Macroeconomics: policies & principles

Project Assignment : End Term Report

The Great Financial Crisis: Macro-economy and Its Impact on Firms - A
Decade of Market Trends & Business Out-look
Goldman Sachs

Submitted to
Dr. Gajavelli V S

Submitted by
Group 13 Sec B
Gurusha Godwani

(2014100)

Hitesh Patidar

(2014108)

Ipshita Sinha

(2014117)

Khushal Goel

(2014134)

I. Introduction to Macro-economic and policy trends and analytics

Financial crisis of 20072008
The financial crisis of 20072008, also known as the Global Financial Crisis and 2008
financial crisis, is considered by many economists to have been the worst financial crisis since
the Great Depression of the 1930s. It threatened the total collapse of large financial institutions,
which was prevented by the bailout of banks by national governments, but stock markets still
dropped worldwide. In many areas, the housing market also suffered, resulting in decreeing GDP
growth, High Unemployment, and ultimately recession. The crisis played a significant role in the
failure of key businesses, declines in consumer wealth estimated in trillions of U.S. dollars, and
a downturn in economic activity leading to the 20082012 global recession and contributing to
the European sovereign-debt crisis.
Impact on U.S economy:
Business cycles: The broadest indicator of economic activity is real gross domestic product
(GDP), which is the sum of consumption expenditure (C), investment expenditure (I),
government expenditure (G), and expenditures on net exports (NX). Most recessions are caused
by a decrease in total expenditure on domestic goods and services. Analysis of the data on
changes in C, I, G and X-M enables one to see how economic activity in the U.S. (GDP) has
slowed and actually decreased since the beginning of the economic turmoil.
it was the collapse of the housing bubble. Investment growth in residential housing slowed to
near zero in late 2005, before turning negative in the first quarter of 2006. The first quarter of
2006 saw a 3.6% decline, and another 16.6% drop in the second quarter. This double-digit
negative slide has yet to come to an end. Residential investment posted a 22.8% decline in the
fourth quarter of 2008 and a 32.8% decline in the first quarter of 2009. This acceleration is
ominous as most recoveries begin where they started-in the housing market. Its hard to see a
sustained recovery occurring until the housing market stabilizes. The decline in the housing
market spilled over into the labor market in late 2007, as shown in the following two
figures. The unemployment rate had bottomed out at 4.4% in October 2006, and remained at
that level for fourteen months. It began rising in in December 2007, the same month that
employment peaked.

The labor force (i.e. the supply of labor) peaked in October 2008. Over the next three months
the labor force declined as discouraged workers stopped looking for work and dropped
out. Despite this offset, by May 2009 the unemployment rate had reached 9.4%

Investment: Business investment followed investment in residential housing. Expenditure on

equipment and software began a negative slide in the first quarter of 2008 that has continued on
to a 33.5% decline in the first quarter of 2009. Investment in non-residential structures saw its
first decline in the fourth quarter of 2008. Total investment expenditure is in free fall as of the
first quarter of 2009, dropping by roughly 50%.
Consumer spending: consumer spending doesnt usually precipitate a recession, since it
represents seventy percent of total spending, and spending drives the economy in the short term,
consumption plays a key role in the duration of recessions. Total Personal Consumption
Expenditures began falling in the third quarter of 2008 with a -3.8% change which worsened to a
-4.3% change in the fourth quarter. Looking at the components of consumption reveals that the
majority of the decline occurred in Durable Goods which turned negative in the first quarter of
2008 and snowballed to -22.1% in the fourth quarter of 2008. The decline in durable goods
likely coincides with the slide in spending on houses; when people stop buying new homes, they
also spend less on appliances, home furnishings, etc. Non-durable Consumption has also
declined beginning in the third quarter of 2008 with a -7.1% change and continuing into the
fourth quarter at -9.4%. Non-durable consumption is largely a function of income. As GDP
declined beginning in the third quarter of 2008, personal disposable income fell precipitously,
bringing down non durable consumption for the next several quarters.

The final component of consumption, Services, while dipping slightly negative in the third
quarter of 2008 at -0.1% turned positive again in the fourth quarter of 2008 clocking in at 1.5%.
Even a small negative decline in Services is a matter of concern as this area of consumption is
generally the most resilient to economic downturns. One hopeful sign of recovery is that in the
first quarter 2009, total consumer spending increased, driven in large part by 9.6% growth in
consumer durable spending.
Export import: Despite the severe decline in the housing market, the US economy was kept
afloat for nearly three years by growth in exports. During the period from the fourth quarter of
2005 to the second quarter of 2008, export growth averaged nearly 10% at an annualized rate. It
was this growth that gave hope during late 2007 and early 2008 that the economy might yet
dodge a recession. However as the recession became a global phenomenon, the world demand
for American exports waned. In the third quarter of 2008, export growth slowed before dropping
23.6% in the fourth quarter. This drop accelerated in the first quarter of 2008, with another
28.7% decrease.

