Tuesday, October 25, 2011

Recession Issues and Balance Sheet Financing

How has the recession (2008-2009) affected companies’ balance sheets?

In 2007, the real estate crisis hit and the economy has been in a balance sheet recession where the private sector began to minimize debt rather than maximize profits. This was late 2007. Beginning 2008, Lehman Brothers became the example of the financial crisis. "Balance-sheet recession is a problem of borrowers, while financial crisis is a problem of lenders" (Koo). People with damaged balance sheets lack interest in raising their borrowing at any interest rate. In reference to liquidity, capital from government spendings are necessary for banks to be able to lend money again. The recovery that started from 2009 led people to think that the economy is on its way to full recovery. The balance sheet issue was still in full force so politicians refused to renew fiscal stimulus in February 2009.

The financial crisis of 2008 which continued into 2009 was a worldwide crisis and considered one of the worst since 1933 with the Great Depression. By early December, the whole economy was heading downward with no light at the end. The recession that started in 2007 (late December) only worsened when the retail sales decreased. Come November 2008, U.S. citizens grew discouraged and went about trying to save money and decrease credit card purchases. Auto sales were down by about 37% in November to the lowest they had been in about 26 years. GM fell 41% and Ford 31%. Retailing plunged dramatically. They rang up the lowest November sales in more than 30 years as holiday seasonal shoppers did not purchase and not only failed to lift the economy but showed that the crisis is further distressing everyday consumers. Balance sheets showed decreasing numbers from this horrid situation. Thirty huge key player companies like Macy's, Sears, Abercrombie and Target all posted sales declines and lowering balance sheets. The Fed Reserve reported in Dec. 2008 that each region in the country documented much in their sales declines and decreases in manufacturing. The balance sheets faced financial decreases and assets went down. Retailers found themselves in a tough situation during the financial crisis period of 2008 and 2009.


Koo, Richard. "Is American Headed for a Double-dip Recession?" The Economist. Web 26 Oct. 2011.

2 comments:

  1. I was really interested to learn that November retail sales rang up the lowest they had been in more than 30 years in 2008. This goes hand in hand with my article about retail companies becoming more and more worried and the upcoming holiday season. Even though we are technically post-recession (2008-2009), holiday sales have failed to return to their pre-recession state. It would be interesting to compare the retail sales declines from 2008-2009 with the declines from 2010-2011 and see how large of an increase, if any, occured during the holiday season of what is considered post-recession. I would expect there would be an increase, but not a very large one, as the economy has continued to be unstable and uncertain, causing holiday spending to stay at all time lows.

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  2. As I was reading in Net Advantage our industry's over view, I found that Standard & Poor's economist see a continued slow "half speed" recovery in 2011. Maybe this slow "half speed" recovery that this economists talk about is the reason why the holiday sales are still not fully recovered Jenna. Falen this is a great explanation and even though we are in a slow recovery, since April 2011 economists were predicting that consumer spending was going to increase by 2.9%. They also mention that even though we are in the post recession state, as Jenna mentioned in her comment, we still have a fairly high unemployment rate which lowers the people's ability to spend. But, as I posted on my most recent blog, we are seeing a gradual increase in the major companies revenues, which are higher now in this first and second quarter of fiscal year 2012, than they were the last fiscal year.

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