Is There Light At The End Of The Tunnel?

Is the end of recession is in sight?

According to the Blue Chip Economic Indicators survey of private economists, about 90% of the respondents believe the recession would end by the end of the third quarter of this year. However, economists were not so sure about the speed and timing of economic growth. Recent data from the government shows that economic output contracted at 1% in the second quarter after a drop of 6.4% in the first quarter. "Debate now centers on the speed, strength and durability of the recovery," the survey said.

Over 66% of the respondents said they expect the economy to go through a "U-shaped" recovery, while 17% said the economy would grow for some time only to falter again, before the long-term growth sets in. The second half of 2009 will see some economic growth on account of inventory liquidation, improvement in consumer spending, and investments by individuals. The survey respondents expressed pessimism on employment outlook. About 70% said the jobless rate will not drop below 7% until the second half of 2012 or later.

Bad loans continue to threaten the financial system

A report released by the Congressional Oversight Panel, which monitors the $700 billion bailout of the financial sector, says that toxic loans threaten to de-stabilize the financial sector. "If the economy worsens...then defaults will rise and the troubled assets will continue to deteriorate in value," the report says. "If the losses are severe enough, some financial institutions may be forced to cease operations." The panel, which comprises 5 members, is chaired by Harvard University Professor Elizabeth Warren.

The report says many of the Obama administration's efforts towards ensuring financial stability - such as infusion of new capital for banks, scrutiny of capital ratios, and "stress-testing" of large financial firms - are working. "These steps have ... allowed the banks to take significant losses while building reserves," the panel wrote in the draft report. "Nonetheless, financial stability remains at risk if the underlying problem of toxic assets remains unresolved." The report refers to the dangers faced by small and regional banks which are particularly vulnerable. Regional and smaller banks hold greater numbers of commercial real estate loans, "which pose a potential threat of high defaults." The report says the capital adequacy of small banks to bear losses hasn't been tested by the government.

Vayron Mirabal
A. B. Home Buyers LLC
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