Is The US Economy Headed For Another Recession?

in Economy

If expert opinion is to be believed, we get a conflicting view of the situation on the US economy. While experts at Goldman Sachs believe that the US economy is going to slow further and there are chances of it slipping into another recessionary phase, Billionaire investor Warren Buffet holds the contrarian view that the US economy is slowly improving. One may note that Warren Buffet has been one of the most successful investors in history and his analysis of a situation cannot be ignored.

As per Goldman Sachs, the US economy will be "fairly bad" in the next six to nine months, with a constrained growth rate between 1.5% to 2% and unemployment shooting up to 10%. It also suggests that there is a 20% to 30% chance for it to slip back into recession. Goldman Sachs further believes that the US Fed will take necessary action in its early November meeting to spur the US economy. This would include measures to lower interest rates and quantitative easing via purchase of securities. The US Fed could purchase about a trillion dollars worth of securities, which could lower interest rates by about 0.25%, with the liquidity increase in the economy. This is likely to weaken the US dollar and help spur exports. Given these measures, Goldman Sachs believes that slow growth without a recession may be the reality that US economy is headed for.

If the move of injecting liquidity into the economy is viewed from the demand-supply angle, an increase in the supply of anything puts a downward pressure on its price. The same is expected of the US dollar. An increase in its supply implies that its value vis-à-vis other currencies should fall. At this point in time the US seems to be comfortable with a weaker US dollar as it is likely to spur exports as its products become cheaper when bought in foreign currencies. Additional liquidity can also lower interest rates, making it cheaper for industry to borrow. This is also likely to spur growth. A growing industry can help stabilize employment and result in a fall in the unemployment rate. Once, there is more money in the consumers' wallet, demand is likely to go up and the US economy can move into a positive growth cycle.

Warren Buffet believes that the strength of the US economy lies in its cowboy spirit of doing what the others have not dared to. Indirectly, it's the ability of the US economy to innovate, which keeps it ahead. Innovations lead to either lowering of costs or creation of new goods and services, which can command a better value. If Buffet's statements are to be analyzed, he is virtually saying that the recession hit US economy can innovate its way out of it. Indirectly, the US economy has the ability to adapt quickly and it is the perilous times like these that force more innovation than other times. Buffet believes that the US economy is on a slow and solid recovery path.

Hopefully, Buffet's contrarian view should prevail and the US economy should see better times ahead.

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Cedric Welsch has 19324 articles online and 24 fans

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Is The US Economy Headed For Another Recession?

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This article was published on 2010/10/09