclical industries, as a result of which their production fell substantially with the recession (Eaton et al 56). The decline in the production of the economy led to fall in their exports considerably. The foreign currency inflows reduced too as the foreign investors lost confidence in them due to insufficient supply. This has impacted the foreign exchange reserve of US economy and the net exports being a major component of GDP resulted in the further fall in GDP. The pro-cyclical industries in the US economy hence aggravated the situation of crisis during the period of recession. US had major trade linkages with other countries and the financial crisis faced by them also had repercussion on those economies, which resulted the recession to turn into a global financial meltdown (Eaton et al 58).
The US government followed some aggressive monetary and fiscal policies as a measure of reducing the financial crisis or the recession. The Federal Reserve lowered their interest rates after the crisis appeared and such a policy was accompanied by purchasing of treasury bonds and mortgage backed securities to ease the long term interest rates (Bernanke 59).