Global Outlook: Recession Fears Expand Beyond the U.S.

The subprime mortgage debacle has had far reaching effects in the U.S. economy. But the effects go beyond our own borders. The economic turmoil has ricocheted throughout the global economy, causing inflation, recession fears and general anxiety.

Consider Europe, which is experiencing the fastest inflation in 16 years and the prospect of a widespread recession. Inflation is currently double the European Central Bank's 2 percent ceiling, and household spending power is quickly being eroded across the continent.

The ECB has authorized nine interest-rate increases since December 2005, in attempts to curb inflation and slow down money-supply growth. The ECB reported this week that this M3 money supply, a figured used as a gauge of future inflation, rose 9.3 percent from a year earlier. This is the weakest growth since November 2006, but still nearly twice the ideal amount to rein in inflation. Policy makers kept the benchmark rate at 4.25 percent this month, a seven-year high, on concerns that inflation may push up wages and prices.

At the same time, European retail sales have declined for a third month in August. Although the measure of sales activity in the region using euros increased slightly this month, it's still the third month the reading held below 50, the boundary between growth and contraction. An executive survey also revealed retailers cut jobs for a fifth month.

Overall, confidence is low across Europe. German business confidence has fallen to a three-year low and consumer sentiment dropped to the weakest since 2003. In France, the housing inventory has reached a record this summer.

In the UK, the outlook is particularly bad. House prices declined this week at the fastest annual rate since 1990, with the average value of a home falling 10.5 percent. At the same time, retail sales have plummeted to the lowest rate since the survey began in 1983. British lending organizations have limited their loans since the subprime collapse, with a 65 percent drop in mortgages granted since last year. The reports suggest a recession is imminent, and forecasts predict the Bank of England will be forced to cut interest rates this year despite fears of inflation.

The economic troubles reach beyond Europe into Latin America, Africa and Asia. In Japan, inflation is a rising concern. Bank of Japan leaders are suggesting a key interest rate increase as the economy shrank at an annual 2.4 percent rate in the second quarter, putting it on the brink of recession.

Globalization has meant significant benefits to the world's economies and citizens, but it also means that the economic problems of one country extend to every country. The ability to recover from our current economic woes will also be affected by the interrelated nature of our global financial systems.

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Prices Rise and Credit Contracts: Is the Recession Here?

Inflation rose in July to the sharpest price increases in 17 years.

Consumer prices rose 0.8 percent on a seasonally adjusted basis from June to July, according to a government report (Consumer Price Index) released today. This is the third consecutive month of inflation, and during the last 12 months prices have risen 5.6 percent.

Driving the price increases are continuing surges in energy and food costs. Energy prices increased 4 percent over the month, while food prices rose 1.2 percent.

The reported figures coincide with consumers cutting back and employment getting squeezed. Core inflation, removing food and energy costs, rose 2.5 percent in the last 12 months, and reaching the levels federal policymakers consider unacceptable. The inflation is causing worker spending power to drop dramatically to rates last seen in 1990. Although average hourly pay rose during the last month, inflation and a cut in average hours means a reduction in real weekly earnings by 0.8 percent. During the last 12 months, real earnings dropped 3.1 percent.

Accompanying the consumer price report was another indication of continuing housing market woes. Existing U.S. home sales fell 16 percent in the second quarter, a 10-year low, according to reports released this week. At the same time, median prices for a single-family house dropped 7.6 percent, from $223,500 to $206,500 over a year period.

A third of all sales in the quarter were foreclosures, with bank seizures of properties in default rising 184 percent in July. Put another way, more than 272,000 properties, one in 464 U.S. households, were in some stage of foreclosure. The increasing foreclosures are depressing home prices further.

For those looking to buy, banks are making it harder to borrow money, with tighter lending standards and terms, according to a survey by Bloomberg. The tight funds extend also to small businesses and credit card loans.

With consumer prices rising, fixed mortgage rates at a six-year high, and a tightening credit crunch, the recession seems to be imminent, or already here.

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Unemployment Spikes, Fed Keeps Interest Rate Level

Initial claims for state unemployment benefits rose to 455,000 last week, according to reports released by the Labor Department. The new figures represent a jump of 7,000 from previous reports, and the highest rate in six years. Overall, the unemployment rate hit 5.7 percent in July, with some analysts predicting the rate to peak next year at well over 6 percent.

Payrolls declined by 51,000 workers in July, the seventh straight monthly drop. Additional figures for unemployment claims, the moving four-week average, posted a jump over the 400,000 mark, the highest since July 2003 and bypassing the threshold for recession.

The Labor Department did cite increased access of benefits, the result of a new federal program, as a partial cause of the increase. But the rising unemployment is also a result of the slowing economy; companies are cutting costs and reducing staff as demand slows and raw material costs spike.

Rising unemployment also increases worry that consumer spending will decline in the coming months. For the last few months spending has been secure on the basis of economic stimulus checks. Now that these are spent, spending will probably decrease as costs rise, jobs are cut, and the economy continues to falter.

With the economy is dragging and labor markets softening, the Fed decided to halt its pattern of interest rate cuts and stay firm at its recent meeting. The Federal Reserve kept the benchmark interest rate at 2 percent, suggesting that weak employment and general financial instability will keep naturally keep borrowing costs low.

After an aggressive series of rate cuts, the most in two decades, the Fed halted the cuts at their last meeting in June, and has continued to do so. Experts contend the Fed will leave the rate unchanged in coming months in efforts to slow inflation and balance economic turmoil.

A rise in the pending home sales index, based in contracts signed in June, was a surprising but welcome piece of news in the midst of the unemployment and economic crises. The 5.3 rise brought the index to 89.0, the highest since October. Some analysts note this could mean a stabilization of sales and a flattening in the market. Others note it could be a rise from increased sales of foreclosed homes.

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