Although the recession began in December 2007, the first very public casualty came in September 2008, with the collapse of Lehman Brothers (LEH). Subsequently, between September 2008 and March 2009 the U.S. economy contracted by 5.5% and consumer prices plummeted by 12.4% in the final quarter of 2008. However, since the 1940s, recessions in the United States have typically existed for approximately a year. Furthermore, there are already symptoms of recovery. For example, consumer prices have increased by a 2.2% annual rate for the first quarter of 2009.
Economists’ opinions over the end of the recession remain divided. Some believe that the U.S. is already on the road to recovery. Others state that the recession will end in the next few months. On a rather less positive note, there are economists who predict that the recession is here for the long haul.
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Brian S. Wesbury and Robert Stein (economists of First Trust Advisers) are in the more positive camp. The pair asserts that claims for unemployment typically peak shortly before the economy hits rock bottom. New claims for unemployment peaked in the U.S. in March 2009, with 658,000 new claimants. In April, this figure dropped to 635,000. Wesbury and Stein state that this is a positive indicator, which suggests the worst of the recession has passed. In addition, consumer spending and the housing market are both showing small signs of recovery.
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However, this does not mean that the country’s situation will improve quickly. The economy may cease contracting, but the effects of the economic upturn may not be felt for many months. Industries are likely to continue to struggle and unemployment could carry on rising for the foreseeable future. Professor Daniel Hamermesh asserts that an unemployment rate of 5.5%, or lower, will not be reached until 2011. In turn, this will result in continued difficulty for many households. Therefore, spending may remain depleted, despite the government’s attempts to encourage consumerism.
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There are economists who paint an even bleaker picture. Asserting that the end of the downturn will not occur until 2010. This theory is based on the fact that the worldwide recession has reduced trade. This is a minority view, but nonetheless the government’s stimulus package has proved to be too small to be effective. A recent report from the World Bank indicates that the United States’ economy will shrink by 3%. This figure was revised after an original estimation of a 2.4% decrease, which was presented in April 2009.
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The World Bank’s report has come under criticism, however. Bill Beach (director of the Center for Data Analysis at the Heritage Foundation, Washington, D.C.) contests the report and claims that the World Bank’s calculation is based upon data garnered two months ago. Since that time, the economies of Europe and the United States have displayed symptoms of recovery.
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Despite the opposing opinions, the majority of economists believe that the signs of improvement are present and the end of the recession is imminent. However, a full-recovery is more difficult to predict.
Whether the economy experiences a robust recovery or a tepid one, investors can generate monthly income using stock options. A covered call investing strategy is an example of a method for generating monthly income with stock options. A covered call investing strategy consists of selling a short call option against a stock. The stock can either be already existing in an account or purchased specifically for executing the covered call.
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Investors can also use stock options as stock insurance. A purchased put option acts just like stock insurance, if the stock falls, then the put option pays “insurance” for the drop in stock price.
Investors can also combine the two stock option methods, income generating and protection, to generate income, which is protected. For this scenario, an investor would first enter a married puts position, followed by application of income generating methods, like covered call investing.
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[tags] recession, recovery, Brian S. Wesbury, Robert, First Trust Advisers, claims for unemployment, Daniel Hamermesh, World Bank, Bill Beach, Heritage Foundation, LEH, Lehman Brothers Hldgs. Inc. [/tags]