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...deteriorated as 2007 came to an end.
At the beginning of 2007, national economic problems seemed fairly well contained within the housing and auto and related industries. Even oil prices, although remaining high, dropped in the first few months of the year from the peaks reached in 2006. The economic situation seemed on track for 2007 growth to be only moderately below potential before returning to trend growth in 2008--a path much like that of 1995-1996 when the Federal Reserve's (Fed) monetary policy slowed the economy, a breather that allowed the economic expansion to continue until 2001.
This relatively rosy scenario came to an end over the summer of 2007 as the problems with subprime mortgages spilled over into financial markets, with uncertainty as to size of losses and affected assets and with accompanying credit restrictions imposing restraints on economic growth. Consumers already stressed by the housing woes were hit with stock market losses and further credit limitations. Added to these problems were oil prices rising to $100/barrel and food prices quickly rising as well, cutting into income available for other uses. The end result was a dismal Christmas shopping season. With both manufacturing and private-sector employment also contracting in December, both of which had been holding up relatively well until then, the year ended on a recessionary note.
As a response to the gravity of the situation in the latter part of 2007, the Fed, which had been holding rates steady, changed policy to quickly try to provide liquidity and accommodate growth. Besides lowering rates since August, the Fed has started a "term auction facility," or TAF, to help the interbank lending market. The Bush Administration and Congress have also been discussing an economic stimulus package. Strong government action will help keep the economy from deeper contraction.
Additionally, one month does not a recession make, and it's questionable whether or not the December trend will continue. The national economy is not without its positive points. Low levels of initial unemployment claims at the beginning of January signal something of a rebound in employment. Exports continue to be strong with a lowering dollar exchange rate and relatively solid foreign economic growth, particularly in Asia. This has benefited manufacturers, although not enough to make up for slow domestic sales.
More importantly, part of the reason for lower production has been the reduction of inventories as sales wane, keeping inventories-to-sales ratios relatively low. This impedes growth now but sets up a situation where manufacturers will not need to radically curtail production later on. National consensus forecasts still call for only a very slow growth rate of around 2 percent for Gross Domestic Product (GDP)...
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The Mississippi economic outlook, 2008., January 01, 2008
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