Is America Plunging into a New Recession?

If you followed the financial news in January, you already know that 2016 started with a weak global economy. In the United States, Janet Yellen and the Fed raised interest rates in an effort to encourage saving and reduce bond prices. While Yellen clearly had good intentions with this decision, the increased interest rates discouraged investors. This resulted in a diving stock market and no new IPOs during January. Fortunately, the Fed restored the pre-January interest rates soon after the stock market began to show negative effects. While this may have been a smart monetary decision, the American economy is still at risk of plunging into a recession.

Interest rates are at pre-January levels. Why is a recession still possible?

This is a question that many people in the financial world are asking right now. Unfortunately, interest rates are not the only factors that can affect the US economy. America is a major player in the world economy, so it is vulnerable to fluctuations across the globe. While there are numerous variables that can affect investment opportunities, it seems that China’s weakened economy is harming its trading partners. The United States happens to be part of a long list of countries that have been affected by China’s bear markets.

How has China impacted the global economy?

In addition to the United States, Brazil, Russia, and the European Union have been negatively impacted by China’s condition. There are several theories about how and why China’s economy dropped to its current state, but many economists agree that its commitment to transition from a manufacturing-based economy to a service-based economy caused many investment opportunities to disappear. This centrally planned decision eliminated China’s demand of many products, including oil and building materials. As a result of this, the aggregate price of Chinese stocks fell by nearly 40 percent, and OPEC has been greatly weakened. This caused ripples in the world economy that continue to impact the United States, Canada, the United Kingdom, and other countries. Along with poor foreign investment opportunities, trends in the American domestic market are also contributing to a weak economy.

How does the American dollar impact the US economy?

The American dollar is stronger than it has ever been in the past decade. While this may sound like good news, an appreciating dollar can harm the revenues of producers who compete with foreign products. This is because American products are becoming more expensive relative to foreign products. As a result of this, foreigners are more likely to buy non-American products to save money. The manufacturing and automobile industries have experienced losses as a result of the strong American dollar. This situation may not cause a recession, but it certainly does not help the American domestic markets.

How are the spending habits of Americans affecting the economy?

As China imports less petroleum and raw materials, Americans are purchasing less of their own domestic products. During the 2015 holiday season, American spending habits grew by .2 percent less than in 2014. This caused many US companies to have less profits during December 2015 and January 2016. The interest rates of January also caused consumers and investors to further reduce their spending habits.

What does the yield curve reveal about the economy?

The yield curve is a plot of securities with different interest rates that can be used by economists to predict the future state of the economy. Prior to the 2008 Financial Crisis, many people were able to use yield curves to predict an economic slowdown. Yield curves remain one of the most accurate ways to detect changes in the aggregate performance of the economy.

In February, the yield curve of one-year and six-month US Treasury bills inverted. This normally indicates that a recession or financial crisis is approaching. While the yield curve recovered from its inversion by the beginning of March, it remains fairly flat. This indicates that another inversion remains a possibility in the near future. Many economists are monitoring these trends closely to see if they can find an advanced warning about the recession.

Due to bear global markets, fluctuating interest rates, an appreciated dollar, and cautious spending habits, it is likely that the United States will experience another recession. For more information about the upcoming recession and economic trends, go to Personal Money Store.

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