US import growth peaked in late 2005, turning negative in the fourth quarter of 2007, spreading
the decrease in demand globally. As American consumption continues to weaken this also
affects the import market, much of which is considered luxuries by Americans. Imports saw their
first double-digit negative decline in the fourth quarter of 2008 at -17.5%. This decline has

accelerated to nearly 40% in early 2009. While helping to move the US economy into recovery,
declining imports increase the harm on the rest of the world.
Government expenditure: US government spending has not played a large role in the current
recession to date. State & local spending has declined as expected, likely a by-product of
weakening tax revenues, especially in states that must keep a balanced budget. The net effect
has been modest with total government spending growth averaging 2.7%. A substantial decline
in federal defense spending in the first quarter of 2009 caused a noticeable 3.5% decline in total
government spending. Hopefully, the effects of the federal stimulus package will become more
apparent in the next few quarters

II. Macro-economy and business cycles

Goldman Sachs is a crisis machine. In 2007-2008, it helped to create the World Food Price
Crisis through the Goldman Sachs Commodity Index. Then, it contributed to the 2008 Global
Financial Crisis by promoting toxic subprime mortgage loans, by betting short against
collateralized debt obligations after having created them and sold them to investors, and by
misleading investors and profiting from the collapse of the mortgage market at the expense of its
clients. Finally, Goldman Sachs was instrumental in creating the conditions of the 2009
Eurozone Crisis, by systematically helping the Greek government to mask the true facts
concerning its national debt between the years 1998 and 2009.
The period of Great Depression
Over the period 1990-2012 convergence occurred even though Central Europe has
been more diverse than ever before. Central Europe gained in terms of stability and
to import a legislative framework that is familiar to most foreign investors who
have also been attracted by modest labor costs.
After the relatively mild 1990-91 recession ended in March 1991, the country hit a belated
unemployment rate peak of 7.8% in mid-1992. Job growth was initially muted by large layoffs
among defense related industries. However, payrolls accelerated in 1992 and experienced robust
growth through the year 2000.
Over the period 1990-2012 convergence occurred even though Central Europe has been more
diverse than ever before. The membership process helped Central Europe gain in terms of
stability and to import a legislative framework that is familiar to most foreign investors who
have also been attracted by modest labor costs.

III. Macro-economy, Market Scenario and Future Out-look

US executives are among the most confident that the global economy is improving: Nearly twothirds express positive sentiment. Executives overwhelmingly see the economic outlook as either
stable or improving, both globally and in the US; the number of executives expecting a decline is
at its lowest level in the history of the Barometer. Greater economic confidence allows companies
to plan more freely for growth, and stability is an essential ingredient for a healthy deal making
environment.
The number of US executives who are confident about the outlook for corporate earnings has
increased significantly over the last 12 months. In April 2014, 70% of our respondents expressed
confidence in corporate earnings, a big jump from 38% last October; that sentiment further
strengthens in this Barometer, with 79% expressing confidence. This reflects the resilience of
US corporate earnings, which were remarkably strong in the first half of 2014 70% of the
S&P 500 beat estimates even as UK and Eurozone companies reported mixed results. Our
respondents expect this US corporate outperformance to persist. Other indicators are also
trending positive: Roughly two-thirds of executives are confident in both credit and market
stability, and more than half express positivity about stock valuations all healthy indicators
for the deal markets.
Improved macroeconomic sentiment is driving positive hiring intentions, as 43% of companies
expect to create jobs or acquire talent, up from about one-third in April 2014. The number of
companies planning to reduce their workforce has dropped to 5% from 15% six months ago. The
positive jobs outlook is also consistent with our respondents optimistic outlook on corporate
health.

Conclusion & learnings

Positive US sentiment about global M&A is nearing an all-time high, reflecting US leadership of
the deal markets. Pipelines are also richer than those at the global level, and the appetite to
pursue deals has increased from six months ago. Unlike their global counterparts, US companies
exhibit a marked readiness to take a higher-risk approach to growth by doing disruptive deals,
but they are also tempering confidence with caution and focusing strongly on their core sectors.
The strongest growth engine of M&A activity in the coming year is likely to be the middle
market, as companies defend positions and strengthen their core businesses.
In line with their growing confidence in the global economy, US companies are taking on more
risk even as they expand their core businesses by changing the mix of products and services.
While all companies worldwide are considering higher-risk organic growth strategies, US

executives show a stronger willingness than their global counterparts to explore research and
development and new products.
This reflects a pattern of complex activity, whereby companies are divesting non-core units
while simultaneously expanding their core and complementary businesses through sophisticated
transactions such as asset swaps, spinoffs and joint ventures.
References: http://www.ey.com/Publication/vwLUAssets/EY-us-ccb-11-october-14/$File/EY-us-ccb-11october-14.pdf