No End in Sight to Dismal US Economy

July 23, 2008

The U.S. economy and financial system have confronted some significant challenges thus far in 2008. Unfortunately, the future outlook does not appear to be getting any better.

Last week worries spread throughout U.S. and world markets as a crisis of confidence battered more U.S. financial institutions and Ben Bernanke, chairman of the Federal Reserve, issued a sober assessment of the country's economic woes.

"The possibility of higher energy prices, tighter credit conditions and a still-deeper contraction in housing markets all represent significant downside risks to the outlook for growth," Bernanke told the Senate Banking Committee. "At the same time, upside risks to the inflation outlook have intensified lately as the rising prices of energy and some other commodities have led to a sharp pickup in inflation and some measures of inflation expectations have moved higher."

The gloomy assessment from the Fed Chairman reflects a financial crisis that began last summer with the crash of the housing markets, and now has spread to regional banks as well as financial lending giants Fannie Mae and Freddie Mac.

It also marks a new phase in the U.S. financial crisis, with fears of a contagion effect that could yet weigh more heavily on the global economy. A mounting sense that America's financial crisis is still far from touching bottom is adding to global troubles, including rising overall inflation and soaring energy prices.

During a forum on the global economy Desmond Lachman, a resident scholar at the American Enterprise Institute, suggested that the economy is heading for negative growth. According to Lachman the convergence of the housing market downturn, the credit crisis, high oil prices, and equity losses signify a recession. The only question that remains is how long and how deep will the impending recession go?

"Experience shows that across a wide range of countries," Lachman said, "when you do get credit crunches and when you do get housing market busts, they tend to be more serious kinds of recessions, longer, and you also get coincidence of cyclical behavior across a range of countries."

Yet the tipping points of economic crises, analysts say, are almost always more about psychology than fundamentals, with panic over a bank's insolvency, for instance, potentially becoming a self-fulfilling prophecy. The psychology in the small-business community is quite different, however. While 71 percent of small businesses have a negative outlook on the overall economy, according to the 2008 NSBA Survey of Small and Mid Sized Business, 70 percent remain confident about the outlook of their own business.

That optimistic, entrepreneurial spirit will likely be what gets the U.S. economy back on track, making paramount the availability of capital to entrepreneurs looking to start and grow a business. Having created more than 93.5 percent of all new net jobs over the last 15 years, it is crucial that entrepreneurs have access to the tools and capital they need to continue to grow their business and help strengthen the economy.