How Bad Can The Economy Get?
As it looks more and more likely that the economy will enter a recession in the upcoming months, many Americans are wondering how bad it will get. The root of our current economic troubles, the housing market, continues to grow worse. Housing prices fell again last month as an increase in foreclosures adds to the glut in supply in the market.
The economy lost jobs for the second month in a row as stocks fell to their lowest level in nearly two years.  The Labor Department reported that 63,000 jobs were lost for the month of February following the 22,000 in losses for January.
The Dow fell under for 12,000 for the first time since August of 2006 as bad economic data and high oil prices sent stocks tumbling. Earlier in the week oil rose to over $105 as OPEC announced it was maintaining it’s production at their current levels.
Energy prices are expected to continue rising, but how high can the price of oil go? Some analysts are saying $120 but there are others who say it could top $150 by the end of the year.  European Central Banks announced this week that they were not cutting interest rates and futures traders are now betting that the Fed will cut rates by 75 basis points later this month. This will put enormous downward pressure on the dollar in exchange markets and force the price of dollar denominated assets like oil upwards.
The high price of oil is starting to take it’s toll on consumer spending as well. It is estimated that every $1 increase in the price of oil costs Americans an extra $100 Billion a year.
Amidst all the gloomy economic news is the specter of inflation. The Fed has had no choice but to put it in the back burner as it slashes rates in an effort to keep the economy from stalling. As the credit crunch worsens it has had to pump more and more cash into the money supply to compensate. This week it announced it was making in as much as $200 billion more available to banks as it increased it’s Term Auction Facility amounts from $30 billion to $50 billion.
There is a real threat that we could be entering into an era of stagflation that could last for quite a bit. I would say that until the housing market starts to improve, we really have no idea how long this economic downturn could last.
