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Dean Anil Puri, CSUF Mihaylo College of Bus/Econ  

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Wednesday, July 23, 2008
A new beginning
October Redux?
The 1929 stock market crash occurred in October. A 23-percent drop in the Dow Index took place on the last day of October in 1984. The stock market also fell by 10 percent on the last day of September in 2001, signaling the beginning of the dotcom bust. Without being superstitious, is there something in the yearly cycle of time that coincides with the economic rhythm of the country?

There is, of course, well-recognized seasonality in the trends of many economic variables, but there is little evidence of a macro-level conglomeration of the woes of the economy that should periodically manifest itself in a sharp jolt to the system at this time of the year. Explanations are offered usually in terms of year-end window dressing by firms, but these do not fully explain the phenomenon.

Yet, forces seem to be lining up for just such a possibility. The housing market shows no let up in its steady downward trend with increasing inventory of unsold homes and declining prices. Credit markets continue to be in a funk. Uncertainty about the fate of Freddie Mac and Fannie Mae is endangering further disruption of the mortgage and related markets. Commercial and investment banks are writing off unprecedented amounts off of their balance sheets and some are in dire straits in raising additional needed capital. Rumors of a major bank failure in the U.S. refuse to go away.

The “real” economy has finally entered the recessionary phase as indicated by the latest employment statistics and the implied downfall in output. The recent fiscal stimulus has dissipated and there is little on the horizon to give households any confidence in maintaining their high spending levels. The latest sales data attest to that.

This slowdown does not need an October to show its colors. We have been in it since mid-2007. Given the current situation it will take a few more quarters before the economy turns around. A great deal will depend on not only our domestic policies, but also on the global economic situation.